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PROSPECTUS
TENNECO LOGO
OFFER TO EXCHANGE
ALL OUTSTANDING
11 5/8% SENIOR SUBORDINATED NOTES DUE 2009
($500,000,000 AGGREGATE PRINCIPAL AMOUNT OUTSTANDING)
FOR
11 5/8% SENIOR SUBORDINATED NOTES DUE 2009
OF
TENNECO AUTOMOTIVE INC.
(FORMERLY KNOWN AS TENNECO INC.)
PRINCIPAL TERMS OF EXCHANGE OFFER
- - We are offering a total of $500,000,000 of new notes, which are registered
with the Securities and Exchange Commission, in exchange for our outstanding
notes.
- - The exchange offer expires at 5:00 p.m., New York City time, on March 7, 2000,
unless extended.
- - You may withdraw tenders of outstanding notes at any time before the exchange
offer expires.
- - The exchange offer is not subject to any condition other than that the
exchange offer will not violate applicable law or any applicable
interpretations of the Staff of the Securities and Exchange Commission.
- - There is no existing market for the new notes, and we do not intend to apply
for their listing on any securities exchange or for their quotation through
the Nasdaq Stock Market.
- - We believe the exchange of notes will not be a taxable exchange for U.S.
federal income tax purposes.
- - We will not receive any proceeds from the exchange offer.
- - The terms of the new notes are substantially identical to the outstanding
notes, except for various transfer restrictions and registration rights
relating to the outstanding notes.
- - All outstanding notes that are validly tendered and not validly withdrawn will
be exchanged.
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 18
BEFORE PARTICIPATING IN THE EXCHANGE OFFER.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this prospectus is February 7, 2000.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary..................... 1
Risk Factors........................... 18
Forward-looking Statements............. 25
Where You Can Find More Information.... 26
Incorporation of Information by
Reference............................ 26
Use of Proceeds........................ 28
Capitalization......................... 29
Unaudited Pro Forma Consolidated
Financial Statements................. 30
Supplemental Consolidated Financial
Data................................. 36
Selected Financial Data................ 37
The Exchange Offer..................... 41
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 51
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PAGE
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The Spin-off........................... 72
Business............................... 77
Management............................. 91
Principal Stockholders................. 101
Description of Senior Credit
Facility............................. 102
Description of the New Notes........... 105
United States Federal Income Tax
Consequences......................... 145
Plan of Distribution................... 151
Legal Matters.......................... 152
Experts................................ 152
Index to Financial Statements.......... F-1
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Some of the market data included in this prospectus is based on independent
industry publications or other publicly available information. Although we
believe that these independent sources are reliable, the accuracy and
completeness of this information is not guaranteed and has not been
independently verified.
THIS PROSPECTUS INCORPORATES BY REFERENCE IMPORTANT BUSINESS AND FINANCIAL
INFORMATION ABOUT US WHICH IS NOT INCLUDED IN OR DELIVERED WITH THIS PROSPECTUS.
SEE "AVAILABLE INFORMATION" AND "INCORPORATION BY REFERENCE." THIS INFORMATION,
EXCLUDING EXHIBITS TO THE INFORMATION UNLESS THE EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE INTO THE INFORMATION, IS AVAILABLE WITHOUT CHARGE TO
ANY HOLDER OR BENEFICIAL OWNER OF OUTSTANDING NOTES UPON WRITTEN OR ORAL REQUEST
TO TIMOTHY R. DONOVAN, SENIOR VICE PRESIDENT AND GENERAL COUNSEL, TENNECO
AUTOMOTIVE INC., 500 NORTH FIELD DRIVE, LAKE FOREST, ILLINOIS 60045, TELEPHONE
NUMBER (847) 482-5000. TO OBTAIN TIMELY DELIVERY OF THIS INFORMATION, YOU MUST
REQUEST THIS INFORMATION NO LATER THAN FIVE BUSINESS DAYS BEFORE THE EXPIRATION
OF THE EXCHANGE OFFER. THEREFORE, YOU MUST REQUEST INFORMATION ON OR BEFORE
MARCH 1, 2000.
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PROSPECTUS SUMMARY
This summary highlights selected information from this prospectus and does
not contain all of the information you need to consider in making your
investment decision. To understand all of the terms of this exchange offer and
for a more complete understanding of our business, you should read carefully
this entire prospectus and the documents incorporated by reference in this
prospectus.
Unless the context otherwise requires, in this prospectus:
- "Tenneco" refers to Tenneco Automotive Inc., a Delaware corporation, and
its subsidiaries. Tenneco was known as Tenneco Inc. before the spin-off
of Tenneco Inc.'s packaging and administrative services businesses on
November 4, 1999.
- "Automotive," "we," "us" and "our" refer to Tenneco after giving effect
to the spin-off described above.
- "Pactiv" or "Packaging" refers to Pactiv Corporation, a Delaware
corporation, and its subsidiaries. Pactiv owns the packaging and
administrative service businesses that Tenneco spun-off on November 4,
1999. Pactiv was known as Tenneco Packaging Inc. before the spin-off.
Because of the spin-off, Tenneco's financial statements presented in this
prospectus reflect its former paperboard packaging and specialty packaging
segments as discontinued operations. See Note 2 to the audited Financial
Statements of Tenneco Automotive Inc. and Consolidated Subsidiaries included in
this prospectus.
THE EXCHANGE OFFER
On October 14, 1999, we completed the private offering of $500 million of
11 5/8% Senior Subordinated Notes due 2009. We are now offering to exchange
these outstanding notes for new notes that have been registered under the
Securities Act of 1933. We entered into a registration rights agreement with the
initial purchasers in the private offering in which we agreed, among other
things, to deliver to you this prospectus and to use our best efforts to
complete the exchange offer within 180 days of the issuance of the outstanding
11 5/8% Senior Subordinated Notes due 2009. You should read the discussion under
the headings "-- Summary Description of the New Notes" and "Description of the
New Notes" for further information regarding the new, registered notes. You
should also read the discussion under the headings "-- Summary of the Terms of
the Exchange Offer" and "The Exchange Offer" for further information regarding
the exchange offer and resale of the new notes.
OUR COMPANY
GENERAL
We are one of the world's largest designers, manufacturers and distributors
of automotive ride control and emissions control products and systems for the
automotive original equipment, or "OE," market and repair and replacement
market, or aftermarket, with leading market shares in North America and Europe.
We operate a global business with 1998 net sales of approximately $3.2 billion
and sell products in over 100 countries. We have approximately 23,500 employees
and 100 facilities in 25 countries. Our executive offices are located at 500
North Field Drive, Lake Forest, IL 60045. The phone number is (847) 482-5000.
We manufacture and sell ride control products, such as shock absorbers,
struts and suspension systems, which are designed to function as safety
components for vehicles in addition to providing a comfortable ride. We also
manufacture and sell emissions control components, such as mufflers, catalytic
converters, manifolds and pipes, all of which play a critical role in safely
conveying noxious exhaust gases away from the passenger compartment, reducing
the level of pollutants and reducing engine exhaust noise.
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In the OE market, we serve more than 25 different original equipment
manufacturers, or "OEMs," on a global basis, with our largest OE customers being
Ford, DaimlerChrysler, General Motors, Volkswagen Group and Toyota. We provide
products or systems for six of the top ten passenger car models and eight of the
top ten light truck models produced globally for 1998. Sales across our OEM
customer base are well-diversified for our industry, with our two largest
customers, Ford and DaimlerChrysler, representing 12.8% and 10.9%, respectively,
of 1998 net sales. Over the last several years, we have successfully executed a
strategy to increase our presence in the OE market. As a result, we have
increased our OE net sales from $736 million to $1,962 million, or by 167%, from
1994 to 1998.
In the aftermarket, we serve over 500 customers, including wholesalers and
retailers such as National Auto Parts Association (NAPA), Monro Muffler Brake
and Advance Auto Parts in North America, and Temot, Autodistribution
International and Kwik-Fit in Europe. Our top 10 aftermarket customers accounted
for less than 11% of our 1998 net sales. We sell our ride control products
primarily under the well-recognized Monroe(R) brand name. Our Monroe(R) ride
control product line has achieved 98% brand recognition in North America within
its targeted consumer market. We sell our emissions control products primarily
under the Gillet(TM) and industry-leading Walker(R) brand names.
We are well-balanced across our product lines, markets and geographic
regions. Ride control accounted for 44% of our 1998 net sales and 55% of our
1998 operating income, and emissions control accounted for the remainder. As
described above, we have achieved a balanced OE and aftermarket revenue base by
successfully increasing our sales to OEMs over the last several years.
Furthermore, our aftermarket business benefits from the design, manufacturing
and technological expertise of our OE business, and we believe this OE expertise
provides us with a significant advantage over many of our aftermarket
competitors. In the past five years, through internal growth and several
strategic acquisitions, we believe we have also strengthened our market position
around the globe. Currently, we have operations in 25 countries and generated
approximately 48% of our 1998 net sales in markets outside of North America. We
believe our participation in both the OE and aftermarket businesses and our
geographic presence reduce our exposure to the cyclicality of the automotive
industry.
We have focused on improving our advanced technology position relative to
our competition in the OE market and have implemented a strategy to leverage
this position into the aftermarket. As a result, in 1998 we were awarded the
Chrysler Technology Role Model Award (awarded to one manufacturer each year)
based on our Walker(R) electronic silencing technology and the successful
implementation of an advanced suspension technology. Also in 1998, we were named
Volvo Supplier of the Year in recognition of our technology and overall quality.
Our commitment to high quality standards and sound management practices and
policies is demonstrated by our successful participation in the International
Standards Organization/Quality Standards certificants process. Over 90% of our
manufacturing facilities have achieved ISO 9000 certification, excluding
facilities held in joint ventures. Of those 60 manufacturing facilities where we
have determined that QS certification is required to service our customers or
would provide us with an advantage in securing additional business, 85% have
achieved QS 9000 certification, and we are pursuing certification of the
remaining 15%. In addition, we have received Ford Q1 certification at 20
facilities and 1998 Chrysler Gold Pentastar Awards at four facilities.
The following table sets forth our estimated 1998 market positions by
product category based on unit volume estimates for each of our primary
geographic regions. These estimates are prepared in accordance
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with what we believe to be standard industry practice and are based on industry
sources and our knowledge of our relative position in each market.
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PRODUCT CATEGORY REGION MARKET POSITION(1)
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Aftermarket Emissions Control North America #1
Europe #1
Aftermarket Ride Control North America #1
Europe #1
OE Emissions Control North America #1
Europe #2
OE Ride Control North America #2
Europe #4
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(1) Calculations of our market position for 1998 exclude components manufactured
by OEMs, other than Delphi Automotive Systems Corporation, which was
separated from General Motors in May 1999.
COMPETITIVE STRENGTHS
Several significant existing and emerging trends are dramatically reshaping
the automotive industry. Key trends that we believe are affecting automotive
parts suppliers include customer and supplier consolidation, increased OEM
outsourcing of development, design and systems integration activities,
globalization and standardization. We believe that we are positioned to respond
to these trends because of our following strengths.
Tier 1 Capabilities. The OEMs are consolidating and are increasingly
outsourcing parts and systems to simplify the vehicle assembly process, lower
costs, and reduce vehicle development time. This shift has created the role of
the Tier 1 systems integrator and supplier. We have been a Tier 1 integrator for
over ten years. We supply modules or systems for 25 vehicle platforms currently
in production worldwide and we have modules or systems for three additional
platforms under development. We also work extensively with our OEM customers in
designing and engineering ride control and emissions control products and
systems for existing and new vehicle platforms. We are currently working with
OEMs on 33 "global" platforms, which are single platforms in production and/or
development in two or more regions. One or more of our products were included on
more than 70 vehicle launches for the 21 months ended September 30, 1999.
Global Presence. OEMs are increasingly requiring suppliers to provide parts
on a global basis. This requires a worldwide approach to supply chain
management, engineering, sales and distribution. Our global presence positions
us to meet the global sourcing, quality and engineering requirements of our
customers. Our worldwide footprint, in addition to our 19 manufacturing
facilities in the United States, includes 32 emissions control manufacturing
facilities and 17 ride control manufacturing facilities located in Argentina,
Australia, Belgium, Brazil, Canada, China, the Czech Republic, India, Mexico,
New Zealand, South Africa, Spain, Turkey and the United Kingdom. As a result, we
believe we are well-positioned to meet the demand of OEMs for globally
positioned suppliers, as well as to meet the needs of aftermarket customers by
providing high-quality, brand-named products on a worldwide basis.
Technology Leadership. Automotive OEMs are increasingly demanding
technological innovation from suppliers for improved vehicle performance and
functionality, causing the technical content of automobiles to increase rapidly.
To continue developing innovative products, systems and modules, we maintain 16
research and development facilities and have entered into several strategic
alliances focused on advanced technology designs. We provide technologically
advanced products by regularly updating and enhancing our product line and
introducing new products. For example, we developed several adaptive damping
systems which reduce undesirable vehicle motion. Also, we developed a
self-lubricating elastomer, which has the additional ability to reduce friction
between moving components in a suspension system, thereby reducing noise and
vibration. As a result of increased technological content, we believe our future
success in the
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aftermarket will depend on our success in maintaining and expanding our OE
markets. We believe our strong OE presence will give us a significant advantage
by allowing us to introduce our OE products to the aftermarket as these products
move through their life cycles.
Strong OEM Relationships. We have long-standing relationships with our OEM
customers around the world. We work with these customers in all stages of
production, including design, development, component sourcing, quality
assurance, manufacturing and delivery. We believe our success in developing
these relationships can be attributed to our design and manufacturing
performance and global capabilities.
Well-Positioned on Popular Vehicle Platforms and Across Aftermarket
Distribution Channels. We manufacture and distribute products for many of the
most-recognized car and light truck models worldwide. Our products are included
on six of the top ten passenger car models and eight of the top ten light truck
models produced globally for 1998, including: the VW Golf, GM Corsa, Ford
Escort, Toyota Corolla, Opel Astra, Honda Civic, Ford F-Series Pickup, Chevy CK
Pickup, Ford Explorer, Dodge Ram Pickup, Ford Ranger, Dodge Caravan, Toyota
Hilux and Ford Windstar. For the aftermarket, we have a dedicated sales force
and consumer brand marketing professionals who sell and market our products
through all the primary channels of distribution, including full-line and
specialty warehouse distributors, jobbers, installers, car dealers and
automotive parts retailers. We have recently adopted a strategy to enhance our
aftermarket profitability by introducing differentiated product lines targeted
to the different aftermarket distribution channels. For example, in the fourth
quarter of 1999, we introduced to the professional installer channel a premium
ride control product which uses acceleration-sensitive damping technology.
BUSINESS STRATEGY
Our objective is to enhance profitability by leveraging our global position
in the manufacture of emissions control and ride control products and systems.
We intend to use our competitive strengths and balanced mix of products,
markets, customers and distribution channels to capitalize on many of the
significant existing and emerging trends in the automotive industry. The key
components of our business strategy are described below.
"Own" the Product Life Cycle. We believe that leveraging our proprietary
"black box" OE design and engineering capabilities enables us to utilize our OE
technology to introduce new products into the aftermarket, where these products
should continue to generate future revenue streams. Innovative products such as
Sensa-Trac(R) shocks, which provide balance between comfort and control, and
Quiet-Flow(TM) mufflers, which reduce back pressure without sacrificing noise
control, are examples of how our market balance between OE and aftermarket sales
allows us to leverage our cost structure over the entire product life cycle.
Develop and Commercialize Innovative, Value-Added Products. We intend to
continue to manufacture and develop innovative, value-added products, both on
our own and through strategic alliances, with a focus on the development of
highly engineered systems and complex assemblies and modules. These products
generally carry higher profit margins than standard components and allow a
supplier to differentiate its offerings from its competitors. Furthermore, we
intend to expand our product lines by continuing to identify and target new
fast-growing niche markets, by developing new products for existing markets, by
making strategic acquisitions and by establishing alliances with other
suppliers. For example, we introduced a new acceleration-sensitive damping
product to the aftermarket installer channel in the fourth quarter of 1999, and
our Walker(R) electronic noise cancellation products incorporate technology that
we acquired but which had not previously been applied to the automotive market.
Leverage Aftermarket Brand Names. We manufacture and market brand-named
products, including Monroe(R) ride control products and Walker(R) emissions
control products. We also have been successful in introducing additional branded
products outside of the Monroe(R) and Walker(R) umbrellas, such as Rancho(R)
ride control products, DynoMax(R) high performance emissions control products,
Clevite(TM) elastomeric vibration control components and Aluminox(TM) emissions
control products in Europe. We are also capitalizing on our brand strength by
incorporating newly acquired product lines within existing product
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families. Our brand equity is a key asset in a time of customer consolidation
and merging channels of distribution.
Diversify End-Markets. We intend to continue to leverage our design,
marketing and manufacturing capabilities by producing products for a variety of
adjacent end-markets. We are targeting opportunities in the aerospace,
two-wheeler, specialty vehicle, industrial and heavy duty vehicle markets, and
we have already expanded our product offerings to include exhaust products for
motorcycles and suspension springs for golf carts. We believe these new markets
will allow us to capitalize on our existing technical and manufacturing
infrastructure to achieve growth, and we expect these markets to generate
margins above traditional OE margins.
Expand Full-System Capabilities. The automotive parts industry is
undergoing a consolidation of parts suppliers, as OEMs increasingly require
suppliers to provide design assistance and innovation for full systems rather
than just individual components. In response to this trend, we continually focus
on the development of highly engineered systems and complex assemblies and
modules which provide value-added solutions to customers and generally carry
higher profit margins than individual components. We are also committed to
expanding our systems capabilities by establishing joint ventures and strategic
alliances, such as our agreement with Ohlins Racing A.B. to jointly develop
advanced, electronically controlled suspension damping systems.
Maintain Operating Cost Leadership. We intend to seek continuous cost
reduction through, among other things, standardizing products and processes,
increasing efficiency and enhancing global coordination. We have adopted several
management techniques to assist in improving best practices and maintaining
efficiency. For example, we have adopted a process of measuring the economic
value added of our operations to help ensure that returns exceed capital costs.
We have also introduced the Business Operating System as a disciplined approach
to manage continuous improvement by assembling and analyzing data for quick and
effective problem resolution.
Execute Focused Acquisitions and Alliances. Historically, we have been
successful at identifying and capitalizing on strategic acquisitions and
alliances to achieve growth. As described above, we intend to continue to pursue
strategic alliances and focused acquisitions to obtain proven proprietary
technology and recognized research capabilities necessary to help develop
leadership in systems integration. An example of this is our acquisition of
Kinetic Ltd., discussed below, which significantly expanded our capability in
advanced ride control technology suspension systems.
RECENT DEVELOPMENTS
Strategic Repositioning. Several dynamics continue to challenge our
aftermarket business, including increasing average product lives, consolidating
distribution channels and increasing competition. Our plan to address these
dynamics consists of: (1) the rationalization of manufacturing and distribution
operations in order to reduce our cost structure; (2) the elimination of
selected quarterly promotional programs in order to better balance demand and
supply within our aftermarket distribution channels; (3) the introduction of a
strategy to more effectively manage product lines targeted at different
aftermarket distribution channels; and (4) management changes and the
introduction of management techniques designed to improve our best practices and
identify additional cost savings.
In the fourth quarter of 1998, we recorded a pre-tax charge to income from
continuing operations of $53 million ($34 million after-tax). This represented
severance benefits, exit costs and asset impairments related to the closing of
two plant locations and five distribution centers and the elimination of 302
positions at those locations, as well as the elimination of 454 administrative
positions in our business unit and corporate operations. This rationalization of
manufacturing and distribution capabilities has increased the capacity
utilization of our existing facilities and has effectively reduced our breakeven
point in the aftermarket. We expect to realize annual savings of about $27
million as a result of these restructuring initiatives. While we have begun to
realize the benefits of the restructuring, we expect these savings will be fully
realized beginning in the second quarter of 2000. To further reduce our cost
structure, we recorded a pre-tax restructuring charge of $55 million in the
fourth quarter of 1999. This charge
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includes $37 million to close a European ride control manufacturing facility and
to restructure other European units, $15 million in North America to close an OE
exhaust facility, and $3 million for headcount reductions in South America and
Asia. Once the restructuring is complete in early 2001, we expect to realize
annual cost savings of $25 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General."
Acquisition of Kinetic. In early 1999, we acquired Kinetic Ltd., an
Australian company with a proprietary technology in advanced suspension
engineering. The Kinetic Suspension System is a passive and reactive
hydraulic/mechanical system which offers advanced roll-control technology,
thereby enhancing both on-road handling and off-road performance. This system
was recently named the Gold Award winning entry of the International Grand Prix
for Technical Innovation at the Paris Equip Auto Showcase. We have established a
group of dedicated employees to develop and pursue a roll-out of the Kinetic
technology in both the OE market and the aftermarket. We are working with four
OEMs on prototypes based on this technology, and we have been awarded business
on a platform for a vehicle scheduled for introduction in 2002.
The Spin-off. The spin-off of Pactiv was the final step in the
transformation of Tenneco from a highly diversified industrial corporation to
independent companies focused on their core businesses. Earlier this year,
Tenneco separated its paperboard packaging business from the rest of its
operations and used the cash proceeds to repay a portion of its short-term debt.
On November 4, 1999, Tenneco separated its packaging and administrative services
businesses from the rest of its operations by completing the spin-off of Pactiv
to holders of Tenneco common stock. For more information, see "The Spin-off."
The following describes the principal transactions that Tenneco and Pactiv
undertook to complete the spin-off.
- Corporate Restructuring Transactions. Tenneco restructured the ownership
of its existing businesses before the spin-off so that the assets,
liabilities and operations of (a) its packaging business and
administrative services operations were owned directly and indirectly by
Pactiv and (b) its automotive business were owned directly and indirectly
by Tenneco and its non-packaging subsidiaries.
- Debt Realignment. Before the spin-off, Tenneco realigned substantially
all of its then-existing debt through a combination of tender offers,
exchange offers, prepayments and other refinancings. The purpose was to
allocate this debt between us and Pactiv before the companies were
separated. To retire its existing public debt, Tenneco exchanged some
series of its then-existing public debt for new Pactiv public debt and
purchased other series of this debt for cash. Tenneco conducted a
concurrent consent solicitation which removed the restrictions on
Tenneco's operations that were included in the related indenture. Tenneco
also repaid other non-public debt and repurchased subsidiary preferred
stock. To finance the cash tender offers and other cash payments, we
issued the $500 million of outstanding notes pursuant to a private
offering and entered into a new senior secured credit facility.
- Distribution of Packaging Common Stock. Tenneco completed the spin-off
by distributing all Pactiv common stock to the holders of Tenneco common
stock at a one-for-one ratio.
Fourth Quarter 1999. On January 25, 2000, we reported record revenues for
the fourth quarter of 1999 of $806 million, compared to $769 million for the
fourth quarter 1998. We also reported a fourth quarter 1999 loss from continuing
operations of $143 million, or $4.25 per diluted share, which includes
transaction costs, a restructuring charge and stand-alone company costs.
Included in fourth quarter results are transaction and other costs and charges
of (1) $94 million after tax, or $2.80 per diluted share, primarily resulting
from the spin-off of Pactiv, (2) $50 million after tax, or $1.50 per diluted
share, related to the restructuring described above, and (3) $6 million, or 17
cents per diluted share, in after-tax costs associated with becoming a
stand-alone company.
Before these stand-alone costs and charges, income from continuing
operations for the fourth quarter 1999 was $7 million, or 22 cents per diluted
share. This compares to a loss of $16 million, or 47 cents per
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diluted share, in the fourth quarter of 1998, before including an after-tax
restructuring charge of $34 million, or $1.02 per diluted share, and previously
unallocated Tenneco after-tax costs of $3 million, or 8 cents per diluted share.
Strong revenue growth in North America, coupled with restructuring programs in
the North American aftermarket business, drove this year-over-year improvement.
We improved our cash flow from operations 230%, generating $99 million in
the fourth quarter 1999 compared to $30 million in the fourth quarter of 1998.
Our strong cash performance since the spin-off allowed us to reduce our debt
level by $68 million, to $1,634 million at year-end 1999. This performance was
driven primarily by working capital improvements in receivables, inventory and
payables.
Earnings before interest expense, income taxes and minority interest for
the quarter, before the charges and costs, increased significantly to $52
million compared to a loss of $4 million, before restructuring and the
previously unallocated Tenneco costs, in the fourth quarter of 1998. Earnings
before interest expense, income taxes, minority interest and depreciation and
amortization for the quarter was $86 million, before the charges and stand-alone
costs, compared to $36 million, before restructuring charges and unallocated
costs, in the fourth quarter a year earlier.
Our North American revenues for the fourth quarter 1999 were $439 million
compared to $393 million the prior year. North American OE revenues were $301
million, an increase of 14% compared to $265 million reported in the fourth
quarter 1998. North American aftermarket revenues rose 9% to $138 million from
$128 million in the prior year, marking the first quarter-over-quarter revenue
improvement for the North American aftermarket since the third quarter of 1997.
Fourth quarter European revenues were $290 million compared with $303
million reported in 1998. European OE revenues declined 3% to $204 million from
$211 million reported a year earlier. European aftermarket revenues were $86
million, a 7% decline from $92 million recorded in the fourth quarter of 1998.
Increased revenue from the full ramp-up of the Ford Focus was offset by the
weakened Euro, OE price pressure and aftermarket mix shift.
Our operations in the rest of the world, consisting of operations in South
America, Asia and Australia, reported revenues of $77 million in the fourth
quarter of 1999, an increase of 5% compared to $73 million reported in 1998.
Difficult economic conditions in South America and softer OE sales in Australia
were partially offset by increased OE exhaust business in China, and improved
aftermarket business in India and Japan.
We recorded pre-tax transaction and other costs of $59 million to complete
the series of actions necessary to spin-off Pactiv. These costs include
severance, legal, banking, accounting and other fees and expenses. Also included
is a charge of $12 million to write down the value of a receivable from a former
business which we sold in the mid-1990's. Deteriorating performance by that
business, as well as a consolidation in its primary industry, has caused us to
revise our estimate of the proceeds we will ultimately collect on the
receivable.
We incurred incremental pre tax stand-alone costs in the fourth quarter of
1999 of $9 million. These costs, incurred after the November 4 spin-off of
Pactiv, include the addition of functions necessary to operate as a separate
public company, as well as administrative costs for information technology and
payroll and accounts payable services, which the company receives under
contractual agreements entered into in connection with the spin-off. While these
costs will continue in 2000 and beyond, they did not exist in the fourth quarter
of 1998.
SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
The exchange offer relates to the exchange of up to $500 million aggregate
principal amount of outstanding notes for an equal aggregate principal amount of
new notes. The new notes will be our obligations, entitled to the benefits of
the indenture governing the outstanding notes. The form and terms of the new
notes are identical in all material respects to the form and terms of the
outstanding notes, except that the new notes have been registered under the
Securities Act, and therefore are not entitled to
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the benefits of the registration rights granted under the registration rights
agreement executed as part of the offering of the outstanding notes. When we
refer to the "notes" in this prospectus, except where the context otherwise
requires we are referring to both the outstanding notes and the new notes.
If we do not complete the exchange offer on or before April 11, 2000, the
interest rate on the outstanding notes will increase by .25% per annum during
each subsequent 90-day period, up to a maximum overall increase of 1% per annum,
until we complete the exchange offer.
Registration Rights
Agreement...................... You are entitled to exchange your outstanding
notes for registered new notes with
substantially identical terms. The exchange
offer is intended to satisfy these rights.
After you exchange your outstanding notes in
the exchange offer, you will no longer be
entitled to any exchange or registration
rights with respect to your notes.
The Exchange Offer............. We are offering to exchange $1,000 principal
amount of new 11 5/8% Senior Subordinated
Notes due 2009 which have been registered
under the Securities Act for each $1,000
principal amount of our outstanding 11 5/8%
Senior Subordinated Notes due 2009.
Expiration Time................ The exchange offer will expire at 5:00 p.m.,
New York City time, on March 7, 2000, unless
we decide to extend the expiration time.
Conditions to the Exchange
Offer.......................... We will not complete this exchange offer if
it violates applicable law or staff
interpretations of the Securities and
Exchange Commission. Holders of outstanding
notes will have specified rights against our
company under the registration rights
agreement executed as part of the private
offering of the outstanding notes should we
fail to complete the exchange offer. See "The
Exchange Offer -- Purpose and Effect of the
Exchange Offer."
Resale of the New Notes........ We believe that the new notes may be offered
for resale, resold and otherwise transferred
by you without compliance with the
registration and prospectus delivery
provisions of the Securities Act, subject to
the conditions described below. We have based
this belief on letters issued in connection
with past offerings of this kind in which the
staff of the Securities and Exchange
Commission has interpreted the laws and
regulations relating to the resale of notes
to the public without the requirement of
further registration under the Securities
Act. See Shearman & Sterling (available July
2, 1993); Morgan Stanley & Co. Incorporated
(available June 5, 1991); and Exxon Capital
Holdings Corporation (available May 13,
1988). In order for the new notes to be
offered for resale, resold or otherwise
transferred by you:
- you must acquire the new notes in the
ordinary course of your business;
- you must not participate or intend to
participate, and you must have no
arrangement or understanding with any
person to participate, in the distribution
of the new notes issued to you;
8
<PAGE> 11
- you must not be a broker-dealer who
purchased your outstanding notes directly
from us for resale under Rule 144A or any
other available exemption under the
Securities Act; and
- you must not be an "affiliate" of ours
within the meaning of Rule 405 under the
Securities Act.
If you do not meet the above conditions, you
may incur liability under the Securities Act
if you transfer any new note without
delivering a prospectus meeting the
requirements of the Securities Act. We do not
assume or indemnify you against this
liability.
If you are a broker-dealer and you are issued
new notes in this exchange offer for your own
account in exchange for outstanding notes
which were acquired as a result of
market-making or other trading activities,
you must acknowledge that you will deliver a
prospectus, as it may be amended or
supplemented, in connection with any resale
of new notes issued in the exchange offer.
For a period of 180 days after the date this
exchange offer is completed, we will make
this prospectus and any amendment or
supplement to this prospectus available to
broker-dealers for use in connection with
resales.
We are not offering to exchange with you, and
will not accept surrenders for exchange from
you, in any jurisdiction in which this
exchange offer or its acceptance would not
comply with the securities or blue sky laws
of that jurisdiction. Furthermore, if you
acquire the new notes, you are responsible
for compliance with securities or blue sky
laws regarding resales. We assume no
responsibility for compliance with these
requirements.
Accrued Interest on the New
Notes and the Outstanding
Notes.......................... Each new note will bear interest from October
14, 1999, the issuance date of the
outstanding notes. The holders of outstanding
notes that are accepted for exchange will be
deemed to have waived the right to receive
payment of accrued interest on those
outstanding notes from October 14, 1999 to
the date of issuance of the new notes.
Interest on the outstanding notes accepted
for exchange will cease to accrue upon
issuance of the new notes.
Consequently, if you exchange your
outstanding notes for new notes, you will
receive the same interest payment on April
15, 2000, which is the first interest payment
date with respect to the outstanding notes
and the new notes, that you would have
received if you had not accepted this
exchange offer.
Procedures for Tendering
Outstanding Notes............ If you are a holder of an outstanding note
and you wish to tender your note for exchange
pursuant to the exchange offer,
9
<PAGE> 12
you must transmit to The Bank of New York, as
exchange agent, before the expiration time:
- an original or a facsimile of a properly
completed and duly executed copy of the
letter of transmittal, which accompanies
this prospectus, together with your
outstanding notes and any other
documentation required by the letter of
transmittal, at the address provided on the
cover page of the letter of transmittal; or
- if the original notes you own are held of
record by The Depository Trust Company
("DTC") in book-entry form and you are
making delivery by book-entry transfer, a
computer-generated message transmitted by
means of the Automated Tender Offer Program
system of DTC in which you acknowledge and
agree to be bound by the terms of the
letter of transmittal and which, when
received by the exchange agent, forms a
part of a confirmation of book-entry
transfer. As part of the book-entry
transfer, DTC will facilitate the exchange
of your notes and update your account to
reflect the issuance of the new notes to
you. The Automated Tender Offer Program
allows you to electronically transmit your
acceptance of the exchange offer to DTC
instead of physically completing and
delivering a letter of transmittal to the
exchange agent.
In addition, you must deliver to the exchange
agent on or before the expiration time:
- if you are effecting delivery by book-entry
transfer, a timely confirmation of
book-entry transfer of your outstanding
notes into the account of the exchange
agent at DTC; or
- if necessary, the documents required for
compliance with the guaranteed delivery
procedures.
By executing and delivering the letter of
transmittal or effecting delivery by
book-entry transfer, you are representing to
us that, among other things:
- the person receiving the new notes in this
exchange offer, whether or not that person
is the holder, is receiving them in the
ordinary course of business;
- neither you nor any other person receiving
your new notes in the exchange offer has an
arrangement or understanding with any
person to participate in the distribution
of the new notes; and
- neither you nor any other person receiving
your new notes in the exchange offer is an
"affiliate" of ours within the meaning of
Rule 405 under the Securities Act, or, if
you are an "affiliate" of ours, that you
will comply with the registration and
prospectus delivery requirements of the
Securities Act, to the extent applicable.
10
<PAGE> 13
Special Procedures for
Beneficial
Owners....................... If you are a beneficial owner of outstanding
notes that are registered in the name of a
broker, dealer, commercial bank, trust
company or other nominee and you wish to
tender the notes in this exchange offer, you
should promptly contact the registered holder
and instruct that person to tender on your
behalf. If you wish to tender on your own
behalf you must, before completing and
executing the letter of transmittal and
delivering your outstanding notes, either
make appropriate arrangements to register
ownership of the outstanding notes in your
name or obtain a properly completed bond
power from the registered holder. The
transfer of registered ownership may take
considerable time.
Guaranteed Delivery
Procedures..................... If you wish to tender your outstanding notes
and:
- time will not permit your notes or other
required documents to reach the exchange
agent before the expiration time; or
- the procedure for book-entry transfer
cannot be completed on time;
you may tender outstanding notes by
completing a notice of guaranteed delivery
and complying with the guaranteed delivery
procedures. See "The Exchange
Offer -- Guaranteed Delivery Procedures."
Shelf Registration Statement... We have agreed to register the outstanding
notes on a shelf registration statement and
use our best efforts to cause the shelf
registration statement to be declared
effective by the Securities and Exchange
Commission if:
- any changes in law or of the applicable
interpretations of the staff of the
Securities and Exchange Commission do not
permit us to effect this exchange offer;
- we do not complete the exchange offer on or
before April 11, 2000; or
- any holder of outstanding notes is not
eligible under applicable securities laws
to participate in the exchange offer, and
the holder has requested us to file the
shelf registration statement and has
satisfied conditions relating to the
provision of information to us.
We have agreed to maintain the effectiveness
of the shelf registration statement for, in
some circumstances, at least two years from
the date of the original issuance of the
outstanding notes to cover resales of those
notes held by the holders. See "The Exchange
Offer -- Purpose and Effect of the Exchange
Offer."
Withdrawal Rights.............. You may withdraw the tender of your
outstanding notes at any time before the
expiration time.
Acceptance of Outstanding Notes
and
Delivery of New Notes........ So long as this exchange offer does not
violate applicable law or staff
interpretations of the Securities and
Exchange Com-
11
<PAGE> 14
mission, we will accept for exchange any and
all outstanding notes which are properly
tendered and not validly withdrawn before the
expiration time. The new notes issued in this
exchange offer will be delivered promptly
following the expiration time.
United States Federal Income
Tax
Consequences................. Based on the advice of our counsel, we
believe the exchange of outstanding notes for
new notes will not be a taxable exchange for
United States federal income tax purposes.
See "United States Federal Income Tax
Consequences."
Consequences of Failure to
Exchange....................... All outstanding notes that are not exchanged
will continue to be subject to the
restrictions on transfer contained in the
outstanding notes and in the related
indenture. In general, the outstanding notes
may not be offered or sold unless registered
under the Securities Act, except pursuant to
an exemption from, or in a transaction not
subject to, the Securities Act and applicable
state securities laws. Except in connection
with a shelf registration statement as
described above, we will have no obligation
to register outstanding notes under the
Securities Act after we complete the exchange
offer.
To the extent that outstanding notes are
tendered and accepted in this exchange offer,
we expect that the trading market for
outstanding notes will be adversely affected.
See "Risk Factors."
Exchange Agent................. The Bank of New York is serving as the
exchange agent in connection with the
exchange offer. The exchange agent will
assist us in the exchange offer by performing
various administrative functions on our
behalf.
Dissenter's Rights............. No dissenter's rights of appraisal exist in
connection with the exchange offer.
SUMMARY DESCRIPTION OF THE NEW NOTES
For a more complete description of the terms of the new notes, see
"Description of the New Notes."
Issuer........................ Tenneco Automotive Inc.
General....................... The form and terms of the new notes are
identical in all material respects to the form
and terms of the outstanding notes except that:
- the new notes will bear a "Series B"
designation to differentiate them from the
outstanding notes, which bear a "Series A"
designation;
- the new notes have been registered under the
Securities Act and, therefore, will not bear
legends restricting their transfer; and
- the holders of new notes generally will not
be entitled to rights under the registration
rights agreement, including any registration
rights or rights to additional interest.
12
<PAGE> 15
The new notes will evidence the same debt as
the outstanding notes and will be entitled to
the benefits of the indenture under which the
outstanding notes were issued.
Notes Offered................. $500,000,000 aggregate principal amount of
11 5/8% Senior Subordinated Notes due 2009.
Maturity...................... October 15, 2009.
Interest Payments............. April 15 and October 15, commencing April 15,
2000.
Optional Redemption........... At any time on or after October 15, 2004, we
may redeem the new notes in whole or in part,
at a redemption price of 105.813% of their
principal amount, declining ratably to their
principal amount after October 15, 2007, plus
accrued and unpaid interest, if any, to the
redemption date.
Optional Redemption After Some
Equity Offerings............ At any time and from time to time on or prior
to October 15, 2002, we may redeem the new
notes with the net cash proceeds of some equity
offerings, as long as:
- we pay 111.625% of the principal amount of
the new notes to be redeemed, plus accrued
and unpaid interest, if any, to the \date
of redemption; and
- at least 65% of the aggregate principal
amount of all notes issued under the
indenture remain outstanding afterwards.
Change of Control............. Upon a change of control with respect to us,
you will have the right, as a holder of new
notes, to require us to repurchase all of your
new notes at a repurchase price equal to 101%
of their principal amount, plus accrued and
unpaid interest, if any, to the date of
repurchase. We might not be able to pay you the
required price for new notes you request us to
purchase at that time because we may not have
enough funds or the terms of our other debt may
prevent us from paying you. See "Description of
the New Notes -- Change of Control."
Ranking....................... The new notes will be unsecured and will rank
in right of payment behind all of our existing
and future senior debt. The new notes will
effectively rank in right of payment behind
debt and other liabilities of our subsidiaries
which are not guarantors. Because the new notes
are subordinated, in the event of our
bankruptcy, liquidation or dissolution, holders
of new notes will not be entitled to receive
any payment until all holders of our senior
debt have been paid in full.
On a pro forma basis after giving effect to the
spin-off, at September 30, 1999 we would have
had approximately $1,173 million of senior debt
outstanding and approximately $459 million
available for borrowing under our new senior
secured credit facility. See "Unaudited Pro
Forma Consolidated Financial Statements" and
"The Spin-off -- Debt Realignment." Holders of
the new notes will rank in right of payment
behind all of this outstanding debt and
available debt.
Guarantees.................... All of our material domestic wholly owned
subsidiaries will fully and unconditionally
guarantee the new notes on a joint and several
basis. Our future material domestic restricted
subsidiaries
13
<PAGE> 16
that incur indebtedness will be required to
execute a similar guarantee. The subsidiary
guarantees will each be unsecured and rank in
right of payment behind each subsidiary
guarantor's existing and future senior debt.
Restrictive Covenants......... We will issue the new notes under an indenture
between us and The Bank of New York, as
trustee. The indenture limits our ability and
the ability of our restricted subsidiaries to:
- incur more debt;
- create liens;
- pay dividends and make distributions or
repurchase stock;
- make investments;
- merge or consolidate or transfer and sell
assets;
- issue stock of subsidiaries; and
- engage in transactions with affiliates.
These covenants are subject to a number of
important exceptions and limitations, which are
described under the heading "Description of the
New Notes." All of our present subsidiaries are
restricted for purposes of the indenture.
Risk Factors.................. You should consider carefully all of the
information set forth in this prospectus and,
in particular, should evaluate the specific
factors set forth under "Risk Factors" in
deciding whether to participate in the exchange
offer.
14
<PAGE> 17
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data as of and for each of the
fiscal years in the five years ended December 31, 1998 were derived from the
audited financial statements of Tenneco and its consolidated subsidiaries. The
following summary consolidated financial data as of and for each of the nine
month periods ended September 30, 1999 and 1998 were derived from the unaudited
condensed financial statements of Tenneco and its consolidated subsidiaries. In
the opinion of Tenneco's management, the summary consolidated historical
financial data of Tenneco as of and for the nine months ended September 30, 1999
and 1998 include all adjusting entries, consisting only of normal recurring
adjustments, necessary to present fairly the information set forth. You should
not regard the results of operations for the nine months ended September 30,
1999 as indicative of the results that may be expected for the full year.
The following summary unaudited pro forma consolidated financial data as of
and for the nine months ended September 30, 1999, and for the year ended
December 31, 1998, reflect the effects of:
- the debt realignment;
- the spin-off of Pactiv and related transactions; and
- the April 1999 contribution of Pactiv's containerboard assets to a new
joint venture and the June 1999 sale of Pactiv's folding carton assets.
These two transactions are reflected only in the pro forma statement of
income data since they were completed before the date of the pro forma
balance sheet.
The unaudited pro forma consolidated statement of income data have been
prepared as if these transactions occurred January 1, 1998; the unaudited pro
forma consolidated balance sheet data have been prepared as if the debt
realignment, spin-off and related transactions occurred on September 30, 1999.
The summary unaudited pro forma consolidated financial data are not necessarily
indicative of what Tenneco's results of operations would have been had these
transactions described above actually been consummated on the dates assumed and
are not necessarily indicative of the results of operations for any future
period.
Following the spin-off, Tenneco executed a one-for-five reverse stock
split. All share and per share amounts in the summary consolidated financial
data reflect the reverse stock split.
There is other information we believe is relevant to understanding our
results of operations following the spin-off. These items relate to corporate
overhead costs incurred by Tenneco and its administrative services operations
that we expect will differ for us following the spin-off. For further
information you should see "Supplemental Consolidated Financial Data."
You should read all of this information in conjunction with the:
- "Unaudited Pro Forma Consolidated Financial Statements"; and
- "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
(continued on next page)
15
<PAGE> 18
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
PRO FORMA
1998 1998 1997 1996
--------- ---- ---- ----
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Revenues
Net sales and operating
revenues...................... $ 3,237 $ 3,237 $ 3,226 $ 2,980
Other income, net............... (25) (25) 37 (22)
----------- ----------- ----------- -----------
3,212 3,212 3,263 2,958
----------- ----------- ----------- -----------
Costs and expenses(a)
Cost of sales (exclusive of
depreciation shown below)..... 2,332 2,332 2,303 2,140
Engineering, research, and
development................... 31 31 34 70
Selling, general, and
administrative................ 477 472 421 412
Depreciation and amortization... 150 150 110 94
----------- ----------- ----------- -----------
2,990 2,985 2,868 2,716
----------- ----------- ----------- -----------
Income from continuing operations
before interest expense, income
taxes, and minority interest.... 222 227 395 242
Interest expense (net of
interest capitalized)(b)..... 169 69 58 60
Income tax expense............ (29) 13 80 79
Minority interest............. -- 29 23 21
----------- ----------- ----------- -----------
Income from continuing
operations...................... $ 82 116 234 82
===========
Income (loss) from discontinued
operations, net of income tax
(c)............................. NA 139 127 564
Extraordinary loss, net of income
tax(d).......................... NA -- -- (236)
Cumulative effect of changes in
accounting principles, net of
income tax(e)................... NA -- (46) --
----------- ----------- -----------
Net income (loss)................ NA $ 255 $ 315 $ 410
=========== =========== ===========
Average number of shares of
common stock outstanding
Basic......................... 33,701,115 33,701,115 34,052,946 33,921,875
Diluted....................... 33,766,906 33,766,906 34,160,327 34,105,223
Earnings (loss) per average share
of common stock --
Basic:
Continuing operations........ $ 2.43 $ 3.45 $ 6.87 $ 2.45
Discontinued operations(c)... NA 4.13 3.73 16.27
Extraordinary loss(d)........ NA -- -- (6.96)
Cumulative effect of changes
in accounting
principles(e).............. NA -- (1.35) --
----------- ----------- -----------
$ 7.58 $ 9.25 $ 11.76
=========== =========== ===========
Diluted:
Continuing operations........ $ 2.42 $ 3.44 $ 6.85 $ 2.43
Discontinued operations(c)... NA 4.12 3.72 16.18
Extraordinary loss(d)........ NA -- -- (6.96)
Cumulative effect of changes
in accounting
principles(e).............. NA -- (1.35) --
----------- ----------- -----------
$ 7.56 $ 9.22 $ 11.65
=========== =========== ===========
Cash dividends per common
share........................... NA $ 6.00 $ 6.00 $ 9.00
BALANCE SHEET DATA:
Net assets of discontinued
operations(c)................. NA $ 1,739 $ 1,771 $ 1,883
Total assets.................... NA $ 4,759 $ 4,682 $ 4,653
Short-term debt(b).............. NA 304 75 74
Long-term debt(b)............... NA 671 713 639
Debt allocated to discontinued
operations(b)................. NA 2,456 2,123 1,590
Minority interest............... NA 407 408 304
Shareowners' equity............. NA 2,504 2,528 2,646
STATEMENT OF CASH FLOWS DATA:
Net cash provided (used) by
operating activities.......... NA $ 532 $ 519 $ 253
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------- ---------------------------------------
PRO FORMA
1995 1994 1999 1999 1998
---- ---- --------- ---- ----
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Revenues
Net sales and operating
revenues...................... $ 2,479 $ 1,989 $ 2,473 $ 2,473 $ 2,468
Other income, net............... 60 (8) 10 10 12
----------- ----------- ----------- ----------- -----------
2,539 1,981 2,483 2,483 2,480
----------- ----------- ----------- ----------- -----------
Costs and expenses(a)
Cost of sales (exclusive of
depreciation shown below)..... 1,788 1,354 1,812 1,812 1,731
Engineering, research, and
development................... 60 38 39 39 18
Selling, general, and
administrative................ 360 307 307 303 333
Depreciation and amortization... 83 52 110 110 110
----------- ----------- ----------- ----------- -----------
2,291 1,751 2,268 2,264 2,192
----------- ----------- ----------- ----------- -----------
Income from continuing operations
before interest expense, income
taxes, and minority interest.... 248 230 215 219 288
Interest expense (net of
interest capitalized)(b)..... 44 33 126 58 49
Income tax expense............ 91 52 31 60 48
Minority interest............. 23 -- -- 21 22
----------- ----------- ----------- ----------- -----------
Income from continuing
operations...................... 90 145 $ 58 80 169
===========
Income (loss) from discontinued
operations, net of income tax
(c)............................. 645 307 NA (99) 146
Extraordinary loss, net of income
tax(d).......................... -- (5) NA (7) --
Cumulative effect of changes in
accounting principles, net of
income tax(e)................... -- (39) NA (134) --
----------- ----------- ----------- -----------
Net income (loss)................ $ 735 $ 408 NA $ (160) $ 315
=========== =========== =========== ===========
Average number of shares of
common stock outstanding
Basic......................... 34,552,840 32,461,438 33,423,014 33,423,014 33,785,955
Diluted....................... 34,702,331 32,582,485 33,491,690 33,491,690 33,876,785
Earnings (loss) per average share
of common stock --
Basic:
Continuing operations........ $ 2.60 $ 4.46 $ 1.74 $ 2.40 $ 4.99
Discontinued operations(c)... 18.32 7.61 NA (2.98) 4.35
Extraordinary loss(d)........ -- (.15) NA (.20) --
Cumulative effect of changes
in accounting
principles(e).............. -- (1.20) NA (4.00) --
----------- ----------- ----------- -----------
$ 20.92 $ 10.72 $ (4.78) $ 9.34
=========== =========== =========== ===========
Diluted:
Continuing operations........ $ 2.59 $ 4.45 $ 1.73 $ 2.40 $ 4.97
Discontinued operations(c)... 18.24 7.58 NA (2.98) 4.34
Extraordinary loss(d)........ -- (.15) NA (.20) --
Cumulative effect of changes
in accounting
principles(e).............. -- (1.20) NA (4.00) --
----------- ----------- ----------- -----------
$ 20.83 $ 10.68 $ (4.78) $ 9.31
=========== =========== =========== ===========
Cash dividends per common
share........................... $ 8.00 $ 8.00 NA $ 4.50 $ 4.50
BALANCE SHEET DATA:
Net assets of discontinued
operations(c)................. $ 1,469 $ 700 NA $ 1,483 $ 1,940
Total assets.................... $ 3,635 $ 2,315 $ 3,017 $ 4,494 $ 4,999
Short-term debt(b).............. 109 31 63 237 197
Long-term debt(b)............... 469 303 1,610 796 822
Debt allocated to discontinued
operations(b)................. 1,454 813 NA 1,985 2,233
Minority interest............... 301 301 17 411 410
Shareowners' equity............. 3,148 2,900 441 2,140 2,664
STATEMENT OF CASH FLOWS DATA:
Net cash provided (used) by
operating activities.......... $ 1,443 $ 450 NA $ (166) $ 365
</TABLE>
(continued on next page)
16
<PAGE> 19
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
PRO FORMA
1998 1998 1997 1996
--------- ---- ---- ----
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net cash (used) by investing
activities....................... NA $ (754) $ (887) $ (685)
Net cash provided (used) by
financing activities.......... NA 216 354 147
Capital expenditures for
continuing operations......... NA 195 221 188
OTHER DATA:
EBITDA(f)....................... $ 372 $ 377 $ 505 $ 336
Ratio of earnings to fixed
charges(g).................... 1.3 2.2 4.8 2.3
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------- ---------------------------------------
PRO FORMA
1995 1994 1999 1999 1998
---- ---- --------- ---- ----
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net cash (used) by investing
activities....................... $ (1,162) $ (113) NA $ (1,068) $ (469)
Net cash provided (used) by
financing activities.......... (356) (151) NA 1,244 96
Capital expenditures for
continuing operations......... 208 114 NA 104 121
OTHER DATA:
EBITDA(f)....................... $ 331 $ 282 $ 325 $ 329 $ 398
Ratio of earnings to fixed
charges(g).................... 2.6 5.4 1.7 2.3 3.2
</TABLE>
- -------------------------
NOTE: The Financial Statements of Tenneco Automotive Inc. and Consolidated
Subsidiaries discussed in the following notes are included in this prospectus.
They cover the three years ended December 31, 1998 and the nine months ended
September 30, 1999 and 1998.
(a) Automotive recorded charges for restructuring and realignment of operations
of $53 million in 1998, $64 million in 1996 and $22 million in 1994.
(b) Debt amounts for 1998, 1997, and 1996, and for September 30, 1998, are net
of allocations of corporate debt to the net assets of Tenneco's discontinued
specialty packaging and paperboard packaging segments. Debt amounts for
September 30, 1999, are net of allocations of corporate debt to the net
assets of Tenneco's discontinued specialty packaging segment. Debt amounts
for 1995 and 1994 are net of allocations of corporate debt to the net assets
of Tenneco's discontinued specialty packaging, paperboard packaging, energy,
and shipbuilding segments. Interest expense for all periods presented is net
of interest expense allocated to income from discontinued operations. These
allocations of debt and related interest expense are based on the ratio of
Tenneco's investment in the specialty packaging, paperboard packaging,
energy, and shipbuilding segments' respective net assets to Tenneco
consolidated net assets plus debt. See Notes to the Financial Statements of
Tenneco Automotive Inc. and Consolidated Subsidiaries for additional
information.
(c) Discontinued operations reflected in the above periods consist of Tenneco's
(1) specialty packaging segment, which was discontinued in August 1999, (2)
paperboard packaging segment, which was discontinued in June 1999, (3)
energy and shipbuilding segments, which were discontinued in December 1996,
(4) farm and construction equipment segment, which was discontinued in March
1996, and (5) chemicals and brakes operations, which were discontinued
during 1994. See Notes to the Financial Statements of Tenneco Automotive
Inc. and Consolidated Subsidiaries for additional information.
(d) Represents Tenneco's costs related to prepayment of debt, including the 1996
loss recognized in the realignment of Tenneco's debt preceding its 1996
corporate reorganization and the 1999 loss recognized in connection with the
contribution of the containerboard assets to a new joint venture. See the
Notes to the Financial Statements of Tenneco Automotive Inc. and
Consolidated Subsidiaries for additional information.
(e) In 1999, Tenneco implemented the American Institute of Certified Public
Accountants Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities." In addition, effective January 1, 1999, Tenneco changed its
method of accounting for customer acquisition costs from a deferral method
to an expense-as-incurred method. In 1997, Tenneco implemented the Financial
Accounting Standards Board's Emerging Issues Task Force Issue 97-13,
"Accounting for Costs Incurred in Connection with a Consulting Contract that
Combines Business Process Reengineering and Information Technology
Transformation." In 1994, Tenneco adopted Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits." See
the Notes to the Financial Statements of Tenneco Automotive Inc. and
Consolidated Subsidiaries for additional information.
(f) EBITDA represents income from continuing operations before interest expense,
income taxes, minority interest and depreciation and amortization. EBITDA is
not a calculation based upon generally accepted accounting principles. The
amounts included in the EBITDA calculation, however, are derived from
amounts included in the consolidated historical or pro forma statements of
income data. In addition, EBITDA should not be considered as an alternative
to net income or operating income as an indicator of the operating
performance of Tenneco, or as an alternative to operating cash flows as a
measure of liquidity. Tenneco has reported EBITDA because it believes EBITDA
is a measure commonly reported and widely used by investors and other
interested parties as an indicator of a company's ability to incur and
service debt. Tenneco believes EBITDA assists investors in comparing a
company's performance on a consistent basis without regard to depreciation
and amortization, which can vary significantly depending upon accounting
methods (particularly when acquisitions are involved) or nonoperating
factors. However, the EBITDA measure presented in this document may not
always be comparable to similarly titled measures reported by other
companies due to differences in the components of the calculation.
(g) For purposes of computing this ratio, earnings generally consist of income
from continuing operations before income taxes and fixed charges, excluding
capitalized interest. Fixed charges consist of interest expense, the portion
of rental expense considered representative of the interest factor and
capitalized interest. For purposes of computing these ratios, preferred
stock dividends have been included in the calculations on a pre-tax basis.
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RISK FACTORS
You should read and carefully consider each of the following factors, as
well as the other information contained or incorporated by reference into this
prospectus, before making a decision to tender your outstanding notes in the
exchange offer.
The risk factors set forth below, other than the first and second risk
factors described below, are generally applicable to the outstanding notes as
well as the new notes.
RISKS FACTORS RELATED TO INVESTMENT IN THE NOTES
IF YOU DO NOT EXCHANGE YOUR OUTSTANDING NOTES PURSUANT TO THIS EXCHANGE
OFFER, YOU MIGHT NOT BE ABLE TO EVER SELL YOUR OUTSTANDING NOTES.
As outstanding notes are tendered and accepted in the exchange offer, the
trading market for the remaining untendered or tendered but not accepted
outstanding notes will be adversely affected. We anticipate that most holders of
the outstanding notes will elect to exchange the outstanding notes for new notes
due to the general absence of restrictions on the resale of new notes under the
Securities Act. Therefore, we anticipate that the liquidity of the market for
any outstanding notes remaining after the consummation of the exchange offer
will be substantially limited.
We will only issue new notes in exchange for outstanding notes that you
timely and properly tender. Therefore, you should allow sufficient time to
ensure timely delivery of the outstanding notes and you should carefully follow
the instructions on how to tender your outstanding notes. Neither we nor the
exchange agent are required to tell you of any defects or irregularities with
respect to your tender of the outstanding notes.
If you do not tender your outstanding notes or if we do not accept some of
your outstanding notes, those outstanding notes will continue to be subject to
the transfer and exchange restrictions in:
- the indenture,
- the legend on the outstanding notes, and
- the offering memorandum relating to the outstanding notes.
The restrictions on transfer of your outstanding notes arise because we
issued the outstanding notes pursuant to an exemption from the registration
requirements of the Securities Act and applicable state securities laws. In
general, you may only offer or sell the outstanding notes if they are registered
under the Securities Act and applicable state securities laws, or offered and
sold pursuant to an exemption from these requirements. If you do not tender your
outstanding notes, or if your outstanding notes are not accepted for exchange,
generally you will have no further right to require us to register your
outstanding notes after the exchange offer. Except in connection with this
exchange offer, we do not presently intend to register the outstanding notes
under the Securities Act.
THERE IS NO ESTABLISHED TRADING MARKET FOR THE NEW NOTES AND NO GUARANTEE
THAT A MARKET WILL DEVELOP OR THAT YOU WILL BE ABLE TO SELL YOUR NEW NOTES.
The new notes will constitute a new issue of securities, and there has not
been an established trading market for the new notes. A market may not develop,
and you may not be able to resell your new notes. Future trading prices of the
new notes will depend on many factors, including, among other things, prevailing
interest rates, our operating results and the market for similar securities.
The liquidity of, and trading market for, the new notes may also be
materially and adversely affected by declines in the market for high-yield
securities generally. Such a decline may materially and adversely affect such
liquidity and trading, independent of our financial performance and prospects.
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OUR SUBSTANTIAL DEBT COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND
PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE NOTES. THIS DEBT COULD
ALSO ADVERSELY AFFECT OUR OPERATING FLEXIBILITY AND PUT US AT A COMPETITIVE
DISADVANTAGE.
We have incurred a substantial amount of debt as a result of the debt
realignment related to the spin-off of Pactiv. As of September 30, 1999, on a
pro forma basis, we would have had indebtedness for money borrowed of about
$1,673 million if the spin-off had occurred on that date. This debt will require
significant interest payments. See "Unaudited Pro Forma Consolidated Financial
Statements." Subject to the limits contained in the indenture for the notes and
the new senior secured bank credit facility we entered into in connection with
the spin-off, we and our subsidiaries may incur additional debt from time to
time to finance capital expenditures, investments or acquisitions, or for other
general corporate purposes.
Our substantial level of debt and these significant demands on our cash
resources could have important effects on your investment. These effects may
include:
- making it more difficult for us to satisfy our obligations with respect
to the notes and our other debt;
- making it more difficult for us to obtain additional financing for
working capital, capital expenditures, acquisitions or other general
corporate purposes;
- requiring a substantial portion of our cash flow to be dedicated to debt
service payments instead of other purposes;
- increasing our vulnerability to general adverse economic and industry
conditions;
- limiting our financial flexibility in planning for and reacting to
changes in the industry in which we compete;
- placing us at a disadvantage as compared to less leveraged competitors;
and
- limiting our ability to borrow additional funds and increasing the cost
of borrowing.
Our ability to pay principal and interest on the notes, to repay our
secured debt and to satisfy our other debt obligations will depend upon our
future operating performance and the availability of refinancing debt. If we are
unable to service our debt and fund our business, we may be forced to reduce or
delay capital expenditures, seek additional debt financing or equity capital,
restructure or refinance our debt or sell assets.
OUR OPERATIONS ARE SUBSTANTIALLY RESTRICTED BY THE TERMS OF OUR DEBT, WHICH
COULD ADVERSELY AFFECT US AND INCREASE YOUR CREDIT RISK.
The indenture relating to the notes and the new senior secured bank credit
facility we entered into in connection with the spin-off include a number of
significant financial and other restrictive covenants. These covenants could
adversely affect us, and adversely affect investors, by limiting our ability to
plan for or react to market conditions or to meet our capital needs. These
covenants, among other things, restrict our ability to:
- - dispose of assets;
- - incur liens, guarantees or additional debt;
- - engage in sale-leaseback transactions;
- - pay dividends or make distributions;
- - engage in mergers or consolidations,
- - enter into investments or acquisitions;
- - engage in transactions with affiliates; and
- - repurchase or redeem capital stock.
THE INDENTURE AND OUR NEW SENIOR SECURED BANK CREDIT FACILITY CONTAIN
RESTRICTIVE COVENANTS THAT, IF NOT SATISFIED OR WAIVED, COULD RESULT IN
ACCELERATION OF OUR OUTSTANDING DEBT OBLIGATIONS.
The indenture and our new senior secured bank credit facility each contain
a number of restrictive covenants. Our failure to comply with these covenants
could result in an event of default which, if not
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cured or waived, could result in us being required to repay these borrowings
before their due date. If we were unable to make this repayment or otherwise
refinance these borrowings, the lenders under our senior secured credit facility
could foreclose on our assets. If we were able to refinance these borrowings on
less favorable terms, our results of operations and financial condition could be
adversely impacted by increased costs and rates.
DESPITE OUR DEBT LEVELS AFTER THE SPIN-OFF, WE MAY STILL BE ABLE TO INCUR
SIGNIFICANTLY MORE DEBT.
Despite the restrictions and limitations described above, we may be able to
incur significant additional indebtedness. The new senior secured credit
facility we entered into in connection with the spin-off will permit additional
borrowings of approximately $459 million, on a pro forma basis at September 30,
1999 after giving effect to the spin-off, and the indenture governing the notes
also permits us to incur additional indebtedness in specified circumstances. If
additional debt is added to our existing debt levels, the related risks that we
face could increase.
THE NOTES ARE SUBORDINATED TO ALL OF OUR SENIOR AND SECURED DEBT.
The payment of principal, interest and any other obligations with respect
to the notes and the subsidiary guarantees is generally subordinated to, and
ranks in right of payment behind, all of our and the subsidiary guarantors'
debt. This includes debt under the new senior secured bank credit facility but
will exclude any future indebtedness that expressly provides that it ranks equal
to, or junior in right of payment to, the notes and the subsidiary guarantees.
Further, as described below, the notes are subordinated in right of repayment to
obligations of the non-guarantor subsidiaries, including without limitation any
trade payables of those subsidiaries. As of September 30, 1999, the
non-guarantor subsidiaries had outstanding indebtedness of approximately $561
million and other outstanding liabilities, including trade payables and accrued
expenses, of $412 million. See "Description of the New Notes -- Subordination."
Upon any distribution to our creditors or the creditors of a subsidiary
guarantor in a bankruptcy, liquidation or reorganization or similar proceeding,
the holders of senior debt, including the lenders under the new senior secured
credit facility, will be entitled to be paid in full in cash before any payment
may be made with respect to the notes. Because we and the subsidiary guarantors
may not have sufficient funds or assets to pay all creditors, holders of notes
may receive less, ratably, than the holders of senior debt. In addition, our new
senior secured credit facility is secured by (1) substantially all of our
domestic assets, (2) 100% of the capital stock of our material domestic
subsidiaries and (3) up to 66% of the capital stock of our material first-tier
foreign subsidiaries. Accordingly, upon our liquidation or reorganization, the
holders of notes will have no claim against these assets or the capital stock of
these subsidiaries until the lenders under this bank credit facility are paid in
full. See "Description of Senior Credit Facility."
In addition, the payment of principal, interest and any other obligations
with respect to the notes will be prohibited in the event of a payment default
on any of our senior debt and may be delayed, at the option of the holders of
that senior debt, for up to 179 consecutive days in the event of specified non-
payment defaults. See "Description of the New Notes -- Subordination."
As of September 30, 1999, on a pro forma basis as if the spin-off had
occurred on that date, we had approximately $1,173 million of consolidated
senior debt outstanding and approximately $459 million of maximum undrawn
capacity under our new revolving credit facility. In addition, subject to the
terms of the indenture, we will be permitted to borrow substantial additional
indebtedness, including senior debt, in the future.
NOT ALL OF OUR SUBSIDIARIES GUARANTEE THE NOTES, AND ASSETS OF OUR
NON-GUARANTOR SUBSIDIARIES MAY NOT BE AVAILABLE TO MAKE PAYMENTS ON THE
NOTES.
Some of our subsidiaries are not guarantors of the notes. Payments on the
notes will only be required to be made by us and the subsidiary guarantors. As a
result, no payments are required to be made from assets of subsidiaries which do
not guarantee the notes unless those assets are transferred (by dividend or
otherwise) to us or a subsidiary guarantor.
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As of, and for the nine months ended, September 30, 1999, the non-guarantor
subsidiaries represented approximately 51% of the consolidated assets of
Automotive (excluding net assets of discontinued operations), approximately 56%
of the consolidated net sales of Automotive (excluding intercompany sales), and
approximately 53% of the consolidated EBITDA of Automotive. The non-guarantor
subsidiaries consist of all of our foreign subsidiaries and immaterial domestic
subsidiaries. To the extent we expand our international operations, a larger
percentage of our consolidated assets, net sales, EBITDA and operating income
may be derived from non-guarantor foreign subsidiaries. Our ability to
repatriate cash from foreign subsidiaries may be limited. See "-- Risks Relating
to Our Business -- We are subject to risks related to our international
operations."
THE SUBSIDIARY GUARANTEES RAISE FRAUDULENT TRANSFER ISSUES, WHICH COULD
IMPAIR THE ENFORCEABILITY OF THE SUBSIDIARY GUARANTEES.
Under U.S. bankruptcy law and comparable provisions of state fraudulent
transfer laws, a court could subordinate or void any guarantee if it found that
the guarantee was incurred with actual intent to hinder, delay or defraud
creditors or the guarantor did not receive fair consideration or reasonably
equivalent value for the guarantee and the guarantor was any of the following:
- insolvent or was rendered insolvent because of the guarantee;
- engaged in a business or transaction for which its remaining assets
constituted unreasonably small capital; or
- intended to incur, or believed that it would incur, debts beyond its
ability to pay at maturity.
If a court voided a guarantee as a result of fraudulent conveyance, or held it
unenforceable for any other reason, noteholders would cease to have a claim
against the guarantor and would be solely creditors of Tenneco and any other
guarantors.
WE MAY NOT HAVE SUFFICIENT FUNDS OR BE PERMITTED BY OUR SENIOR DEBT TO
PURCHASE NOTES UPON A CHANGE OF CONTROL.
Upon a change of control, we will be required to make an offer to purchase
all outstanding notes. However, we cannot assure you that we will have or will
be able to borrow sufficient funds at the time of any change of control to make
any required repurchases of notes, or that restrictions in our senior secured
bank credit facility or other senior debt we may incur in the future would
permit us to make the required repurchases. For the foreseeable future, we
expect covenants in our new senior secured credit facility will not permit us to
make the required repurchases.
RISKS RELATING TO OUR BUSINESS
CONSOLIDATION AMONG AUTOMOTIVE PARTS CUSTOMERS AND SUPPLIERS COULD MAKE IT
MORE DIFFICULT FOR US TO COMPETE FAVORABLY.
Our financial condition and results of operations could be adversely
affected because the customer base for automotive parts is consolidating in both
the original equipment market and aftermarket. As a result, we are competing for
business from fewer customers. Due to the cost focus of these major customers,
we have been, and expect to continue to be, required to reduce prices. We cannot
be certain that we will be able to generate cost savings and operational
improvements in the future that are sufficient to offset price reductions
required by existing customers and necessary to win additional business.
Furthermore, the trend towards consolidation among automotive parts
suppliers is resulting in fewer, larger suppliers who benefit from purchasing
and distribution economies of scale. If we cannot achieve cost savings and
operational improvements sufficient to allow us to compete favorably in the
future with these larger companies, our financial condition and results of
operations could be adversely affected due to a reduction of, or inability to
increase, sales. See "Business -- Industry Trends."
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WE ARE DEPENDENT ON LARGE CUSTOMERS FOR FUTURE REVENUES.
We depend on major vehicle manufacturers for a substantial portion of our
net sales. For example, during 1998 Ford and DaimlerChrysler accounted for 12.8%
and 10.9% of our net sales, respectively. The loss of all or a substantial
portion of our sales to any of our large volume customers could have a material
adverse effect on our financial condition and results of operations by reducing
cash flows and our ability to spread costs over a larger revenue base. We may
make fewer sales to these customers for a variety of reasons, including: (1)
loss of awarded business; (2) reduced or delayed customer requirements; or (3)
strikes or other work stoppages affecting production by the customers. See
"Business -- Analysis of Revenues."
WE MAY NOT BE ABLE TO SUCCESSFULLY RESPOND TO THE CHANGING DISTRIBUTION
CHANNELS FOR AFTERMARKET PRODUCTS.
Major automotive aftermarket retailers, such as AutoZone and Advance Auto
Parts, are attempting to increase their commercial sales by selling directly to
automotive parts installers in addition to individual consumers. These
installers have historically purchased from their local warehouse distributors
and jobbers, who are our more traditional customers. We cannot assure you that
we will be able to maintain or increase aftermarket sales through increasing our
sales to retailers. Furthermore, because of the cost focus of major retailers,
we have been, and expect to continue to be, required to offer price concessions.
Our failure to maintain or increase aftermarket sales, or to offset the impact
of any reduced sales or pricing through cost improvements, could have an adverse
impact on our business and operating results.
WE MAY BE UNABLE TO COMPETE FAVORABLY IN THE HIGHLY COMPETITIVE AUTOMOTIVE
PARTS INDUSTRY.
The automotive parts industry is highly competitive. Although the overall
number of competitors has decreased due to ongoing industry consolidation, we
face significant competition within each of our major product areas. The
principal competitive factors are price, quality, service, product performance,
design and engineering capabilities, new product innovation and timely delivery.
For more information about the automotive parts industry, see
"Business -- Overview of Automotive Parts Industry" and "Business -- Industry
Trends." We cannot assure you that we will be able to continue to compete
favorably in this competitive market or that increased competition will not have
a material adverse effect on our business by reducing our ability to increase or
maintain sales or profit margins.
WE MAY BE UNABLE TO REALIZE OUR BUSINESS STRATEGY OF IMPROVING OPERATING
PERFORMANCE.
We have either implemented or plan to implement several important strategic
initiatives designed to improve our operating performance. The failure to
achieve the goals of these initiatives could have a material adverse effect on
our business, particularly since we rely on these initiatives to offset pricing
pressures from our customers, as described above. We cannot assure you that we
will be able to successfully implement or realize the expected benefits of any
of these initiatives or that we will be able to sustain improvements made to
date. See "Prospectus Summary -- Our Company -- Recent Developments" and
"Business -- Business Strategy."
WE ARE SUBJECT TO RISKS RELATED TO OUR INTERNATIONAL OPERATIONS.
We have manufacturing and distribution facilities in many countries,
principally in North America, Europe and Latin America, and sell our products
worldwide. For 1998, about 48% of our net sales were derived from operations
outside North America. International operations are subject to various risks
which could have a material adverse effect on those operations or our business
as a whole, including:
- exposure to local economic conditions;
- exposure to local political conditions, including the risk of seizure of
assets by foreign government;
- currency exchange rate fluctuations;
- controls on the repatriation of cash; and
- export and import restrictions.
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WE MAY BE UNABLE TO REALIZE SALES REPRESENTED BY OUR AWARDED BUSINESS.
The realization of future sales from awarded business is inherently subject
to a number of important risks and uncertainties, including as to the number of
vehicles that our OE customers will actually produce, the timing of that
production and the mix of options that our OE customers and consumers may
choose. In addition, our customers generally have the right to replace us with
another supplier at any time for a variety of reasons. Accordingly, we cannot
assure you that we will in fact realize any or all of the future sales
represented by our awarded business.
EXCHANGE RATE FLUCTUATIONS COULD CAUSE A DECLINE IN OUR FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
As a result of our international operations, we generate a significant
portion of our net sales and incur a significant portion of our expenses in
currencies other than the U.S. dollar. To the extent we are unable to match
revenues received in foreign currencies with costs paid in the same currency,
exchange rate fluctuations in that currency could have a material adverse effect
on our business. For example, where we have significantly more costs than
revenues generated in a foreign currency, we are subject to risk if that foreign
currency appreciates against the U.S. dollar because the appreciation
effectively increases our cost in that country. We generally seek to mitigate
the effect of exchange rate fluctuations from time to time through the use of
derivative financial instruments, but cannot assure you that we will continue
this practice or be successful in these efforts.
The financial condition and results of operations of some of our operating
entities are reported in foreign currencies and then translated into U.S.
dollars at the applicable exchange rate for inclusion in our consolidated
financial statements. As a result, appreciation of the U.S. dollar against these
foreign currencies will have a negative impact on our reported revenues and
operating profit while depreciation of the U.S. dollar against these foreign
currencies will have a positive effect on reported revenues and operating
profit. We do not generally seek to mitigate this translation effect through the
use of derivative financial instruments. For more information about the impact
of exchange rate fluctuations, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
THE CYCLICALITY OF AUTOMOTIVE PRODUCTION AND SALES COULD CAUSE A DECLINE IN
OUR FINANCIAL CONDITION AND RESULTS.
A decline in automotive sales and production would likely cause a decline
in our sales to vehicle manufacturers, and could result in a decline in our
results of operations and financial condition. The automotive industry has been
characterized historically by periodic fluctuations in overall demand for
vehicles due to, among other things, changes in general economic conditions and
consumer preferences. These fluctuations generally result in corresponding
fluctuations in demand for our products. The highly cyclical nature of the
automotive industry presents a risk that is outside our control and that cannot
be accurately predicted.
LONGER PRODUCT LIVES OF AUTOMOTIVE PARTS ARE ADVERSELY AFFECTING AFTERMARKET
DEMAND FOR SOME OF OUR PRODUCTS.
The average useful life of automotive parts has been steadily increasing in
recent years due to innovations in products and technologies. The longer product
lives allow vehicle owners to replace parts of their vehicles less often. As a
result, a portion of sales in the aftermarket has been displaced. Additional
increases in the average useful lives of automotive parts are likely to
adversely affect the demand for our aftermarket products. Aftermarket sales
represented approximately 39% of our net sales for 1998. See
"Business -- Industry Trends."
THE HOURLY WORKFORCE IN THE AUTOMOTIVE INDUSTRY IS HIGHLY UNIONIZED AND OUR
BUSINESS COULD BE ADVERSELY AFFECTED BY LABOR DISRUPTIONS.
Substantially all of the hourly employees of North American vehicle
manufacturers are represented by the United Automobile, Aerospace and
Agricultural Implement Workers of America under collective
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bargaining agreements. In addition, vehicle manufacturers and their employees in
other countries are also subject to labor agreements. A work stoppage or strike
at the production facilities of a significant customer, at our facilities or at
a significant supplier could have an adverse impact on us by disrupting demand
for our products and/or our ability to manufacture our products.
WE MAY INCUR MATERIAL PRODUCT WARRANTY COSTS.
From time to time, we receive product warranty claims from our customers.
Vehicle manufacturers are increasingly requiring their outside suppliers to
guarantee or warrant their products and to bear the costs of repair and
replacement of these products under new vehicle warranties. We cannot assure you
that costs associated with providing product warranties will not be material.
WE CANNOT ASSURE YOU THAT WE WILL BE ABLE TO SUCCESSFULLY TRANSITION TO AN
INDEPENDENT PUBLIC COMPANY.
Automotive has never operated as a stand-alone company and has historically
been able to rely, to some degree, on the earnings, assets and cash flow of
Pactiv's business for capital requirements and some administrative services.
Accordingly, the pro forma consolidated financial statements for Tenneco
included in this document may not necessarily reflect the results of operations
and financial condition that would have been achieved if Tenneco had operated
independently of Pactiv during the periods presented.
IF NOT FULLY RESOLVED, THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Many computer software systems, as well as some hardware and equipment
utilizing date-sensitive data, were designed to use two-digit date fields.
Consequently, these systems, hardware and equipment will not be able to
recognize dates properly beyond the year 1999. If we did not complete on a
timely and cost-efficient basis the remediation or replacement of critical
systems or equipment not yet in compliance, or develop alternative procedures,
or if our major suppliers, financial institutions or others with whom we conduct
business were unsuccessful in implementing timely solutions, year 2000 issues
could have a material adverse effect on our financial condition and results of
operations. This adverse effect could result from interruptions in our ability
to manufacture our products, process and ship orders, and properly bill and
collect accounts receivable. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISK FACTORS RELATING TO THE SPIN-OFF
WE COULD BE ADVERSELY AFFECTED IF THE SPIN-OFF, THE CORPORATE RESTRUCTURING
TRANSACTIONS OR THE DEBT REALIGNMENT ARE NOT VALID UNDER FRAUDULENT
TRANSFER OR LEGAL DIVIDEND STATUTES.
In connection with the spin-off, Tenneco undertook numerous corporate
restructuring transactions and realigned its debt, which, along with the
spin-off, are subject to federal and state fraudulent conveyance laws. Under
these laws, if a court determines that one of the parties to these transactions
did not receive fair consideration and, at the time, was insolvent, had
unreasonably small capital or was unable to pay its debts as they came due, the
court could reverse the transactions or the spin-off or impose liability on the
parties. The resulting complications and costs could have a material adverse
effect on us.
In addition, the corporate restructuring transactions, debt realignment and
spin-off are subject to state corporate distribution statutes. For example,
under Delaware law, a corporation may only pay dividends to its stockholders
either: (1) out of its surplus, calculated as net assets minus capital; or (2)
if there is no surplus, out of its net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year, subject to some
restrictions. Although all distributions are intended to be made entirely from
surplus, we cannot assure you that a court will not later determine that the
spin-off, one or more of the corporate restructuring transactions or the debt
realignment was unlawful under state corporate law. This could allow the court
to reverse the transactions. The resulting complications and costs could have a
material adverse effect on us.
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FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. The words "will,"
"may," "designed to," "outlook," "believes," "should," "anticipates," "plans,"
"expects," "intends" and "estimates," and similar expressions, identify these
forward-looking statements. These forward-looking statements are contained
principally under the headings " Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business." Although we believe that the expectations reflected in these
forward-looking statements are based on reasonable assumptions, these
expectations may not prove to be correct. Because these forward-looking
statements are also subject to risks and uncertainties, actual results may
differ materially from the expectations expressed in the forward-looking
statements. Important factors that could cause actual results to differ
materially from the expectations reflected in the forward-looking statements
include those described in "Risk Factors," as well as:
- general economic, business and market conditions;
- operating hazards associated with our business;
- changes in automobile manufacturers' actual and forecasted requirements
for our products;
- labor disruptions at our facilities or at any of our significant
customers or suppliers;
- customer acceptance of new products;
- capital availability or costs, including changes in interest rates or
market perceptions of our company;
- changes by the Financial Accounting Standards Board or the Securities and
Exchange Commission of authoritative generally accepted accounting
principles or policies;
- the impact of laws and regulations, including environmental laws and
regulations; and
- the occurrence or non-occurrence of circumstances beyond our control.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement under the Securities Act of 1933 covering the offering of the new
notes. This document does not contain all of the information included in this
registration statement and its associated exhibits and schedules. For more
information about us and the new notes, you should read this registration
statement and its associated exhibits and schedules. This document summarizes
provisions of contracts and other documents that it refers you to. If we have
filed any contract or other document as an exhibit to the registration statement
covering the new notes, you should read the exhibit for a more complete
understanding of the contract or document involved. Each statement in this
document summarizing the provisions of a contract or other document is qualified
in all respects by reference to the actual document.
We file annual, quarterly and other reports, proxy statements and other
information with the SEC. You may read and copy our filings with the SEC at the
public reference rooms at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's regional offices located at 7 World
Trade Center, 13th Floor, New York, New York 10048, and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. You may also obtain copies of those
filings at prescribed rates by (a) calling the SEC at 1-800-SEC-0330, or (b)
writing to the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may also access the filings electronically on the
SEC's website at http://www.sec.gov. Because our common stock is listed on the
New York, Chicago and Pacific Stock Exchanges, you may review reports and other
information concerning us at these exchanges.
In addition, we maintain a website where you can find information about us
at http://www.tenneco-automotive.com.
INCORPORATION OF INFORMATION BY REFERENCE
The SEC allows "incorporation by reference" of information filed with the
SEC into this prospectus. This means that we can disclose important information
to you by referring you to those documents. The information incorporated by
reference is considered part of this prospectus, except that information filed
in later-dated documents will automatically update and supersede the information
contained in earlier-dated documents.
The following documents filed with the SEC by us, File No. 1-12387, are
incorporated by reference into this document and shall be deemed to be a part
hereof:
(a) our Annual Report on Form 10-K for the fiscal year ended December
31, 1998;
(b) our Quarterly Reports on Form 10-Q for the fiscal quarter ended
March 31, 1999, the fiscal quarter ended June 30, 1999, as amended,
and the fiscal quarter ended September 30, 1999;
(c) our Definitive Proxy Statements for the Annual Meeting of
Stockholders held on May 11, 1999 and the Special Meeting of
Stockholders held on October 25, 1999;
(d) our Current Report on Form 8-K dated April 12, 1999;
(e) our Current Report on Form 8-K dated July 14, 1999.
(f) our Current Report on Form 8-K dated August 20, 1999, which includes
financial and other information that supersedes the comparable
information in our Annual Report on Form 10-K for the fiscal year
ended December 31, 1998, our Quarterly Reports on Form 10-Q for the
fiscal quarters ended March 31, 1999 and June 30, 1999 and our
Current Report on Form 8-K dated July 14, 1999;
(g) our Current Report on Form 8-K dated October 4, 1999, as amended;
(h) our Current Report on Form 8-K dated October 7, 1999;
26
<PAGE> 29
(i) our Current Report on Form 8-K dated October 12, 1999;
(j) our Current Report on Form 8-K dated October 25, 1999;
(k) our Current Report on Form 8-K dated November 4, 1999; and
(l) All documents subsequently filed by us pursuant to Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 after the
date of this document and prior to the termination of the offering
of the new notes.
27
<PAGE> 30
USE OF PROCEEDS
We will not receive any proceeds from the exchange offer. The net proceeds
of the sale by us of the outstanding notes were approximately $482 million,
after deducting underwriting discounts and commissions and other expenses of the
offering payable by us. These net proceeds, together with initial borrowings
under our new senior secured credit facility and new credit facilities entered
into by Pactiv, were used to fund the cash portions of the debt realignment. See
"The Spin-off -- Debt Realignment."
28
<PAGE> 31
CAPITALIZATION
The following table sets forth the unaudited historical capitalization of
Tenneco as of September 30, 1999, and the unaudited pro forma capitalization of
Tenneco as of September 30, 1999 after giving effect to the debt realignment and
the spin-off and related transactions, each as if they occurred on that date.
You should read this table in conjunction with the Financial Statements of
Tenneco Automotive Inc. and Consolidated Subsidiaries and related notes,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Unaudited Pro Forma Consolidated Financial Statements," each of
which is included elsewhere in this prospectus.
<TABLE>
<CAPTION>
TENNECO
----------------------
SEPTEMBER 30, 1999
----------------------
HISTORICAL PRO FORMA
---------- ---------
(IN MILLIONS)
<S> <C> <C>
Short-term debt, including current maturities of long-term
debt........................................................ $ 237 $ 63
Long-term debt.............................................. 796 22
Senior Credit Facility(a)................................... -- 1,088
11 5/8% Senior subordinated notes due 2009.................. -- 500
Debt allocated to discontinued operations(b)................ 1,985 --
------ ------
Total debt.................................................. 3,018 1,673(c)
------ ------
Minority interest of continuing operations.................. 411 17
Minority interest of discontinued operations................ 21 --
------ ------
Total minority interest..................................... 432 17
------ ------
Shareowners' equity......................................... 2,140 441
------ ------
Total capitalization........................................ $5,590 $2,131
====== ======
</TABLE>
- -------------------------
(a) The senior credit facility consists of $1,050 million in term loans
borrowed upon the consummation of the spin-off and a $500 million revolving
credit facility, of which $38 million on a pro forma basis was borrowed
upon consummation of the spin-off. See "Description of Senior Credit
Facility."
(b) Tenneco's historical practice was to incur debt for its consolidated group
at the parent company level or at a limited number of subsidiaries, rather
than at the operating company level, and to centrally manage various cash
functions. Consequently, corporate debt of Tenneco has been allocated to
the net assets of Tenneco's discontinued specialty packaging segment based
on the portion of Tenneco's investment in the specialty packaging segment
which Tenneco deemed to be debt. This allocation is generally based upon
the ratio of specialty packaging's net assets to Tenneco's consolidated net
assets plus debt.
(c) Represents amounts outstanding under the Tenneco borrowings incurred in
connection with the debt realignment. The pro forma capitalization is based
on the actual results of the cash tender offer and the exchange offer
completed as part of Tenneco's debt realignment prior to the spin-off.
After completion of those offers, Tenneco retained the obligation to repay
approximately $85 million in debt securities not tendered or exchanged by
security holders. Of these securities, approximately $63 million were due
on November 15, 1999, and are reflected as current maturities of long-term
debt in the above table. The remaining $22 million of these securities is
shown as long-term debt. See "The Spin-off -- Debt Realignment" and
"Description of Senior Credit Facility."
29
<PAGE> 32
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Consolidated Balance Sheet of Tenneco as
of September 30, 1999, and the Unaudited Pro Forma Consolidated Statements of
Income for the nine months ended September 30, 1999 and the year ended December
31, 1998, reflect the effects of:
- the debt realignment;
- the spin-off of Pactiv and related transactions; and
- the April 1999 contribution of Pactiv's containerboard assets to a new
joint venture and the June 1999 sale of Pactiv's folding carton assets
(the "paperboard transactions"). These two transactions are reflected
only in the pro forma statement of income data since they were completed
before the date of the pro forma balance sheet.
The Unaudited Pro Forma Consolidated Statements of Income have been
prepared as if these transactions occurred as of January 1, 1998. The Unaudited
Pro Forma Consolidated Balance Sheet has been prepared as if the debt
realignment, spin-off and related transactions occurred on September 30, 1999.
The Unaudited Pro Forma Consolidated Financial Statements for these periods are
not necessarily indicative of the results that would have actually occurred if
these transactions had been consummated as of September 30, 1999 or January 1,
1998, or results which may be attained in the future.
The spin-off represents the pro rata distribution of Pactiv common stock to
the holders of Tenneco common stock. Consequently, no gain or loss will be
recognized as a result of the spin-off.
Following the spin-off, Tenneco executed a one-for-five reverse stock
split. All share and per share amounts in the unaudited pro forma consolidated
financial statements reflect the reverse stock split.
The pro forma adjustments, as described in the Notes to the Unaudited Pro
Forma Consolidated Financial Statements, are based upon available information
and upon certain assumptions that management believes are reasonable.
You should read the Unaudited Pro Forma Consolidated Financial Statements
in conjunction with the Financial Statements of Tenneco Automotive Inc. and
Consolidated Subsidiaries for the year ended December 31, 1998 and the nine
months ended September 30, 1999.
30
<PAGE> 33
TENNECO
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------
SPIN-OFF CONSOLIDATED
TENNECO DEBT AND RELATED TENNECO
AS REPORTED REALIGNMENT TRANSACTIONS PRO FORMA
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments........... $ 42 $ -- $ -- $ 42
Receivables................................... 680 -- -- 680
--
Inventories................................... 403 -- -- 403
Other current assets.......................... 91 31(a) -- 122
------ ----- ------- ------
Total current assets....................... 1,216 31 -- 1,247
Plant, property, and equipment, net............. 1,055 -- -- 1,055
Goodwill and intangibles, net................... 505 -- -- 505
Other assets and deferred charges............... 235 34(a) (59)(f) 210
Net assets of discontinued operations........... 1,483 -- (1,483)(b) --
------ ----- ------- ------
Total assets............................... $4,494 $ 65 $(1,542) $3,017
====== ===== ======= ======
LIABILITIES AND
SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt (including current maturities
on long-term debt)......................... $ 237 $(174)(a) $ -- $ 63
Trade payables................................ 365 -- -- 365
Other current liabilities..................... 286 -- -- 286
------ ----- ------- ------
Total current liabilities.................. 888 (174) -- 714
Long-term debt.................................. 796 814(a) -- 1,610
Deferred income taxes........................... 104 -- (24)(f) 80(d)
Other liabilities and deferred credits.......... 155 -- -- 155
Minority interest............................... 411 (394)(a) -- 17
Shareowners' equity............................. 2,140 (181)(a) (1,483)(b) 441
(35)(f)
------ ----- ------- ------
Total liabilities and shareowners'
equity................................... $4,494 $ 65 $(1,542) $3,017
====== ===== ======= ======
</TABLE>
See the accompanying Notes to Unaudited Pro Forma Consolidated Financial
Statements.
31
<PAGE> 34
TENNECO
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------------------
SPIN-OFF CONSOLIDATED
TENNECO PAPERBOARD DEBT AND RELATED TENNECO
AS REPORTED TRANSACTIONS REALIGNMENT TRANSACTIONS PRO FORMA
----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES
Net sales and operating
revenues....................... $ 2,473 $ -- $ -- $ -- $ 2,473
Other income, net................. 10 -- -- -- 10
------------ ---- ---- ----- ------------
2,483 -- -- -- 2,483
------------ ---- ---- ----- ------------
OPERATING COSTS AND EXPENSES
Cost of sales (exclusive of
depreciation shown below)...... 1,812 -- -- -- 1,812
Engineering, research, and
development.................... 39 -- -- -- 39
Selling, general, and
administrative................. 303 -- -- 4(f) 307
Depreciation and amortization..... 110 -- -- -- 110
------------ ---- ---- ----- ------------
2,264 -- -- 4 2,268
INCOME BEFORE INTEREST EXPENSE,
INCOME TAXES, AND MINORITY
INTEREST.......................... 219 -- -- (4) 215
Interest expense.................... 58 (15)(c) 83(e) -- 126(e)
Income tax expense.................. 60 6(g) (33)(g) (2)(g) 31
Minority interest................... 21 -- (21)(h) -- --
------------ ---- ---- ----- ------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS........................ $ 80 $ 9 $(29) $ (2) $ 58
============ ==== ==== ===== ============
EARNINGS PER SHARE
Average shares of common stock --
Basic........................ 33,423,014 33,423,014
Diluted...................... 33,491,690 33,491,690
Income from continuing
operations --
Basic........................ $2.40 $1.74
Diluted...................... $2.40 $1.74
</TABLE>
See the accompanying Notes to Unaudited Pro Forma Consolidated Financial
Statements.
32
<PAGE> 35
TENNECO
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
(MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
------------------------------------------
SPIN-OFF CONSOLIDATED
TENNECO PAPERBOARD DEBT AND RELATED TENNECO
AS REPORTED TRANSACTIONS REALIGNMENT TRANSACTIONS PRO FORMA
----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES
Net sales and operating
revenues................... $ 3,237 $ -- $ -- $ -- $ 3,237
Other income, net............. (25) -- -- -- (25)
------------ ---- ---- ----- ------------
3,212 -- -- -- 3,212
------------ ---- ---- ----- ------------
OPERATING COSTS AND EXPENSES:
Cost of sales (exclusive of
depreciation shown
below)..................... 2,332 -- -- -- 2,332
Engineering, research, and
development................ 31 -- -- -- 31
Selling, general, and
administrative............. 472 -- -- 5(f) 477
Depreciation and
amortization............... 150 -- -- -- 150
------------ ---- ---- ----- ------------
2,985 -- 5 2,990
------------ ---- ---- ----- ------------
INCOME BEFORE INTEREST EXPENSE,
INCOME TAXES, AND MINORITY
INTEREST...................... 227 -- -- (5) 222
Interest expense................ 69 (53)(c) 153(e) -- 169(e)
Income tax expense (benefit).... 13 21(g) (61)(g) (2)(g) (29)
Minority interest............... 29 -- (29)(h) -- --
------------ ---- ---- ----- ------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS.................... $ 116 $ 32 $(63) $ (3) $ 82
============ ==== ==== ===== ============
EARNINGS PER SHARE
Average shares of common
stock --
Basic.................... 33,701,115 33,701,115
Diluted.................. 33,766,906 33,766,906
Income from continuing
operations --
Basic.................... $3.45 $2.43
Diluted.................. $3.44 $2.43
</TABLE>
See the accompanying Notes to Unaudited Pro Forma Consolidated Financial
Statements.
33
<PAGE> 36
TENNECO
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(a) To reflect adjustments to Tenneco's debt for the debt realignment and the
assumed payment of interest on Tenneco consolidated debt tendered or
exchanged as part of the pre-spin-off debt realignment. The adjustment to
equity reflects the net impact of the debt realignment, the recording of
debt issue costs and deferred income taxes related to the debt realignment.
Tenneco acquired certain subsidiary preferred stock as part of the debt
realignment. In the cash tender offer, Tenneco offered to purchase
securities with a book value of approximately $1,374 million. Of this
amount, approximately $1,292 million was tendered by security holders.
Therefore, Tenneco retained the obligation to pay the remaining $82 million
of debt securities as they become due. Approximately $63 million of these
securities were due on November 15, 1999 and have been reflected as current
maturities on long-term debt on the accompanying pro forma balance sheet. In
the exchange offer, Tenneco offered to exchange new Pactiv public debt
securities for Tenneco debt securities with a book value of approximately
$1,166 million. Of this amount, approximately $1,163 million was exchanged
by security holders. Therefore, Tenneco retained the obligation to pay the
remaining $3 million of debt securities as they become due. The new Pactiv
debt securities were recorded at the net carrying amount of the Tenneco debt
securities for which they were exchanged. In other words, the new Pactiv
debt securities were not considered to be "substantially different" for
accounting purposes from the Tenneco debt securities for which they were
exchanged. Tenneco will incur an extraordinary charge as a result of the
debt realignment related to the cash tender offers which it expects will be
approximately $12 million after tax. Other costs, including transaction
costs and costs associated with foreign tax restructuring initiatives, will
be incurred by Tenneco in connection with the corporate restructuring
transactions and the spin-off, which Tenneco estimates will be approximately
$50 million after-tax. The effect on Tenneco's debt of these costs has been
reflected in this pro forma adjustment. However, these charges have not been
included in the unaudited pro forma consolidated statements of income.
(b) To reflect the spin-off of Pactiv common stock to holders of Tenneco common
stock at an exchange ratio of one share of Pactiv common stock for each
share of Tenneco common stock.
(c) To reflect the adjustment to interest expense resulting from the use of $854
million of proceeds from (1) the contribution of the containerboard assets
of Tenneco's paperboard packaging segment to a new joint venture with an
affiliate of Madison Dearborn Partners, Inc. and (2) the sale of Tenneco's
folding carton operations. For the purpose of this pro forma adjustment, the
$854 million of Tenneco short-term debt, with an average annual effective
interest rate of 6 1/4%, was assumed to be repaid.
(d) Deferred income taxes at September 30, 1999 include $45 million of net
operating loss carryforwards which will be utilized by Pactiv in connection
with the paperboard transactions.
34
<PAGE> 37
(e) To reflect the adjustment to interest expense from the allocation of Tenneco
debt to Pactiv in the debt realignment as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------------- ------------
(IN MILLIONS)
<S> <C> <C>
Interest expense on historical debt(1)......... $(58) $(69)
Reduction of interest expense from paperboard
transactions(2).............................. 15 53
Interest expense on the new Tenneco
borrowings(3)................................ 122 162
Amortization of debt financing costs and
commitment fees(4)........................... 4 7
---- ----
Adjustment to interest expense................. $ 83 $153
==== ====
</TABLE>
- -------------------------
(1) Weighted average outstanding historical debt and average annual
effective interest rates were $1,010 million and 7.2%, respectively,
for the nine months ended September 30, 1999 and $1,155 million and
7.0%, respectively, for the year ended December 31, 1998.
(2) See Note (c) above.
(3) Weighted average outstanding debt and average annual effective
interest rate for the new Tenneco borrowings were assumed to be
$1,673 million and 9 5/8%, respectively, for the nine months ended
September 30, 1999 and the year ended December 31, 1998.
(4) Represents commitment fees on the unused borrowing capacity of the
new financing arrangements to be entered into prior to the spin-off
and the amortization of deferred debt financing costs.
A 1/8% change in the assumed interest rates would change annual pro forma
interest expense by approximately $2 million, before the effect of income
taxes.
(f) To reflect the increase in net periodic pension costs resulting from the
transfer to Pactiv of prepaid pension costs attributable to Automotive
employees. Automotive employees will no longer participate in the Tenneco
Retirement Plan following the spin-off and Pactiv has become the sponsor of
this plan. These prepaid pension costs were transferred to Pactiv in
connection with the corporate restructuring transactions.
(g) To reflect the income tax expense effects of pro forma adjustments at an
assumed statutory tax rate of 40%.
(h) To eliminate the minority interest related to the acquisition of subsidiary
preferred stock in connection with the debt realignment.
35
<PAGE> 38
SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
Tenneco has historically incurred costs at the corporate level, including
administrative services, corporate overhead, and costs related to operation as a
public company, which have not been fully allocated to the operating segments.
Because these functions became part of Pactiv upon the spin-off, the costs have
been included in Pactiv's historical operating results and are not in our
historical or pro forma EBIT. We must be able to obtain these functions in order
to operate as a public company following the spin-off. We have entered into
services agreements under which Pactiv and a third party will provide us with
specified administrative services for a period of time. Additionally, our EBIT
includes charges for restructuring and sales of receivables which we believe
require additional explanation. The following information discusses these items
in detail and their financial impact on Tenneco.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(MILLIONS)
<S> <C> <C>
- Costs for shared services -- Pactiv owns the
administrative services operations. Tenneco must
acquire the services from Pactiv and third party
service providers under services agreements. Had the
administrative services operations been allocated
based on the provisions of the services agreements,
approximately $27 million would have been billed to
Automotive for 1998, and Automotive would have
incurred $3 million in additional depreciation....... $(30) $(23)
- Public company costs -- Tenneco will not have the
benefit of corporate operations such as treasury,
corporate secretary, tax reporting, internal audit,
board of directors and other public company functions
following the spin-off. Tenneco must replace these
functions so that it can operate as a public company
following the spin-off. Tenneco estimates that had it
operated as a stand-alone, separate entity it would
have incurred additional costs for these
functions............................................ $(20) $(15)
- Sale of receivables -- Tenneco's results of
operations include costs related to a receivables
sale program operated by Tenneco prior to the
spin-off. The debt realignment contemplates the
termination of this program. The pro forma financial
statements of Tenneco calculate interest on debt
balances assuming these receivables have not been
sold................................................. $ 19 $ 2
- Restructuring charge -- Tenneco recorded a
restructuring charge in the fourth quarter of 1998
for the costs of a plan designed to reduce
administrative and operational costs. Refer to Note 3
to the audited Financial Statements of Tenneco
Automotive Inc. and Consolidated Subsidiaries........ $ 54 $ --
- Cost savings -- The restructuring plan contemplates
closing certain facilities and terminating employees
to reduce cost of sales. Refer to "Management's
Discussion and Analysis of Financial Condition and
Results of Operations" for further information on the
expected savings..................................... $ 25 $ 10
</TABLE>
36
<PAGE> 39
SELECTED FINANCIAL DATA
The following consolidated selected financial data as of and for each of
the fiscal years in the five years ended December 31, 1998, were derived from
the audited financial statements of Tenneco and its consolidated subsidiaries.
The following consolidated selected financial data as of and for each of the
nine month periods ended September 30, 1999 and 1998 were derived from Tenneco's
unaudited condensed financial statements and its consolidated subsidiaries. In
the opinion of Tenneco's management, the selected financial data of Tenneco as
of and for the nine months ended September 30, 1999 and 1998, include all
adjusting entries, consisting only of normal recurring adjustments, necessary to
present fairly the information set forth. You should not regard the results of
operations for the nine months ended September 30, 1999 as indicative of the
results that may be expected for the full year.
Following the spin-off, Tenneco executed a one-for-five reverse stock
split. All share and per share amounts in the selected financial data reflect
the reverse stock split.
There is other information we believe is relevant to understanding our
results of operations following the spin-off. These items relate to corporate
overhead costs incurred by Tenneco and its administrative services operations
that we expect will differ following the spin-off. For further information you
should see "Supplemental Consolidated Financial Data."
You should read all of this information in conjunction with the Financial
Statements of Tenneco Automotive Inc. and Consolidated Subsidiaries for the year
ended December 31, 1998 and for the nine months ended September 30, 1999,
contained elsewhere in this prospectus.
37
<PAGE> 40
<TABLE>
<CAPTION>
Nine Months
Years Ended December 31, Ended September 30,
------------------------------------------------------------------- -------------------------
1998(a) 1997(a) 1996(a) 1995 1994 1999(a) 1998(a)
------- ------- ------- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA(B):
Net sales and operating
revenues from continuing
operations.................. $ 3,237 $ 3,226 $ 2,980 $ 2,479 $ 1,989 $ 2,473 $ 2,468
=========== =========== =========== =========== =========== =========== ===========
Income from continuing
operations before interest
expense, income taxes, and
minority interest --
Automotive.................. $ 248 $ 407 $ 249 $ 240 $ 223 $ 223 $ 305
Other....................... (21) (12) (7) 8 7 (4) (17)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total..................... 227 395 242 248 230 219 288
Interest expense (net of
interest capitalized)(c)...... 69 58 60 44 33 58 49
Income tax expense.............. 13 80 79 91 52 60 48
Minority interest............... 29 23 21 23 -- 21 22
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from continuing
operations.................... 116 234 82 90 145 80 169
Income (loss) from discontinued
operations, net of income
tax(d)........................ 139 127 564 645 307 (99) 146
Extraordinary loss, net of
income tax(e)................. -- -- (236) -- (5) (7) --
Cumulative effect of changes in
accounting principles, net of
income tax(f)................. -- (46) -- -- (39) (134) --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)............... 255 315 410 735 408 (160) 315
Preferred stock dividends....... -- -- 12 12 60 -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) to common
stock......................... $ 255 $ 315 $ 398 $ 723 $ 348 $ (160) $ 315
----------- ----------- ----------- ----------- ----------- ----------- -----------
Average number of shares of
common stock outstanding
Basic....................... 33,701,115 34,052,946 33,921,875 34,552,840 32,461,438 33,423,014 33,785,955
Diluted..................... 33,766,906 34,160,327 34,105,223 34,702,331 32,582,485 33,491,690 33,876,785
Earnings (loss) per average
share of common stock --
Basic:
Continuing operations..... $ 3.45 $ 6.87 $ 2.45 $ 2.60 $ 4.46 $ 2.40 $ 4.99
Discontinued
operations(d)........... 4.13 3.73 16.27 18.32 7.61 (2.98) 4.35
Extraordinary loss(e)..... -- -- (6.96) -- (.15) (.20) --
Cumulative effect of
changes in accounting
principles(f)........... -- (1.35) -- -- (1.20) (4.00) --
----------- ----------- ----------- ----------- ----------- ----------- -----------
$ 7.58 $ 9.25 $ 11.76 $ 20.92 $ 10.72 $ (4.78) $ 9.34
=========== =========== =========== =========== =========== =========== ===========
Diluted:
Continuing operations..... $ 3.44 $ 6.85 $ 2.43 $ 2.59 $ 4.45 $ 2.40 $ 4.97
Discontinued
operations(d)........... 4.12 3.72 16.18 18.24 7.58 (2.98) 4.34
Extraordinary loss(e)..... -- -- (6.96) -- (.15) (.20) --
Cumulative effect of
changes in accounting
principles(f)........... -- (1.35) -- -- (1.20) (4.00) --
----------- ----------- ----------- ----------- ----------- ----------- -----------
$ 7.56 $ 9.22 $ 11.65 $ 20.83 $ 10.68 $ (4.78) $ 9.31
=========== =========== =========== =========== =========== =========== ===========
Cash dividends per common
share......................... $ 6.00 $ 6.00 $ 9.00 $ 8.00 $ 8.00 $ 4.50 $ 4.50
</TABLE>
(continued on next page)
38
<PAGE> 41
<TABLE>
<CAPTION>
Nine Months
Years Ended December 31, Ended September 30,
--------------------------------------------------------- ---------------------
1998(a) 1997(a) 1996(a) 1995 1994 1999(a) 1998(a)
------- ------- ------- ---- ---- --------- ---------
(Millions Except Per Share Amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(B):
Net assets of discontinued
operations(d)........................... $ 1,739 $ 1,771 $ 1,883 $ 1,469 $ 700 $ 1,483 $ 1,940
Total assets.............................. 4,759 4,682 4,653 3,635 2,315 4,494 4,999
Short-term debt(c)........................ 304 75 74 109 31 237 197
Long-term debt(c)......................... 671 713 639 469 303 796 822
Debt allocated to discontinued
operations(c)........................... 2,456 2,123 1,590 1,454 813 1,985 2,233
Minority interest......................... 407 408 304 301 301 411 410
Shareowners' equity....................... 2,504 2,528 2,646 3,148 2,900 2,140 2,664
STATEMENT OF CASH FLOWS DATA(B)
Net cash provided (used) by operating
activities.............................. $ 532 $ 519 $ 253 $ 1,443 $ 450 $ (166) $ 365
Net cash (used) by investing activities... (754) (887) (685) (1,162) (113) (1,068) (469)
Net cash provided (used) by financing
activities.............................. 216 354 147 (356) (151) 1,244 96
Capital expenditures for continuing
operations.............................. 195 221 188 208 114 104 121
OTHER DATA:
EBITDA(g)................................. $ 377 $ 505 $ 336 $ 331 $ 282 $ 329 $ 398
Ratio of earnings to fixed charges(h)..... 2.2 4.8 2.3 2.6 5.4 2.3 3.2
</TABLE>
- -------------------------
NOTE: The Financial Statements of Tenneco Automotive Inc. and Consolidated
Subsidiaries discussed in the following notes are included in this prospectus.
They cover the three years ended December 31, 1998 and the nine months ended
September 30, 1999 and 1998.
(a) For a discussion of the significant items affecting comparability of the
financial information for the years ended 1998, 1997, and 1996, and for the
nine months ended September 30, 1999 and 1998, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(b) During the periods presented, Tenneco completed numerous acquisitions. The
most significant acquisition was Automotive's acquisition of Clevite for
$328 million in July 1996. See Notes to the Financial Statements of Tenneco
Automotive Inc. and Consolidated Subsidiaries for additional information.
See also "Business -- Strategic Acquisitions and Alliances" included
elsewhere in this prospectus.
(c) Debt amounts for 1998, 1997, and 1996, and for June 30, 1998, are net of
allocations of corporate debt to the net assets of Tenneco's discontinued
specialty packaging and paperboard packaging segments. Debt amounts for
September 30, 1999, are net of allocations of corporate debt to the net
assets of Tenneco's discontinued specialty packaging segment. Debt amounts
for 1995 and 1994 are net of allocations of corporate debt to the net assets
of Tenneco's discontinued specialty packaging, paperboard packaging, energy,
and shipbuilding segments. Interest expense for periods presented is net of
interest expense allocated to income from discontinued operations. These
allocations of debt and related interest expense are based on the ratio of
Tenneco's investment in the specialty packaging, paperboard packaging,
energy, and shipbuilding segments' respective net assets to Tenneco
consolidated net assets plus debt. See Notes to the Financial Statements of
Tenneco Automotive Inc. and Consolidated Subsidiaries for additional
information.
(d) Discontinued operations reflected in the above periods consist of Tenneco's
(1) specialty packaging segment, which was discontinued in August 1999, (2)
paperboard packaging segment, which was discontinued in June 1999, (3)
energy and shipbuilding segments, which were discontinued in December 1996,
(4) farm and construction equipment segment, which was discontinued in March
1996, and (5) chemicals and brakes operations, which were discontinued
during 1994. See Notes to the Financial Statements of Tenneco Automotive
Inc. and Consolidated Subsidiaries for additional information.
(e) Represents Tenneco's costs related to prepayment of debt, including the 1996
loss recognized in the realignment of Tenneco's debt preceding its 1996
corporate reorganization and the 1999 loss recognized in connection with the
contribution of the containerboard assets to a new joint venture. See the
Notes to the Financial Statements of Tenneco Automotive Inc. and
Consolidated Subsidiaries for additional information.
(f) In 1999, Tenneco implemented the American Institute of Certified Public
Accountants Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities." In addition, effective January 1, 1999, Tenneco changed its
method of accounting for customer acquisition costs from a deferred method
to an expense-as-incurred method. In 1997, Tenneco implemented the Financial
Accounting Standards Board's Emerging Issues Task Force Issue 97-13,
"Accounting for Costs Incurred in Connection with a Consulting Contract that
Combines Business Process Reengineering and Information Technology
Transformation." In 1994, Tenneco adopted Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits." See
the Notes to the Financial Statements of Tenneco Automotive Inc. and
Consolidated Subsidiaries for additional information.
(g) EBITDA represents income from continuing operations before interest expense,
income taxes, minority interest and depreciation and amortization. EBITDA is
not a calculation based upon generally accepted accounting principles. The
amounts included in the EBITDA calculation, however, are derived from
amounts included in the historical statements of income data. In addition,
EBITDA should not be considered as an alternative to net income or operating
income as an indicator of the operating
(continued on next page)
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<PAGE> 42
performance of Tenneco, or as an alternative to operating cash flows as a
measure of liquidity. Tenneco has reported EBITDA because it believes EBITDA
is a measure commonly reported and widely used by investors and other
interested parties as an indicator of a company's ability to incur and
service debt. Tenneco believes EBITDA assists investors in comparing a
company's performance on a consistent basis without regard to depreciation
and amortization, which can vary significantly depending upon accounting
methods, particularly when acquisitions are involved, or nonoperating
factors. However, the EBITDA measure presented in this document may not
always be comparable to similarly titled measures reported by other
companies due to differences in the components of the calculation.
(h) For purposes of computing this ratio, earnings generally consist of income
from continuing operations before income taxes and fixed charges excluding
capitalized interest. Fixed charges consist of interest expense, the portion
of rental expense considered representative of the interest factor and
capitalized interest. For purposes of computing these ratios, preferred
stock dividends have been included in the calculations on a pre-tax basis.
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<PAGE> 43
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
Tenneco originally sold the outstanding notes to Salomon Smith Barney Inc.
and certain other initial purchasers, under the terms of a purchase agreement
dated October 8, 1999. The initial purchasers subsequently resold the notes to
qualified institutional buyers in reliance on Rule 144A and Regulation S under
the Securities Act. As a condition to the purchase agreement, Tenneco, the
subsidiary guarantors and the initial purchasers entered into a registration
rights agreement, which is filed as an exhibit to the registration statement of
which this prospectus forms a part, in which Tenneco and the guarantors agreed
to:
(1) file a registration statement registering the new notes with the
Securities and Exchange Commission within 120 days after the original
issuance of the outstanding notes;
(2) use their best efforts to have the registration statement relating
to the new notes declared effective by the Securities and Exchange
Commission within 150 days after the original issuance of the outstanding
notes; and
(3) unless the exchange offer would not be permitted by applicable law
or staff interpretation of the Securities and Exchange Commission, commence
the exchange offer and use their best efforts to issue, within 180 days
after the original issuance of the outstanding notes, new notes in exchange
for all outstanding notes tendered before the expiration time.
We have agreed to keep the exchange offer open for not less than 20
business days, or longer if required by applicable law, after the date on which
notice of the exchange offer is mailed to the holders of the outstanding notes.
The registration rights agreement also requires us to include in the prospectus
for the exchange offer information necessary to allow broker-dealers to satisfy
the prospectus delivery requirements in connection with resales of the new notes
received by those broker-dealers in the exchange offer. See "-- Resale of the
New Notes."
For each outstanding note properly surrendered to us in the exchange offer,
the holder of that note will receive a new note having a principal amount equal
to that of the surrendered outstanding note. See "-- Interest on the New Notes"
for a description of how interest will accrue on each new note and cease to
accrue on the outstanding notes.
We have agreed to file with the Securities and Exchange Commission a shelf
registration statement to cover resales of the outstanding notes by holders who
satisfy certain conditions relating to the provision of information in
connection with the shelf registration statement if:
(1) we are not permitted to consummate the exchange offer because it
is not permitted by applicable law or interpretations of the staff of the
Securities and Exchange Commission; or
(2) the exchange offer is not consummated on or before April 11, 2000;
or
(3) any holder of "private exchange notes" so requests; or
(4) in the case of any holder of outstanding notes who participates in
the exchange offer, that holder does not receive new notes that may be
resold without restriction under state and federal securities laws, other
than due solely to the holder's status as an affiliate of ours.
For purposes of the foregoing, "private exchange notes" refer to notes that
are issued privately by us in exchange for outstanding notes to any initial
purchaser of outstanding notes who holds such notes acquired by it and having,
or that are reasonably likely to be determined to have, the status of an unsold
allotment in the initial distribution, or any other holder of outstanding notes
who is not entitled to participate in the exchange offer, upon the request of
that initial purchaser or holder. Any private exchange notes will be issued
simultaneously with the delivery of the new notes in the exchange offer, and
will be identical in all material respects to the new notes.
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<PAGE> 44
We will, in the event of the filing of a shelf registration statement,
provide to each holder of outstanding notes eligible to participate in the shelf
registration statement copies of the prospectus which is a part of the shelf
registration statement, notify each such holder when the shelf registration
statement for the outstanding notes has become effective and take certain other
actions as are required to permit resales of the outstanding notes. A holder of
outstanding notes that sells the notes under the shelf registration statement
generally will be required to be named as a selling securityholder in the
related prospectus and to deliver a prospectus to purchasers, will be subject to
civil liability provisions under the Securities Act in connection with such
sales and will be bound by the provisions of the registration rights agreement
which are applicable to the holder, including indemnification obligations. In
addition, each such holder will be required to deliver information to be used in
connection with the shelf registration statement in order to have their notes
included in the shelf registration statement.
We will pay liquidated damages to each holder of outstanding notes if:
(1) we fail to file any of the registration statements on or before
the date specified for such filing in the registration rights agreement;
(2) any of such registration statements is not declared effective by
the Securities and Exchange Commission before the date specified for such
effectiveness (the "Effectiveness Target Date");
(3) we fail to consummate the exchange offer on or before April 11,
2000; or
(4) any shelf registration statement is declared effective but
thereafter ceases to be effective during the periods specified in the
registration rights agreement, unless all notes have been disposed of
thereunder. Each such event described in clauses (1) through (4), above, is
referred to herein as a "registration default".
The amount of liquidated damages will be equal to a per annum rate of 0.25%
on the principal amount of outstanding notes held by each holder with respect to
the first 90-day period immediately following the occurrence of the first
registration default. Liquidated damages will increase by an additional per
annum rate of 0.25% with respect to each subsequent 90-day period until all
registration defaults have been cured, up to a maximum amount of liquidated
damages for all registration defaults of 1.00% per annum on the principal amount
of outstanding notes. We will pay all accrued liquidated damages on each
interest payment date in the manner provided for the payment of interest in the
notes' indenture. Following the cure of all registration defaults, the accrual
of liquidated damages will cease.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and the accompanying letter of transmittal, we will accept all outstanding notes
validly tendered before 5:00 p.m., New York City time, on March 7, 2000. We will
issue $1,000 principal amount of new notes in exchange for each $1,000 principal
amount of outstanding notes accepted in the exchange offer. Holders may tender
some or all of their outstanding notes in the exchange offer in integral
multiples of $1,000.
The form and terms of the new notes are identical to the outstanding notes
except for the following:
(1) the new notes bear a Series B designation and a different CUSIP
number from the outstanding notes to differentiate the new notes from the
outstanding notes;
(2) the new notes have been registered under the Securities Act and,
therefore, will not bear legends restricting their transfer; and
(3) the holders of the new notes will not generally be entitled to
rights under the registration rights agreement, including the provisions
providing for an increase in the interest rate on the notes in certain
circumstances relating to the timing of the exchange offer, all of which
rights generally will terminate when the exchange offer is terminated.
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<PAGE> 45
The new notes will evidence the same debt as the outstanding notes and will
be entitled to the benefits of the indenture under which the outstanding notes
were issued. As of the date of this prospectus, $500 million in aggregate
principal amount of the notes is outstanding. Only a registered holder of
outstanding notes, or such holder's legal representative or attorney-in-fact, as
reflected on the records of the trustee under the notes indenture, may
participate in the exchange offer. There will be no fixed record date for
determining registered holders of the outstanding notes entitled to participate
in the exchange offer.
The holders of outstanding notes do not have any appraisal or dissenters'
rights under the General Corporation Law of the State of Delaware or the notes'
indenture in connection with the exchange offer.
We shall be deemed to have accepted validly tendered outstanding notes
when, as and if we have given oral or written notice thereof to the exchange
agent. The exchange agent will act as agent for the tendering holders for the
purpose of receiving the new notes from us.
If any tendered outstanding notes are not accepted for exchange because of
an invalid tender, the occurrence of certain other events set forth in this
prospectus or otherwise, the certificates for any such unaccepted notes will be
returned, without expense, to the tendering holder as promptly as practicable
after the expiration time. If the unaccepted outstanding notes were tendered by
book-entry transfer they will be returned by book-entry transfer to the
designated account.
Those holders who tender outstanding notes in the exchange offer will not
be required to pay brokerage commissions or fees or, subject to the instructions
in the letter of transmittal, transfer taxes with respect to the exchange of
outstanding notes. We will pay all charges and expenses, other than certain
applicable taxes, in connection with the exchange offer. See "-- Fees and
Expenses."
Following consummation of the exchange offer, we may, in our sole
discretion, commence one or more additional exchange offers to holders of
outstanding notes who did not exchange their outstanding notes for new notes in
the exchange offer on terms which may differ from those contained in the
registration rights agreement. We may use this prospectus, as it may be amended
of supplemented from time to time, in connection with any such additional
exchange offers. Such additional exchange offers may take place from time to
time until all outstanding notes have been exchanged for new notes.
EXPIRATION TIME; EXTENSIONS; AMENDMENTS
The term "expiration time" shall mean 5:00 p.m., New York City time, on
March 7, 2000 unless we, in our sole discretion, extend the exchange offer, in
which case the term "expiration time" shall mean the latest time to which the
exchange offer is extended.
We have no current plans to extend the exchange offer. In order to extend
the expiration time, we will notify the exchange agent of any extension by oral
or written notice and will make a public announcement of such extension, in each
case prior to 9:00 a.m., New York City time, on the next business day after the
previously scheduled expiration time.
We reserve the right, in our sole discretion, to
- delay accepting any outstanding notes, or
- terminate the exchange offer,
if any of the conditions set forth below under "-- Conditions to the Exchange
Offer" shall not have been satisfied, in each case by giving oral or written
notice of such delay, extension or termination to the exchange agent. We also
reserve the right to extend the exchange offer or amend the terms of the
exchange offer in any manner. Any delay in acceptance, extension, termination or
amendment will be followed as promptly as practicable by a public announcement
of the matter. If the exchange offer is amended in a manner determined by us to
constitute a material change, we will promptly disclose the amendment by means
of a prospectus supplement that will be distributed to the registered holders of
the outstanding notes and the exchange offer will be extended for a period of
five to ten business days, as
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<PAGE> 46
required by law, depending upon the significance of the amendment and the manner
of disclosure to the registered holders, assuming the exchange offer would
otherwise expire during that five to ten business-day period.
Without limiting the manner in which we may choose to make a public
announcement of any delay, extension, termination or amendment of the exchange
offer, we shall not have an obligation to publish, advertise or otherwise
communicate any public announcement other than by making a timely release of the
announcement to the Dow Jones News Service.
INTEREST ON THE NEW NOTES
Each new note will bear interest from October 14, 1999, the issuance date
of the outstanding notes. The holders of outstanding notes that are accepted for
exchange will be deemed to have waived the right to receive payment of any
accrued interest on those outstanding notes from October 14, 1999 to the date of
issuance of the new notes. Interest on the outstanding notes accepted for
exchange will cease to accrue upon issuance of the new notes in exchange
therefor. Consequently, if you exchange your outstanding notes for new notes,
you will receive the same interest payment on April 15, 2000, which is the first
interest payment date with respect to the outstanding notes and the new notes,
that you would have received if you had not accepted the exchange offer.
PROCEDURES FOR TENDERING
Only a registered holder of outstanding notes may tender outstanding notes
in the exchange offer. To effectively tender in the exchange offer, a holder
must transmit to The Bank of New York, as exchange agent, before the expiration
time either:
- a properly completed and duly executed letter of transmittal, which
accompanies this prospectus, or a facsimile of the letter of transmittal,
with the signature on the letter of transmittal guaranteed if the letter
of transmittal so requires, and all other documents required by the
letter of transmittal, or
- if the outstanding notes are being tendered pursuant to the book-entry
procedures described below, an "Agent's Message" (as defined below)
instead of a letter of transmittal.
In addition, prior to the expiration time, either:
- the exchange agent must receive certificates for the outstanding notes
along with the accompanying letter of transmittal; or
- the exchange agent must receive a timely confirmation of book-entry
transfer of the outstanding notes into the exchange agent's account at
DTC according to the procedures for book-entry transfer described below,
along with a properly completed letter of transmittal or a properly
transmitted Agent's Message; or
- the holder must comply with the guaranteed delivery procedures described
below.
To be tendered effectively, the exchange agent must receive any physical
delivery of a letter of transmittal and other required documents at the address
set forth below under "-- Exchange Agent" prior to the expiration time.
By executing the letter of transmittal or effecting delivery by book-entry
transfer, each holder is making to us those representations set forth under the
heading "-- Resale of the New Notes."
The tender by a holder of outstanding notes will constitute an agreement
between that holder and us in accordance with the terms and subject to the
conditions set forth in this prospectus and in the letter of transmittal.
The method of delivery of outstanding notes and the letter of transmittal
and all other required documents to the exchange agent is at the election and
sole risk of the holder. As an alternative to
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delivery by mail, holders may wish to consider overnight or hand delivery
service. In all cases, sufficient time should be allowed to assure delivery to
the exchange agent before the expiration time. No letter of transmittal or
outstanding notes should be sent to us. Holders may request that their
respective brokers, dealers, commercial banks, trust companies or nominees
effect the above transactions for them.
Only a registered holder of outstanding notes may tender outstanding notes
in connection with the exchange offer. The term "holder" with respect to the
exchange offer means any person in whose name outstanding notes are registered
on our books, any other person who has obtained a properly completed bond power
from the registered holder, or any person whose notes are held of record by DTC
who desires to deliver their notes by book-entry transfer at DTC.
Any beneficial owner whose outstanding notes are registered in the name of
a broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should promptly contact the person in whose name the notes are
registered and instruct the registered holder to tender on the beneficial
owner's behalf. If, as a beneficial owner, you wish to tender on your own
behalf, you must, before completing and executing the letter of transmittal and
delivering your outstanding notes, either make appropriate arrangements to
register ownership of the outstanding notes in your name or obtain a properly
completed bond power from the registered holder. The transfer of registered
ownership may take considerable time.
Signatures on a letter of transmittal or a notice of withdrawal must be
guaranteed by an Eligible Institution (defined below) unless the notes tendered
are tendered (1) by a registered holder who has not completed the box entitled
"Special Registration Instructions" or "Special Delivery Instructions" on the
letter of transmittal or (2) for the account of an Eligible Institution. In the
event that signatures on a letter of transmittal or a notice of withdrawal, as
the case may be, are required to be guaranteed, the guarantee must be by an
"eligible guarantor institution" within the meaning of Rule 17Ad-15 under the
Exchange Act (an "Eligible Institution").
If the letter of transmittal is signed by a person other than the
registered holder of any outstanding notes listed therein, such notes must be
endorsed or accompanied by properly completed bond powers, signed by such
registered holder as such registered holder's name appears on such notes with
the signature on such bond powers guaranteed by an Eligible Institution.
If the letter of transmittal or any notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and submit with the letter of
transmittal evidence satisfactory to us of their authority to so act.
We understand that the exchange agent will make a request, promptly after
the date of this prospectus, to establish accounts with respect to the
outstanding notes at the book-entry transfer facility of DTC for the purpose of
facilitating this exchange offer. Subject to the establishment of these
accounts, any financial institution that is a participant in the book-entry
transfer facility system may make book-entry delivery of outstanding notes by
causing the transfer of outstanding notes into the exchange agent's account with
respect to outstanding notes in accordance with DTC's procedures for transfer.
Although delivery of the notes may be effected through book-entry transfer into
the exchange agent's account at the book-entry transfer facility, unless the
holder complies with the procedures described in the following paragraph, an
appropriate letter of transmittal properly completed and duly executed with any
required signature guarantee and all other required documents must in each case
be transmitted to and received or confirmed by the exchange agent at its address
set forth below before the expiration time, or the guaranteed delivery
procedures described below must be complied with. The delivery of documents to
the book-entry transfer facility does not constitute delivery to the exchange
agent.
The exchange agent and DTC have confirmed that the exchange offer is
eligible for the Automated Tender Offer Program ("ATOP") of DTC. Accordingly,
DTC participants may electronically transmit their acceptance of the exchange
offer by causing DTC to transfer outstanding notes to the exchange agent in
accordance with the procedures for transfer established under ATOP. DTC will
then send an "Agent's
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Message" to the exchange agent. The term "Agent's Message" means a message
transmitted by DTC, which when received by the exchange agent forms part of the
confirmation of a book-entry transfer, and which states that DTC has received an
express acknowledgment from the participant in DTC tendering outstanding notes
which are the subject of such book-entry confirmation that the participant has
received and agrees to be bound by the terms of the letter of transmittal and
that we may enforce such agreement against that participant. In the case of an
Agent's Message relating to guaranteed delivery, the term means a message
transmitted by DTC and received by the exchange agent which states that DTC has
received an express acknowledgment from the participant in DTC tendering
outstanding notes that the participant has received and agrees to be bound by
the notice of guaranteed delivery.
All questions as to the validity, form, eligibility, including time of
receipt, acceptance and withdrawal of the tendered notes will be determined by
us in our sole discretion, which determinations will be final and binding. We
reserve the absolute right to reject any and all outstanding notes not validly
tendered or any outstanding notes the acceptance of which would, in the opinion
of our counsel, be unlawful. We also reserve the absolute right to waive any
defects, irregularities or conditions of tender as to particular notes. Our
interpretation of the terms and conditions of the exchange offer, including the
instructions in the letter of transmittal, will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of notes must be cured within such time as we shall determine. Although we
intend to notify holders of defects or irregularities with respect to the
tenders of outstanding notes, neither we, the exchange agent nor any other
person shall incur any liability for failure to give such notification. Tenders
of outstanding notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any outstanding notes received by the
exchange agent that are not validly tendered and as to which the defects or
irregularities have not been cured or waived, or if outstanding notes are
submitted in a principal amount greater than the principal amount of outstanding
notes being tendered by such tendering holder, such unaccepted or non-exchanged
outstanding notes will be returned by the exchange agent to the tendering
holders, or, in the case of notes tendered by book-entry transfer into the
exchange agent's account at the book-entry transfer facility under the
book-entry transfer procedures described above, such unaccepted or non-exchanged
outstanding notes will be credited to an account maintained with such book-entry
transfer facility, unless otherwise provided in the letter of transmittal
designated for such outstanding notes, as soon as practicable following the
expiration time.
GUARANTEED DELIVERY PROCEDURES
Those holders who wish to tender their outstanding notes and:
- whose outstanding notes are not immediately available; or
- who cannot deliver their outstanding notes, the letter of
transmittal or any other required documents to the exchange agent before
the expiration time; or
- who cannot complete the procedures for book-entry transfer before
the expiration time,
may effect a tender if:
- the tender is made through an Eligible Institution;
- before the expiration time, the exchange agent receives from that
Eligible Institution a properly completed and duly executed notice of
guaranteed delivery, a form of which accompanies this prospectus, by
facsimile transmission, mail or hand delivery, setting forth the name and
address of the holder, the certificate number or numbers of such
outstanding notes and the principal amount of outstanding notes tendered,
stating that the tender is being made thereby, and guaranteeing that,
within five New York Stock Exchange trading days after the date on which
expiration time occurs, either (a) the letter of transmittal, or facsimile
thereof, together with the certificate(s) representing the outstanding
notes and any other documents required by the letter of transmittal, will
be deposited by the Eligible Institution with the exchange agent or (b) a
confirmation of book-entry transfer of
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<PAGE> 49
such outstanding notes into the exchange agent's account at DTC, along with
a letter of transmittal or Agent's Message, will be delivered to the
exchange agent; and
- either (a) the properly completed and duly executed letter of
transmittal, or facsimile thereof, together with the certificate(s)
representing all tendered outstanding notes in proper form for transfer and
all other documents required by the letter of transmittal or (b) if
applicable, confirmation of a book-entry transfer into the exchange agent's
account at DTC, along with a properly completed and duly executed letter of
transmittal or properly transmitted Agent's Message, are actually received
by the exchange agent within five NYSE trading days after the expiration
time.
Upon request to the exchange agent, a notice of guaranteed delivery will be
sent to holders who wish to tender their outstanding notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of outstanding notes may be
withdrawn at any time prior to the expiration time.
To effectively withdraw a tender of outstanding notes in the exchange
offer, the exchange agent must receive a telegram, telex, letter or facsimile
transmission notice of withdrawal at its address set forth herein prior to the
expiration time. Any notice of withdrawal must:
- specify the name of the person having deposited the outstanding
notes to be withdrawn;
- identify the outstanding notes to be withdrawn, including the
certificate number or numbers and the aggregate principal amount of the
notes or, in the case of outstanding notes transferred by book-entry
transfer, the name and number of the account at DTC to be credited;
- be signed by the holder in the same manner as the original signature
on the letter of transmittal by which the outstanding notes were tendered,
including any required signature guarantees, or be accompanied by documents
of transfer sufficient to permit the trustee with respect to the
outstanding notes to register the transfer of the outstanding notes into
the name of the person withdrawing the tender; and
- specify the name in which any outstanding notes are to be
registered, if different from that of the person depositing the outstanding
notes.
All questions as to the validity, form and eligibility, including time of
receipt, of notices of withdrawal will be determined by us, and our
determination shall be final and binding on all parties. Any outstanding notes
withdrawn will be deemed not to have been validly tendered for purposes of the
exchange offer and no new notes will be issued with respect thereto unless the
outstanding notes so withdrawn are validly retendered. Any outstanding notes
which have been tendered but which are not accepted for exchange because of the
rejection of the tender due to uncured defects or the prior termination of the
exchange offer, or which have been validly withdrawn, will be returned to the
holder thereof without cost to the holder as soon as practicable after
withdrawal, rejection of tender or termination of the exchange offer. Properly
withdrawn outstanding notes may be retendered by following one of the procedures
described above under "-- Procedures for Tendering" at any time before the
expiration time.
CONDITIONS OF THE EXCHANGE OFFER
The exchange offer is subject to the condition that the exchange offer, or
the making of any exchange by a holder, does not violate applicable law or any
applicable interpretation of the staff of the Securities and Exchange
Commission.
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<PAGE> 50
If we determine that the exchange offer is not permitted by applicable law
or staff interpretation, we may terminate the exchange offer. In connection with
any termination we may:
- refuse to accept any outstanding notes and return any outstanding
notes that have been tendered;
- extend the exchange offer and retain all outstanding notes tendered
before the expiration time, subject to the rights of the holders of
tendered outstanding notes to withdraw their tendered outstanding notes; or
- waive the termination event with respect to the exchange offer and
accept all properly tendered outstanding notes that have not been properly
withdrawn.
If the waiver constitutes a material change in the exchange offer, we will
disclose the change by means of a supplement to this prospectus that will be
distributed to each registered holder of outstanding notes, and we will extend
the exchange offer for a period of five to ten business days, depending upon the
significance of the waiver, if the exchange offer would otherwise expire during
that period.
EXCHANGE AGENT
The Bank of New York has been appointed as exchange agent for the exchange
offer. Questions and requests for assistance, requests for additional copies of
this prospectus or the letter of transmittal and requests for the notice of
guaranteed delivery should be directed to the exchange agent, addressed as
follows:
<TABLE>
<S> <C> <C>
By Regular or Certified Mail: By Facsimile: 212-815-6339 By Overnight Courier or Hand:
The Bank of New York (Eligible Guarantor The Bank of New York
101 Barclay Street, 7E Institutions Only) 101 Barclay Street, 7E
New York, NY 10286 New York, NY 10286
Attn: Ayikwei Aryeetey To Confirm by Telephone: Attn: Ayikwei Aryeetey
Reorganization Section 212-815-3687 Reorganization Section
Attn: Ayikwei Aryeetey
</TABLE>
Any requests or deliveries to an address or facsimile number other than as
set forth above will not constitute a valid delivery.
FEES AND EXPENSES
We will bear the expenses of soliciting tenders. The principal solicitation
for tenders is being made by mail. Additional solicitations, however, may be
made by our officers and regular employees and those of our affiliates in
person, by telegraph or telephone.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers or other persons
soliciting acceptances of the exchange offer. We will pay the exchange agent,
however, reasonable and customary fees for its services and will reimburse the
exchange agent for its reasonable out-of-pocket expenses in connection with the
exchange offer.
We will pay the cash expenses incurred by us in connection with the
exchange offer. These expenses include fees and expenses of the exchange agent
and the trustee, accounting and legal fees and printing costs, among others.
We will pay all transfer taxes, if any, applicable to the exchange of
outstanding notes pursuant to the exchange offer. If, however, a transfer tax is
imposed for any reason other than the exchange of outstanding notes pursuant to
the exchange offer, then the amount of any such transfer taxes, whether imposed
on the registered holder or any other persons, will be payable by the tendering
holder. If satisfactory evidence of payment of these taxes or exemption
therefrom is not submitted with the letter of transmittal, the amount of the
transfer taxes will be billed directly to such tendering holder.
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<PAGE> 51
ACCOUNTING TREATMENT
Because the terms of the new notes are not "substantially different" from
the terms of the outstanding notes, the new notes will be recorded at the same
carrying value as the outstanding notes, which is face value as reflected in our
accounting records on the date of exchange. Accordingly, we will not recognize
any gain or loss on the exchange transaction for accounting purposes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of outstanding notes who do not exchange their outstanding notes
for new notes under the exchange offer will remain subject to the restrictions
on transfer of the outstanding notes:
- as set forth in the legend printed on the outstanding notes and in the
indenture as a consequence of the issuance of the outstanding notes under
an exemption from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws;
and
- otherwise as set forth in the offering memorandum distributed in
connection with the private offering of the outstanding notes.
In general, you may not offer or sell the outstanding notes unless they are
registered under the Securities Act, or if the offer or sale is exempt from
registration under the Securities Act and applicable state securities laws.
Except as required by the registration rights agreement, we do not intend to
register resales of the outstanding notes under the Securities Act.
RESALE OF THE NEW NOTES
Based on no-action letters issued by the staff of the Securities and
Exchange Commission to third parties, we believe the new notes issued pursuant
to the exchange offer in exchange for outstanding notes may be offered for
resale, resold and otherwise transferred by any holder (other than (1) a
broker-dealer who purchased such notes directly from us for resale pursuant to
Rule 144A or any other available exemption under the Securities Act or (2) a
person that is an "affiliate" of ours within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided, however, that the holder is
acquiring the new notes in its ordinary course of business and is not
participating, and has no arrangement or understanding with any person to
participate, in the distribution of the new notes. In the event that our belief
is inaccurate, holders of new notes who transfer new notes in violation of the
prospectus delivery provisions of the Securities Act and without an exemption
from registration thereunder may incur liability under the Securities Act. We do
not assume or indemnify holders against such liability.
If, however, any holder acquires new notes in the exchange offer for the
purpose of distributing or participating in a distribution of the new notes,
that holder cannot rely on the position of the staff of the Securities and
Exchange Commission enunciated in the referenced no-action letters or any
similar interpretive letters, and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction, unless an exemption from registration is otherwise
available. Further, each participating broker-dealer that receives new notes for
its own account in exchange for outstanding notes, where the exchanged
outstanding notes were acquired by such participating broker-dealer as a result
of market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of the new notes.
Although a broker-dealer may be an "underwriter" within the meaning of the
Securities Act, the letter of transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. We will make this
prospectus, as it may be amended or supplemented from time to time, available
for use by such broker-dealers in connection with resales of new notes received
in exchange for outstanding notes for a period of 180 days after the exchange
offer is completed.
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<PAGE> 52
As contemplated by these no-action letters and the registration rights
agreement, each holder tendering outstanding notes in the exchange offer is
required to represent to us in the letter of transmittal, that, among things:
(1) the person receiving the new notes pursuant to the exchange offer,
whether or not such person is the holder, is receiving them in the ordinary
course of business;
(2) neither the holder nor any such other person has an arrangement or
understanding with any person to participate in the distribution of such
new notes and that such holder is not engaged in, and does not intend to
engage in, a distribution of new notes;
(3) neither the holder nor any such other person is an "affiliate" of
ours within the meaning of Rule 405 under the Securities Act, or, if the
holder is an "affiliate" of ours, that the holder will comply with the
registration and prospectus delivery requirements of the Securities Act, to
the extent applicable; and
(4) the holder acknowledges and agrees that:
(a) any person participating in the exchange offer for the purpose
of distributing the new notes must comply with the registration and
prospectus delivery requirements of the Securities Act in connection
with a secondary resale transaction with respect to the new notes
acquired by such person and cannot rely on the position of the staff of
the SEC set forth in no-action letters that are discussed above and
under the heading "-- Purpose and Effect of the Exchange Offer;" and
(b) any broker-dealer that receives new notes for its own account
in exchange for outstanding notes pursuant to the exchange offer must
deliver a prospectus in connection with any resale of such new notes,
but by so acknowledging, the holder shall not be deemed to admit that,
by delivering a prospectus, it is an "underwriter" within the meaning of
the Securities Act.
The exchange offer is not being made to, and we will not accept surrenders
for exchange from, holders of the notes in any jurisdiction in which the
exchange offer or its acceptance would not comply with the securities or blue
sky laws of such jurisdiction.
All resales must be made in compliance with state securities or "blue sky"
laws. Such compliance may require that the exchange notes be registered or
qualified in a state or that the resales be made by or through a licensed
broker-dealer, unless exemptions from these requirements are available. We
assume no responsibility with regard to compliance with these requirements.
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<PAGE> 53
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following review of Tenneco's financial condition and results of
operations should be read in conjunction with the Financial Statements of
Tenneco Automotive Inc. and Consolidated Subsidiaries and notes thereto
presented beginning on page F-1.
GENERAL
Tenneco's Automotive business is one of the world's largest designers,
manufacturers, and distributors of ride control and emissions control products
and systems for the automotive original equipment market and aftermarket, with
leading market shares in North America and Europe. Now that the spin-off of
Pactiv is complete, Tenneco's continuing business consists solely of the
Automotive business.
In the original equipment business, Automotive sells most of its products
under business awards which generally last for the production life of the
platform model. See "Risk Factors -- Risks Relating to Our Business." Automotive
normally begins working on products awarded for new or redesigned models two to
five years before the marketing of those models to the public. One or more of
Automotive's products were included on 70 vehicle launches in the 21 months
ended September 30, 1999. The portion of Automotive's net sales derived from the
original equipment market has increased significantly over the past several
years, from approximately 37 percent in 1994, to approximately 61 percent in
1998, as Automotive has continued to focus on the introduction of new products
into the original equipment market.
In the aftermarket business, Automotive sells its products through all of
the primary channels of distribution, including full-line and specialty
warehouse distributors, jobbers, installers, car dealers and automotive parts
retailers. Several dynamics continue to challenge the aftermarket business.
These dynamics include longer average product lives, consolidating distribution
channels and increased competition. Automotive's plan to address these dynamics
consists of: (1) the rationalization of manufacturing and distribution
operations in order to reduce the cost structure; (2) the elimination of
selected quarterly promotional programs in order to better balance demand and
supply within the aftermarket distribution channels; (3) the introduction of a
strategy to more effectively manage product lines targeted at different
aftermarket distribution channels; and (4) management changes and the
introduction of management techniques designed to improve Automotive's best
practices and identify additional cost savings. As a result, while aftermarket
revenues have decreased, Automotive believes these actions improve its strategic
position.
- In the fourth quarter of 1998, Automotive recorded a $53 million pre-tax
($34 million after-tax) restructuring charge which represented severance
benefits, exit costs, and asset impairments related to closing two plant
locations and five distribution centers in North America and the
elimination of 302 positions at those facilities as well as the
elimination of 454 administrative positions. These actions are expected
to result in annual cost savings of $27 million, including $2 million in
reduced depreciation expense. Automotive expects those savings will be
fully realized beginning in the second quarter of 2000. See "-- Nine
Months Ended September 30, 1999 and 1998 -- Restructuring and Other
Charges." To further reduce its cost structure, Automotive is also
implementing a supplemental restructuring plan which will involve the
closure of additional manufacturing and distribution facilities in North
America and Europe. This supplemental plan has been approved by the Board
of Directors and resulted in an additional charge in the fourth quarter
of 1999 of approximately $55 million before taxes. This charge includes
$37 million to close a European ride control manufacturing facility and
to restructure other European units; $15 million in North America to
close an OE exhaust facility; and $3 million for headcount reductions in
South America and Asia. Once the restructuring is complete in early 2001,
Tenneco expects to realize annual cost savings of $25 million.
- To better align demand and supply within its distribution channels,
during the fourth quarter of 1998 Automotive eliminated selected
quarterly promotional programs, principally in the North American
aftermarket, and has implemented a marketing strategy designed to
increase demand at
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<PAGE> 54
the consumer level. These actions, which initially reduced revenues and
profitability, position Automotive for growth as supply and demand are
better aligned in the aftermarket and customer inventories become
normalized.
- To improve its competitive position in the aftermarket, Automotive has
introduced a strategy to more effectively manage product lines targeted
at different aftermarket distribution channels. This strategy is designed
to introduce differentiated product lines targeted at different
distribution channels. These include (1) the introduction of a premium
ride control product ("Monroe Reflex(TM)") which incorporates
acceleration-sensitive damping to the professional installer channel in
the fourth quarter of 1999 and the subsequent repositioning of
Sensa-Trac(R) as a lower-priced offering, (2) the introduction of several
lower-priced exhaust product offerings, and (3) the targeting of
additional retail sales channels.
- To enhance its management team and focus, Automotive initiated several
management changes and introduced several management techniques,
including a measurement approach for analyzing the economic value added
of operations and the Business Operating System as a disciplined approach
to manage continuous improvement.
BACKGROUND OF THE SPIN-OFF TRANSACTIONS
Tenneco Automotive Inc. was known as Tenneco Inc. before the spin-off, on
November 4, 1999, of Tenneco Inc.'s packaging business, as described below. In
this Management's Discussion and Analysis, discussions of Tenneco refer to
Tenneco Inc. and its subsidiaries before the spin-off and to Tenneco Automotive
Inc. and its subsidiaries after the spin-off.
In July 1998, Tenneco's Board of Directors authorized management to develop
a broad range of strategic alternatives to separate the automotive, paperboard
packaging and specialty packaging businesses. Subsequently, Tenneco completed
the following actions:
- In January 1999, Tenneco announced an agreement to contribute its
containerboard business to a new joint venture with an affiliate of
Madison Dearborn Partners. The proceeds from the transaction, including
debt assumed by the new joint venture, were approximately $2 billion. The
transaction closed in April 1999. Tenneco retained a 43% percent interest
in the joint venture.
- In April 1999, Tenneco announced an agreement to sell its folding carton
operations to Caraustar Industries. This transaction closed in June 1999.
The folding carton operations and the containerboard business together
represented Tenneco's paperboard packaging operating segment.
- On November 4, 1999, Tenneco completed the spin-off of Tenneco Packaging
Inc., now known as Pactiv Corporation. The morning following the
spin-off, Tenneco changed its name from "Tenneco Inc." to "Tenneco
Automotive Inc." and effected a reverse stock split whereby every five
shares of Tenneco common stock were converted into one share of Tenneco's
new common stock.
The separation of the automotive and packaging businesses was accomplished
by the spin-off of the common stock of Packaging to Tenneco shareowners. At the
time of the spin-off, Packaging included Tenneco's specialty packaging business,
the remaining interest in the containerboard joint venture and Tenneco's
administrative services operations. After the spin-off, Packaging changed its
name to Pactiv Corporation. In August 1999, Tenneco received a letter ruling
from the Internal Revenue Service that the spin-off would be tax-free for U.S.
federal income tax purposes to Tenneco and its shareowners.
Before the spin-off, Tenneco realigned substantially all of its existing
debt through a combination of tender offers, exchange offers, and other
refinancings. The company's debt realignment was financed by borrowings by
Tenneco under new credit facilities, the issuance by Tenneco of subordinated
debt, and borrowings by Packaging under new credit facilities and the issuance
by Packaging of its new publicly-traded debt in exchange for certain series of
the publicly-traded debt of Tenneco that was outstanding before the spin-off and
debt realignment. The debt of Packaging was rated investment grade
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<PAGE> 55
and the debt of Tenneco was rated non-investment grade by both Standard & Poor's
and Moody's debt rating agencies.
As a result of these transactions, Tenneco's former specialty and
paperboard packaging operating segments are presented as discontinued operations
in the accompanying financial statements. Tenneco's sole continuing operation is
its automotive segment ("Automotive"). Refer to Notes 2 and 3 to the financial
statements for further information related to discontinued operations.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
RESULTS OF CONTINUING OPERATIONS
Net Sales and Operating Revenues
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998 % CHANGE
------- ------- ---------
(MILLIONS)
<S> <C> <C> <C>
North America................................. $1,321 $1,287 3 %
Europe........................................ 945 949 --
Rest of World................................. 207 232 (11)
------ ------
$2,473 $2,468 --
====== ======
</TABLE>
Revenues for Automotive's North American operations were $1.3 billion, a 3
percent increase over the same period in 1998. Aftermarket revenues decreased
$82 million in the nine months ended September 30, 1999 from the comparable
period in 1998. Weaker industry conditions in the North American aftermarket
were more than offset by the $116 million increase in sales to North American
original equipment manufacturers. This increase is primarily attributable to
Tenneco Automotive's strong presence in the light duty truck market, where North
American light duty truck production has increased by one million units from the
nine months ended September 30, 1998 to the comparable period in 1999, and
otherwise generally higher North American vehicle production levels.
Automotive's European revenues were $945 million, essentially flat from the
same period a year earlier. European aftermarket revenues decreased $36 million
in the nine months ended September 30, 1999 from the comparable period in 1998.
This reduction was offset by increased sales to European original equipment
manufacturers of $32 million for the nine months ended September 30, 1999
compared to the same period in 1998 resulting primarily from new program
launches.
Automotive's revenues from operations in the rest of the world decreased 11
percent to $207 million compared to $232 million in the nine months ended
September 30, 1998. Difficult economic conditions in South America and currency
devaluation in Brazil led to a $38 million decrease in revenues. This was
partially offset by an increase of $13 million in revenues from solid Australian
and improving Asian results.
Income Before Interest Expense, Income Taxes and Minority Interest
("Operating Income")
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 1998 % CHANGE
---- ---- --------
(MILLIONS)
<S> <C> <C> <C>
North America.................................... $143 $129 11 %
Europe........................................... 74 147 (50)
Rest Of World.................................... 6 29 (79)
Other............................................ (4) (17) NM
---- ----
$219 $288 (24)%
==== ====
</TABLE>
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<PAGE> 56
North American operating income was $143 million for the nine months ended
September 30, an 11 percent improvement over the same period in the prior year.
Improved operating efficiencies in manufacturing and other cost reduction
actions including results from earlier period restructuring initiatives
contributed $26 million to these results. Additionally, Automotive's strong
position in the solid selling light truck market and otherwise generally higher
North American vehicle production levels increased operating income by $18
million. Lower North American aftermarket volumes and the change in accounting
principles with respect to the capitalization of start-up activities somewhat
offset this improvement in operating income for the nine months ended September
30, 1999 compared to the same period in 1998.
European operating income decreased 50 percent from $147 million to $74
million. The lower operating income in Europe is primarily attributable to the
change in accounting for platform start-up costs, lower aftermarket volumes and
a shift in the mix of original equipment revenues from higher to lower margin
business.
Operating income from operations in the rest of the world declined 79
percent to $6 million from $29 million, as difficult economic conditions in
South America and currency devaluation in Brazil reduced operating income by $16
million.
Operating Income as a Percentage of Revenue
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 1998 % CHANGE
---- ---- --------
<S> <C> <C> <C>
North America..................................... 10.8% 10.0% 8 %
Europe............................................ 7.8 15.5 (50)
Rest of World..................................... 2.9 12.5 (77)
Tenneco Automotive................................ 8.9% 11.7% (24)%
</TABLE>
Since revenue was essentially flat, operating income as a percentage of
revenue declined primarily as a result of the factors cited in the discussion of
operating income above.
Interest Expense, net of interest capitalized
For the nine months ended September 30, 1998, Tenneco allocated $129
million in interest expense to discontinued specialty packaging operations. For
the comparable period in 1999, $115 million in interest expense was allocated to
discontinued operations. Adjusting for this allocation, interest expense was $5
million lower in the first three quarters of 1999 than the comparable period in
1998. The lower interest expense is primarily attributable to debt reduction
from the proceeds of the sale of Tenneco's containerboard interest early in the
second quarter of 1999.
Income Taxes
Tenneco's effective tax rate for the nine months ended September 30, 1999
was 37% compared to 20% in the third quarter last year. The 1998 rate was lower
as a result of certain non-recurring foreign tax benefits in that quarter. The
1999 rate was unfavorably impacted by the tax effect of the recapitalization of
Automotive's foreign subsidiaries.
Earnings Per Share
In October 1999, Tenneco's shareowners approved an amendment to the
Certificate of Incorporation providing for a one-for-five reverse stock split of
Tenneco's common stock. As a result, the reverse stock split is reflected for
all periods in this computation of earnings per share of common stock
outstanding. Income from continuing operations was $2.40 per diluted common
share for the nine months ended September 30, 1999, compared to $4.97 per
diluted common share in the comparable period of 1998. Discontinued operations
generated a loss of $2.98 per diluted common share during 1999 compared to
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<PAGE> 57
income of $4.34 per diluted common share for the prior year. The current year
period also included a $.20 per diluted common share extraordinary loss on early
retirement of debt in connection with the sale of the containerboard assets, and
$4.00 per diluted common share of charges related to the cumulative effect of
changes in accounting principles noted above. Net loss was $4.78 per diluted
common share for the nine months ended September 30, 1999, compared to $9.31 net
income per diluted common share in the comparable period of 1998.
Minority Interest
Minority interest is primarily related to dividends on the preferred stock
of a U.S. subsidiary. The preferred stock was repurchased before the spin-off in
conjunction with Tenneco's debt realignment.
RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of 1998, Tenneco's Board of Directors approved an
extensive restructuring plan designed to reduce administrative and operational
overhead costs. Tenneco recorded a pre-tax charge to income from continuing
operations of $53 million, $34 million after-tax, or $1.02 per diluted common
share. Of the pre-tax charge, for operational restructuring plans, $36 million
related to the consolidation of the manufacturing and distribution operations of
Automotive's North American aftermarket business. A staff and related cost
reduction plan, which covers employees in Automotive's operating units and
corporate operations, is expected to cost $17 million.
The Automotive aftermarket restructuring involves closing two plant
locations and five distribution centers, resulting in the elimination of 302
positions. The staff and related cost reduction plan involves the elimination of
454 administrative positions in Automotive's business units and its corporate
operations.
The fixed assets at the locations to be closed were written down to their
fair value, less costs to sell, in the fourth quarter of 1998. As a result of
the single-purpose nature of the assets, fair value was estimated at scrap value
less cost to dispose. No significant net cash proceeds are expected to be
received from the ultimate disposal of these assets, which should be complete by
the fourth quarter of 2000. The effect of suspending depreciation for these
impaired assets is a reduction in depreciation and amortization expense of
approximately $2 million on an annual basis.
As of September 30, 1999, approximately 670 employees have been terminated.
To address customer service and production transfer issues, the closure of one
plant location and one Automotive aftermarket distribution center has been
delayed until the first and second quarters of 2000, respectively. All other
restructuring actions, with the exception of the final disposal of certain
assets, are being executed according to the initial plan and are expected to be
complete by the fourth quarter of 1999. During the nine months ended September
30, 1999, the Automotive aftermarket business closed one plant location and four
distribution centers.
Amounts related to the restructuring plan are shown in the following table:
<TABLE>
<CAPTION>
CASH
PAYMENTS
NINE MONTHS
DECEMBER 31, 1998 ENDED BALANCE AT
RESTRUCTURING SEPTEMBER 30, SEPTEMBER 30,
CHARGE BALANCE 1999 1999
----------------- ------------- -------------
(MILLIONS)
<S> <C> <C> <C>
Severance........................................... $15 $6 $ 9
Facility exit costs................................. 1 1 --
--- -- ---
$16 $7 $ 9
=== == ===
</TABLE>
Automotive expects to realize annual savings of $27 million as a result of
these restructuring initiatives, primarily from a reduction in salary and
related employee expenses. Reduced depreciation
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<PAGE> 58
charges comprise $2 million of the balance. Tenneco expects these savings will
be fully realized beginning in the second quarter of 2000.
To further reduce its cost structure, Tenneco is also implementing a
supplemental restructuring plan which was discussed above under "General" and
will involve the closure of additional manufacturing facilities in North America
and Europe. This supplemental plan has been approved by the Board of Directors
and resulted in an additional charge in the fourth quarter of 1999 of
approximately $55 million before taxes.
DISCONTINUED OPERATIONS AND EXTRAORDINARY LOSS
On November 5, 1999, Tenneco spun-off its specialty packaging businesses
into a separate, independent company. The specialty packaging company also owns
the remaining interest in the containerboard joint venture and the
administrative services operations. The specialty and paperboard packaging
businesses, and the administrative services operations, have been reflected as
discontinued operations in the accompanying financial statements.
Revenues and income for the paperboard packaging discontinued operations
are shown in the following table.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
1999 1998 1999 1998
----- ----- ----- ------
(MILLIONS)
<S> <C> <C> <C> <C>
Net sales and operating revenues............................ $-- $415 $ 445 $1,185
=== ==== ===== ======
Income before income taxes and interest allocation.......... $ 8 $ 35 $ 30 $ 101
Income tax (expense) benefit................................ -- (12) (11) (38)
--- ---- ----- ------
Income before interest allocation........................... 8 23 19 63
Allocated interest expense, net of income tax............... -- (8) (5) (20)
--- ---- ----- ------
Income from discontinued operations before disposition...... 8 15 14 43
Gain (loss) on disposition, net of income tax............... -- 10 (169) 19
--- ---- ----- ------
Income (loss) from discontinued operations.................. $ 8 $ 25 $(155) $ 62
=== ==== ===== ======
</TABLE>
Revenues and income for the specialty packaging business and administrative
services operations are shown in the following table:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- ---------------
1999 1998 1999 1998
----- ----- ------ ------
(MILLIONS)
<S> <C> <C> <C> <C>
Net sales and operating revenues............................ $754 $696 $2,158 $2,067
==== ==== ====== ======
Income before income taxes and interest allocation.......... 69 74 213 247
Income tax (expense) benefit................................ (39) (36) (87) (96)
---- ---- ------ ------
Income before interest allocation........................... 30 38 126 151
Allocated interest expense, net of income tax............... (26) (23) (70) (67)
---- ---- ------ ------
Income (loss) from discontinued operations.................. $ 4 $ 15 $ 56 $ 84
==== ==== ====== ======
</TABLE>
The current year period also included a $7 million extraordinary loss on
early retirement of debt in connection with the sale of the containerboard
assets.
Nine months ended September 30, 1999 results from discontinued operations
for the specialty packaging segment includes a pre-tax charge of $29 million
relating to a plan to realign its headquarters
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<PAGE> 59
functions. This plan involves the severance of approximately 40 employees and
the closing of the Greenwich, Connecticut headquarters facility.
CHANGES IN ACCOUNTING PRINCIPLES
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use," which establishes
new accounting and reporting standards for the costs of computer software
developed or obtained for internal use. This statement requires prospective
application for fiscal years beginning after December 15, 1998. Tenneco adopted
SOP 98-1 on January 1, 1999. The impact of this new standard did not have a
significant effect on Tenneco's financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-Up Activities," which requires costs of start-up activities to be expensed
as incurred. This statement is effective for fiscal years beginning after
December 15, 1998. The statement requires previously capitalized costs related
to start-up activities to be expensed as a cumulative effect of a change in
accounting principle when the statement is adopted. Prior to January 1, 1999,
Tenneco capitalized certain costs related to start-up activities, primarily
engineering costs for new automobile original equipment platforms. Tenneco
adopted SOP 98-5 on January 1, 1999, and recorded an after-tax charge for the
cumulative effect of this change in accounting principle of $102 million (net of
a $50 million tax benefit), or $3.05 per diluted common share. The change in
accounting principle decreased income from continuing operations by $11 million
(net of a $8 million tax benefit), or $.33 per diluted common share for the nine
months ended September 30, 1999. If the new accounting method had been applied
retroactively, income from continuing operations for the nine months ended
September 30, 1998, would have been lower by $10 million (net of a $7 million
tax benefit), or $.30 per diluted common share. For the three months ended
September 30, 1999, the change in accounting principle decreased income from
continuing operations by $6 million (net of $4 million tax benefit), or $.18 per
diluted common share. If the new accounting method had been applied
retroactively, income from continuing operations for the three months ended
September 30, 1998, would have been lower by $5 million (net of a $3 million tax
benefit), or $.15 per diluted common share.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes new
accounting and reporting standards requiring that all derivative instruments,
including derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting treatment. This statement cannot be
applied retroactively and is effective for all fiscal years beginning after June
15, 2000. Tenneco is currently evaluating the new standard but has not yet
determined the impact it will have on its financial position or results of
operations.
Effective January 1, 1999, Tenneco changed its method of accounting for
customer acquisition costs from a deferral method to an expense-as-incurred
method. In connection with Tenneco's decision to separate its automotive and
specialty packaging businesses into independent public companies, Tenneco
determined that a change to an expense-as-incurred method of accounting for
automotive aftermarket customer acquisition costs was preferable in order to
permit improved comparability of stand-alone financial results with its
aftermarket industry competitors. Tenneco recorded an after-tax charge for the
cumulative effect of this change in accounting principle of $32 million (net of
a $22 million tax benefit), or $.95 per diluted common share. The change in
accounting principle increased income from continuing operations by $8 million
(net of $5 million in income tax expense), or $.24 per diluted common share for
the nine months ended September 30, 1999. If the new accounting principle had
been applied
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<PAGE> 60
retroactively, income from continuing operations for the nine months ended
September 30, 1998, would have been higher by $1 million (net of $1 million in
income tax expense), or $.03 per diluted common share. For the three months
ended September 30, 1999, the change in accounting principle increased income
from continuing operations by $3 million (net of $1 million in income tax
expense), or $.09 per diluted common share. If the new accounting principle had
been applied retroactively, income from continuing operations for the three
months ended September 30, 1998, would have been higher by $3 million (net of $2
million in income tax expense), or $.09 per diluted common share.
LIQUIDITY AND CAPITAL RESOURCES
Capitalization
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998 % CHANGE
------------- ------------ --------
(MILLIONS)
<S> <C> <C> <C>
Short term debt and current maturities.................... $ 237 $ 304 (22)%
Long-term debt............................................ 796 671 19
Debt allocated to discontinued operations................. 1,985 2,456 (19)
------ ------
Total debt................................................ 3,018 3,431 (12)
------ ------
Minority interest of continuing operations................ 411 407 1
Minority interest of discontinued operations.............. 21 14 50
------ ------
Total minority interest................................... 432 421 3
------ ------
Common shareowners' equity................................ 2,140 2,504 (15)
------ ------
Total capitalization...................................... $5,590 $6,356 (12)%
====== ======
</TABLE>
Tenneco's ratio of debt to total capitalization was 54 percent at September
30, 1999 and at December 31, 1998. This ratio was calculated before giving
effect to the debt realignment and spin-off, described below, which were
completed after September 30, 1999. Tenneco expects its debt to total
capitalization ratio to increase significantly as a result of these
transactions.
Prior to the spin-off, Tenneco realigned substantially all of its existing
debt. To accomplish this, Tenneco initiated an offer to exchange Packaging debt
securities for Tenneco debt securities having a book value of $1,166 million.
Tenneco also initiated a cash tender offer to purchase debt securities having a
book value of $1,374 million and repaid substantially all of its short-term
borrowings. Finally, Tenneco retired approximately $400 million of subsidiary
preferred stock. These transactions were financed by borrowings by Tenneco under
a new credit facility, senior subordinated debt issued by Tenneco, and
borrowings by Packaging under new credit facilities. The debt of Packaging was
rated investment grade and the debt of Tenneco was rated non-investment grade by
debt rating agencies.
As part of the debt realignment, on September 30, 1999 Tenneco entered into
a $1.55 billion committed senior secured financing arrangement with a syndicate
of banks and other financial institutions consisting of: (i) a $500 million,
six-year revolving credit facility; (ii) a $450 million six-year term loan;
(iii) a $300 million eight-year term loan and; (iv) a $300 million eight and
one-half year term loan. A portion of each term loan is payable in quarterly
installments beginning September 30, 2001. Borrowings under this facility bear
interest at an annual rate equal to, at the borrower's option, either (i) the
London Interbank Offering Rate plus a margin of 275 basis points for the
six-year revolving credit facility and the six-year term loan, 325 basis points
for the eight-year term loan and 350 basis points for the eight and one-half
year term loan; or (ii) a rate consisting of the greater of The Chase Manhattan
Bank's prime rate or the Federal Funds rate plus 50 basis points, plus a margin
of 175 basis points for the six-year revolving credit facility and the six-year
term loan, 225 basis points for the eight-year term loan and 250 basis points
for the eight and one-half year term loan. Under the provisions of the senior
credit facility agreement, the interest margins for borrowings under the
revolving credit facility and the six-year term loan may be adjusted based on
the consolidated leverage ratio (total debt divided by consolidated earnings
before interest, taxes, depreciation and amortization ("EBITDA") as defined in
the senior credit facility
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<PAGE> 61
agreement) measured at the end of each quarter starting with the fiscal quarter
ending December 31, 2000.
The senior credit facility agreement requires that Tenneco initially
maintain: (i) a consolidated leverage ratio (consolidated indebtedness divided
by consolidated EBITDA) not greater than 4.75; (ii) a consolidated interest
coverage ratio (consolidated EBITDA divided by consolidated interest expense)
not less than 2.00; and (iii) a consolidated fixed charge coverage ratio
(consolidated EBITDA less consolidated capital expenditures, divided by
consolidated interest expense) not less than 1.00. Under the terms of the senior
credit facility agreement, the maximum permitted consolidated leverage ratio
will decrease beginning in the year 2001, the minimum permitted consolidated
interest coverage ratio will increase beginning in the year 2001 and the minimum
permitted consolidated fixed charge coverage ratio will increase beginning in
the year 2002. The senior credit facility agreement also contains restrictions
on Tenneco's operations that are customary for similar facilities, including
limitations on: (a) incurring additional liens; (b) sale and leaseback
transactions; (c) liquidations and dissolutions (d) incurring additional
indebtedness or guarantees; (e) capital expenditures; (f) dividends; (g) mergers
and consolidations; and (h) prepayments and modifications of subordinated and
other debt instruments. Compliance with these requirements and restrictions is a
condition for any incremental borrowings under the senior credit facility
agreement and failure to meet these requirements enables the lenders to require
repayment of any outstanding loans.
The senior subordinated debt indenture requires that Tenneco, as a
condition to incurring certain types of indebtedness not otherwise permitted,
initially maintain an interest coverage ratio of not less than 2.00. Under the
terms of the indenture, the minimum interest coverage ratio will increase
beginning in 2001. The indenture also contains restrictions on Tenneco's
operations, including limitations on: (1) incurring additional indebtedness or
liens; (2) dividends; (3) distributions and stock repurchases; (4) investments;
and (5) mergers and consolidations. See "Description of the New Notes."
Upon completion of the debt realignment and spin-off, Tenneco's total
indebtedness was approximately $1.7 billion. Tenneco believes that cash flows
from operations, combined with available borrowing capacity described above,
will generally be sufficient to meet its future capital requirements for the
following year.
Cash Flows
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 1998 % CHANGE
------ ----- --------
(MILLIONS)
<S> <C> <C> <C>
Cash provided (used) by:
Operating activities -- continuing operations... $ (100) $ 33 (403)%
Investing activities -- continuing operations... $ (161) $(181) 11 %
Financing activities............................ $1,244 $ 96 1,195 %
</TABLE>
Operating Activities
Cash provided by continuing operating activities declined by $133 million
for the nine months ended September 30, 1999 compared to the comparable 1998
period. Income from continuing operations was $89 million lower and investments
in working capital were $63 million more for the nine months ended September 30,
1999 compared to the 1998 period. The increase in working capital was primarily
attributable to the one-time impact of terminating Automotive's accounts
receivable factoring program in connection with the spin-off, which increased
receivables by $67 million.
Cash provided by Tenneco's discontinued operations declined by $398 million
in the first nine months ended 1999 compared to the 1998 period. The paperboard
operations were responsible for $213 million which is primarily attributable to
the purchase of containerboard business accounts receivable in contemplation of
the sale of the containerboard business in April. Additionally, containerboard
results are reflected for the first four months in 1999 and for the first nine
months in 1998 due to the sale of this
59
<PAGE> 62
business. Investment in working capital within the specialty packaging business
increased by $139 million in the nine months ended 1999 compared to the 1998
period.
Investing Activities
Cash used by investing activities from continuing operations was $20
million lower in the nine months ended September 30, 1999 compared to the same
period in 1998. Capital expenditures were $17 million lower in the nine months
ended September 30, 1999 compared to the same period in 1998 due to more
effective capital management. This was offset by the acquisition of Kinetic Ltd.
for $36 million. Kinetic, an Australian suspension engineering company with
advanced roll-control technology, provides enhanced on-road handling while
improving off-road performance.
Cash used by investments in discontinued operations increased by $619
million in the nine months ended September 30, 1999 compared to the 1998 period.
During the second quarter of 1999, Tenneco acquired for approximately $1.1
billion certain assets previously used by the containerboard business under
operating leases and timber cutting rights. This was required in order to
complete the April containerboard sale. The source of the funds for these
capital expenditures was borrowings by Packaging prior to the containerboard
sale. See "Financing Activities" below. Tenneco also received approximately $300
million in proceeds related to the containerboard and folding carton sale
transactions.
Financing Activities
Excluding borrowings required to complete the containerboard sale
transaction, cash used by financing activities was $517 million for the nine
months ended September 30, 1999. This primarily reflected the use of the net
proceeds of the containerboard sale transaction to reduce Tenneco's short-term
debt.
Before the containerboard sale transaction, Packaging borrowed
approximately $1.8 billion. These borrowings were used to acquire the assets
used under operating leases and timber cutting rights described under "Investing
Activities" above, and to purchase the containerboard business accounts
receivable described under "Operating Activities" above. Packaging remitted the
balance of the borrowings to Tenneco to retire short-term debt. Packaging
contributed the containerboard business to the new joint venture subject to the
approximately $1.8 billion in new debt. The debt reduction, which resulted from
this contribution, is shown on the Statements of Cash Flows as a non-cash
financing activity.
YEAR 2000
Many computer software systems, as well as some hardware and equipment
utilizing date-sensitive data, were designed to use a two-digit date field.
Consequently, these systems will not be able to properly recognize dates beyond
the year 1999 ("the Year 2000 issue"). Tenneco's significant technology
transformation projects have addressed the Year 2000 issue in those areas where
replacement systems were installed for other business reasons. Where existing
systems and equipment remained in place beyond 1999, Tenneco identified and
assessed Year 2000 issues and remediated, replaced or established alternative
procedures addressing non-Year 2000 compliant systems, hardware, and equipment.
Tenneco completed all Year 2000 remediation efforts as described above by
December 31, 1999. No material Year 2000 issues have been identified as of the
filing of this document.
Tenneco completed the inventory of its systems and equipment, including
computer systems and business applications, as well as date-sensitive technology
embedded in its equipment and facilities. Tenneco planned for and undertook
remediation, replacement, or establishment of alternative procedures for
non-compliant Year 2000 systems and equipment; and tested, remediated, replaced
or developed alternative procedures for systems and equipment.
Tenneco believes that approximately 99 percent of Automotive's major
business applications systems and approximately 99 percent of Automotive's
manufacturing equipment had achieved Year 2000 compliance as of September 30,
1999. Tenneco has confirmed that none of its Automotive products are
60
<PAGE> 63
date-sensitive. Remediation, replacement, or establishment of alternative
procedures for systems and equipment were undertaken on a business priority
basis.
Tenneco also contacted Automotive's major suppliers, financial
institutions, and others with whom Automotive conducts business to determine
whether they would be able to resolve in a timely manner Year 2000 problems
possibly affecting Automotive. A majority of these entities, including critical
suppliers, responded by advising as to the status of their efforts and by
stating that they expected to become Year 2000 compliant in a timely manner.
Based on these responses, critical suppliers were assigned a risk rating.
Tenneco continued corresponding with critical high risk third parties to obtain
information and updates on their Year 2000 efforts, and to assess new suppliers,
financial institutions and others with whom Automotive began to conduct
business.
Based upon current estimates, Tenneco believes that costs to address
Automotive's Year 2000 issues and implement necessary changes to its existing
systems and equipment, including costs incurred to date, will range from $15 to
$17 million. As of September 30, 1999, approximately $13 million of the costs
had been incurred. These costs are being expensed as they are incurred, except
that in some instances Tenneco may determine that replacing existing computer
systems or equipment may be more effective and efficient, particularly where
additional functionality is available. These replacements would be capitalized
and would reduce the estimated expense associated with Year 2000 issues.
If Tenneco had been unable to complete on a timely and cost-effective basis
the remediation or replacement of critical systems or equipment not yet in
compliance, or develop alternative procedures, or if those with whom Automotive
conducts business had been unsuccessful in implementing timely solutions, Year
2000 issues could have had a material adverse effect on Tenneco's financial
condition or results of operations. Possible worst case scenarios include
interruptions in Automotive's ability to manufacture its products, process and
ship orders, and bill and collect accounts receivable due to internal systems
failures or the systems failures of its suppliers or customers. Tenneco believes
it has timely resolved Automotive's own Year 2000 issues.
As part of its planning and readiness activities, Tenneco developed Year
2000 contingency plans for critical business processes such as banking, data
center operations and just-in-time manufacturing operations. Contingency plans
were developed on a business unit basis, where needed, to respond to previously
undetected Year 2000 problems and business interruption from suppliers.
Contingency plans included alternative suppliers, as necessary, and assuring the
availability of key personnel at year end to address unforeseen Year 2000
problems.
EURO CONVERSION
The European Monetary Union resulted in the adoption of a common currency,
the "Euro," among eleven European nations. The Euro is being adopted over a
three-year transition period beginning January 1, 1999. In October 1997, Tenneco
established a cross-functional Euro Committee, comprised of representatives of
the Company's operational divisions as well as its corporate offices. That
Committee had two principal objectives: (1) to determine the impact of the Euro
on Tenneco's business operations, and (2) to recommend and facilitate
implementation of those steps necessary to ensure that Tenneco would be fully
prepared for the Euro's introduction. As of January 1, 1999, Tenneco implemented
those Euro conversion procedures that it had determined to be necessary and
prudent to adopt by that date, and is on track to becoming fully "Euro ready" on
or before the conclusion of the three-year Euro transition period. Tenneco
believes that the costs associated with transitioning to the Euro will not be
material to its consolidated financial position or the results of its
operations.
ENVIRONMENTAL AND OTHER MATTERS
Tenneco and certain of its subsidiaries and affiliates are parties to
environmental proceedings. Expenditures for ongoing compliance with
environmental regulations that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations and which do not contribute to current or future
revenue generation are expensed. Liabilities are
61
<PAGE> 64
recorded when environmental assessments indicate that remedial efforts are
probable and the costs can be reasonably estimated. Estimates of the liability
are based upon currently available facts, existing technology, and presently
enacted laws and regulations taking into consideration the likely effects of
inflation and other societal and economic factors. All available evidence is
considered including prior experience in remediation of contaminated sites,
other companies' clean-up experience and data released by the United States
Environmental Protection Agency or other organizations. These estimated
liabilities are subject to revision in future periods based on actual costs or
new information. These liabilities are included in the balance sheet at their
undiscounted amounts. Recoveries are evaluated separately from the liability
and, when assured, are recorded and reported separately from the associated
liability in the financial statements.
At October 1, 1999, Tenneco had been designated as a potentially
responsible party in four Superfund sites. Tenneco has estimated its share of
the remediation costs for these sites to be approximately $2 million in the
aggregate and has established reserves that it believes are adequate for such
costs. This amount is evenly split between continuing operations and
discontinued operations. In addition, Tenneco may have the obligation to
remediate current or former facilities and estimates its share of remediation
costs at these facilities to be approximately $16 million for continuing
operations. For both the Superfund sites and its current and former facilities,
Tenneco has established reserves that it believes are adequate for these costs.
Although Tenneco believes its estimates of remediation costs are reasonable and
are based on the latest available information, the clean-up costs are estimates
and are subject to revision as more information becomes available about the
extent of remediation required. At some sites, Tenneco expects that other
parties will contribute to the remediation costs. In addition, at the Superfund
sites, the Comprehensive Environmental Response, Compensation and Liability Act
provides that Tenneco's liability could be joint and several, meaning that
Tenneco could be required to pay in excess of its share of remediation costs.
Tenneco's understanding of the financial strength of other potentially
responsible parties has been considered, where appropriate, in Tenneco's
determination of its estimated liability. Tenneco believes that the costs
associated with its current status as a potentially responsible party in the
Superfund sites referenced above, or as a liable party at its current or former
facilities, will not be material to its consolidated financial position or
results of operations.
Tenneco estimates that its capital expenditures for environmental matters
for 1999 and 2000 will be $2 million and $3 million, respectively.
Tenneco is party to various other legal proceedings arising from its
operations. Tenneco believes that the outcome of these other proceedings,
individually and in the aggregate, will not have a material adverse effect on
its financial position or results of operations.
YEARS 1998 AND 1997
RESULTS OF CONTINUING OPERATIONS
Tenneco reported income from continuing operations of $116 million for the
year ended December 31, 1998, compared to $234 million for the same period in
1997. The 1998 figure includes a $34 million after-tax charge to restructure the
automotive aftermarket business and to reduce overhead and manufacturing costs
throughout every part of the business. Excluding the restructuring charge,
Tenneco's income from continuing operations for the 1998 period was $150 million
compared to $234 million for the year ended December 31, 1997. The decline
results from lower Automotive operating income combined with higher interest
expense and minority interest.
Net Sales and Operating Revenues
<TABLE>
<CAPTION>
%
1998 1997 CHANGE
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Automotive............................................ $3,237 $3,226 --%
</TABLE>
62
<PAGE> 65
Automotive's revenue for 1998 was essentially flat with 1997 as increases
in original equipment revenue in North America and Europe of $215 million were
offset by a $165 million decline in aftermarket revenues throughout the world, a
$54 million reduction due to the adverse impact of a strong U.S. dollar, with
the remaining change due to the mix of products sold. Original equipment revenue
increased as Automotive continued to place its ride control and exhaust products
on many of the world's best-selling vehicles. Lower aftermarket demand was
driven by customer consolidations that temporarily increased field inventory
levels in North America and Europe; milder than normal winter weather; and
continuing soft Asian and South American replacement markets. Additionally,
Automotive began reducing its quarterly promotional programs in an effort to
better balance supply and demand going into 1999.
Operating Income
The following table presents operating income for the years 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997 % CHANGE
---- ---- --------
(MILLIONS)
<S> <C> <C> <C>
Automotive........................................... $248 $407 (39)%
Other................................................ (21) (12) NM
---- ----
$227 $395 (43)%
==== ====
</TABLE>
Excluding restructuring charges, a comparison of Tenneco's 1998 and 1997
operating income is as follows:
<TABLE>
<CAPTION>
1998 1997 % CHANGE
---- ---- --------
(MILLIONS)
<S> <C> <C> <C>
Automotive........................................... $301 $407 (26)%
Other................................................ (21) (12) NM
---- ----
$280 $395 (29)%
==== ====
</TABLE>
Automotive's operating income in 1998 reflected strong volume growth in the
original equipment business which was more than offset by lower volumes in the
aftermarket. The net impact of volume was a decline in operating income of $43
million. Adverse currency movements caused a further deterioration of $14
million. The 1997 operating income included $10 million related to the favorable
resolution of a legal action and a net reduction of $4 million in certain
reserves, primarily related to ongoing reorganization initiatives which had
proceeded more rapidly and efficiently than planned, allowing Automotive to
adjust its cost estimate for completing the initiatives. Charges in 1998 for bad
debts, a higher level of costs related to customer acquisition activity and
marketing, and pricing adjustments in the original equipment business produced
the balance of the earnings decline.
Tenneco's "Other" operating loss in 1997 reflects gain on liquidation of
overseas subsidiaries.
Operating Income as a Percentage of Revenue
Operating income as a percentage of revenue for 1998 and 1997, including
the fourth quarter 1998 restructuring charge, were as follows:
<TABLE>
<CAPTION>
1998 1997 % CHANGE
---- ---- --------
<S> <C> <C> <C>
Automotive............................................ 7.7% 12.6% (39)%
Total................................................. 7.0% 12.2% (43)%
</TABLE>
Operating income as a percentage of revenue declined primarily as a result
of the factors cited in the discussion of operating income above since revenue
was essentially flat.
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<PAGE> 66
Excluding the fourth quarter 1998 restructuring charge described below,
operating income as a percentage of revenue for the same periods were as
follows:
<TABLE>
<CAPTION>
1998 1997 % CHANGE
---- ---- --------
<S> <C> <C> <C>
Automotive............................................ 9.3% 12.6% (26)%
Total................................................. 8.7% 12.2% (29)%
</TABLE>
Interest Expense, net of interest capitalized
Tenneco incurred interest expense of $69 million, a $11 million increase
over 1997. For the year 1998, $171 million of interest expense was allocated to
discontinued operations compared with $158 million during 1997. Adjusting for
the allocation, interest expense increased by $24 million. This increase was
attributable to higher average debt levels in 1998 resulting from inclusion for
the full year of amounts used to acquire the protective and flexible packaging
business of KNP BT in late April 1997 for the specialty packaging segment, a
higher level of working capital to support higher revenue levels and Tenneco's
share repurchase activity.
Income Taxes
Tenneco's effective tax rate for 1998 was 8 percent, compared to 24 percent
for 1997. The 1998 effective tax rate was lower than the statutory rate as a
result of certain non-recurring foreign and state tax benefits, lower foreign
tax rates and a reduction in Tenneco's estimated tax liabilities related to
certain global tax audits. The 1997 effective tax rate benefitted from the
non-recurring impact of certain foreign tax benefits and the benefit of
previously unrecognized deferred tax assets.
Minority Interest
Minority interest was $29 million in 1998, compared to $23 million in 1997.
This primarily represents dividends on the preferred stock of a U.S. subsidiary.
In December 1997, this subsidiary issued additional preferred stock. See the
Notes to the Financial Statements of Tenneco Automotive Inc. and Consolidated
Subsidiaries contained elsewhere in this document for additional information.
DISCONTINUED OPERATIONS
See Note 2 to the audited Financial Statements of Tenneco Automotive Inc.
and Consolidated Subsidiaries contained elsewhere in this document for
information regarding the results of discontinued operations.
Fourth quarter 1998 results from discontinued operations for the paperboard
packaging segment include a pre-tax charge of $14 million related to Tenneco's
restructuring plan to reduce administrative and operational overhead costs. The
paperboard packaging restructuring plan involved closing four box plants and the
elimination of 78 manufacturing and 198 administrative positions.
CHANGE IN ACCOUNTING PRINCIPLE
As required by the FASB's Emerging Issues Task Force Issue 97-13,
"Accounting for Costs Incurred in Connection with a Consulting Contract that
Combines Business Process Reengineering and Information Technology
Transformation," Tenneco recorded an after-tax charge of $46 million or $.27 per
diluted common share in the fourth quarter of 1997, which was reported as a
cumulative effect of a change in accounting principle.
EARNINGS PER SHARE
Income from continuing operations was $3.44 per diluted common share for
1998, compared to $6.85 per diluted common share in 1997. (All references to
earnings per share in this Management's Discussion and Analysis are on a diluted
basis unless otherwise noted.) Discontinued operations contributed $4.12 per
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<PAGE> 67
diluted common share for 1998 compared to $3.72 per diluted common share for
1997. For 1997, Tenneco also recorded a charge for the cumulative effect of a
change in accounting principle noted above of $1.35 per diluted common share,
resulting in net income of $9.22 per diluted common share compared to $7.56 per
diluted common share for 1998.
CASH FLOWS
<TABLE>
<CAPTION>
1998 1997
----- -----
(MILLIONS)
<S> <C> <C>
Cash provided (used) by:
Operating activities...................................... $ 532 $ 519
Investing activities...................................... (754) (887)
Financing activities...................................... 216 354
</TABLE>
Operating Activities
Cash flow provided by operating activities was $13 million higher in 1998
than in 1997. Income before depreciation, depletion and amortization was $78
million lower than in 1997, largely as a result of higher interest expense and
the restructuring charge taken during the fourth quarter of 1998, for which the
bulk of the cash outflows will occur during 1999. Noncash charges for deferred
income taxes were higher in 1997 than in 1998, primarily as a result of tax
benefits derived from the 1996 reorganization and debt realignment and a 1996
tax net operating loss which was carried back to earlier years.
Investing Activities
Investing activities used $133 million less cash in 1998 than in 1997.
Capital expenditures for continuing operations declined by $26 million in 1998.
Capital expenditures and acquisitions for discontinued operations decreased in
1998 by $124 million, as lower acquisitions in 1998 were partially offset by
higher capital spending. During 1998, the most significant acquisitions were
Richter Manufacturing, a North American protective packaging business, and the
Belvidere, Illinois dual-ovenable paperboard tray manufacturing facility of
Champion International. Acquisition activity in 1997 primarily related to the
purchase of KNP BT's protective and flexible packaging business. The higher
capital expenditures were primarily a result of $84 million spent to acquire
certain leased timberlands in contemplation of the separation of the
containerboard assets from Tenneco's other businesses.
Financing Activities
Financing activities in 1998 generated $138 million less cash than in 1997.
During 1997, a Tenneco subsidiary issued preferred stock, the net proceeds of
which were $99 million. During 1998, Tenneco repurchased $22 million more of its
common stock than in 1997. During 1997, Tenneco refinanced a portion of its
short-term debt by issuing $100 million of 10-year 7 1/2% notes, $200 million of
30-year 7 7/8% debentures, and $300 million of 20-year 7 5/8% debentures. The
net proceeds of these debt offerings was $593 million. During 1998, Tenneco's
short-term debt (excluding current maturities on long-term debt) increased by
$540 million.
Capital Commitments
Tenneco estimates that expenditures of approximately $231 million will be
required by its Automotive and specialty packaging businesses after December 31,
1998, to complete facilities and projects authorized at such date, and
substantial commitments have been made in connection therewith. Of this amount,
approximately $121 million pertains to the continuing Automotive operations and
approximately $110 million pertains to the discontinued specialty packaging
operations.
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<PAGE> 68
Dividends on Common Stock
In October 1999, Tenneco's shareowners approved an amendment to the
Certificate of Incorporation providing for a one-for-five reverse stock split of
Tenneco's common stock. As a result, the reverse stock split is reflected in the
dividends declared on its common shares. Tenneco Inc. declared dividends on its
common shares of $1.50 per share for each quarter in 1998. Declaration of
dividends is at the discretion of the Board of Directors. The Board has not
adopted a dividend policy as such. Subject to legal and contractual
restrictions, its decisions regarding dividends are based on all considerations
that in its business judgment are relevant at the time, including past and
projected earnings, cash flows, economic, business and securities market
conditions, and anticipated developments concerning Tenneco's business and
operations.
Now that the spin-off of Packaging is complete, Tenneco is highly leveraged
and restricted with respect to the payment of dividends by the terms of its
financing arrangements. Accordingly, its annual dividend is expected to be
nominal. For the first quarter of 2000, the Board of Directors approved a
dividend of $.05 per share of common stock payable March 14, 2000 to
shareholders of record at the close of business on February 25, 2000.
DERIVATIVE FINANCIAL INSTRUMENTS
Foreign Currency Exchange Rate Risk
Tenneco uses derivative financial instruments, principally foreign currency
forward purchase and sale contracts with terms of less than one year, to hedge
its exposure to changes in foreign currency exchange rates. Tenneco's primary
exposure to changes in foreign currency rates results from intercompany loans
made between Tenneco affiliates to minimize the need for borrowings from third
parties. Additionally, Tenneco enters into foreign currency forward purchase and
sale contracts to mitigate its exposure to changes in exchange rates on
intercompany and third party trade receivables and payables. Tenneco has from
time to time also entered into forward contracts to hedge its net investment in
foreign subsidiaries. Tenneco does not currently enter into derivative financial
instruments for speculative purposes.
In managing its foreign currency exposures, Tenneco identifies and
aggregates naturally occurring offsetting positions and then hedges residual
exposures through third party derivative contracts. The following table
summarizes by major currency the notional amounts, weighted average settlement
rates,
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<PAGE> 69
and fair value for foreign currency forward purchase and sale contracts as of
December 31, 1998. All contracts in the following table mature in 1999.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------------------
WEIGHTED
NOTIONAL AMOUNT AVERAGE FAIR VALUE
IN FOREIGN CURRENCY SETTLEMENT RATES IN U.S. DOLLARS
------------------- ---------------- ---------------
(MILLIONS EXCEPT SETTLEMENT RATES)
<S> <C> <C> <C> <C>
Belgian Francs -Purchase 594 0.029 $ 17
-Sell (644) 0.029 (19)
British Pounds -Purchase 98 1.660 163
-Sell (152) 1.660 (252)
Canadian Dollars -Purchase 112 0.654 73
-Sell (176) 0.654 (115)
Danish Krone -Purchase 79 0.157 12
-Sell -- -- --
French Francs -Purchase 497 0.179 89
-Sell (97) 0.179 (17)
German Marks -Purchase 3 0.599 2
-Sell (56) 0.599 (33)
Portuguese Escudo -Purchase 1,947 0.006 11
-Sell (30) 0.006 --
Spanish Pesetas -Purchase 4,545 0.007 32
-Sell (325) 0.007 (2)
U.S. Dollars -Purchase 105 1.000 105
-Sell (33) 1.000 (33)
Other -Purchase 395 .043 17
-Sell (719) 0.068 (49)
-----
$ 1
=====
</TABLE>
Interest Rate Risk
Following the realignment of Tenneco's debt in connection with the spin-off
of Packaging, Tenneco's financial instruments that are sensitive to market risk
for changes in interest rates are its debt securities. Tenneco primarily uses a
revolving credit facility to finance its short-term capital requirements.
Tenneco pays a current market rate of interest on these borrowings. Tenneco
finances its long-term capital requirements with long-term debt with original
maturity dates ranging from 6 to 8 and one-half years. Tenneco has $500 million
of long-term debt obligations that have fixed interest rates and $1.05 billion
of long-term debt obligations that have variable interest rates which pay a
current market rate of interest. Should Tenneco decide to redeem its fixed rate,
long-term debt securities prior to their stated maturity, it would generally
incur costs based on the fair value of the debt at that time.
Since Tenneco's debt was issued in connection with the debt realignment,
its book value approximates its fair value.
The statements and other information (including the tables) in this
"Derivative Financial Instruments" section constitute "forward-looking
statements."
YEARS 1997 AND 1996
The year ended December 31, 1997, represents the first full year of Tenneco
Inc. and consolidated subsidiaries' operation as a global manufacturing company
focused on its automotive parts and packaging businesses.
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Tenneco Inc. was spun-off from the company previously known as Tenneco Inc.
("Old Tenneco") on December 11, 1996, following a series of transactions
undertaken to realign the assets, liabilities and operations of Old Tenneco such
that the automotive parts ("Automotive"), packaging ("Specialty Packaging" and
"Paperboard Packaging") and the administrative services ("Tenneco Business
Services") businesses were owned by Tenneco Inc. and the shipbuilding business
was owned by Newport News Shipbuilding Inc. ("Newport News"). Old Tenneco
distributed the shares of Tenneco Inc. and Newport News to its shareowners on
December 11, 1996. On December 12, 1996, Old Tenneco, which then consisted
primarily of the energy business ("Energy") and certain previously discontinued
operations of Old Tenneco, merged with a subsidiary of El Paso Natural Gas
Company.
Although the separation of Tenneco Inc. from Old Tenneco was structured as
a spin-off for legal, tax and other reasons, Tenneco Inc. kept certain important
aspects of Old Tenneco, including its executive management, Board of Directors
and headquarters. Most importantly, the combined assets, revenues, and operating
income of Automotive, Specialty Packaging and Paperboard Packaging represented
more than half the assets, revenues and operating income of Old Tenneco prior to
the distributions and merger. Consequently, this Management's Discussion and
Analysis of Financial Condition and Results of Operations and Tenneco's
financial statements for periods prior to the distributions and merger present
the net assets and results of operations of Old Tenneco's shipbuilding and
energy businesses, as well as its farm and construction equipment business which
was disposed of before the distributions and merger, as discontinued operations.
Refer to Note 2 to the audited Financial Statements of Tenneco Automotive Inc.
and Consolidated Subsidiaries contained elsewhere in this document for further
discussion.
For purposes of this Management's Discussion and Analysis "Tenneco" or the
"Company" refers to Old Tenneco and its subsidiaries before the above described
corporate reorganization transactions and to Tenneco Inc., formerly known as New
Tenneco Inc., and its subsidiaries after those transactions.
The following review of Tenneco's financial condition and results of
operations should be read in conjunction with the financial statements and
related notes of Tenneco Automotive Inc. and Consolidated Subsidiaries.
RESULTS OF CONTINUING OPERATIONS
Tenneco reported income from continuing operations for the year ended
December 31, 1997, of $234 million compared to $82 million for the same period
in 1996. The improvement resulted from record operating results at Automotive
and a lower effective tax rate for 1997 compared to 1996.
Net Sales and Operating Revenues
<TABLE>
<CAPTION>
%
1997 1996 CHANGE
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Automotive............................................ $3,226 $2,980 8%
</TABLE>
Automotive's revenue increase over 1996 resulted from acquisition
performance, volume gains, and improved pricing and product mix. Companies
acquired in 1996 and 1997 contributed $238 million to revenue gains during 1997.
For companies acquired in 1996, these revenue gains include only revenues earned
through the first anniversary of the 1996 acquisition. Performance following the
first year of ownership is included in the other year over year measures of
performance. Volume growth with both existing and new customers resulted in
revenue increases of $128 million, while improved price realizations and a more
favorable product mix added $35 million to 1997 revenues. These revenue gains
were partially offset by the impact of the strong U.S. dollar in overseas
markets, which resulted in $141 million in lower revenues than would have been
realized had the U.S. dollar not strengthened during the year.
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Operating Income
<TABLE>
<CAPTION>
%
1997 1996 CHANGE
---- ---- ------
(MILLIONS)
<S> <C> <C> <C>
Automotive............................................... $407 $249 63%
Other.................................................... (12) (7) NM
---- ----
$395 $242 63%
==== ====
</TABLE>
During 1996, Automotive recorded a pre-tax charge of $64 million to
streamline certain exhaust operations and realign the ride control product line.
Absent this charge, 1996 operating income would have been $313 million. The
remaining increase in operating income during 1997 is primarily attributable to
acquisition performance, cost reduction initiatives, and improved realizations,
partially offset by the impact of the strong U.S. dollar in overseas markets.
Acquisitions, including the impact of 1996 transactions calculated through the
first anniversary of the date of each acquisition, added $35 million to 1997
operating income. Cost reduction initiatives contributed more than $40 million
to the 1997 operating income improvement while improved pricing realization and
product mix combined with volume growth resulted in higher 1997 operating income
of more than $30 million. During the third quarter of 1997, Automotive benefited
from a net reduction of $4 million in certain reserves, primarily related to
ongoing reorganization initiatives which have proceeded more rapidly and
efficiently than planned, allowing Automotive to adjust its cost estimates for
completing these initiatives. Additionally, favorable resolution of a legal
action contributed $10 million to third quarter 1997 results. Partially
offsetting these operating income gains was the impact of the strong U.S. dollar
on overseas earnings, which reduced 1997 operating income by $22 million, and
fourth quarter charges totaling $4 million related to a customer bankruptcy and
a prior asset sale.
The increase in Tenneco's "Other" operating loss reflects the cost of
factoring a higher level of receivables, offset in part by gain recognized on
liquidation of overseas subsidiaries in 1997.
Operating Income as a Percentage of Revenue
Operating income as a percentage of revenue for 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
%
1997 1996 CHANGE
---- ---- ------
<S> <C> <C> <C>
Automotive................................................. 12.6% 8.4% 50%
Total...................................................... 12.2% 8.1% 51%
</TABLE>
Automotive's operating income as a percentage of revenue increased as
operating income grew 63 percent while revenues increased by 8 percent.
Interest Expense, net of interest capitalized
Tenneco incurred interest expense of $216 million during 1997, an increase
of $21 million over 1996. These amounts include $158 million and $135 million of
interest allocated to discontinued operations in 1997 and 1996, respectively.
The increase reflects a higher level of borrowings during 1997, resulting
primarily from acquisitions made in both Specialty Packaging and Automotive, as
well as Tenneco's share repurchase activity.
Income Taxes
Tenneco's effective tax rate for 1997 was 24 percent, compared to 43
percent for 1996. The 1997 tax rate was lower than the statutory rate due to the
non-recurring impact of certain foreign tax benefits and the benefit of
previously unrecognized deferred tax assets. For 1996, the effective tax rate
was in excess of the statutory rate primarily as a result of the realignment
charges recorded for Automotive's European operations which were not fully
benefited for tax purposes.
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Minority Interest
Minority interest in 1997 was $23 million compared to $21 million in 1996.
This is primarily related to dividends on the preferred stock of a U.S.
subsidiary. In December 1997, this subsidiary issued additional preferred stock.
See Note 10 to the audited Financial Statements of Tenneco Inc. and Consolidated
Subsidiaries contained elsewhere in this document for additional information.
The preferred stock was repurchased before the spin-off in conjunction with
Tenneco's debt realignment.
DISCONTINUED OPERATIONS AND EXTRAORDINARY LOSS
For 1997, discontinued operations include the Paperboard Packaging and the
Specialty Packaging operations, which were discontinued in June and August 1999,
respectively. The Paperboard Packaging operations generated income of $21
million after income tax expense of $10 million, or $.12 per diluted common
share. The Specialty Packaging operations generated income of $106 million after
income tax expense of $75 million, or $.63 per diluted common share.
For 1996, discontinued operations include the Paperboard Packaging and
Specialty Packaging operations, as well as, the energy and shipbuilding
operations, which were discontinued in December 1996, and the farm and
construction equipment operations, which were discontinued in March 1996. During
this year, income from discontinued operations from Paperboard Packaging was $71
million, net of income tax expense of $48 million; income from Specialty
Packaging discontinued operations was $65 million, net of income tax expense of
$67 million; income from discontinued operations for energy was $127 million,
net of income tax expense of $32 million; income from discontinued operations
for shipbuilding was $70 million, net of income tax expense of $32 million; loss
from discontinued operations for farm and construction equipment was $1 million,
net of an income tax benefit of $1 million. Additionally, income from
discontinued operations included a $340 million gain, net of income tax expense
of $83 million, on the sale of Tenneco's remaining investment in the farm and
construction equipment business, and transaction costs -- consisting primarily
of financial advisory, legal, accounting, printing, and other costs -- of $108
million, net of an income tax benefit of $17 million, that were incurred in
connection with the 1996 corporate reorganization. In total, discontinued
operations generated $564 million of income, net of income tax expense of $244
million, or $3.23 per diluted common share.
See the Notes to the Financial Statements of Tenneco Automotive Inc. and
Consolidated Subsidiaries contained elsewhere in this document for further
discussion of discontinued operations.
Income from discontinued operations in 1997 included a one-time $38 million
pre-tax gain which resulted from the refinancing of two containerboard mill
leases. Income from the discontinued Paperboard Packaging business in 1996
included a $50 million pre-tax gain on the sale of certain recycled paperboard
assets to a joint venture with Caraustar Industries and a pre-tax charge of $6
million to reorganize Packaging's folding carton operations.
Extraordinary loss for 1996 was $236 million, net of an income tax benefit
of $126 million, or $1.38 per diluted common share. The extraordinary loss was
incurred as a result of the debt realignment undertaken before the December 1996
corporate reorganization and consists principally of the fair value paid in the
cash tender offers and the fair value of debt exchanged in the debt exchange
offers in excess of the historical net carrying value for the debt tendered and
exchanged.
EARNINGS PER SHARE
Income from continuing operations was $6.85 per diluted common share in
1997, up from $2.43 per diluted common share in 1996. Tenneco also recorded
income from discontinued operations of $3.72 per diluted common share and a
charge for the cumulative effect of a change in accounting principle discussed
above of $1.35 per diluted common share, resulting in net income of $9.22 per
diluted common share for 1997. During 1996, discontinued operations earned
$16.18 per diluted common share while Tenneco recorded an extraordinary loss on
retirement of debt of $6.96 per diluted common share. Net income in 1996 was
$11.65 per diluted common share. Average shares of common stock outstanding
increased
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slightly during 1997. For further information regarding the calculation of
earnings per share, refer to the Notes to the Financial Statements of Tenneco
Automotive Inc. and Consolidated Subsidiaries contained elsewhere in this
document.
CASH FLOWS
<TABLE>
<CAPTION>
1997 1996
----- -----
(MILLIONS)
<S> <C> <C>
Cash provided (used) by:
Operating activities...................................... $ 519 $ 253
Investing activities...................................... (887) (685)
Financing activities...................................... 354 147
</TABLE>
Operating Activities
Cash flow provided by operating activities was $266 million higher in 1997
than 1996. Tenneco's discontinued operations generated $308 million in 1997 and
used $15 million in cash flow in 1996, for an improvement of $323 million.
Within continuing operations, income before depreciation was higher in 1997 by
$168 million. Tenneco also generated cash flow benefits from tax refunds during
1997, resulting primarily from the December 1996 reorganization and debt
realignment and a 1996 tax net operating loss which was carried back to earlier
years. These positive benefits were more than offset by increased working
capital associated with higher revenue levels and increased cash outflows
associated with the realignment plan implemented in the fourth quarter of 1996.
Investing Activities
During 1996 Tenneco's investing cash flows included expenditures of $425
million for businesses acquired, primarily for Clevite. Capital expenditures for
continuing operations in 1997 were $33 million higher than in 1996. The sale of
discontinued operations provided $24 million in 1997 and $1,197 million in 1996
of investing cash flow. The 1996 amount arose primarily from sale of Tenneco's
remaining Case Corporation shares and a business owned by Energy. Tenneco also
spent $622 million in 1997 and $1,106 million in 1996 for capital expenditures
and business acquisitions for discontinued operations. In April 1997, Specialty
Packaging acquired the flexible and protective packaging businesses of KNP BT.
In 1996, Specialty Packaging acquired the foam products business.
Financing Activities
During 1997, Tenneco refinanced a portion of its short term debt by issuing
$100 million of 10 year 7 1/2% notes, $200 million of 30 year 7 7/8% debentures,
and $300 million of 20 year 7 5/8% debentures. The net proceeds to Tenneco of
these debt offerings was $593 million. Tenneco retired $23 million in long-term
debt during 1997 according to its terms and reduced short-term debt by a net $31
million. A subsidiary of Tenneco also issued preferred stock, the net proceeds
of which were $99 million. During 1996, financing activities included the debt
realignment executed in December to facilitate the separation of New Tenneco,
Energy, and Newport News, as well as the issuance of $296 million in preferred
stock by Old Tenneco which remained with Old Tenneco in the Energy merger.
During 1997, Tenneco issued $48 million in common stock, related to employee
benefit plans, and repurchased $132 million in common stock under its common
stock repurchase plan. Tenneco also paid 1997 dividends on its common stock of
$204 million. Activity in 1996 included common stock issued of $164 million,
common stock repurchases of $172 million, common and preferred stock dividends
of $313 million and cash of $99 million transferred to Energy and Newport News
in the December 1996 corporate reorganization.
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<PAGE> 74
THE SPIN-OFF
The details of Tenneco's spin-off of Pactiv and the transactions completed
in connection therewith are described below.
MANNER OF SPIN-OFF
To effect the spin-off, Tenneco's Board of Directors declared a special
distribution consisting of all of the capital stock of Pactiv. The shares of
common stock of Pactiv were distributed to holders of record of Tenneco's
outstanding common stock at the close of business on October 29, 1999, without
any consideration being paid by those holders, on the basis of one share of
common stock of Pactiv for every share of common stock of Tenneco. The spin-off
became effective after the close of business on November 4, 1999.
CORPORATE RESTRUCTURING TRANSACTIONS
Before the spin-off, Tenneco effected various corporate restructuring
transactions which restructured, divided and separated its then-existing
businesses so that, in general, the assets, liabilities and operations of its
packaging businesses and administrative services operations were owned and
operated, directly or indirectly, by Pactiv and would, therefore, be spun-off to
Tenneco's then-existing stockholders. As a result of the spin-off, our remaining
assets, liabilities and operations consist primarily of those assets,
liabilities and operations related to Tenneco's automotive business.
Upon completion of the corporate restructuring transactions and spin-off,
Tenneco's assets at the time of the spin-off were allocated as follows:
- We received or retained all of Tenneco's assets at the time not expressly
allocated to Pactiv or its subsidiaries as described below; and
- Pactiv received or retained (1) those assets related to the conduct of
Tenneco's past and current packaging businesses and administrative
services operations and (2) all rights expressly allocated to Pactiv and
its subsidiaries under the distribution agreement we entered into with
Pactiv to implement the spin-off, or any related agreement we entered
into with Pactiv as part of the spin-off.
Upon completion of the corporate restructuring transactions and spin-off,
Tenneco's liabilities at the time of the spin-off were allocated as follows:
- We assumed or retained responsibility for (1) those liabilities related
to the assets allocated to us as described above and the current and past
conduct of Tenneco's automotive business, (2) liabilities for possible
violations of securities laws in connection with the spin-off related to
disclosures or omissions regarding Automotive's business, results of
operations, prospects or management, (3) those liabilities expressly
allocated to us or our subsidiaries under the distribution agreement or
any related agreement, and (4) all other liabilities of Tenneco or any of
its subsidiaries which do not constitute Pactiv liabilities, as described
below; and
- Pactiv assumed or retained responsibility for: (1) those liabilities
related to the Pactiv assets described above and the current and past
conduct of Tenneco's packaging businesses and administrative services
operations, (2) liabilities for possible violations of securities laws in
connection with the spin-off related to disclosures or omissions
regarding Pactiv's business, results of operations, prospects or
management, and (3) those other liabilities expressly allocated to Pactiv
or its subsidiaries under the distribution agreement or any related
agreement.
In addition, we and Pactiv each agreed to be responsible for one-half of
any third-party liability imposed on either party that is both (1) related to
the transactions undertaken as part of the spin-off, such as the debt
realignment, and (2) based on a claim (a) under Delaware corporate law, such as
a claim for a breach of fiduciary duties, or (b) under applicable securities
laws, but only to the extent the alleged violation is not specifically related
to disclosures or omissions about either party's business operations as provided
by that party.
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DEBT REALIGNMENT
Prior to the spin-off, Tenneco realigned its debt, including transaction
fees and specified preferred stock obligations, through a combination of tender
offers, exchange offers, prepayments and other refinancings. As part of the debt
realignment, Tenneco (1) offered to purchase for cash approximately $1,283
million aggregate principal amount of various series of its outstanding public
debt securities (the "Tender Offers"), (2) offered to exchange up to
approximately $1,176 million aggregate principal amount of newly issued debt
securities of Pactiv for its remaining series of outstanding public debt
securities (the "Exchange Offers"), (3) repaid approximately $934 million of
other non-public debt and (4) repurchased $400 million of outstanding subsidiary
preferred stock.
The Tender and Exchange Offers were completed on November 4, 1999, with
Tenneco retiring approximately $2,376 million aggregate principal amount of its
outstanding public debt. Approximately $84 million aggregate principal amount of
Tenneco's public debt was outstanding after completion of the Tender and
Exchange Offers, of which $63 was retired in November 1999 in accordance with
its terms. As part of the Tender and Exchange Offers, Tenneco solicited consents
from the holders of its public debt to amendments to the indenture under which
the debt was issued. The required consents were received, and the indenture was
amended to eliminate all of the operating restrictions that were formerly
contained in the indenture.
To fund the cash portions of the debt realignment, we (1) borrowed $1,092
million under a new senior secured credit facility, described below under
"Description of Senior Credit Facility", and (2) issued the outstanding notes
which are subject to this exchange offer. Also as part of the debt realignment,
Pactiv (1) made borrowings under new credit facilities entered into in
connection with the spin-off and remitted the proceeds to Tenneco and (2) issued
new public debt pursuant to the Exchange Offers described above.
Now that the debt realignment is complete, we are responsible for all of
Tenneco's existing public debt that was not retired in the Tender or Exchange
Offers, borrowings under the new senior secured credit facility and the
outstanding notes. Pactiv is responsible for its new public debt securities
issued in the Exchange Offers and the borrowings under the new Pactiv credit
facilities described above.
RELATIONSHIP BETWEEN US AND PACTIV AFTER THE SPIN-OFF
The distribution agreement and principal related, or ancillary, agreements
that we entered into with Pactiv in connection with the spin-off are described
below.
DISTRIBUTION AGREEMENT
In addition to providing for the terms of the spin-off and the various
actions that were required to be taken before the spin-off, the distribution
agreement contains other provisions governing the relationship between us and
Pactiv after the spin-off.
Responsibility for Liabilities. The distribution agreement provides that
after the spin-off date: (1) we are responsible for paying, performing and
discharging our allocated liabilities according to their terms, and (2) Pactiv
is responsible for paying, performing and discharging its allocated liabilities
according to their terms. See "-- Corporate Restructuring Transactions." The
distribution agreement provides for cross-indemnities so that: (1) we must
indemnify Pactiv and its respective subsidiaries, directors, officers, employees
and agents, and other related parties, against all losses arising out of or in
connection with our allocated liabilities or the breach of the distribution
agreement or any ancillary agreement by us; and (2) Pactiv must indemnify us and
our respective subsidiaries, directors, officers, employees and agents, and
other related parties, against all losses arising out of or in connection with
Pactiv's allocated liabilities or the breach of the distribution agreement or
any ancillary agreement by Pactiv.
Further Assurances. We and Pactiv have each agreed to use all reasonable
efforts to take all action following the spin-off that is reasonably necessary
or advisable to consummate the transactions contemplated by and carry out the
purposes of the distribution agreement.
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Information Sharing. The distribution agreement provides for the transfer
and sharing of books and records between us and Pactiv and provides that each
party will grant to the other access to specified information in such party's
possession, subject to confidentiality requirements and legal privilege issues.
Intercompany Accounts. According to the distribution agreement, in general
all intercompany receivables, payables and loans between Tenneco's automotive
business, on the one hand, and its packaging businesses and administrative
services operations, on the other hand, that did not arise from ordinary trading
transactions were settled, capitalized or converted into ordinary trade
obligations as of the close of business on the spin-off date. Further, all
intercompany agreements between these businesses, other than those contemplated
in connection with the spin-off and specified trade supply agreements, were
terminated.
Expenses. Tenneco used a portion of the funds borrowed by us and Pactiv as
part of the debt realignment to fund the payment of fees, costs and expenses
associated with the spin-off. Under the distribution agreement, other specified
fees, costs and expenses related to the spin-off but not funded in connection
with the debt realignment will be shared equally by us and Pactiv. All other
fees, costs and expenses will be paid by the party incurring the fees, costs or
expenses.
HUMAN RESOURCES AGREEMENT
The human resources agreement entered into between us and Pactiv governs
labor, employment, compensation and benefit matters in connection with the
spin-off. Under the human resources agreement, each of us and Pactiv agreed to:
- continue employment of each of our respective retained employees, subject
to our rights to terminate employees, with the same compensation as
before the spin-off date;
- continue to honor all related existing collective bargaining agreements
in accordance with their terms;
- recognize related incumbent labor organizations, subject to our rights to
seek changes in our relationships with the organizations; and
- continue sponsorship of hourly employee benefit plans in accordance with
their terms.
Effective on the spin-off date, Pactiv became the sponsor of the Tenneco
Retirement Plan and of the Tenneco Thrift Plan and Tenneco Thrift Plan for
Hourly Employees (collectively, the "Tenneco Thrift Plan"). We will establish
one or more thrift plans similar to the Tenneco Thrift Plan to which the account
balances of retained and former employees of Automotive in the Tenneco Thrift
Plan will be transferred. The benefits accrued by Automotive employees in the
Tenneco Retirement Plan were frozen as of the last day of November 1999, and
Pactiv will amend the Tenneco Retirement Plan to provide that all benefits
accrued through that day by Automotive employees are fully vested and
non-forfeitable. Generally, each of us and Pactiv will retain liabilities with
respect to benefits accrued by our respective current and former employees under
the Tenneco Inc. Supplemental Executive Retirement Plan and with respect to the
welfare benefits of our respective current and former employees and their
dependents. In addition, as of the spin-off date, participation by current and
former employees of Automotive in the Tenneco Inc. Deferred Compensation Plan
was discontinued and we succeeded to those liabilities.
Under the human resources agreement, Tenneco generally caused outstanding
restricted stock and performance share equivalent unit awards to become fully
earned and vested before the spin-off. Tenneco common stock options held by
Pactiv employees were replaced by options to purchase shares of Pactiv common
stock on terms economically equivalent to the old Tenneco options. Tenneco
common stock options held by Automotive employees were adjusted to maintain
equivalent economic terms to the options outstanding immediately prior to the
spin-off.
TAX SHARING AGREEMENT
A tax sharing agreement was also entered into between us and Pactiv in
connection with the spin-off. This agreement provides for the allocation of tax
liabilities between the parties arising before, as a result of and after the
spin-off. As a general rule, we are liable for all taxes not specifically
allocated to Pactiv
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<PAGE> 77
under the terms of the tax sharing agreement. Generally, Pactiv is liable for
taxes imposed exclusively on Pactiv and its affiliates engaged in the packaging
and administrative services businesses. In the case of U.S. federal income taxes
imposed on the combined activities of Tenneco's automotive and packaging groups,
Pactiv is generally liable to us for federal income taxes attributable to the
activities of its group. Liability for foreign income taxes and non-income taxes
will generally be allocated to the legal entity on which the taxes are imposed.
In the case of state income taxes imposed on the combined activities of the
business groups, Pactiv will generally be liable for the tax that would be
imposed if the Pactiv group had filed combined returns for its group.
In general, and except as provided below, any taxes imposed on or resulting
from any or all of the spin-off, the corporate restructuring transactions and
the debt realignment will be the responsibility of the legal entity on which the
taxes are imposed. However, if any of those transaction taxes arise due to any
action taken or permitted by us or Pactiv that is inconsistent with any
representations or warranties made in connection with the IRS letter ruling
requested and received by Tenneco in connection with the spin-off, that entity,
either us or Pactiv, will be responsible for the resulting tax liability.
Additionally, if any transaction taxes arise under Section 355(e) of the
Internal Revenue Code as a result of a 50% ownership shift, as defined below,
then the resulting corporate tax burden will be borne by the entity, either us
or Pactiv, that experienced the 50% ownership shift. Any income tax liability
that results from the spin-off, corporate restructuring transactions or debt
realignment, but which is not due to either a 50% ownership shift or an action
that is inconsistent with the tax treatment contemplated in the IRS letter
ruling request, will be shared equally by us and Pactiv.
Section 355(e) of the Internal Revenue Code, which was enacted in 1997,
generally provides that a company that distributes shares of a subsidiary in a
spin-off that is otherwise tax-free will incur federal income tax liability if
50% or more, by vote or value, of the capital stock of either the company making
the distribution or the spun-off subsidiary is acquired by one or more persons
acting together pursuant to a plan or series of related transactions that
includes the spin-off. This provision can be triggered by some reorganizations
involving the acquisition of the assets of the company making the distribution
or the spun-off subsidiary. There is a presumption that any 50% ownership shift
that occurs within two years before or after the spin-off is pursuant to a plan
that includes the spin-off. However, the presumption may be rebutted by
establishing that the spin-off and the acquisitions are not part of a plan or
series of related transactions.
We and Pactiv agreed not to take or permit actions inconsistent or
partially inconsistent with the IRS letter ruling request on or before the
period ending two calendar years from the date of the spin-off, unless the
action has been consented to by the other. These agreements could restrict the
ability of us or Pactiv to engage in some corporate transactions, redeem stock,
dispose of assets except in the ordinary course of business or be the target of
an acquisition transaction during that period.
TRANSITION SERVICES AGREEMENT
Prior to the spin-off, Tenneco's administrative services operations
provided a number of services to Tenneco's operating units. These services
included: (1) financial accounting services; (2) employee benefits
administration for all major salaried and hourly benefit plans; (3) human
resources and payroll services; (4) mainframes and distributed systems
operations; (5) telecommunications and network operations and management; (6)
help desk support; and (7) disaster recovery support.
Upon completion of the spin-off, Tenneco's administrative services
operations became a part of Pactiv. Accordingly, we entered into a transition
services agreement with Pactiv under which Pactiv will continue to provide us
with specified administrative services. Specifically, Pactiv will provide or
cause to be provided to us the following services:
- financial reporting, human resource administration, cash management and
tax services for a period of up to one year following the spin-off, for
which we will pay a fixed fee; and
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- telecommunication and information technology services ("ITOC Services")
until December 31, 2001, for which we will pay Pactiv its direct costs
plus 50% of Pactiv's unreimbursed overhead expenses related to providing
the ITOC Services.
In addition, we entered into a separate agreement with a third-party
service provider to provide us with accounts payable, payroll processing and
related services through December 31, 2002. For these services, we will pay a
fixed fee, subject to adjustment based on actual usage.
We estimate that our fee for these services is currently approximately $3.4
million per month. We will generally receive a rebate equal to 25% of any
overhead costs savings and 50% of any direct costs savings that Pactiv achieves
in providing its services, except that we will receive the full benefit of any
direct costs savings attributable to volume reductions.
In addition, the transition services agreement with Pactiv contemplates
that on or before December 31, 2001 Pactiv will transfer to us, with no
additional consideration paid to Pactiv, assets that will enable us to provide
the ITOC Services for ourselves. To the extent this transfer occurs before
December 31, 2001 and we therefore assume expenses for the provision of the
related ITOC Services, we will receive a credit against the applicable fees
described above.
Because we retained a portion of the administrative support for Tenneco's
European operations, we also agreed to provide Pactiv with specified
administrative services for its European operations for an initial period of six
months beginning on the date of the spin-off. After the initial six-month
period, Pactiv may elect to have us continue to provide specified services for
up to six months on a month-to-month basis. Pactiv will pay us a monthly fee for
these services.
INSURANCE AGREEMENT
The insurance agreement entered into between us and Pactiv provides for the
separation and administration of Tenneco's insurance programs in effect prior to
the spin-off and the purchase of "run-off " policies for fiduciaries and
directors and officers. In general, the insurance agreement provides that we and
Pactiv will obtain coverage for the period ending in December 1996 through
Tenneco's pre-existing policies. For the period between December 1996 and the
spin-off, we and Pactiv will obtain coverage through Tenneco's existing policies
plus supplemental coverage that was purchased. "Run-off" insurance policies were
also purchased that remain in effect for seven years and provide coverage for
acts prior to the spin-off by directors, officers and fiduciaries of benefit and
pension plans. We and Pactiv will each be responsible for administering our
respective insurance programs after the spin-off and for purchasing insurance as
necessary to cover our respective losses arising after the spin-off. The
insurance agreement also allocates responsibility for the payment of premiums
and deductibles, and the distribution of insurance proceeds.
TRADEMARK TRANSITION LICENSE AGREEMENT
After the spin-off, we continue to hold the rights to various trademarks,
servicemarks, tradenames and similar intellectual property, including rights in
the marks "Tenneco," "Ten" and "Tenn" alone and in combination with other terms
and/or symbols and variations thereof (collectively, the "Trademarks"), in the
United States and throughout the world. In connection with the spin-off, Pactiv
entered into a trademark transition license agreement with us. Under this
agreement, we granted to Pactiv and its subsidiaries a limited, royalty-free
license to use the Trademarks with respect to Pactiv businesses, subject to
quality standards and other conditions. In general, the license will expire (1)
60 days after the spin-off, with respect to the use of the Trademarks in
corporate names, (2) 12 months after the spin-off, with respect to stationery
and similar supplies, and (3) 18 months after the spin-off, with respect to
signage and other advertising material.
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BUSINESS
TENNECO BEFORE THE SPIN-OFF
Before the spin-off, Tenneco was a global manufacturing company whose major
businesses consisted of (1) the manufacture and sale of automotive emissions
control and ride control products and systems, and (2) the manufacture and sale
of specialty packaging and consumer products for the foodservice, consumer,
protective, flexible and institutional/industrial markets. Now that the spin-off
is complete, our remaining operations consist solely of Automotive. See "The
Spin-off."
Tenneco was incorporated in 1996 under the name "New Tenneco Inc." as a
wholly owned subsidiary of the company then known as Tenneco Inc. At that time,
the company's major businesses were shipbuilding, energy, automotive and
packaging. On December 11, 1996, the "old" Tenneco completed the transfer of its
automotive and packaging businesses to Tenneco, and spun off Tenneco to its
public stockholders. In connection with that spin-off, the "old" Tenneco also
spun off its shipbuilding division to its public stockholders and the remaining
energy company was acquired by El Paso Natural Gas Company. Unless the context
otherwise requires, for periods prior to December 11, 1996, references to
Tenneco Inc. also refer to the company formerly known as Tenneco.
GENERAL
With 1998 revenues of over $3.2 billion, we are one of the world's largest
producers of automotive emissions control and ride control systems and products.
We serve both original equipment (OE) manufacturers and replacement markets
worldwide through leading brands, including Monroe(R) brand ride control and
Walker(R) brand emissions control products. On an independent basis, we would
have ranked as number 457 based on revenues on the 1998 Fortune 500 listing of
U.S. companies.
As an automotive parts supplier, we design, market and sell individual
component parts for vehicles as well as groups of components that are combined
as modules or systems within vehicles. These parts, modules and systems are sold
globally to the vast majority of vehicle manufacturers and throughout all
aftermarket distribution channels.
OVERVIEW OF AUTOMOTIVE PARTS INDUSTRY
The automotive parts industry is generally separated into two categories:
(1) "original equipment" or "OE" sales, in which parts are sold in large
quantities directly to original equipment vehicle manufacturers; and (2)
"aftermarket" sales, in which parts are sold as replacement parts in varying
quantities to a wide range of wholesalers, retailers and installers. In the OE
market, parts suppliers are generally divided into tiers -- "Tier 1" suppliers,
who provide their products directly to original equipment manufacturers, and
"Tier 2" or "Tier 3" suppliers, who sell their products principally to other
suppliers for combinations into the other suppliers' own product offerings.
Demand for automotive parts in the OE market is driven by the number of new
vehicle sales, which in turn is largely determined by prevailing economic
conditions. Although OE demand is tied to planned vehicle production, parts
suppliers also have the opportunity to grow through increasing product content
and customer and market penetration. Companies with global presence in advanced
technology, engineering, manufacturing and support capabilities, such as us, are
in the best position to take advantage of these opportunities.
Demand for aftermarket products is fundamentally driven by the quality of
OE parts, the number of vehicles in operation, the average age of the vehicle
fleet and vehicle usage. Innovative aftermarket products that upgrade the
performance or safety of an automobile's original parts, as several of our
products do, can also drive aftermarket demand.
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INDUSTRY TRENDS
Currently, several significant existing and emerging trends are
dramatically reshaping the automotive industry. As the dynamics of the
automotive industry change, so do the roles, responsibilities and relationships
of its participants. Key trends that we believe are affecting automotive parts
suppliers include:
CUSTOMER AND SUPPLIER CONSOLIDATION
The customer base for automotive parts is consolidating in both the OE
market and aftermarket. Because of recent business combinations among vehicle
manufacturers -- such as the DaimlerChrysler merger and Ford's acquisition of
Volvo -- and in the aftermarket -- such as AutoZone's acquisition of Chief Auto
Parts and CSK Auto's acquisition of Big Wheel/Rossi -- suppliers are competing
for the business of fewer customers. The cost focus of these major customers is
causing suppliers to reduce prices.
Consolidation is also occurring among automotive parts suppliers,
particularly those who supply vehicle makers. The approximate number of Tier 1
suppliers is projected to decrease from 1,500 to 600 between 1998 and 2005. The
primary reasons for this consolidation include: (1) an increasing desire by
original equipment manufacturers to work with fewer, larger suppliers that can
provide fully-integrated systems; and (2) the inability of smaller suppliers to
compete on price with the larger companies who benefit from purchasing and
distribution economies of scale. A supplier's viability in this consolidating
market depends, in part, on its continuing ability to maintain and increase
operating efficiencies by reducing costs and improving productivity. Also
important is a supplier's ability to provide value-added services such as
materials management, specialized engineering capabilities and integration of
individual components into modules and systems. With our strong market positions
in emissions control and ride control products and our demonstrated ability to
integrate and deliver modules and systems, we are well-positioned to respond to
increasing customer consolidation.
INCREASED OE OUTSOURCING AND DEMAND FOR FULL-SYSTEM INTEGRATION BY
SUPPLIERS
Original equipment manufacturers are moving towards outsourcing automotive
parts and systems to simplify the vehicle assembly process, lower costs and
reduce vehicle development time. Outsourcing allows original equipment
manufacturers to take advantage of the lower cost structure of the automotive
parts suppliers and to benefit from multiple suppliers engaging in simultaneous
development efforts. Development of advanced electronics has enabled formerly
independent vehicle components to become "interactive," leading to a shift in
demand from individual parts to fully-integrated systems. As a result,
automotive parts suppliers offer original equipment manufacturers component
products individually, as well as in a variety of integrated forms such as
modules and systems:
- "Modules" are groups of component parts arranged in close physical
proximity to each other within a vehicle. Modules are often assembled by
the supplier and shipped to the original equipment manufacturer for
installation in a vehicle as a unit. Seats, instrument panels, axles and
door panels are examples.
- "Systems" are groups of component parts located throughout a vehicle
which operate together to provide a specific vehicle function. Anti-lock
braking systems, safety restraint systems, emissions control and power
train systems are examples.
This shift in demand towards fully-integrated systems has created the role of
the Tier 1 systems integrator. These systems integrators will increasingly have
the responsibility to execute a number of activities, such as design, product
development, engineering, testing of component systems and purchasing from Tier
2 suppliers. We are an established Tier 1 supplier with ten years of product
integration experience. We have modules or systems for 25 vehicle platforms in
production worldwide and modules or systems for three additional platforms under
development. For example, we supply ride control modules for the Chrysler JA
Cirrus/Stratus/Breeze and the emissions control system for the Porsche Boxster.
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GLOBALIZATION OF THE AUTOMOTIVE INDUSTRY
Original equipment manufacturers are increasingly requiring suppliers to
provide parts on a global basis. As the customer base of original equipment
manufacturers changes, and emerging markets become more important to achieving
growth, suppliers must be prepared to provide products any place in the world.
This requires a worldwide approach to supply chain management, engineering,
sales and distribution:
- Growing Importance of Emerging Markets. Because the North American and
Western European automotive markets are relatively mature, original
equipment manufacturers are increasingly focusing on emerging markets for
growth opportunities, particularly China, Eastern Europe, India and Latin
America. This increased OE focus has, in turn, increased the growth
opportunities in the aftermarkets in these regions.
- Governmental Tariffs and Local Parts Requirements. Many governments
around the world require that vehicles sold within their country contain
specified percentages of locally produced parts. Additionally, some
governments place high tariffs on imported parts.
- Location of Production Closer to End Markets. Original equipment
manufacturers and parts suppliers have relocated production globally on
an "on-site" basis that is closer to end markets. This international
expansion allows suppliers to pursue sales in developing markets and take
advantage of relatively lower labor costs.
With facilities around the world, including the key regions of North America,
South America, Europe and Asia, we can supply our customers on a global basis.
GLOBAL RATIONALIZATION OF OE VEHICLE PLATFORMS
Original equipment manufacturers are increasingly designing "global"
platforms. A "global" platform is a basic mechanical structure of a vehicle that
can accommodate different features and is in production and/or development in
two or more regions. Thus, original equipment manufacturers can design one
platform for a number of similar vehicle models. This allows manufacturers to
realize significant economies of scale through limiting variations across items
such as steering columns, brake systems, transmissions, axles, exhaust systems,
support structures and power window and door lock mechanisms. We believe that
this shift towards standardization will have a large impact on automotive parts
suppliers, who should experience a reduction in production costs as original
equipment manufacturers reduce variations in components. We also expect parts
suppliers to experience higher production volumes per unit and greater economies
of scale, as well as reduced total investment costs for molds, dies and
prototype development. We currently work with original equipment manufacturers
on 33 "global" platforms.
INCREASING ELECTRONIC COMPONENTS AND TECHNOLOGICAL INNOVATION
As consumers continue to demand competitively priced vehicles with
increased performance and functionality, the number of electronic components
utilized in vehicles is increasing. By replacing mechanical functions with
electronics and by integrating mechanical and electronic functions within a
vehicle, original equipment manufacturers are achieving improved emissions
control, improved safety and more sophisticated features at lower costs.
In addition, automotive parts customers are increasingly demanding
technological innovation from suppliers to address more stringent emissions and
other regulatory standards and to improve vehicle performance. To continue
developing innovative products, systems and modules, we maintain 16 research and
development facilities and have entered into several strategic alliances focused
on advanced technology designs. For example, we have developed several adaptive
damping systems which reduce undesirable vehicle motion. Also, we have developed
the self-lubricating elastomer, which has the additional ability to reduce
friction between moving components in a suspension-system, thereby reducing
noise and vibration.
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INCREASING ENVIRONMENTAL STANDARDS
Automotive parts suppliers and original equipment manufacturers are
designing products and developing materials to comply with increasingly
stringent environmental requirements. Government regulations adopted over the
past decade require substantial reductions in automobile tailpipe emissions,
longer warranties on parts of an automobile's pollution-control equipment and
additional equipment to control fuel-vapor emissions. Some of these regulations
also mandate more frequent emissions and safety inspections for the existing
fleet of vehicles. Manufacturers have responded by focusing their efforts
towards technological development to minimize pollution. As a leading supplier
of emissions control systems with strong technical capabilities, we are
well-positioned to benefit from more rigorous environmental standards.
EXTENDED PRODUCT LIFE OF AUTOMOTIVE PARTS
The average useful life of automotive parts -- both OE and
replacement -- has been steadily increasing in recent years due to innovations
in products and technologies. The longer product lives allow vehicle owners to
replace parts of their vehicles less often. As a result, a portion of sales in
the aftermarket has been displaced. Accordingly, a supplier's future viability
in the aftermarket will depend, in part, on its ability to reduce costs and
leverage its advanced technology and recognized brand names to maintain or
achieve additional sales. As a Tier 1 OE supplier, we are well-positioned to
leverage our products and technology into the aftermarket. Furthermore, an
opportunity exists for replacement of certain parts to increase as the average
age of vehicles on the road increases. For example, from 1990 to 1997 the
average age of cars in the U.S. increased from 7.8 to 8.7 years.
GROWING RETAIL AFTERMARKET DISTRIBUTION
During the last decade, the number of retail automotive parts chains, such
as AutoZone and Advance Auto Parts, has been growing while the number of
traditional automotive parts stores that sell to installers ("jobbers") has been
declining. Since 1990, the number of retail automotive parts stores has
increased from approximately 10,000 to approximately 14,000, while the number of
jobbers has decreased from approximately 25,000 to approximately 21,000. In
addition, since retailers are attempting to grow their commercial sales to
automotive parts installers, they are increasingly adding premium brands to
their product portfolios. This enables them to offer the option of a premium
brand, which is often preferred by their commercial customers, or a standard
product, which is often preferred by their retail customers. We are
well-positioned to respond to this changing aftermarket situation because of our
focus on cost reduction and high-quality, premium brands.
BUSINESS STRATEGY
Our objective is to enhance profitability by leveraging our global position
in the manufacture of emissions control and ride control products and systems.
We intend to apply our competitive strengths and balanced mix of products,
markets, customers and distribution channels to capitalize on many of the
significant existing and emerging trends in the automotive industry. The key
components of our business strategy are described below.
"OWN" THE PRODUCT LIFE CYCLE
Using our global engineering capabilities and its advanced technology
position, we are pursuing opportunities to design unique, value-added products
for vehicle manufacturers that yield higher margins in the OE market. We expect
to take advantage of our OE technology investments by moving these
differentiated products into the aftermarket, where they should continue to
generate future revenue streams through the entire life of the vehicle.
Innovative products such as Sensa-Trac(R) shocks and Quiet-Flow(TM) mufflers are
examples of where our market balance between OE and aftermarket sales allows us
to leverage our cost structure over the entire product life cycle.
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DEVELOP AND COMMERCIALIZE INNOVATIVE, VALUE-ADDED PRODUCTS
We intend to continue to focus on the development of highly engineered
systems and complex assemblies and modules which provide value-added solutions
to customers and generally carry higher profit margins than individualized
components. Furthermore, we intend to expand our product lines by continuing to
identify and fill new fast-growing niche markets, by developing new products for
existing markets, by acquiring companies with product portfolios that complement
the products we currently supply and by establishing strategic alliances with
other suppliers.
One example of our focus on innovation is our acquisition in early 1999 of
Kinetic Ltd., an Australian advanced suspension engineering company with
advanced roll-control technology. This technology also provides enhanced on-road
handling while improving off road performance. In addition, in an effort to
further enhance our electronic competencies we entered into an agreement with
Siemens Automotive S.A. in late 1998 to cooperate in the development and
commercialization of advanced electronically controlled ride control and
suspension technologies. Also in late 1998, we reached an agreement with Ohlins
Racing A.B. to jointly develop advanced, electronically controlled suspension
damping systems which decrease spring movement.
LEVERAGE AFTERMARKET BRAND NAMES
We manufacture and market leading brand-name products. Monroe(R) ride
control products and Walker(R) emissions control products, which have been
offered to consumers for over 50 years, are two of the most recognized
brand-name products in the automotive parts industry. We continue to emphasize
product value differentiation with these brands and its other primary brands,
including:
- the Monroe Sensa-Trac(R) line of shock absorbers, that has been enhanced
by the Safe-Tech(TM) system technology which incorporates a fluon banded
piston to improve performance and durability;
- Walker's Quiet-Flow(TM) muffler, which features an open-flow design that
increases exhaust flow, improves sound quality and significantly reduces
exhaust backpressure when compared to other replacement mufflers;
- Rancho(R) ride control products for the high-performance light truck
market;
- DynoMax(R) high-performance emissions control systems;
- Walker Perfection(TM) catalytic converters;
- Clevite(TM) elastomeric vibration control components, which are primarily
rubber products used to reduce vibration through "cushioning" a
connection or contact point; and
- in European markets, Walker(R) and Aluminox(TM) mufflers.
We are also capitalizing on our brand strength by incorporating newly
acquired product lines within existing product families. Our brand equity is a
key asset in a time of customer consolidation and merging channels of
distribution.
DIVERSIFY END-MARKETS
One of our goals is to apply our existing design, marketing and
manufacturing capabilities to produce products for a variety of adjacent
markets. We believe that these capabilities could be used for heavy duty vehicle
and industrial applications, various recreational vehicles, scooters and
bicycles. We expect that expanding into markets other than automotive parts will
allow us to capitalize on our advanced technical and manufacturing
infrastructure to achieve growth in higher margin businesses.
EXPAND FULL-SYSTEM CAPABILITIES
The automotive parts industry is encountering a consolidation of parts
suppliers, as original equipment manufacturers require suppliers to provide
design assistance and innovation and full-system capabilities
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rather than just specific parts. In response to this trend, we have developed
integrated, electronically linked global engineering and manufacturing
facilities to maintain our presence on top selling vehicles. We have over 10
years of experience as an integrator of systems and modules. We are currently
supplying modules or systems for 25 vehicle platforms worldwide and have modules
or systems for three additional platforms under development. We also plan to
continue to dedicate more resources towards strengthening technical capability
and design expertise and to pursue appropriate strategic acquisitions, joint
ventures, strategic alliances and cooperative development agreements to increase
our ability to deliver full-system capabilities.
MAINTAIN OPERATING COST LEADERSHIP
We intend to continue to reduce costs by:
- standardizing products and processes throughout our operations;
- further developing our global supply chain management capabilities;
- improving our information technology;
- increasing efficiency through employee training;
- investing in more efficient machinery; and
- enhancing the global coordination of costing and quoting procedures.
In the fourth quarter of 1998, we began a restructuring designed to reduce
administrative and operational overhead costs. The largest part of the $53
million pre-tax restructuring charge which was recorded in income from
continuing operations related to the restructuring of our North American
aftermarket operations. The operational restructuring, designed to better match
our capacity to market demand, involves closing two plant locations and five
distribution centers, with the elimination of 302 positions at those locations.
We expect to complete this by mid-2000. The administrative restructuring
involved the reduction of approximately 450 administrative staff positions. We
completed this by the end of 1999. We are also implementing a supplemental
restructuring plan. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- General."
We have also adopted Business Operating System as a disciplined system to
promote and manage continuous improvement. BOS focuses on the assembly and
analysis of data for quick and effective problem resolution to create more
efficient and profitable operations.
We have also adopted a management process of measuring the economic value
of its operations to help ensure returns exceed capital costs. We are planning
to link the successful application of this management discipline to our
incentive compensation program.
EXECUTE FOCUSED ACQUISITIONS AND ALLIANCES
In the past, we have been successful in identifying and capitalizing on
strategic acquisitions and alliances to achieve growth. Through these
acquisitions and alliances, we have: (1) expanded our product portfolio; (2)
realized incremental business with existing customers; (3) gained access to new
customers; and (4) achieved leadership positions within new geographic markets.
Where appropriate, we intend to continue to pursue strategic acquisitions
that complement our existing technology and systems development efforts. This
focused strategy will assist us to identify and acquire smaller-scale companies
with proven proprietary technology and recognized research capabilities
necessary to help develop further leadership in systems integration. Any
potential acquisition will be expected to meet strict financial criteria to
ensure it increases economic value. We also plan to continue to pursue joint
venture and alliance opportunities to achieve our objectives and enhance
profitability.
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ANALYSIS OF REVENUES
The following table provides for each of the years 1996 through 1998, and
for the nine months ended September 30, 1999, information relating to our net
sales, by primary product lines and markets:
<TABLE>
<CAPTION>
NET SALES (MILLIONS)
------------------------------------------------
NINE MONTHS YEAR ENDED DECEMBER 31,
ENDED --------------------------
SEPTEMBER 30, 1999 1998 1997 1996
------------------ ---- ---- ----
<S> <C> <C> <C> <C>
EMISSIONS CONTROL SYSTEMS & PRODUCTS
Aftermarket......................... $ 407 $ 590 $ 686 $ 710
OE Market........................... 1,033 1,224 1,067 989
------ ------ ------ ------
1,440 1,814 1,753 1,699
------ ------ ------ ------
RIDE CONTROL SYSTEMS & PRODUCTS
Aftermarket......................... 483 685 782 768
OE Market........................... 550 738 691 513
------ ------ ------ ------
1,033 1,423 1,473 1,281
------ ------ ------ ------
Total Automotive............... $2,473 $3,237 $3,226 $2,980
====== ====== ====== ======
</TABLE>
CUSTOMERS
We have developed long-standing business relationships with our customers
around the world. We work together with our customers in all stages of
production, including design, development, component sourcing, quality
assurance, manufacturing and delivery. With a balanced mix of OE and aftermarket
products and facilities in major markets worldwide, we are well-positioned to
meet customer needs. We have a strong, established reputation with customers for
providing high-quality products at competitive prices, as well as for timely
delivery and customer service.
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We serve more than 25 different original equipment manufacturers on a
global basis, and our products or systems are included on six of the top 10
passenger car models and eight of the top 10 light truck models produced
globally for 1998. Our current OE customers include:
<TABLE>
<S> <C> <C>
NORTH AMERICA EUROPE INDIA
CAMI BMW Maruti Suzuki
DaimlerChrysler DaimlerChrysler TELCO
Ford DAF Bajaj
Freightliner Daihatsu
General Motors Fiat AUSTRALIA
Honda Ford Ford
Mazda Jaguar General Motors/Holden
Mitsubishi Lada Mitsubishi
Navistar Leyland Toyota
Nissan Mitsubishi
NUMMI Nissan JAPAN
Toyota Opel Mazda
Volkswagen Peugeot/Citroen Nissan
Porsche Suzuki
SOUTH AMERICA Renault/Matra Toyota
DaimlerChrysler Rover/Land Rover
Fiat Saab/Scania CHINA
Ford Toyota DaimlerChrysler
General Motors Volkswagen/Audi/SEAT/Skoda Citroen
Honda Volvo Ford
Renault Toyota
Toyota Volkswagen
Volkswagen
THAILAND
General Motors
Isuzu
</TABLE>
Our aftermarket customers are comprised of full-line and specialty
warehouse distributors, retailers, jobbers (traditional automotive parts stores
that have historically sold primarily to installers), installer chains and car
dealers. These customers include such wholesalers and retailers as National Auto
Parts Association (NAPA), Monro Muffler Brake, and Advance Auto Parts in North
America and Temot, Autodistribution International and Kwik-Fit in Europe. We
have a balanced mix of aftermarket customers, with our top 10 aftermarket
customers accounting for less than 11% of our total net sales for 1998.
For each of the last three years, fewer than five customers individually
accounted for 5% or more of our net sales. For example, Ford accounted for
approximately 11.5%, 13.2% and 12.8% of our net sales in 1996, 1997 and 1998,
respectively, and DaimlerChrysler accounted for approximately 9.6%, 8.9% and
10.9% of our net sales in 1996, 1997 and 1998, respectively. No other customer
accounted for more than 10% of our net sales for those years.
COMPETITION
We operate in highly competitive markets. Customer loyalty is a key element
of competition in these markets and is developed through long-standing
relationships, customer service, value-added products and timely delivery.
Product pricing and services provided are other important competitive factors.
In both the OE market and aftermarket, we compete with vehicle
manufacturers, some of which are also customers of ours, and numerous
independent suppliers. In the OE market, we believe that we are among the top
three suppliers in the world for both emissions control and ride control
products and
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systems. In the aftermarket, we believe that we are the market share leader in
the supply of both emissions control and ride control products in the world.
EMISSIONS CONTROL SYSTEMS
Vehicle emissions control products and systems play a critical role in
safely conveying noxious exhaust gases away from the passenger compartment,
reducing the level of pollutants and engine exhaust noise to an acceptable
level. Precise engineering of the exhaust system -- from the manifold that
connects an engine's exhaust ports to an exhaust pipe, to the catalytic
converter that eliminates pollutants from the exhaust, to the muffler -- leads
to a pleasant, tuned engine sound, reduced pollutants and optimized engine
performance.
We design, manufacture and distribute a variety of automotive emissions
control systems, which include components such as:
- mufflers;
- resonators -- help the muffler eliminate noise;
- catalytic converters -- devices used to convert harmful gaseous
emissions, such as carbon monoxide, from a vehicle's exhaust system into
harmless components such as water vapor and carbon dioxide;
- fabricated exhaust manifolds -- made of sheet metal or tubes and collect
gases from individual cylinders of a vehicle's engine and direct them
into a single exhaust pipe;
- pipes -- connect various parts of an exhaust system;
- hydroformed tubing -- forms into various geometric shapes, such as
Y-pipes or T-pipes, and provide flexibility in design; and
- electronic noise cancellation products.
We entered this product line in 1967 with the acquisition of Walker
Manufacturing Company, which was founded in 1888. When the term "Walker" is used
in this document, it refers our affiliates that produce emissions control
products and systems.
Walker supplies emissions control products used in six of the 10 top
passenger car models and five of the 10 top light truck models produced globally
for 1998. With the acquisition of Heinrich Gillet GmbH & Co. in 1994, Walker
also became one of Europe's leading OE emissions control systems suppliers.
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The following table provides for each of the years 1996 through 1998, and
for the nine months ended September 30, 1999, information relating to our sales
of emissions control systems:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
----------------------------------------------
NINE MONTHS YEAR ENDED DECEMBER 31,
ENDED ------------------------
SEPTEMBER 30, 1999 1998 1997 1996
------------------ ---- ---- ----
<S> <C> <C> <C> <C>
UNITED STATES MARKET
Aftermarket......................... 31% 37% 43% 46%
OE Market........................... 69% 63% 57% 54%
---- ---- ---- ----
100% 100% 100% 100%
==== ==== ==== ====
FOREIGN SALES
Aftermarket......................... 27% 30% 36% 38%
OE Market........................... 73% 70% 64% 62%
---- ---- ---- ----
100% 100% 100% 100%
==== ==== ==== ====
TOTAL SALES BY GEOGRAPHIC AREA
United States....................... 39% 41% 44% 44%
European Union...................... 45% 44% 41% 43%
Canada.............................. 8% 7% 7% 6%
Other areas......................... 8% 8% 8% 7%
---- ---- ---- ----
100% 100% 100% 100%
==== ==== ==== ====
</TABLE>
RIDE CONTROL SYSTEMS
Superior ride control is governed by a vehicle's suspension system,
including its shock absorbers and struts. Shock absorbers and struts help
maintain vertical loads placed on a vehicle's tires to help keep the tires in
contact with the road. A vehicle's ability to steer, brake and accelerate
depends on the contact between the vehicle's tires and the road. Worn shocks and
struts can allow excess weight transfer from side to side, which is called
"roll", from front to rear, which is called "pitch", and up and down, which is
called "bounce". Variations in tire-to-road contact can affect a vehicle's
handling and braking performance and the safe operation of a vehicle. Shock
absorbers are designed to control vertical loads placed on tires by providing
resistance to vehicle roll, pitch and bounce. Thus, by maintaining the
tire-to-road contact, ride control products are designed to function as safety
components of a vehicle, in addition to providing a comfortable ride.
We design, manufacture and distribute a variety of ride control products
and systems. Our ride control offerings include:
- shock absorbers;
- struts;
- electronically adjustable suspension systems that change performance
based on inputs like steering and braking;
- vibration control components, including rubber-like bushings and
mountings, that reduce vibration between metal parts of a vehicle;
- springs; and
- modular assemblies, which are combinations of parts that are provided to
customers as a unit.
We manufacture and market replacement shock absorbers for virtually all
North American, European and Asian makes of automobiles. In addition, we
manufacture and market shock absorbers and struts for use on passenger cars and
trucks, as well as for other uses such as exercise and recreational equipment.
We supply ride control products used in three of the top 10 passenger car models
and seven of the 10 top light truck models produced globally for 1998. We
entered the ride control product line in 1977 with the acquisition of Monroe
Auto Equipment, which was founded in 1916 and introduced the world's first
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automotive shock absorber in 1926. When the term "Monroe" is used in this
document it refers to our affiliates that produce ride control products and
systems.
The following table provides for each of the years 1996 through 1998, and
for the nine months ended September 30, 1999, information relating to our sales
of ride control equipment:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
----------------------------------------------
NINE MONTHS YEAR ENDED DECEMBER 31,
ENDED ------------------------
SEPTEMBER 30, 1999 1998 1997 1996
------------------ ---- ---- ----
<S> <C> <C> <C> <C>
UNITED STATES MARKET
Aftermarket......................... 41% 43% 50% 62%
OE Market........................... 59% 57% 50% 38%
---- ---- ---- ----
100% 100% 100% 100%
==== ==== ==== ====
FOREIGN SALES
Aftermarket......................... 52% 53% 56% 59%
OE Market........................... 48% 47% 44% 41%
---- ---- ---- ----
100% 100% 100% 100%
==== ==== ==== ====
TOTAL SALES BY GEOGRAPHIC AREA
United States....................... 49% 47% 48% 48%
European Union...................... 29% 32% 27% 34%
Canada.............................. 5% 3% 3% 3%
Other areas......................... 17% 18% 22% 15%
---- ---- ---- ----
100% 100% 100% 100%
==== ==== ==== ====
</TABLE>
SALES AND MARKETING
We sell directly to original equipment manufacturers. To maintain our
customer focus, our OE sales force is organized into customer-dedicated teams.
These sales teams service the original equipment manufacturers at a regional
facility level, with global coordination and support from our headquarters.
For the aftermarket, we use a dedicated sales force and consumer brand
marketing professionals to sell and market our products. This group provides
extensive marketing support to aftermarket customers, including trade and
consumer marketing, promotions and general advertising. We maintain an
aftermarket customer order fill rate of 95%, which reflects the percentage of
the average customer order we are able to fill from inventory. We sell our
aftermarket products through five primary channels of distribution: (1) the
traditional three-step distribution system: full-line warehouse distributors,
jobbers and installers; (2) the specialty two-step distribution system:
specialty warehouse distributors that carry only specified automotive product
groups and installers; (3) direct sales to retailers; (4) direct sales to
installer chains; and (5) direct sales to car dealers.
MANUFACTURING AND ENGINEERING
We use state-of-the-art manufacturing to achieve superior product quality
at the lowest operating costs possible. Our manufacturing strategy centers on a
lean production system that reduces overall costs -- especially indirect
costs -- while maintaining quality standards and reducing manufacturing cycle
time. We deploy new technology where it makes sense to differentiate our
processes from our competitors' or to achieve balance in one piece flow-through
production lines.
EMISSIONS CONTROL
Walker operates 11 manufacturing facilities in the U.S. and six engineering
and technical facilities worldwide. Walker also operates 32 manufacturing
facilities outside of the U.S. and has a controlling
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<PAGE> 90
interest in six joint ventures that own manufacturing facilities in China,
Germany, India, and Sweden. See "-- Properties."
Walker attempts to locate original equipment manufacturing facilities close
to its OE customers to provide products on demand, or "just-in-time." Eleven of
Walker's plants are just-in-time facilities.
During the 1990's, Walker expanded its converter and emission system
design, development, test and manufacturing capabilities. Walker's engineering
capabilities now include advanced predictive design tools, advanced prototyping
processes and state-of-the-art testing equipment. This expanded technological
capability makes Walker a "full system" integrator, supplying complete emissions
control systems from the manifold to the tailpipe, to provide full emission and
noise control. It also allows Walker to provide just-in-time delivery and, when
feasible, sequence delivery of emissions control systems to meet customer
production requirements.
RIDE CONTROL
Monroe operates eight manufacturing facilities in the U.S. and ten
engineering and technical facilities worldwide. Monroe also operates 17
manufacturing facilities outside of the U.S. and has a controlling interest in
three joint ventures that own manufacturing facilities in China and India.
Monroe is attempting to locate original equipment manufacturing facilities close
to customers to provide products on demand, or just-in-time. See
"-- Properties."
In designing its shock absorbers and struts, Monroe uses advanced
engineering and test capabilities to provide product reliability, endurance and
performance. Monroe's engineering capabilities feature advanced computer-aided
design equipment and testing facilities. Monroe's dedication to innovative
solutions has led to such technological advances as:
- adaptive damping systems -- adapts to the vehicle's motion to better
control undesirable vehicle motions;
- electronically adjustable suspensions -- changes suspension performance
based on a variety of inputs such as steering, braking, vehicle height,
and velocity; and
- air leveling systems -- manually or automatically adjust the height of
the vehicle.
Conventional shock absorbers and struts generally compromise either ride comfort
or vehicle control. Monroe's innovative grooved-tube, gas-charged shock
absorbers and struts provide both ride comfort and vehicle control, resulting in
improved handling, less roll, reduced vibration and a wider range of vehicle
control. This technology can be found in Monroe's premium quality Sensa-Trac(R)
shock absorbers. In late 1997, Monroe further enhanced this technology by adding
the Safe-Tech(TM) fluon banded piston, which improves shock absorber performance
and durability.
PROPERTIES
We lease our principal offices, which are located at 500 North Field Drive,
Lake Forest, Illinois, 60045.
Walker operates 11 manufacturing facilities in the U.S. and six engineering
and technical facilities worldwide. Walker also operates 32 manufacturing
facilities outside of the U.S. and has a controlling interest in six joint
ventures that own manufacturing facilities in China, Germany, India and Sweden.
Monroe operates eight manufacturing facilities in the U.S. and ten
engineering and technical facilities worldwide. Monroe also operates 17
manufacturing facilities outside of the U.S. and has a controlling interest in
three joint ventures that own manufacturing facilities in China, South Africa
and India.
Our manufacturing locations outside of the U.S. are located in Canada,
Mexico, Belgium, Spain, the United Kingdom, the Czech Republic, Turkey, South
Africa, France, Denmark, Sweden, Germany, Poland, Portugal, Argentina, Brazil,
Australia, and New Zealand. Sales offices are located in Australia, Canada,
Italy, Japan, Poland, Russia, and Sweden.
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Of our properties described above, approximately one-half are owned and
one-half are leased. Twelve of the properties are held through joint ventures.
We also have distribution facilities at our manufacturing sites and at a few
offsite locations, substantially all of which are leased.
Our commitment to sound management practices and policies is also
demonstrated by our successful participation in the International Standards
Organization/Quality Systems certification process (ISO/QS). ISO/QS
certifications are yearly audits that certify that a company's facilities meet
stringent quality and business systems requirements. Without either ISO or QS
certification, we would not be able to supply original equipment manufacturers
locally or globally. Over 90% of our manufacturing facilities have achieved ISO
9000 certification, excluding facilities held in joint ventures. Of those 60
manufacturing facilities where we have determined that QS certification is
required to service our customers or would provide us with an advantage in
securing additional business, 85% have achieved QS 9000 certification, and we
are pursuing certification of the remaining 15%.
We believe that substantially all of our plants and equipment are, in
general, well maintained and in good operating condition. They are considered
adequate for present needs and, as supplemented by planned construction, are
expected to remain adequate for the near future.
We also believe that we have generally satisfactory title to the properties
owned and used in our respective businesses.
STRATEGIC ACQUISITIONS AND ALLIANCES
Strategic acquisitions, joint ventures and alliances have been an important
part of our growth. Through this strategy, we have expanded to meet customers'
global requirements. This strategy has also allowed us to acquire or align with
companies that possess proven technology and research capabilities, furthering
our leadership in systems integration.
EMISSIONS CONTROL
- In 1996, we established a joint venture in Dalian, China to supply
emissions control systems to the Northern Chinese automotive market,
expanded our North American heavy duty truck aftermarket business through
the acquisition of Stemco Inc. and acquired Minuzzi, the second largest
manufacturer of exhaust products in Argentina.
- In 1997, we acquired Autocan, a Mexican catalytic converter and exhaust
pipe assembly manufacturer. We also acquired the manufacturing operations
of MICHEL, a privately owned, Polish-based manufacturer of replacement
market emissions control systems for passenger cars in Eastern Europe.
- In 1998, we established a joint venture in Shanghai, China to supply
emissions control systems to the Central and Southern Chinese automotive
markets. We also established a joint venture in Pune, India to supply
emissions control systems to OE customers and the aftermarket.
- In 1999, we began manufacturing emissions control systems at a new
facility in Curitiba, Brazil to supply original equipment customers in
this growing regional market.
RIDE CONTROL
- In 1995, we acquired a 51% interest in a joint venture that has three
ride control manufacturing facilities in India and acquired a 51%
interest in a joint venture that has one ride control manufacturing
facility in China.
- In July 1996, we acquired The Pullman Company and its Clevite products
division. Clevite is a leading original equipment manufacturer of
elastomeric vibration control components, including bushings, engine
mounts and control arms, for the auto, light truck and heavy truck
markets. These products connect major metal parts and help isolate noise,
vibration and shock. With this acquisition, we expanded our capability to
deliver ride control systems to original equipment
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<PAGE> 92
manufacturers. The Clevite acquisition also complemented our interest in
global growth opportunities, since both Clevite and Monroe have
manufacturing operations in Mexico and Brazil.
- In September 1996, we acquired full ownership of Monroe Amortisor Imalat
ve Ticaret, a Turkish shock absorber manufacturer, in which we previously
held a 16.7% ownership interest.
- In December 1996, we acquired 94% of the voting stock of Fric-Rot
S.A.I.C., the leading producer and marketer of ride control products in
Argentina. In 1997, we increased our interest in Fric-Rot to more than
99% through the purchase of additional shares.
- In 1996, we also expanded our presence in Australia's ride control
product market with the acquisition of National Springs.
- In 1997, we entered into a joint venture which resulted in our
acquisition of majority ownership of Armstrong, a leading South African
manufacturer of ride control products.
- In early 1999, we completed our acquisition of Kinetic, an Australian
advanced suspension engineering company with advanced roll-control
technology. Also in 1999, we licensed elastomer technology and equipment
from Draftex, a French company. We intend to apply this technology to
manufacturing engine mounts and ride control products for sale in Mexico,
Central America and South America.
LEGAL AND ENVIRONMENTAL PROCEEDINGS
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for information about our potential environmental
liability.
In May 1999, Tenneco Inc., Tenneco Packaging Inc. and a number of
containerboard manufacturers were named as defendants in a civil class action
antitrust lawsuit pending in the United States District Court for the Eastern
District of Pennsylvania. The lawsuit alleges that the defendants conspired to
raise linerboard prices for corrugated containers and corrugated sheets,
respectively, from October 1, 1993 through November 30, 1995, in violation of
Section 1 of the Sherman Act. The lawsuit seeks treble damages in an unspecified
amount, plus attorney fees. Under and in accordance with the distribution
agreement, as between us and Pactiv, Pactiv will be responsible for defending
the claims and for any liability resulting from the action. Accordingly, we
believe the outcome of this litigation will not have a material adverse effect
on our financial position or results of operations.
We are party to various other legal proceedings arising from our
operations. We believe that the outcome of these other proceedings, individually
and in the aggregate, will not have a material adverse effect on our financial
position or results of operations.
OTHER
As of September 30, 1999, we had approximately 23,500 employees, 34% of
which were covered by collective bargaining agreements and 16% of which are
governed by European works councils. Around 20 of our existing labor agreements,
covering a total of approximately 3,000 employees, are scheduled for
renegotiation in 2000. We regard our employee relations as generally
satisfactory.
The principal raw material utilized by us is steel. We believe that an
adequate supply of steel can presently be obtained from a number of different
domestic and foreign suppliers.
We hold a number of domestic and foreign patents and trademarks relating to
our products and businesses. We manufacture and distribute our products
primarily under the Walker(R) and Monroe(R) brand names, which are
well-recognized in the marketplace and are registered trademarks of ours. The
patents, trademarks and other intellectual property owned by or licensed to us
are important in the manufacturing, marketing and distribution of our products.
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<PAGE> 93
MANAGEMENT
BOARD OF DIRECTORS
In connection with the spin-off, the Board of Directors of Tenneco Inc. was
restructured. This restructured Board of Directors governs our management and
operations now that the spin-off is complete.
Our Board of Directors is currently divided into three classes serving
staggered three-year terms. On October 25, 1999, our stockholders approved a
proposal to eliminate our staggered board structure and provide instead for the
annual election of directors. Under this proposal, the staggered board structure
will be phased out over the next three annual stockholders' meetings, with
directors being elected annually after the expiration of the current staggered
board terms set forth below.
Information concerning the individuals who serve as our directors and their
terms is provided below.
Terms Expiring at the 2000 Annual Meeting of Stockholders -- Class I
MARK ANDREWS -- Mr. Andrews has been Chairman of Andrews Associates, Inc.,
a government consulting firm, since February 1987. From 1963 to 1980, he served
in the U.S. House of Representatives, and from 1980 to 1986 he served in the
U.S. Senate. He is also a director of Union Storage Co. Mr. Andrews is 73 and
has been a director of Tenneco since 1987. He became a director of Pactiv in
connection with the spin-off.
DAVID B. PRICE, JR. -- Mr. Price has been an Executive Vice President of
the BF Goodrich Company and President and Chief Operating Officer of BF Goodrich
Performance Materials, a producer of chemical additives and specialty plastics
for use in consumer and industrial products, since July 1997. Prior to joining
BF Goodrich, Mr. Price held various executive positions over a 20-year span at
Monsanto Company, most recently serving as President of the Performance
Materials Division of Monsanto Company from 1995 to July 1997. From 1993 to
1995, he was Vice President and General Manager of commercial operations for the
Industrial Products Group and was also named to the management board of
Monsanto's Chemical Group. Mr. Price is 53 years old and was named a director in
November 1999.
Terms Expiring at the 2001 Annual Meeting of Stockholders -- Class II
DANA G. MEAD, CHAIRMAN OF THE BOARD -- In connection with the spin-off, Mr.
Mead retired as Chief Executive Officer of Tenneco. He served as an executive
officer of Tenneco from April 1992, when he joined Tenneco as Chief Operating
Officer, to November 1999. Prior to joining Tenneco, Mr. Mead served as an
Executive Vice President of International Paper Company, a manufacturer of
paper, pulp, and wood products, from 1988, and served as Senior Vice President
of that company from 1981. He is also a director of Packaging Corporation of
America, Pactiv (Chairman), Textron Inc., Zurich Allied AG, Pfizer Inc. and
Newport News Shipbuilding Inc. Mr. Mead is 63 years old and has been a director
of Tenneco since 1992. Mr. Mead will continue, on a non-executive basis, as the
Chairman of the Board through March 2000.
M. KATHRYN EICKHOFF -- Ms. Eickhoff has been President of Eickhoff
Economics, Inc., a consulting firm, since 1987. From 1985 to 1987, she was
Associate Director for Economic Policy for the U.S. Office of Management and
Budget, and prior to 1985, was Executive Vice President and Treasurer of
Townsend-Greenspan & Co., Inc., an economic consulting firm. She is also a
director of AT&T Corp., Pharmacia & Upjohn, Inc., and Fleet Bank, NA. Ms.
Eickhoff is 60 years old, and has been a director of Tenneco since 1987. She
previously served as a member of the Tenneco Board of Directors from 1982 until
her resignation to join the Office of Management and Budget in 1985.
ROGER B. PORTER -- Mr. Porter is Director of the Center for Business and
Government at Harvard University and is the IBM Professor of Business and
Government. Mr. Porter has served on the faculty at Harvard University since
1977. Mr. Porter also held senior economic policy positions in the Ford, Reagan
and Bush White Houses, serving as special assistant to the President and
executive secretary of the Economic Policy Board from 1974 to 1977, as deputy
assistant to the President and director of the White House Office of Policy
Development from 1981 to 1985, and as assistant to the President for economic
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and domestic policy from 1989 to 1993. He is also a director of RightCHOICE
Managed Care, Inc., National Life Insurance Company, and Zions Bancorporation.
Mr. Porter is 53 years old and has been a director of Tenneco since January
1998. He became a director of Pactiv in connection with the spin-off.
Terms Expiring at the 2002 Annual Meeting of Stockholders -- Class III
MARK P. FRISSORA -- Mr. Frissora is our Chief Executive Officer and has
been serving as our President since April 1999. From 1996 to April 1999, he held
various positions within our operations including Senior Vice President and
General Manager of North American Original Equipment. Mr. Frissora joined us in
1996 from Aeroquip-Vickers Corporation, where he served from 1991 as Vice
President of North American marketing, sales and distribution. Mr. Frissora is
44 years old.
SIR DAVID PLASTOW -- Sir David Plastow was Chairman of the Medical Research
Council, which promotes and supports research and post-graduate training in the
biomedical and other sciences, from 1990 until his retirement 1998. He served as
Chairman of Inchcape plc, a multi-national marketing and distribution company,
from June 1992 to December 1995, and Chairman and Chief Executive Officer of
Vickers plc, an engineering and manufacturing company headquartered in London,
from January 1987 to May 1992. He is also a director of FT Everard & Sons
Limited. Sir David Plastow is 67 years old and has been a director of Tenneco
since May 1996. He previously served as a member of the Board of Directors of
Tenneco from 1985 until 1992.
PAUL T. STECKO -- Mr. Stecko became the Chief Executive Officer of
Packaging Corporation of America, Pactiv's containerboard joint venture, in
connection with the April 1999 formation of that venture. From November 1998 to
April 1999, Mr. Stecko served as President and Chief Operating Officer of
Tenneco. From January 1997 to November 1998, Mr. Stecko served as Chief
Operating Officer of Tenneco. From December 1993 through January 1997, Mr.
Stecko served as Chief Executive Officer of Pactiv. Prior to joining Tenneco,
Mr. Stecko spent 16 years with International Paper Company. Mr. Stecko is 54
years old and has been a director of Tenneco since November 1998. He is also a
director of State Farm Mutual Insurance Company and the Chairman of the Board of
Packaging Corporation of America. He became a director of Pactiv in connection
with the spin-off.
EXECUTIVE OFFICERS
The following provides information concerning the persons who serve as our
executive officers now that the spin-off is complete. These individuals were
named as our company's executive officers effective November 4, 1999, the day of
the Pactiv spin-off, at which time the then-existing executive officers of
Tenneco resigned. Prior to that time, these individuals served Tenneco's
automotive operations in various capacities. Accordingly, for periods prior to
November 4, 1999, references to service to "us" or "our company" reflect
services to Tenneco's automotive operations.
<TABLE>
<CAPTION>
AGE AT
NAME SEPTEMBER 30, 1999 TITLE
---- ------------------ -----
<S> <C> <C>
Mark P. Frissora............... 44 Chief Executive Officer
Richard J. Sloan............... 61 Executive Vice President and Managing Director --
Europe
Mark A. McCollum............... 40 Senior Vice President and Chief Financial Officer
Richard P. Schneider........... 52 Senior Vice President -- Global Administration
Timothy R. Donovan............. 43 Senior Vice President and General Counsel
Timothy E. Jackson............. 45 Senior Vice President and General Manager --
North American Original Equipment and Worldwide
Program Management
David G. Gabriel............... 41 Senior Vice President and General Manager --
North American Aftermarket
</TABLE>
MARK P. FRISSORA -- See "-- Board of Directors," above, for information
about Mr. Frissora.
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RICHARD J. SLOAN -- Mr. Sloan was named our Executive Vice President and
Managing Director -- Europe in October 1999. Prior to joining our company, Mr.
Sloan spent 18 years with United Technologies Automotive ("UTA"). He served as
President of UTA's Worldwide Interior Division from 1998 to October 1999 and
President of UTA Europe from 1993 to 1998.
MARK A. MCCOLLUM -- Mr. McCollum joined us in April 1998 from Tenneco,
where as Vice President, Corporate Development he was responsible for executing
Tenneco's strategic transactions. From January 1995 to April 1998, he served in
various capacities with Tenneco, including Vice President, Financial Analysis
and Planning and Corporate Controller. Before joining Tenneco, Mr. McCollum
spent 14 years with the international public accounting firm of Arthur Andersen
LLP, serving as an audit and business advisory partner of the company's
worldwide partnership from 1991 to December 1994.
RICHARD P. SCHNEIDER -- As Senior Vice President -- Global Administration,
Mr. Schneider is responsible for the development and implementation of human
resources programs and policies and corporate communications activities for our
worldwide operations. He joined us in 1994 from International Paper Company
where, during his 20-year tenure, he held key positions in labor relations,
management development, personnel administration and equal employment
opportunity.
TIMOTHY R. DONOVAN -- Mr. Donovan was named Senior Vice President and
General Counsel of our company in August 1999. Mr. Donovan was a partner in the
law firm of Jenner & Block from 1989 until his resignation in September 1999,
and most recently served as the Chairman of the firm's Corporate and Securities
Department and as a member of its Executive Committee.
TIMOTHY E. JACKSON -- Mr. Jackson was named Senior Vice President and
General Manager -- North American Original Equipment and Worldwide Program
Management in June 1999. Mr. Jackson joined the company from ITT Industries
where he was President of the company's Fluid Handling Systems Division. With
over 20 years of management experience, 14 within the automotive industry, he
was also Chief Executive Officer for HiSAN, a joint venture between ITT
Industries and Sanoh Industrial Company. Mr. Jackson has also served in senior
management positions at BF Goodrich Aerospace and General Motors Corporation.
DAVID G. GABRIEL -- Mr. Gabriel was named Senior Vice President and General
Manager -- North American Aftermarket in August 1999. From March to August 1999,
Mr. Gabriel was the Vice President of Operations for our company's North
American aftermarket business. From March 1997 to March 1999, he served as Vice
President of Manufacturing for our company's North American aftermarket
business. From February 1995 to March 1997, he served as Executive Director of
Supplier Development for Tenneco Business Services. Before joining Tenneco in
February 1995, Mr. Gabriel spent 15 years in various operating positions of
increasing responsibility with the Pepsi Cola Company and Johnson and Johnson.
From 1993 to February 1995, Mr. Gabriel was Director of Supplier Development at
the Pepsi Cola Company.
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STOCK OWNERSHIP OF MANAGEMENT
The following table shows, as of November 30, 1999, the number of shares of
our company's common stock beneficially owned by: (1) each director; (2) each
person who is named in the Summary Compensation Table, below; and (3) all
directors and executive officers, as a group. The table also shows: (a) common
stock equivalents held by these directors and executive officers under benefit
plans; and (b) the total number of shares of common stock and common stock
equivalents held.
<TABLE>
<CAPTION>
SHARES OF COMMON COMMON STOCK TOTAL SHARES
STOCK OWNED(1)(2)(3) EQUIVALENTS(4) AND EQUIVALENTS
-------------------- -------------- ---------------
<S> <C> <C> <C>
DIRECTORS
Mark Andrews............................................. 5,147 -- 5,147
M. Kathryn Eickhoff...................................... 5,634 -- 5,634
Mark P. Frissora......................................... 112,202 75,000 187,202
Dana G. Mead............................................. 1,016,492 9,078 1,025,570
Sir David Plastow........................................ 4,900 -- 4,900
Roger B. Porter.......................................... 2,711 -- 2,711
David B. Price, Jr. ..................................... -- -- --
Paul T. Stecko........................................... 5,125 -- 5,125
EXECUTIVE OFFICERS
Mark A. McCollum......................................... 88,363 21,000 109,363
Richard P. Schneider..................................... 69,311 16,500 85,811
David G. Gabriel......................................... 39,670 15,000 54,670
All executive officers and directors as a group.......... 1,418,440(5) 199,578 1,618,018(5)
</TABLE>
- -------------------------
(1) Each director and executive officer has sole voting and investment power
over the shares beneficially owned (or has the right to acquire shares as
described in note (2) below) as set forth in this column, except for: (a)
restricted shares; and (b) shares that executive officers and directors have
the right to acquire pursuant to stock options.
(2) Includes restricted shares. At November 30, 1999, Messrs. Frissora,
McCollum, Schneider and Gabriel held 68,385, 29,308, 29,308 and 19,538
restricted shares, respectively. Also includes shares that are subject to
options, which are exercisable within 60 days of November 30, 1999 for Ms.
Eickhoff and Messrs. Andrews, Frissora, Mead, Plastow, Porter, McCollum,
Schneider and Gabriel to purchase 3,764, 1,882, 39,315, 977,516, 3,764,
1,882, 58,273, 37,073 and 18,535 shares, respectively.
(3) Less than one percent of the outstanding shares of our common stock, except
(1) for Mr. Mead, who beneficially owns approximately 3.0% and (2) for all
directors and executive officers as a group, who beneficially own
approximately 4.1%.
(4) Common stock equivalents are distributed in shares of our common stock or,
in some circumstances, cash after the individual ceases to serve as a
director or officer or after the applicable performance period. Mr. Mead's
stock equivalent units are credited to his account under the Tenneco Inc.
Deferred Compensation Plan and are, therefore, already vested.
(5) Includes 1,142,004 shares that are subject to options that are exercisable
within 60 days of November 30, 1999, by all executive officers and directors
as a group, and includes 214,924 restricted shares for all executive
officers and directors as a group.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has three standing committees. These committees have
the following described responsibilities and authority:
The Audit Committee, comprised solely of outside directors, has the
responsibility, among other things, to: (1) recommend the selection of our
independent public accountants; (2) review and approve the scope of the
independent public accountants' audit activity and extent of non-audit services;
(3) review with management and such independent public accountants the adequacy
of our basic accounting system and the effectiveness of our internal audit plan
and activities; (4) review with management and the independent public
accountants our certified financial statements and exercise general oversight of
our financial reporting process; and (5) review with us litigation and other
legal matters that may affect our financial condition and monitor compliance
with our business ethics and other policies.
The Compensation/Nominating/Governance Committee, comprised solely of
outside directors, has the responsibility, among other things, to: (1) establish
the salary rate of officers and employees of our company and its subsidiaries;
(2) examine periodically the compensation structure of our company; and (3)
supervise the welfare and pension plans and compensation plans of our company.
It will also have
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significant corporate governance responsibilities, among other things, to: (a)
review and determine the desirable balance of experience, qualifications and
expertise among members of the Board; (b) review possible candidates for
membership on the Board and recommend a slate of nominees for election as
directors at our annual stockholders' meeting; (c) review the function and
composition of the other committees of the Board and recommend membership on
these committees; and (d) review the qualifications and recommend candidates for
election as officers of our company.
The Three-year Independent Director Evaluation Committee, comprised solely
of outside directors, has the responsibility, among other things, to review our
qualified offer rights plan at least every three years and, if it deems it
appropriate, recommend that the full Board modify or terminate that plan.
EXECUTIVE COMPENSATION
The following table shows the compensation paid for 1998 by Tenneco to: (1)
our Chief Executive Officer, who became our Chief Executive Officer upon the
spin-off of Pactiv; and (2) each of our next three most highly compensated
executive officers, based on 1998 compensation and after giving effect to the
Pactiv spin-off, other than the Chief Executive Officer. The table shows amounts
paid to these persons for all services provided to Tenneco and its subsidiaries.
Messrs. Sloan, Donovan and Jackson had no compensation from Tenneco and its
subsidiaries prior to 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------- -----------------------
RESTRICTED
OTHER ANNUAL STOCK ALL OTHER
NAME AND PRINCIPAL POSITION SALARY(1) BONUS COMPENSATION(2) AWARDS(3) OPTIONS(4) COMPENSATION(5)
--------------------------- --------- -------- --------------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Mark P. Frissora........................... $252,300 $130,000 $ 31,234 $450,720 65,881 $ 9,393
Chief Executive Officer
Mark A. McCollum........................... $211,800 $ 75,000 $110,678 -- 28,235 $ 584
Senior Vice President and Chief Financial
Officer
Richard P. Schneider....................... $216,310 $ 80,000 $ 39,169 -- 28,235 $12,683
Senior Vice President -- Global
Administration
David G. Gabriel........................... $182,353 $ 60,000 $ 15,720 $187,800 18,823 $ 7,288
Senior Vice President and General
Manager -- North
American Aftermarket
</TABLE>
- -------------------------
(1) Includes base salary plus amounts paid in lieu of matching contributions to
the Tenneco Thrift Plan.
(2) Includes amounts attributable to: (a) the value of personal benefits
provided by Tenneco to executive officers, such as the personal use of
Tenneco-owned property, and relocation expenses; (b) reimbursement for
taxes; and (c) amounts paid as dividend equivalents on performance share
equivalent units ("Dividend Equivalents"). The amount of each personal
benefit that exceeds 25% of the estimated value of the total personal
benefits provided by Tenneco, reimbursement for taxes, and amounts paid as
Dividend Equivalents to the individuals named in the table for 1998 was as
follows: $1,013 for reimbursement of taxes; $8,760 in Dividend Equivalents
and $20,000 perquisite allowance for Mr. Frissora; $58,946 in relocation
expenses, $20,745 for reimbursement of taxes, $8,400 in Dividend Equivalents
and $20,000 perquisite allowance for Mr. McCollum; $3,950 for reimbursement
of taxes, $10,200 in Dividend Equivalents and $20,000 perquisite allowance
for Mr. Schneider; and $3,720 in Dividend Equivalents and $12,000 in
perquisite allowance for Mr. Gabriel.
(3) Includes the dollar value of grants of restricted shares based on the price
of Tenneco common stock on the date of grant. At December 31, 1998, Messrs.
Frissora, McCollum, Schneider and Gabriel held 19,300; 7,000; 11,500; and
8,100 restricted shares and/or performance share equivalent units,
respectively. The value at December 31, 1998, based on a per
share/equivalent unit price of $34.063 on that date, of all restricted
shares/performance units held was $657,416 for Mr. Frissora, $238,441 for
Mr. McCollum, $391,725 for Mr. Schneider and $275,910 for Mr. Gabriel. These
restricted shares and performance share equivalent units were vested
immediately prior to the spin-off. Dividends/Dividend Equivalents were paid
on the restricted shares/performance share equivalent units held by each
individual.
(4) Upon completion of the Pactiv spin-off, employee stock options granted
before the spin-off which remained outstanding were adjusted to give effect
to (1) the spin-off and (2) the one-for-five reverse stock split of our
common stock effected in connection with the spin-off. The adjustment for
the spin-off amended the number of shares subject to these options, as well
as their
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exercise prices, so that the options immediately after the spin-off had
equivalent economic terms to the options immediately before the spin-off.
Amounts presented give effect to this adjustment.
(5) Includes amounts attributable during 1998 to benefit plans of Tenneco as
follows:
(a) The amounts contributed pursuant to Tenneco's Thrift Plan for the
accounts of Messrs. Frissora, Schneider and Gabriel were $6,400, $5,013
and $5,000, respectively.
(b) The dollar values paid by Tenneco for insurance premiums under the
Tenneco group life insurance plan (including dependent life) for Messrs.
Frissora, McCollum, Schneider and Gabriel were $2,993, $584, $7,670 and
$2,288, respectively.
In connection with completion of the spin-off and the separation of our
automotive business into a stand-alone public company, we made equity incentive
awards to our executive officers. These awards consisted of grants of stock
options, restricted stock, performance share units and stock equivalent units.
At the time of the spin-off, Messrs. Frissora, Sloan, McCollum, Schneider,
Donovan, Jackson and Gabriel received options to purchase 375,000, 165,000,
120,000, 90,000, 90,000, 90,000 and 75,000 shares of common stock, respectively,
at an exercise price equal to 100% of the fair market value of a share of common
stock on the date of grant. These grants are intended to represent three-year
awards.
Upon the spin-off, Messrs. Frissora, Sloan, McCollum, Schneider, Donovan,
Jackson and Gabriel were also granted 75,000, 30,000, 21,000, 16,500, 16,500,
16,500 and 15,000 performance share units, respectively. These grants are also
intended to represent a three-year award.
Also in connection with the spin-off, we awarded shares of restricted
common stock to our executive officers, which vest in equal annual increments
over three years, assuming the grantee continues to be employed by us. Messrs.
Frissora, Sloan, McCollum, Schneider, Donovan, Jackson and Gabriel were granted
68,385, 39,077, 29,308, 29,308, 29,308, 29,308 and 19,538 shares of restricted
common stock, respectively.
The final piece of the equity incentive awards we made in connection with
the spin-off is comprised of awards of common stock equivalent units which vest
in equal annual installments over a three-year period based on the achievement
of performance goals. The units are payable in cash based on the market price of
our common stock at the time of payment. Messrs. Sloan, McCollum, Schneider,
Donovan, Jackson and Gabriel received 162,114, 113,430, 87,567, 87,567, 87,567
and 89,349 common stock equivalent units, respectively. Mr. Frissora received
150,000 common sock equivalent units, which vest over one year, rather than
three years.
Also at the time of the spin-off, Mr. Frissora's annual salary was
increased to $580,000 and his bonus target was increased to $550,000. Bonus
targets for Messrs. McCollum, Schneider, and Gabriel have been increased on a
prorated basis for 1999. See also "-- Termination of Employment and
Change-in-Control Arrangements."
OPTIONS GRANTED IN 1998
The following table shows the number of options to purchase Tenneco common
stock granted during 1998 to the persons named in the Summary Compensation Table
above.
<TABLE>
<CAPTION>
PERCENT OF
SHARES OF TOTAL
COMMON STOCK OPTIONS GRANTED
UNDERLYING TO TENNECO EMPLOYEES EXERCISE EXPIRATION GRANT DATE
NAME OPTIONS GRANTED(#)(1) IN 1998(%) PRICE($)(2) DATE PRESENT VALUE(3)
---- --------------------- -------------------- ----------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Mr. Frissora......... 65,881 2.0% $19.46 7/21/08 $360,150
Mr. McCollum......... 28,235 .9% $19.46 7/21/08 $154,350
Mr. Schneider........ 28,235 .9% $19.46 7/21/08 $154,350
Mr. Gabriel.......... 18,823 .5% $19.46 7/21/08 $102,900
</TABLE>
- -------------------------
(1) Gives effect to the adjustments of outstanding options in connection with
the Pactiv spin-off and our one-for-five reverse stock split in November
1999 described in Note (4) to the Summary Compensation Table, above.
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(2) All options were granted with exercise prices equal to 100% of the fair
market value of a share of Tenneco common stock on the date of grant. The
exercise prices were adjusted to give effect to the Pactiv spin-off and our
one-for-five reverse stock split. See Note (4) to the Summary Compensation
Table, above.
(3) The Black-Scholes valuation was performed using the following assumptions:
25.6% volatility, 5.7% risk free interest rate, 3.2% expected dividend rate
and 10 year option life.
OPTIONS AT 1998 YEAR-END
The following table shows the number of options to purchase Tenneco common
stock held at December 31, 1998 by the persons named in the Summary Compensation
Table above. No Tenneco options were exercised in 1998, and there were no
in-the-money Tenneco options as of December 31, 1998.
<TABLE>
<CAPTION>
TOTAL NUMBER OF
UNEXERCISED OPTIONS
HELD AT
DECEMBER 31, 1998(1)
----------------------------
NAME EXERCISABLE UNEXERCISABLE
---- ----------- -------------
<S> <C> <C>
Mr. Frissora................................................ 15,607 123,286
Mr. McCollum................................................ 42,305 93,336
Mr. Schneider............................................... 17,279 99,414
Mr. Gabriel................................................. 11,094 43,833
</TABLE>
- -------------------------
(1) Gives effect to the adjustments of outstanding options in connection with
the Pactiv spin-off and our one-for-five reverse stock split in November
1999 described in Note (4) to the Summary Compensation Table, above.
LONG-TERM INCENTIVE PLANS
PERFORMANCE SHARE EQUIVALENT UNIT AWARDS IN 1998
The following table shows information concerning performance-based awards
made during 1998 to the persons named in the Summary Compensation Table above.
<TABLE>
<CAPTION>
NUMBER OF SHARES, PERFORMANCE OR ESTIMATED FUTURE PAYOUTS UNDER
UNITS OR OTHER PERIOD NON-STOCK PRICE-BASED PLANS(1)
OTHER UNTIL MATURATION ---------------------------------------
NAME RIGHTS(1)(2) OR PAYOUT(3) THRESHOLD(4) TARGET(4) MAXIMUM(4)
---- ----------------- ---------------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Mr. Frissora.................. 1,000 4 years 25% 100% 150%
Mr. McCollum.................. 700 4 years 25% 100% 150%
Mr. Schneider................. 900 4 years 25% 100% 150%
Mr. Gabriel................... 400 4 years 25% 100% 150%
</TABLE>
- -------------------------
(1) Estimated future payouts are based on earnings per share ("EPS") from
continuing operations. However, these performance share equivalent units
were deemed to be earned at the target level and vested prior to the
spin-off.
(2) Each performance share equivalent unit represents one share of common stock
that may be earned under the award and the number of performance share
equivalent units listed in this column represents the maximum number of
performance share equivalent units that may be earned under the award,
adjusted to give effect to our one-for-five reverse stock split in November
1999.
(3) Performance share equivalent units are earned at the rate of 25% per year
based on achievement of annual EPS goals. However, these performance share
equivalent units were deemed to be earned at the target level and vested
prior to the spin-off.
(4) Represents maximum performance share equivalent units earned where the goals
were consistently within the indicated performance range on an individual
year and accumulated four-year basis. However, these performance share
equivalent units were deemed to be earned at the target level and vested
prior to the spin-off.
PENSION PLAN TABLE
The following table shows the aggregate estimated annual benefits payable
upon normal retirement pursuant to the Tenneco Retirement Plan and the Tenneco
Inc. Supplemental Executive Retirement Plan to persons in specified remuneration
and years of credited participation classifications. In connection with the
spin-off, Pactiv became the sponsor of the Tenneco Retirement Plan. We expect to
adopt a salaried defined benefit pension plan patterned after the Tenneco
Retirement Plan. Our plan will count service prior to the spin-off for all
purposes, including benefit accrual, but there will be an offset for benefits
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accrued under the Tenneco Retirement Plan. Therefore, as to our employees, the
benefits described in the table will be provided by a combination of payments
from the Tenneco Retirement Plan and our new plan. We also expect to adopt plans
similar to the Tenneco Inc. supplemental pension plan. We also expect to adopt a
key executive pension plan covering executive officers which will call for
benefits commencing at age 55 of 4% of compensation (salary and bonus) per year
of service up to a maximum of 50%, reduced by payments under all other
company-sponsored qualified and non-qualified defined benefit pension plans.
<TABLE>
<CAPTION>
YEARS OF CREDITED PARTICIPATION
ANNUAL -------------------------------------------------------------------------
REMUNERATION 5 10 15 20 25 30 35
- ------------ - -- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C> <C>
$250,000 $19,642 $ 39,285 $ 58,928 $ 78,571 $ 98,214 $117,857 $137,500
$300,000 $23,571 $ 47,142 $ 70,714 $ 94,285 $117,857 $141,428 $165,000
$350,000 $27,500 $ 55,000 $ 82,500 $110,000 $137,500 $165,000 $192,500
$400,000 $31,428 $ 62,857 $ 94,285 $125,714 $157,142 $188,571 $220,000
$450,000 $35,357 $ 70,714 $106,071 $141,428 $176,785 $212,142 $247,500
$500,000 $39,285 $ 78,571 $117,857 $157,142 $196,428 $235,714 $275,000
$550,000 $43,214 $ 86,428 $129,642 $172,857 $216,071 $259,285 $302,500
$600,000 $47,142 $ 94,285 $141,428 $188,571 $235,714 $282,857 $330,000
$650,000 $51,071 $102,142 $153,214 $204,285 $255,357 $306,428 $357,500
$700,000 $55,000 $110,000 $165,000 $220,000 $275,000 $330,000 $385,000
</TABLE>
- -------------------------
1. The benefits shown above are computed as a straight life annuity and are
based on years of credited participation and the employee's average
compensation, which is comprised of salary and bonus. These benefits are not
subject to any deduction for Social Security or other offset amounts. The
years of credited participation for Messrs. Frissora, McCollum, Schneider and
Gabriel are 2, 4, 4 and 4, respectively. See the Summary Compensation Table
above for salary and bonus information for these individuals.
2. If Mr. Frissora completes 10 years of service in the period commencing
January 1, 1999, he will be entitled to benefits commencing at age 55 of at
least 40% of his average salary plus bonus determined over a three-year
period.
COMPENSATION OF DIRECTORS
Fee Structure. Each director who is not also an employee of us or our
subsidiaries, an "outside director," will be paid a yearly retainer fee of
$35,000 for service on the Board of Directors. In general, 100% of that fee will
be paid in the form of stock-settled common stock equivalents (the "directors'
stock equivalents"), as described below. A director may elect, however, to have
up to 40%, or $14,000, of the fee paid in cash. These outside directors also
receive cash attendance fees and committee chair and membership fees, and
reimbursement of their expenses for attending meetings of the Board of
Directors. Outside directors receive $1,000 for each meeting of the Board of
Directors attended, and each one who serves as a Chairman of the Audit Committee
or the Compensation/Nominating/Governance Committee is paid a fee of $7,000 per
chairmanship. Outside directors who serve as members of these committees are
paid $4,000 per committee membership. Members of the Three-year Independent
Director Evaluation Committee receive $1,000 plus expenses for each meeting of
that committee attended.
Common Stock Equivalents/Options. As described above, all or a portion of
an outside director's retainer fee is paid in common stock equivalent units.
These directors' stock equivalents will be payable in shares of our common stock
after an outside director ceases to serve as a director. Final distribution of
these shares may be made either in a lump sum or in installments over a period
of years. The directors' stock equivalents are issued at 100% of the fair market
value on the date of the grant. Each outside director will also receive an
annual grant of an option to purchase up to 5,000 shares of common stock and
1,000 performance share equivalent units as additional incentive compensation.
Directors options: (a) are granted with per share exercise prices equal to 100%
of the fair market value of a share of common stock on the day the option is
granted; (b) have terms of ten years; and (c) will fully vest six months from
the grant date. Once vested, the directors options will be exercisable at any
time during the option term.
Deferred Compensation Plan. We have a voluntary deferred compensation plan
for outside directors. Under the plan, an outside director may elect, prior to
commencement of the next calendar year, to have some or all of the cash portion,
that is, up to 40%, or $14,000 of his or her retainer fee and some or all of his
or her meeting fees credited to a deferred compensation account. The plan
provides these directors
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with various investment options. The investment options will include stock
equivalent units of our common stock, which may be paid out in either cash or
shares of our common stock.
Restricted Stock. In satisfaction of residual obligations under the
discontinued retirement plan for directors, Ms. Eickhoff and Mr. Andrews will
receive a yearly grant of $15,400 in value of restricted shares of our common
stock. The restricted shares may not be sold, transferred, assigned, pledged or
otherwise encumbered and are subject to forfeiture if Ms. Eickhoff or Mr.
Andrews ceases to serve on the Board prior to the expiration of the restricted
period. This restricted period ends upon his or her normal retirement from the
Board, unless he or she is disabled, dies, or the
Compensation/Nominating/Governance Committee of the Board, at its discretion,
determines otherwise. During the restricted period, Ms. Eickhoff and Mr. Andrews
will be entitled to vote the shares and receive dividends.
TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS
We maintain a key executive change-in-control severance benefit plan. The
purpose of the plan is to enable us to continue to attract, retain and motivate
highly qualified employees by eliminating, to the maximum practicable extent,
any concern on the part of such employees that their job security or benefit
entitlements will be jeopardized by a "change-in-control" of our company, as
that term is defined in the plan. The plan is designed to achieve this purpose
through the provision of severance benefits for key employees and officers whose
positions are terminated following a change-in-control as provided in the plan.
Under the plan, we expect that Messrs. Frissora, McCollum, Schneider and Gabriel
would have become entitled to receive payments from us in the amount of
$2,115,000, $1,428,999, $1,295,001 and $924,999, respectively, had their
positions been terminated on November 30, 1999 following a change-in-control,
based on their current 1999 salaries of $580,000, $315,000, $315,000 and
$235,000, respectively. In addition, restricted shares held in the name of those
individuals under restricted stock plans would have automatically reverted to
us, and we would have been obliged to pay those individuals the fair market
value of those restricted shares. Their performance share equivalent units would
also have been fully vested and paid.
Other than in connection with a change-in-control, we have agreed that if
Mr. Frissora's employment is terminated other than for death, disability or
non-performance of duties, he will be paid two times the total of his current
salary and his bonus for the immediately preceding year, all outstanding
stock-based awards would be vested, subject to Board approval, and his stock
options will remain exercisable for at least 90 days. We have agreed to provide
Mr. Schneider severance benefits similar to those with respect to Mr. Frissora,
except he would be paid one and one-half times the total of his current salary
plus his bonus for the immediately preceding year.
Mr. Sloan receives an annual salary of $350,000. His target bonus is
$255,000 and he is included in the group of executors who qualify for the
benefits described above with respect to a change in control.
Mr. Donovan receives an annual salary of $290,000. His target bonus is
$150,000 and he is included in the group of executives who qualify for the
benefits described above with respect to a change-in-control.
Mr. Jackson receives an annual salary of $250,000. His target bonus is
$150,000 and he is included in the group of executives who qualify for the
benefits described above with respect to a change-in-control.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal year 1998, Tenneco paid the firm Eickhoff Economics, Inc., of
which Ms. Eickhoff is the sole owner, approximately $25,000 for financial
consulting services. These services have not been and will not be provided in
1999.
In connection with the spin-off, Mr. Mead resigned as Chief Executive
Officer of Tenneco, and he entered into a revised agreement with Tenneco. Under
that agreement: (1) Mr. Mead will be paid an amount equivalent to three times
the total of his annual salary plus bonus; (2) if certain performance goals are
met, he will be entitled to an adjusted target bonus for 1999 prorated through
the date of his separation; (3) his stock options were made exercisable,
one-half were replaced by Pactiv options and one-
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half continue as Automotive options (the number and exercise price of such
options being determined under the generally applicable rules applied in
connection with the spin-off and which maintain the economic equivalent of the
currently outstanding options); (4) for purposes of Tenneco's Supplemental
Executive Retirement Plan, he will be treated as though he had remained employed
until age 65; and (5) was granted options to purchase up to 50,000 shares of
Pactiv common stock and options to purchase up to 50,000 shares of our common
stock at the time of the spin-off. Mr. Mead's agreement is with an entity which
is a subsidiary of Pactiv now that the spin-off is complete, and the expense
associated therewith was included in the spin-off expenses and part of the debt
realignment.
During 1999, Mr. Mead was indebted to an affiliate of Tenneco in connection
with a relocation loan of approximately $400,000. In September 1999, that
obligation was canceled.
During 1999, Mr. Frissora was indebted to Tenneco. Such indebtedness was
incurred in connection with his relocation and all amounts outstanding are
secured by a subordinated mortgage note, without interest. Principal will only
be payable in full upon termination of his employment prior to 2003 except for a
termination without cause or following a change-in-control. The approximate
aggregate amount outstanding is $400,000.
During 1999, Mr. McCollum was indebted to an affiliate of Tenneco in
connection with a relocation loan of approximately $400,000. In July 1999, that
obligation was canceled.
During 1998, Tenneco and its subsidiaries paid the law firm of Jenner &
Block, of which Mr. Donovan was a partner, approximately $13.5 million for legal
services, a substantial portion of which related to work for Pactiv. During 1999
and 2000, Jenner & Block continued to provide legal services to Tenneco and its
subsidiaries.
For additional information concerning certain relationships between Tenneco
and members of Tenneco's management prior to the spin-off, see the Tenneco Inc.
Proxy Statement for the Annual Meeting of Shareowners held on May 11, 1999.
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PRINCIPAL STOCKHOLDERS
The following table sets forth the number of shares of our company's common
stock beneficially owned as of December 27, 1999 by owners of more than 5% of
our common stock who are known to us.
<TABLE>
<CAPTION>
NAME AND ADDRESS SHARES OF PERCENT OF COMMON
OF BENEFICIAL OWNER(1) COMMON STOCK OWNED(1) STOCK OUTSTANDING(1)
---------------------- --------------------- --------------------
<S> <C> <C>
Barrow, Hanley, Mewhinney & Strauss, Inc. .......... 4,152,208(2) 12.32%(2)
One McKinney Plaza
3232 McKinney Avenue
15th Floor
Dallas, Texas 75204-2429
Gabelli Asset Management Inc........................ 2,405,220(3) 7.14%(3)
One Corporate Center
Rye, New York 10580-1435
Highfields Capital Management....................... 2,612,998(4) 7.76%(4)
200 Clarendon Street
Boston, Massachusetts 02117
</TABLE>
- -------------------------
(1) This information is based on information contained in filings made with the
Securities and Exchange Commission regarding the ownership of our common
stock, adjusted to give effect to the one-for-five reverse stock split we
completed on November 5, 1999.
(2) Barrow, Hanley, Mewhinney & Strauss, Inc. has indicated that it has sole
voting power over 906,768 shares, shared voting power over 3,245,440 shares,
and sole dispositive power over 4,152,208 shares. Barrow, Hanley also
advised Tenneco that it is a registered investment advisor and these shares
are held on behalf of various clients.
(3) Gabelli Funds, LLC ("Gabelli Funds"), a wholly-owned subsidiary of Gabelli
Asset Management Inc. ("GAMI"), is the beneficial owner of 2.68% of the
common stock outstanding. Gabelli Funds has indicated that it has sole
voting power over 903,000 shares and sole dispositive power over 903,000
shares. Gabelli Funds has the same principal business address as GAMI. GAMCO
Investors, Inc. ("GAMCO"), a wholly owned subsidiary of GAMI, is the
beneficial owner of 4.40% of the common stock outstanding. GAMCO has
indicated that it has sole voting power over 1,481,820 shares and sole
dispositive power over 1,482,220 shares. GAMCO has the same principal
business address as GAMI. Gemini Capital Management Ltd. ("Gemini") is the
beneficial owner of .06% of the common stock outstanding. Gemini has
indicated that it has sole voting power over 20,000 shares and sole
dispositive power over 20,000 shares. The address of Gemini's principal
office is as follows: c/o Appleby, Spurling & Kempe, Cedar House, Cedar
Avenue, Hamilton HM12, Bermuda. Mario J. Gabelli is the Chief Executive
Officer of GAMCO and the Chief Investment Officer of GAMCO and Gabelli
Funds. Marc Gabelli is the President and Chief Investment Officer of Gemini.
Gabelli Funds and GAMCO also advised Tenneco that they are registered
investment advisors.
(4) Highfields GP LLC ("Highfields GP") is the general partner of Highfields
Capital Management ("Highfields"). Highfields GP has the same principal
business address as Highfields. Highfields Capital Management LP
("Highfields Management") is the investment advisor to Highfields Capital I
LP ("Highfields I"), Highfields II LP ("Highfields II") and Highfields
Capital Ltd. ("Highfields Limited," collectively, the "Funds"). Highfields
Management has the same principal business address as Highfields. Jonathon
S. Jacobson and Richard L. Grubman are both managing partners of Highfields
GP. Highfields GP, Highfields Management, Mr. Jacobson and Mr. Grubman filed
a statement with respect to the common stock owned by the Funds. The Funds
are the beneficial owners of 7.76% of the common stock outstanding. The
Funds have sole voting power over 2,612,998 shares and sole dispositive
power over 2,612,998 shares. Highfields Limited is the beneficial owner of
5.6% of the common stock outstanding. Highfields Limited has indicated that
it has sole voting power over 1,878,239 shares and sole dispositive power
over 1,878,239 shares. Highfields Limited's principal business address is as
follows: c/o Goldman Sachs (Cayman) Trust, Limited, Harbour Centre, North
Church Street, P.O. Box 896, George Town, Grand Cayman, Cayman Islands.
Neither Highfields I nor Highfields II owns more than 5% of the common stock
outstanding.
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DESCRIPTION OF SENIOR CREDIT FACILITY
GENERAL
In connection with the spin-off, we entered into a senior secured credit
facility with a syndicate, or group, of banks and financial institutions,
including Citibank as syndication agent, Commerzbank and Bank of America as
co-documentation agents and The Chase Manhattan Bank as administrative agent for
the lenders' syndicate. The credit facility is referred to as a senior credit
facility because borrowings under the credit facility are our unsubordinated
obligations and are secured as described below under the heading "-- Guarantee;
Security."
As is customary when a number of financial institutions form a syndicate to
make a loan, the lead arranger is responsible for enlisting other financial
institutions to participate in the loan. The syndication agent and the
administrative agent are authorized to perform mechanical and administrative
functions associated with making and monitoring the loan on behalf of all of the
other lenders who make up the lending syndicate.
The senior secured credit facility consists of:
- a Term Loan A facility of $450 million in term loans;
- a Term Loan B facility of $300 million in term loans;
- a Term Loan C facility of $300 million in term loans; and
- the revolving credit facility of up to $500 million in revolving credit
loans, including letters of credit of up to $250 million.
We borrowed $1,072 million under the senior secured credit facility
substantially contemporaneously with the spin-off, which consisted of $1,050
million in term loans and $22 million under the revolving credit facility. The
proceeds of these borrowings were used to fund a portion of the debt
realignment. Following the spin-off, the revolving credit facility will be
available for general corporate purposes.
REPAYMENT
The terms of the senior secured credit facility require that the revolving
credit facility be repaid on or before the sixth anniversary of the funding
date. Prior to that date, funds may be borrowed, repaid and reborrowed under the
revolving credit facility without premium or penalty. The revolving credit
facility will terminate in 2005. The term loans under the senior secured credit
facility have varying maturities from six to eight and one-half years, a portion
of which will be payable in quarterly installments beginning September 30, 2001,
and the remainder of which will be payable at maturity.
GUARANTEE; SECURITY
The senior credit facility is jointly and severally guaranteed by each of
our material direct and indirect domestic subsidiaries. The senior credit
facility is also secured by substantially all of our tangible and intangible
domestic assets and is collateralized by a perfected security interest in all of
the capital stock of our material domestic subsidiaries and in up to 66% of the
capital stock of our first-tier foreign subsidiaries. The collateral will be
permanently released if we achieve specified long-term debt ratings and a
portion of the term loans has been paid in full.
COVENANTS
The senior credit facility requires us to maintain compliance with the
following financial tests:
- Maximum Leverage Ratio. Our maximum leverage ratio, which is the ratio of
our consolidated indebtedness to our consolidated EBITDA, cannot exceed a
fixed amount at the end of each period of four consecutive fiscal
quarters commencing with the quarter ending March 31, 2000.
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- Minimum Fixed Charge Coverage Ratio. Our fixed charge coverage ratio,
which is the ratio of our consolidated EBITDA less our consolidated
capital expenditures to our consolidated cash interest expense, must
exceed a minimum level at the end of each period of four consecutive
fiscal quarters commencing with the period ending December 31, 2000.
- Minimum Interest Coverage Ratio. Our interest coverage ratio, which is
the ratio of consolidated EBITDA to consolidated cash interest expense,
must exceed a minimum level at the end of each period of four consecutive
fiscal quarters commencing with the period ending on December 31, 2000.
For the fiscal quarters ending March 31, June 30 and September 30, 2000,
our interest coverage ratio must exceed the minimum level for the one,
two or three fiscal quarters, respectively, ending with each such fiscal
quarter.
In addition, the senior secured credit facility contains negative covenants
limiting (with some exceptions), among other things:
- additional liens;
- additional indebtedness or guarantees;
- additional capital expenditures;
- transactions with affiliates;
- mergers and consolidations;
- prepayments and modifications of the outstanding and new notes, and other
debt instruments;
- additional lines of business;
- liquidations and dissolutions;
- sales or other dispositions of assets;
- dividends;
- investments;
- loans and advances; and
- sales and leasebacks.
INTEREST
The borrowings under the senior secured credit facility bear interest at a
floating rate and may be maintained as base rate loans or as Eurodollar loans.
Base rate loans bear interest at the base rate, which is the greater of (1) the
applicable prime lending rate of the administrative agent or (2) the Federal
Funds Effective Rate plus 1/2 of 1%, plus, in each case, the applicable margin
as described below. Eurodollar loans will bear interest at the Eurodollar rate
as described in the senior secured credit facility, plus the applicable margin
as described below.
The applicable margin with respect to the revolving credit facility and
Term Loan A will vary from time to time in accordance with a pricing grid based
on our leverage ratio. The initial applicable margin with respect to the
revolving credit facility and Term Loan A is (1) 1.75%, in the case of base rate
loans and (2) 2.75% in the case of Eurodollar loans. The applicable margins with
respect to Term Loan B and Term Loan C will not fluctuate. The applicable margin
for Term Loan B is (1) 2.25% in the case of base rate loans and (2) 3.25% in the
case of Eurodollar loans. The applicable margin with respect to Term Loan C is
(1) 2.50% in the case of base rate loans and (2) 3.50% in the case of Eurodollar
loans.
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MANDATORY PREPAYMENTS
The senior secured credit facility requires us to prepay the term loan
facilities with:
- 100% of the net proceeds of any issuance or incurrence of indebtedness
after the funding date by us or our subsidiaries, subject to exceptions
for permitted debt;
- 50% of the net proceeds of any issuance of equity by us or our
subsidiaries, subject to some exceptions;
- 100% of the net proceeds of any sale or other disposition by us or our
subsidiaries of any assets, subject to certain exceptions, unless such
proceeds are reinvested in assets useful in our business, with certain
exceptions;
- 75% of excess cash flow as defined in the senior credit facility; and
- 100% of the net proceeds of casualty insurance, condemnation awards or
other recoveries, to the extent such proceeds are not reinvested in other
assets useful in our business and subject to some other exceptions.
The mandatory prepayment percentages listed above, other than the
percentage relating to issuance of equity, will be reduced if we achieve certain
performance measures established in the facility.
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DESCRIPTION OF THE NEW NOTES
The Company issued the outstanding notes, and will issue the new notes,
under an indenture (the "Indenture") dated as of October 14, 1999, as amended,
by and among the Company, the Guarantors and The Bank of New York, as Trustee
(the "Trustee"). The following summary of the Indenture does not include all of
the information included in the Indenture and may not include all of the
information that you would consider important. This summary is qualified by
reference to the Trust Indenture Act of 1939, as amended (the "TIA"), and to all
of the provisions of the Indenture, which is incorporated herein by reference,
including the definitions of terms therein and those terms made a part of the
Indenture by reference to the TIA as in effect on the date of the Indenture. A
copy of the Indenture may be obtained from us and is filed as an exhibit to the
registration statement that includes this prospectus. The definitions of most of
the capitalized terms used in the following summary are set forth below under
"-- Certain Definitions." For purposes of this section, references to the
"Company" include only Tenneco Automotive Inc. and not its Subsidiaries.
The new notes will be unsecured obligations of the Company, ranking
subordinate in right of payment to all Senior Debt of the Company. The form and
terms of the new notes will be identical to the outstanding notes except for the
following:
(1) the new notes bear a Series B designation and a different CUSIP
number from the outstanding notes to differentiate the new notes from the
outstanding notes;
(2) the new notes have been registered under the Securities Act and,
therefore, will not bear legends restricting their transfer; and
(3) the holders of the new notes will not generally be entitled to
rights under the registration rights agreement, including the provisions
providing for an increase in the interest rate on the notes in certain
circumstances relating to the timing of the exchange offer, all of which
rights generally will terminate when the exchange offer is terminated.
As used in this section, unless the context otherwise requires, the term
"notes" refers collectively to all notes issued under the indenture, including
the outstanding notes and new notes.
The new notes will be issued in fully registered form only, without
coupons, in denominations of $1,000 and integral multiples thereof. Initially,
the Trustee will act as paying agent and registrar for the notes. The notes may
be presented for registration or transfer and exchange at the offices of the
registrar, which initially will be the Trustee's corporate trust office. The
Company may change any paying agent and registrar without notice to holders of
the notes. The Company will pay principal (and premium, if any) on the notes at
the Trustee's corporate office in New York, New York. Interest may be paid at
the Trustee's corporate trust office, by check mailed to the registered address
of the holders or by wire transfer if instructions therefor are furnished by a
holder. Any outstanding notes that remain outstanding after the completion of
the exchange offer, together with the new notes issued in connection with the
exchange offer, will be treated as a single class of securities under the
Indenture.
PRINCIPAL, MATURITY AND INTEREST
The notes are limited in aggregate principal amount to $750,000,000, of
which $500,000,000 were issued on the Issue Date, and will mature on October 15,
2009. Additional notes may be issued from time to time subject to the
limitations set forth under "Certain Covenants -- Limitation on Incurrence of
Additional Indebtedness." Interest on the notes will accrue at the rate of
11 5/8% per annum and will be payable semiannually in cash on each April 15 and
October 15 commencing on April 15, 2000, to the persons who are registered
holders at the close of business on the April 1 and October 1 immediately
preceding the applicable interest payment date. Interest on the notes will
accrue from and including the most recent date to which interest has been paid
or, if no interest has been paid, from and including the date of issuance,
provided, however, that interest on any new notes issued in the exchange offer
will accrue from and including the Issue Date for the outstanding notes. See
"The Exchange Offer -- Interest on the New Notes".
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The notes will not be entitled to the benefit of any mandatory sinking
fund.
REDEMPTION
Optional Redemption. The notes will be redeemable, at the Company's option,
in whole at any time or in part from time to time, on and after October 15, 2004
upon not less than 30 nor more than 60 days' notice, at the following redemption
prices (expressed as percentages of the principal amount thereof) if redeemed
during the twelve-month period commencing on October 15 of the applicable year
set forth below, plus, in each case, accrued and unpaid interest, if any, to the
date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2004........................................................ 105.813%
2005........................................................ 103.875%
2006........................................................ 101.938%
2007 and thereafter......................................... 100.000%
</TABLE>
Optional Redemption upon Public Equity Offerings. At any time, or from time
to time, on or prior to October 15, 2002, the Company may, at its option, use
all or any portion of the net cash proceeds of one or more Public Equity
Offerings (as defined below) to redeem up to 35% of the aggregate principal
amount of the notes issued at a redemption price equal to 111.625% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of redemption; provided that at least 65% of the aggregate principal amount of
notes issued remains outstanding immediately after any such redemption. In order
to effect the foregoing redemption with the proceeds of any Public Equity
Offering, the Company shall make such redemption not more than 180 days after
the consummation of any such Public Equity Offering.
As used in the preceding paragraph, "Public Equity Offering" means an
underwritten public offering of Qualified Capital Stock of the Company pursuant
to a registration statement filed with the Commission in accordance with the
Securities Act.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the notes are to be redeemed at any
time, selection of the notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the notes are listed or, if the notes are not then listed on a
national securities exchange, on a pro rata basis, by lot or by such method as
the Trustee shall deem fair and appropriate; provided, however, that:
- no notes of a principal amount of $1,000 or less shall be redeemed in
part; and
- if a partial redemption is made with the proceeds of a Public Equity
Offering, selection of the notes or portions thereof for redemption shall
be made by the Trustee only on a pro rata basis or on as nearly a pro
rata basis as is practicable (subject to DTC procedures), unless such
method is otherwise prohibited.
Notice of an optional redemption shall be mailed at least 30 but not more
than 60 days before the redemption date to each holder of notes to be redeemed
at its registered address. If any note is to be redeemed in part only, the
notice of redemption that relates to such note shall state the portion of the
principal amount thereof to be redeemed. A separate note in a principal amount
equal to the unredeemed portion thereof will be issued in the name of the holder
thereof upon cancellation of the original note. On and after the redemption
date, interest will cease to accrue on notes or portions thereof called for
redemption as long as the Company has deposited with the paying agent funds in
satisfaction of the applicable redemption price pursuant to the Indenture.
SUBORDINATION
The payment of all Obligations on the notes is subordinated in right of
payment to the prior payment in full in cash or Cash Equivalents of all
Obligations on Senior Debt. Upon any payment or distribution of
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assets or securities of the Company of any kind or character, whether in cash,
property or securities, to creditors upon any liquidation, dissolution, winding
up, reorganization, assignment for the benefit of creditors or marshaling of
assets of the Company or in a bankruptcy, reorganization, insolvency,
receivership or other similar proceeding relating to the Company or its
property, whether voluntary or involuntary, all Obligations due upon all Senior
Debt must first be paid in full in cash or Cash Equivalents, or such payment
duly provided for to the satisfaction of the holders of Senior Debt, before any
payment or distribution of any kind or character is made on account of any
Obligations on the notes. If any default occurs and is continuing in the payment
when due, whether at maturity, upon any redemption, by declaration or otherwise,
of any principal of, interest on, unpaid drawings for letters of credit issued
in respect of, regularly accruing fees with respect to, or other Obligations
with respect to, any Senior Debt, no payment or distribution of any kind or
character shall be made by or on behalf of the Company with respect to any
Obligations on the notes or to acquire, redeem or defease any of the notes for
cash or property or otherwise. In addition, if any other event of default occurs
and is continuing with respect to any Designated Senior Debt, as such event of
default is defined in the instrument creating or evidencing such Designated
Senior Debt, permitting the holders of such Designated Senior Debt then
outstanding to accelerate the maturity thereof and if the Representative for
such Designated Senior Debt gives written notice of the event of default to the
Trustee (a "Default Notice"), then, unless and until all events of default with
respect to such Designated Senior Debt have been cured or waived or have ceased
to exist or the Trustee receives notice from the Representative for such
Designated Senior Debt terminating the Blockage Period (as defined below),
during the 179 days after the delivery of such Default Notice (the "Blockage
Period"), neither the Company nor any other Person on its behalf shall:
- make any payment or distribution of any kind or character with respect to
any Obligations on the notes; or
- acquire, redeem or defease any of the notes for cash or property or
otherwise.
Notwithstanding anything herein to the contrary, in no event will a
Blockage Period extend beyond 179 days from the date the Default Notice was
delivered to the Trustee and only one such Blockage Period may be commenced
within any 360 consecutive days. No event of default which existed or was
continuing on the date of the commencement of any Blockage Period with respect
to the Designated Senior Debt shall be, or be made, the basis for commencement
of a second Blockage Period by the Representative of such Designated Senior Debt
whether or not after a period of 360 consecutive days, unless such event of
default shall have been cured or waived or ceased to exist for a period of not
less than 90 consecutive days (it being acknowledged that any subsequent action,
or any breach of any financial covenants for a period commencing after the date
of commencement of such Blockage Period that, in either case, would give rise to
an event of default pursuant to any provisions of the Designated Senior Debt
under which an event of default previously existed or was continuing shall
constitute a new event of default for this purpose).
By reason of such subordination, in the event of the insolvency of the
Company, creditors of the Company who are not holders of Senior Debt, including
the holders of notes, may recover less, ratably, than holders of Senior Debt.
Any payment or distribution made to the Trustee or the holders of the notes
at a time when such payment or distribution is prohibited by the subordination
provisions of the Indenture shall be turned over to the holders of the Senior
Debt or their Representative as their interests may appear.
GUARANTEES
The notes are guaranteed by each of the Company's Wholly Owned Domestic
Restricted Subsidiaries (other than any Immaterial Domestic Subsidiaries) as of
the Spin-Off Date (after giving effect to the Spin-Off Transactions) and will be
guaranteed by certain of the Company's Restricted Subsidiaries formed or
acquired after the Spin-Off Date. See "-- Certain Covenants -- Issuance of
Subsidiary Guarantees." The Guarantee of each Guarantor will be subordinated to
all Guarantor Senior Debt of such Guarantor to the same extent as the notes are
subordinated to all Senior Debt. In the event of either (i) the issuance or
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sale of Capital Stock of a Guarantor which results in the Guarantor no longer
being a Subsidiary of the Company, (ii) a Guarantor becoming an Unrestricted
Subsidiary or (iii) the sale of all or substantially all of the assets of a
Guarantor pursuant to an Asset Sale which complies with the provisions set forth
under "-- Certain Covenants -- Limitation on Asset Sales," the applicable
Guarantor's Guarantee will be released. The amount of each Guarantee will be
limited to the extent required under applicable fraudulent conveyance laws to
cause such Guarantee to be enforceable.
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control,
each holder will have the right to require that the Company purchase all or a
portion of such holder's notes pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101% of the principal
amount thereof plus accrued interest, if any, thereon to the date of purchase.
The Indenture provides that, prior to the mailing of the notice referred to
below, but in any event within 30 days following any Change of Control, the
Company will:
- repay in full and terminate all commitments under all Indebtedness under
the Credit Agreement and all other Senior Debt the terms of which require
repayment upon a Change of Control or offer to repay in full and
terminate all commitments under all Indebtedness under the Credit
Agreement and all other such Senior Debt and to repay the Indebtedness
owed to each lender or holder which has accepted such offer; or
- obtain the requisite consents under the Credit Agreement and all other
Senior Debt to permit the repurchase of the notes as provided below.
The Company shall first comply with the covenant in the immediately
preceding sentence before it shall be required to repurchase notes pursuant to
the provisions described below.
Within 30 days following the date upon which the Change of Control occurs,
the Company must send, by first class mail, a notice to each holder, with a copy
to the Trustee, which notice shall govern the terms of the Change of Control
Offer. Such notice shall state, among other things, the purchase date, which
must be no earlier than 30 days nor later than 60 days from the date such notice
is mailed, other than as may be required by law (the "Change of Control Payment
Date"). Holders electing to have a note purchased pursuant to a Change of
Control Offer will be required to surrender the note, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the note completed, to
the paying agent at the address specified in the notice prior to the close of
business on the third business day prior to the Change of Control Payment Date.
If a Change of Control Offer is required to be made, there can be no
assurance that the Company will be permitted by the terms of its Senior Debt to
make such a Change of Control Offer or that it will have available funds
sufficient to pay either (1) all Indebtedness under the Credit Agreement and
other Senior Debt the terms of which require payments upon a Change of Control
or (2) the Change of Control purchase price for all the notes that might be
delivered by holders seeking to accept the Change of Control Offer. In the event
the Company is required to purchase outstanding notes pursuant to a Change of
Control Offer, the Company expects that it would seek third party financing to
the extent it does not have available funds to meet its purchase obligations.
However, there can be no assurance that the Company would be able to obtain such
financing.
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to a holder's right to require the purchase of notes upon a
Change of Control. Restrictions in the Indenture described herein on the ability
of the Company and the Restricted Subsidiaries to incur additional Indebtedness,
to grant Liens on their property, to make Restricted Payments and to make Asset
Sales may also make more difficult or discourage a takeover of the Company,
whether favored or opposed by the management of the Company. Consummation of any
such transaction in certain circumstances may require the purchase of the notes,
and there can be no assurance that the Company or the acquiring party will have
sufficient financial resources to effect such purchase. Such restrictions and
the restrictions on
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transactions with Affiliates may, in certain circumstances, make more difficult
or discourage any leveraged buyout of the Company or any of its Subsidiaries by
the management of the Company. While such restrictions cover a wide variety of
arrangements which have traditionally been used to effect highly leveraged
transactions, the Indenture may not afford the holders protection in all
circumstances from the adverse aspects of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations to the extent such
laws and regulations are applicable in connection with a Change of Control
Offer. To the extent that the provisions of any securities laws or regulations
conflict with the "Change of Control" provisions of the Indenture, the Company
shall comply with the applicable securities laws and regulations and shall not
be deemed to have breached its obligations under the "Change of Control"
provisions of the Indenture by virtue thereof.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness. On the Spin-Off Date
(after giving effect to the Spin-Off Transactions) and after the Spin-Off Date
the Company will not, and will not permit any of the Restricted Subsidiaries to,
directly or indirectly, create, incur, issue, assume, guarantee, acquire, become
liable, contingently or otherwise, with respect to, or otherwise become
responsible for payment of (collectively, "incur") any Indebtedness (other than
Permitted Indebtedness); provided, however, that if no Default or Event of
Default shall have occurred and be continuing at the time of or as a consequence
of the incurrence of any such Indebtedness:
(a) the Company, any Guarantor, any Finance Subsidiary that is a
Domestic Restricted Subsidiary and any Accounts Receivable Entity that is a
Domestic Restricted Subsidiary may incur Indebtedness (including, without
limitation, Acquired Indebtedness) if on the date of the incurrence of such
Indebtedness, after giving effect to the incurrence thereof, the
Consolidated Fixed Charge Coverage Ratio of the Company would be greater
than:
- 2.0 to 1.0, if the incurrence were to occur on or prior to October 15,
2001; or
- 2.25 to 1.0, if the incurrence were to occur after October 15, 2001;
and
(b) any Restricted Subsidiary that is not a Guarantor (and is not a
Finance Subsidiary or an Accounts Receivable Entity that is a Domestic
Restricted Subsidiary) may incur Indebtedness (including, without
limitation, Acquired Indebtedness) if, on the date of the incurrence of
such Indebtedness, after giving effect to the incurrence thereof:
(i) the Consolidated Fixed Charge Coverage Ratio of the Company
would be greater than:
- 2.0 to 1.0, if the incurrence were to occur on or prior to October
15, 2001; or
- 2.25 to 1.0, if the incurrence were to occur after October 15,
2001; and
(ii) if the agreements governing such Indebtedness contain an
encumbrance or restriction on the ability of the applicable Restricted
Subsidiary that is not a Guarantor (and is not a Finance Subsidiary or
an Accounts Receivable Entity that is a Domestic Restricted Subsidiary)
to pay dividends or make distributions on or in respect of its Capital
Stock, the Combined Fixed Charge Coverage Ratio of the Restricted
Subsidiaries that are not Guarantors would be greater than 2.5 to 1.0.
No Indebtedness incurred pursuant to the Consolidated Fixed Charge Coverage
Ratio test of the preceding paragraph (including, without limitation,
Indebtedness under the Credit Agreement) shall reduce the amount of Indebtedness
which may be incurred pursuant to any clause of the definition of Permitted
Indebtedness (including without limitation, Indebtedness under the Credit
Agreement pursuant to clause (2) of the definition of Permitted Indebtedness).
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Limitation on Restricted Payments. On the Spin-Off Date (after giving
effect to the Spin-Off Transactions) and after the Spin-Off Date, the Company
will not, and will not cause or permit any of the Restricted Subsidiaries to,
directly or indirectly:
(a) declare or pay any dividend or make any distribution (other than
dividends or distributions payable in Qualified Capital Stock of the
Company) on or in respect of shares of its Capital Stock to holders of such
Capital Stock (including by means of a Person (including an Unrestricted
Subsidiary) making such a payment with the proceeds of an Investment made
by the Company or any Restricted Subsidiary);
(b) purchase, redeem or otherwise acquire or retire for value any
Capital Stock of the Company or any warrants, rights or options to purchase
or acquire shares of any class of such Capital Stock (including by means of
a Person (including an Unrestricted Subsidiary) making such a payment with
the proceeds of an Investment made by the Company or any Restricted
Subsidiary); or
(c) make any Investment (other than Permitted Investments);
(each of the foregoing actions set forth in clauses (a), (b) and (c) being
referred to as a "Restricted Payment"), if at the time of such Restricted
Payment or immediately after giving effect thereto:
(1) a Default or an Event of Default shall have occurred and be
continuing;
(2) the Company is not able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
covenant described under "-- Limitation on Incurrence of Additional
Indebtedness"; or
(3) the aggregate amount of Restricted Payments (including such
proposed Restricted Payment) made after the Spin-Off Date (the amount
expended for such purpose, if other than in cash, being the Fair Market
Value of such property as determined reasonably and in good faith by the
Board of Directors of the Company) shall exceed the sum of:
(v) $30.0 million; plus
(w) 50% of the cumulative Consolidated Net Income (or if cumulative
Consolidated Net Income shall be a loss, minus 100% of such loss) of the
Company earned during the period beginning on the first day of the
fiscal quarter during which the Spin-Off Date occurs and through the end
of the most recent fiscal quarter for which financial statements are
available prior to the date such Restricted Payment occurs (the
"Reference Date") (treating such period as a single accounting period);
plus
(x) 100% of the Fair Market Value of the net proceeds received by
the Company from any Person (other than a Subsidiary of the Company)
from the issuance and sale subsequent to the Spin-Off Date and on or
prior to the Reference Date of Qualified Capital Stock of the Company
(excluding any net proceeds from a Public Equity Offering to the extent
used to redeem notes); plus
(y) without duplication of any amounts included in clause (3)(x)
above, 100% of the Fair Market Value of the net proceeds of any
contribution to the common equity capital of the Company received by the
Company from a holder of the Company's Capital Stock (excluding any net
proceeds from a Public Equity Offering to the extent used to redeem the
notes) subsequent to the Spin-Off Date; plus
(z) an amount equal to the lesser of (A) the sum of the Fair Market
Value of the Capital Stock of an Unrestricted Subsidiary owned by the
Company and/or the Restricted Subsidiaries and the aggregate amount of
all Indebtedness of such Unrestricted Subsidiary owed to the Company and
each Restricted Subsidiary on the date of Revocation of such
Unrestricted Subsidiary as an Unrestricted Subsidiary in accordance with
the covenant described under "-- Limitation on Designations of
Unrestricted Subsidiaries" or (B) the Designation Amount with respect to
such Unrestricted Subsidiary on the date of the Designation of such
Subsidiary as
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an Unrestricted Subsidiary in accordance with the covenant described
under "-- Limitation on Designations of Unrestricted Subsidiaries."
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration of such dividend if the dividend would have been permitted on
the date of declaration;
(2) the acquisition of any shares of Capital Stock of the Company,
either (A) solely in exchange for shares of Qualified Capital Stock of the
Company or (B) through the application of net proceeds of a substantially
concurrent sale for cash (other than to a Subsidiary of the Company) of
shares of Qualified Capital Stock of the Company;
(3) so long as no Default or Event of Default shall have occurred and
be continuing, repurchases of Capital Stock (or rights or options therefor)
of the Company from officers, directors, employees or consultants pursuant
to equity ownership or compensation plans or stockholders agreements not to
exceed $15.0 million in the aggregate;
(4) dividends and distributions paid on Common Stock of a Restricted
Subsidiary on a pro rata basis;
(5) the distribution of the Capital Stock of Packaging to the
Company's shareholders pursuant to the Spin-Off Transactions; and
(6) repurchases on the Spin-Off Date in connection with the Spin-Off
Transactions, of any of the Variable Rate Voting Participating Preferred
Stock, par value $.01, of Tenneco International Holding Corp. outstanding
on the Issue Date.
In determining the aggregate amount of Restricted Payments made subsequent
to the Spin-Off Date in accordance with clause (3) of the first paragraph of
this covenant "-- Limitation on Restricted Payments", amounts expended pursuant
to clauses (1), (2) and (3) shall be included in such calculation.
Limitation on Asset Sales. After the Spin-Off Date the Company will not,
and will not permit any of the Restricted Subsidiaries to, consummate an Asset
Sale unless:
(1) the Company or the applicable Restricted Subsidiary, as the case
may be, receives consideration at the time of such Asset Sale at least
equal to the Fair Market Value of the assets sold or otherwise disposed of;
(2) at least 75% of the consideration received by the Company or the
Restricted Subsidiary, as the case may be, from such Asset Sale shall be in
the form of cash or Cash Equivalents and is received at the time of such
disposition; and
(3) upon the consummation of an Asset Sale, the Company shall apply,
or cause such Restricted Subsidiary to apply, the Net Cash Proceeds
relating to such Asset Sale within 365 days after receipt thereof either
(A) to repay any Senior Debt, Guarantor Senior Debt or Indebtedness of a
Restricted Subsidiary that is not a Guarantor, (B) to acquire Replacement
Assets, or (C) a combination of prepayment and investment permitted by the
foregoing clauses (3)(A) and (3)(B).
On the 366th day after an Asset Sale or such earlier date, if any, as the
Board of Directors of the Company or of such Restricted Subsidiary determines
not to apply the Net Cash Proceeds relating to such Asset Sale as set forth in
clauses (3)(A), (3)(B) and (3)(C) of the preceding paragraph (each, a "Net
Proceeds Offer Trigger Date"), such aggregate amount of Net Cash Proceeds which
have not been applied on or before such Net Proceeds Offer Trigger Date as
permitted in clauses (3)(A), (3)(B) and (3)(C) of the preceding paragraph (each
a "Net Proceeds Offer Amount") shall be applied by the Company to make an offer
to purchase (the "Net Proceeds Offer") on a date (the "Net Proceeds Offer
Payment Date") not less than 30 nor more than 60 days following the applicable
Net Proceeds Offer Trigger Date, from all holders on a pro rata basis, that
principal amount of notes equal to the Net Proceeds Offer Amount at a
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price equal to 100% of the principal amount of the notes to be purchased, plus
accrued and unpaid interest, if any, thereon to the date of purchase; provided,
however, that if at any time any non-cash consideration received by the Company
or any Restricted Subsidiary, as the case may be, in connection with any Asset
Sale is converted into or sold or otherwise disposed of for cash (other than
interest received with respect to any such non-cash consideration) or Cash
Equivalents, then such conversion or disposition shall be deemed to constitute
an Asset Sale hereunder and the Net Cash Proceeds thereof shall be applied in
accordance with this covenant.
The Company may defer the Net Proceeds Offer until there is an aggregate
unutilized Net Proceeds Offer Amount equal to or in excess of $35.0 million
resulting from one or more Asset Sales or deemed Asset Sales (at which time, the
entire unutilized Net Proceeds Offer Amount, and not just the amount in excess
of $35.0 million, shall be applied as required pursuant to this paragraph). The
first such date the aggregate unutilized Net Proceeds Offer Amount is equal to
or in excess of $35.0 million shall be treated for this purpose as the Net
Proceeds Offer Trigger Date.
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and the Restricted Subsidiaries after the
Spin-Off Date as an entirety to a Person in a transaction permitted under "--
Merger, Consolidation and Sale of Assets," the successor corporation shall be
deemed to have sold the properties and assets of the Company and the Restricted
Subsidiaries not so transferred for purposes of this covenant, and shall comply
with the provisions of this covenant with respect to such deemed sale as if it
were an Asset Sale. In addition, the Fair Market Value of such properties and
assets of the Company or the Restricted Subsidiaries deemed to be sold shall be
deemed to be Net Cash Proceeds for purposes of this covenant.
Each Net Proceeds Offer will be mailed to the record holders as shown on
the register of holders within 30 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures set forth
in the Indenture. Upon receiving notice of the Net Proceeds Offer, holders may
elect to tender their notes in whole or in part in integral multiples of $1,000
in exchange for cash. To the extent holders properly tender notes in an amount
exceeding the Net Proceeds Offer Amount, notes of tendering holders will be
purchased on a pro rata basis (based on amounts tendered). A Net Proceeds Offer
shall remain open for a period of 20 business days or such longer period as may
be required by law.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations to the extent such
laws and regulations are applicable in connection with the repurchase of notes
pursuant to a Net Proceeds Offer. To the extent that the provisions of any
securities laws or regulations conflict with the "Asset Sale" provisions of the
Indenture, the Company shall comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations under the
"Asset Sale" provisions of the Indenture by virtue thereof.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Company will not, and will not cause or permit any of the
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
permit to exist after the Spin-Off Date or become effective after the Spin-Off
Date, any encumbrance or restriction on the ability of any Restricted Subsidiary
to:
(a) pay dividends or make any other distributions on or in respect of
its Capital Stock;
(b) make loans or advances or to pay any Indebtedness or other
obligation owed to the Company or any other Restricted Subsidiary; or
(c) transfer any of its property or assets to the Company or any other
Restricted Subsidiary,
except for such encumbrances or restrictions existing under or by reasons of:
(1) applicable law;
(2) the Indenture;
(3) the Credit Agreement;
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(4) customary non-assignment provisions of any contract or any lease
governing a leasehold interest of any Restricted Subsidiary;
(5) any instrument governing Acquired Indebtedness, which encumbrance
or restriction is not applicable to any Person, or the properties or assets
of any Person, other than the Person or the properties or assets of the
Person so acquired;
(6) agreements existing on the Spin-Off Date to the extent and in the
manner such agreements are in effect on the Spin-Off Date;
(7) any other agreement entered into after the Spin-Off Date which
contains encumbrances and restrictions which are not materially more
restrictive with respect to any Restricted Subsidiary than those in effect
with respect to such Restricted Subsidiary pursuant to agreements as in
effect on the Spin-Off Date;
(8) any instrument governing Indebtedness of a Foreign Restricted
Subsidiary;
(9) customary restrictions on the transfer of any property or assets
arising under a security agreement governing a Lien permitted under the
Indenture;
(10) any agreement governing Refinancing Indebtedness incurred to
Refinance the Indebtedness issued, assumed or incurred pursuant to an
agreement referred to in clause (2), (5), (6) or (8) above; provided,
however, that the provisions relating to such encumbrance or restriction
contained in any such Refinancing Indebtedness are not materially more
restrictive than the provisions relating to such encumbrance or restriction
contained in agreements referred to in such clause (2), (5), (6) or (8);
(11) any agreement governing the sale or disposition of any Restricted
Subsidiary which restricts dividends and distributions pending such sale or
disposition; and
(12) any agreement, instrument or Lien placing encumbrances or
restrictions applicable only to a Finance Subsidiary or an Accounts
Receivable Entity.
Limitation on Issuances of Capital Stock of Restricted Subsidiaries. The
Company will not permit any of the Restricted Subsidiaries (other than a Finance
Subsidiary or an Accounts Receivable Entity) to issue any Preferred Stock after
the Spin-Off Date (other than to the Company or to a Restricted Subsidiary) or
permit any Person (other than the Company or a Restricted Subsidiary) to own
after the Spin-Off Date any Preferred Stock of any Restricted Subsidiary (other
than a Finance Subsidiary or an Accounts Receivable Entity). The Company will
not, and will not permit any Restricted Subsidiary to, issue, sell, transfer or
dispose of on or after the Spin-Off Date any Capital Stock of any Restricted
Subsidiary (other than a Finance Subsidiary or an Accounts Receivable Entity)
that is not a Guarantor (other than the granting of Liens permitted by the
covenant described under "-- Limitation on Liens") unless such issuance, sale,
transfer or disposition results in the issuer of such Capital Stock no longer
being a Restricted Subsidiary.
Limitation on Liens. The Company will not, and will not cause or permit any
of the Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or permit or suffer to exist after the Spin-Off Date, any Liens of any kind
against or upon any property or assets of the Company or any of the Guarantors,
whether owned on the Spin-Off Date or acquired after the Spin-Off Date, or any
proceeds therefrom, or assign or otherwise convey any right to receive income or
profits therefrom unless:
(1) in the case of Liens securing Indebtedness that is expressly
subordinate or junior in right of payment to the notes or a Guarantee, the
notes or such Guarantee are secured by a Lien on such property, assets or
proceeds that is senior in priority to such Liens; and
(2) in all other cases, the notes are equally and ratably secured,
except for:
(A) Liens existing as of the Spin-Off Date to the extent and in the
manner such Liens are in effect on the Spin-Off Date;
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(B) Liens securing Senior Debt and Liens securing Guarantor Senior
Debt;
(C) Liens securing the notes and any Guarantees;
(D) Liens in favor of the Company or a Guarantor;
(E) Liens securing Refinancing Indebtedness which is incurred to
Refinance any Indebtedness secured by a Lien permitted under the
Indenture; provided, however, that such Liens do not extend to or cover
any property or assets of the Company or any of the Restricted
Subsidiaries not securing the Indebtedness so Refinanced; and
(F) Permitted Liens.
Prohibition on Incurrence of Senior Subordinated Debt. The Company will
not, and will not permit any Guarantor to, incur or suffer to exist after the
Spin-Off Date, Indebtedness that is senior in right of payment to the notes or
the Guarantee of such Guarantor, as the case may be, and subordinate in right of
payment to any other Indebtedness of the Company or such Guarantor, as the case
may be.
Merger, Consolidation and Sale of Assets. The Company will not, in a single
transaction or series of related transactions, consolidate or merge with or into
any Person, or sell, assign, transfer, lease, convey or otherwise dispose of (or
cause or permit any Restricted Subsidiary to sell, assign, transfer, lease,
convey or otherwise dispose of) after the Spin-Off Date all or substantially all
of the Company's assets (determined on a consolidated basis for the Company and
the Restricted Subsidiaries) whether as an entirety or substantially as an
entirety to any Person unless:
(1) either (A) the Company shall be the surviving or continuing
corporation or (B) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person which
acquires by sale, assignment, transfer, lease, conveyance or other
disposition the properties and assets of the Company and the Restricted
Subsidiaries substantially as an entirety (the "Surviving Entity") (x)
shall be a corporation organized and validly existing under the laws of the
United States or any State thereof or the District of Columbia and (y)
shall expressly assume, by supplemental indenture (in form and substance
satisfactory to the Trustee), executed and delivered to the Trustee, the
due and punctual payment of the principal of, and premium, if any, and
interest on all of the notes and the performance of every covenant of the
notes, the Indenture and the Registration Rights Agreement on the part of
the Company to be performed or observed;
(2) immediately after giving effect to such transaction and the
assumption contemplated by clause (1)(B)(y) above (including giving effect
to any Indebtedness and Acquired Indebtedness incurred or anticipated to be
incurred in connection with or in respect of such transaction), the Company
or such Surviving Entity, as the case may be, shall be able to incur at
least $1.00 of additional Indebtedness (other than Permitted Indebtedness)
pursuant to the covenant described under "-- Limitation on Incurrence of
Additional Indebtedness";
(3) immediately before and immediately after giving effect to such
transaction and the assumption contemplated by clause (1)(B)(y) above
(including, without limitation, giving effect to any Indebtedness and
Acquired Indebtedness incurred or anticipated to be incurred and any Lien
granted in connection with or in respect of the transaction), no Default or
Event of Default shall have occurred and be continuing; and
(4) the Company or the Surviving Entity shall have delivered to the
Trustee an officers' certificate and an opinion of counsel, each stating
that such consolidation, merger, sale, assignment, transfer, lease,
conveyance or other disposition and, if a supplemental indenture is
required in connection with such transaction, such supplemental indenture
comply with the applicable provisions of the Indenture and that all
conditions precedent in the Indenture relating to such transaction have
been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more
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Restricted Subsidiaries, the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company. In addition, for purposes of the foregoing, consummation of the
Spin-Off Transactions was deemed not to be a transfer, conveyance or disposition
of substantially all of the Company's assets.
The Indenture provides that upon any consolidation, combination or merger
or any transfer of all or substantially all of the assets of the Company in
accordance with the foregoing in which the Company is not the continuing
corporation, the successor Person formed by such consolidation or into which the
Company is merged or to which such conveyance, lease or transfer is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture and the notes with the same effect as if such
surviving entity had been named as such.
No Guarantor (other than any Guarantor whose Guarantee is to be released in
accordance with the terms of the Guarantee and Indenture in connection with any
transaction complying with the provisions of the covenant described under "--
Limitation on Asset Sales") will, and the Company will not cause or permit any
Guarantor to, consolidate with or merge with or into any Person other than the
Company or any other Guarantor unless:
(1) the entity formed by or surviving any such consolidation or merger
(if other than the Guarantor) is a corporation organized and existing under
the laws of the United States or any State thereof or the District of
Columbia;
(2) such entity assumes by supplemental indenture all of the
obligations of the Guarantor under the Indenture, such Guarantor's
Guarantee and the Registration Rights Agreement;
(3) immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing;
(4) immediately after giving effect to such transaction and the use of
any net proceeds therefrom on a pro forma basis, the Company could satisfy
the provisions of clause (2) of the first paragraph of this covenant; and
(5) the Company shall have delivered to the Trustee an officers'
certificate and opinion of counsel, each stating that such consolidation or
merger and, if a supplemental indenture is required in connection with such
transaction, such supplemental indenture comply with the applicable
provisions of the Indenture and that all conditions precedent in the
Indenture relating to such transaction have been satisfied.
Limitation on Transactions with Affiliates. (a) The Company will not, and
will not permit any of the Restricted Subsidiaries to, directly or indirectly,
enter into or permit to exist after the Spin-Off Date any transaction or series
of related transactions (including, without limitation, the purchase, sale,
lease or exchange of any property or the rendering of any service) with, or for
the benefit of, any of its Affiliates (each an "Affiliate Transaction"), other
than:
(x) Affiliate Transactions permitted under paragraph (b) below; and
(y) Affiliate Transactions on terms that are not materially less
favorable than those that would have reasonably been expected in a
comparable transaction at such time on an arm's-length basis from a Person
that is not an Affiliate of the Company or such Restricted Subsidiary.
All Affiliate Transactions (and each series of related Affiliate
Transactions which are similar or part of a common plan) on or after the
Spin-Off Date involving aggregate payments or other property with a Fair Market
Value in excess of $10.0 million shall be approved by the Board of Directors of
the Company or such Restricted Subsidiary, as the case may be, such approval to
be evidenced by a Board Resolution stating that such Board of Directors has
determined that such transaction complies with the foregoing provisions. If the
Company or any Restricted Subsidiary enters into an Affiliate Transaction (or
series of related Affiliate Transactions related to a common plan) on or after
the Spin-Off Date that involves an
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aggregate Fair Market Value of more than $50.0 million, the Company or such
Restricted Subsidiary, as the case may be, shall, prior to the consummation
thereof, obtain a favorable opinion as to the fairness of such transaction or
series of related transactions to the Company or the relevant Restricted
Subsidiary, as the case may be, from a financial point of view, from an
Independent Financial Advisor and file the same with the Trustee.
(b) The restrictions set forth in clause (a) shall not apply to:
(1) employment, consulting and compensation arrangements and
agreements of the Company or any Restricted Subsidiary consistent with past
practice or approved by a majority of the disinterested members of the
Board of Directors (or a committee comprised of disinterested directors);
(2) reasonable fees and compensation paid to and indemnity provided on
behalf of, officers, directors, employees, consultants or agents of the
Company or any Restricted Subsidiary as determined in good faith by the
Company's Board of Directors or senior management;
(3) transactions exclusively between or among the Company and any of
the Restricted Subsidiaries or exclusively between or among such Restricted
Subsidiaries; provided that such transactions are not otherwise prohibited
by the Indenture;
(4) Restricted Payments, Permitted Investments or Permitted Liens
permitted by the Indenture; and
(5) the Spin-Off Transaction Agreements.
Issuance of Subsidiary Guarantees. If, on or after the Spin-Off Date after
giving effect to the Spin-Off Transactions, the Company forms or acquires any
Domestic Restricted Subsidiary (other than (w) an Acquired Subsidiary for so
long as it is not a Wholly Owned Domestic Restricted Subsidiary, (x) a Finance
Subsidiary, (y) an Accounts Receivable Entity or (z) an Immaterial Domestic
Subsidiary) that incurs any Indebtedness (other than Indebtedness owing to the
Company or a Restricted Subsidiary), or if, on or after the Spin-Off Date, any
Restricted Subsidiary that is not a Guarantor guarantees any Indebtedness of the
Company or a Guarantor (other than Indebtedness owing to the Company or a
Restricted Subsidiary), then the Company shall cause such Domestic Restricted
Subsidiary or Restricted Subsidiary that is not a Guarantor, as the case may be,
to:
(1) execute and deliver to the Trustee a supplemental indenture in
form reasonably satisfactory to the Trustee pursuant to which such Domestic
Restricted Subsidiary or Restricted Subsidiary that is not a Guarantor, as
the case may be, shall unconditionally guarantee (each, a "Guarantee") all
of the Company's obligations under the notes and the Indenture on the terms
set forth in the Indenture; and
(2) deliver to the Trustee an opinion of counsel (which may contain
customary exceptions) that such supplemental indenture has been duly
authorized, executed and delivered by such Domestic Restricted Subsidiary
or Restricted Subsidiary that is not a Guarantor, as the case may be, and
constitutes a legal, valid, binding and enforceable obligation of such
Domestic Restricted Subsidiary or Restricted Subsidiary that is not a
Guarantor, as the case may be.
Thereafter, such Domestic Restricted Subsidiary or Restricted Subsidiary
that was not a Guarantor, as the case may be, shall be a Guarantor for all
purposes of the Indenture. The Company may cause any other Restricted Subsidiary
of the Company to issue a Guarantee and become a Guarantor.
Payments for Consent. The Company will not, and will not cause or permit
any of its Subsidiaries to, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any holder of
any notes for or as an inducement to any consent, waiver or amendment of any of
the terms or provisions of the Indenture, the notes or the Guarantees unless
such consideration is offered to be paid to all holders who so consent, waive or
agree to amend in the time frame set forth in solicitation documents relating to
such consent, waiver or amendment.
Limitation on Designations of Unrestricted Subsidiaries. The Company may,
on or after the Spin-Off Date, designate any Subsidiary of the Company (other
than a Subsidiary of the Company which owns
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Capital Stock of a Restricted Subsidiary) as an "Unrestricted Subsidiary" under
the Indenture (a "Designation") only if:
(1) no Default or Event of Default shall have occurred and be
continuing at the time of or after giving effect to such Designation;
(2) the Company would be permitted under the Indenture to make an
Investment at the time of Designation (assuming the effectiveness of such
Designation) in an amount (the "Designation Amount") equal to the sum of
(A) the Fair Market Value of the Capital Stock of such Subsidiary owned by
the Company and/or any of the Restricted Subsidiaries on such date and (B)
the aggregate amount of Indebtedness of such Subsidiary owed to the Company
and the Restricted Subsidiaries on such date; and
(3) the Company would be permitted to incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to the covenant
described under "-- Limitation on Incurrence of Additional Indebtedness" at
the time of Designation (assuming the effectiveness of such Designation).
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment in the Designation Amount
pursuant to the covenant described under "-- Limitation on Restricted Payments"
for all purposes of the Indenture.
The Indenture will further provide that the Company shall not, and shall
not permit any Restricted Subsidiary to, at any time:
(x) provide direct or indirect credit support for or a guarantee of
any Indebtedness of any Unrestricted Subsidiary (including any undertaking
agreement or instrument evidencing such Indebtedness);
(y) be directly or indirectly liable for any Indebtedness of any
Unrestricted Subsidiary; or
(z) be directly or indirectly liable for any Indebtedness which
provides that the holder thereof may (upon notice, lapse of time or both)
declare a default thereon or cause the payment thereof to be accelerated or
payable prior to its final scheduled maturity upon the occurrence of a
default with respect to any Indebtedness of any Unrestricted Subsidiary
(including any right to take enforcement action against such Unrestricted
Subsidiary), except, in the case of clause (x) or (y), to the extent
permitted under the covenant described under "-- Limitation on Restricted
Payments."
The Indenture further provides that the Company may revoke any Designation
of a Subsidiary as an Unrestricted Subsidiary ("Revocation"), whereupon such
Subsidiary shall then constitute a Restricted Subsidiary, if
(1) no Default or Event of Default shall have occurred and be
continuing at the time and after giving effect to such Revocation; and
(2) all Liens and Indebtedness of such Unrestricted Subsidiaries
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred for all purposes of the
Indenture.
All Designations and Revocations must be evidenced by an officers'
certificate of the Company delivered to the Trustee certifying compliance with
the foregoing provisions.
Reports to Holders. The Indenture provides that the Company will deliver to
the Trustee within 15 days after the filing of the same with the Commission,
copies of the quarterly and annual reports and the information, documents and
other reports, if any, which the Company is required to file with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act. The Indenture further
provides that, notwithstanding that the Company may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
will file with the Commission, to the extent permitted, and provide the Trustee
with such annual and quarterly reports and such information, documents and other
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reports specified in Section 13 or 15(d) of the Exchange Act. The Company will
also comply with the other provisions of TIA Section 314(a).
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(1) the failure to pay interest on any notes when the same becomes due
and payable and the default continues for a period of 30 days (whether or
not such payment shall be prohibited by the subordination provisions of the
Indenture);
(2) the failure to pay the principal on any notes, when such principal
becomes due and payable, at maturity, upon redemption or otherwise
(including the failure to make a payment to purchase notes tendered
pursuant to a Change of Control Offer or a Net Proceeds Offer) (whether or
not such payment shall be prohibited by the subordination provisions of the
Indenture);
(3) a default in the observance or performance of any other covenant
or agreement contained in the Indenture which default continues for a
period of 30 days after the Company receives written notice specifying the
default from the Trustee or the holders of at least 25% of the outstanding
principal amount of the notes (except in the case of a default with respect
to the covenant described under "-- Certain Covenants -- Merger,
Consolidation and Sale of Assets," which will constitute an Event of
Default with such notice requirement but without such passage of time
requirement);
(4) a default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness of the Company or of any Restricted Subsidiary (or the payment
of which is guaranteed by the Company or any Restricted Subsidiary),
whether such Indebtedness now exists or is created after the Spin-Off Date,
which default (A) is caused by a failure to pay principal of such
Indebtedness after any applicable grace period provided in such
Indebtedness on the date of such default (a "payment default") or (B)
results in the acceleration of such Indebtedness prior to its express
maturity (and such acceleration is not rescinded, or such Indebtedness is
not repaid, within 30 days) and, in each case, the principal amount of any
such Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a payment default or the maturity
of which has been so accelerated (and such acceleration is not rescinded,
or such Indebtedness is not repaid, within 30 days), aggregates $75.0
million;
(5) one or more judgments in an aggregate amount in excess of $75.0
million not covered by adequate insurance shall have been rendered against
the Company or any of the Restricted Subsidiaries and such judgments remain
undischarged, unpaid or unstayed for a period of 60 days after such
judgment or judgments become final and nonappealable;
(6) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries;
(7) any Guarantee of a Significant Subsidiary of the Company ceases to
be in full force and effect or any Guarantee of such a Significant
Subsidiary is declared to be null and void and unenforceable or any
Guarantee of such a Significant Subsidiary is found to be invalid or any
Guarantor which is such a Significant Subsidiary denies its liability under
its Guarantee (other than by reason of release of such Guarantor in
accordance with the terms of the Indenture); or
(8) the Release Conditions are not satisfied on or prior to December
31, 1999 and the Company fails to effect the special redemption on or prior
to January 14, 2000.
If an Event of Default (other than an Event of Default specified in clause
(6) above) shall occur and be continuing, the Trustee or the holders of at least
25% in principal amount of outstanding notes may declare the principal of,
premium, if any, and accrued interest on all the notes to be due and payable by
notice in writing to the Company and (if given by the holders) the Trustee
specifying the respective Events of Default and that it is a "notice of
acceleration," and the same shall become immediately due and payable. If an
Event of Default specified in clause (6) above occurs and is continuing, then
all unpaid
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principal of, premium, if any, and accrued and unpaid interest on all of the
outstanding notes shall ipso facto become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any holder.
If any Designated Senior Debt is outstanding at the time of any acceleration of
the notes, the Company shall not make any payment with respect to the notes
until five business days after the holders of such Designated Senior Debt
receive notice of such acceleration.
The Indenture provides that, at any time after a declaration of
acceleration with respect to the notes as described in the preceding paragraph,
the holders of a majority in principal amount of the then outstanding notes may
rescind and cancel such declaration and its consequences:
(1) if the rescission would not conflict with any judgment or decree;
(2) if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of
the acceleration;
(3) to the extent the payment of such interest is lawful, if interest
on overdue installments of interest and overdue principal, which has become
due otherwise than by such declaration of acceleration, has been paid;
(4) if the Company has paid the Trustee its reasonable compensation
and reimbursed the Trustee for its expenses, disbursements and advances;
and
(5) in the event of the cure or waiver of an Event of Default of the
type described in clause
(6) of the description above of Events of Default, the Trustee shall
have received an officers' certificate and an opinion of counsel that such
Event of Default has been cured or waived.
No such rescission shall affect any subsequent Default or Event of Default
or impair any right consequent thereto.
The holders of a majority in principal amount of the then outstanding notes
may waive any existing Default or Event of Default under the Indenture, and its
consequences, except a default in the payment of the principal of or premium, if
any, or interest on any notes.
Holders of the notes may not enforce the Indenture or the notes except as
provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon the Company obtaining knowledge of any
Default or Event of Default (provided that the Company shall provide such
certification at least annually whether or not it knows of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations and the obligations of any Guarantors discharged with respect to the
outstanding notes ("Legal Defeasance"). Such Legal Defeasance means that the
Company shall be deemed to have paid and discharged the entire indebtedness
represented by the outstanding notes, except for:
(1) the rights of holders to receive payments in respect of the
principal of, premium, if any, and interest on the notes when such payments
are due;
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(2) the Company's obligations with respect to the notes concerning
issuing temporary notes, registration of notes, mutilated, destroyed, lost
or stolen notes and the maintenance of an office or agency for payments;
(3) the rights, powers, trust, duties and immunities of the Trustee
and the Company's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have
the obligations of the Company released with respect to certain covenants that
are described in the Indenture ("Covenant Defeasance") and thereafter any
omission or failure to comply with such obligations shall not constitute a
Default or Event of Default with respect to the notes. In the event Covenant
Defeasance occurs, certain events (not including nonpayment, bankruptcy,
receivership, reorganization and insolvency events) described under "-- Events
of Default" will no longer constitute an Event of Default with respect to the
notes.
In order to exercise Legal Defeasance or Covenant Defeasance:
(1) the Company must irrevocably deposit with the Trustee, in trust,
for the benefit of the holders cash in U.S. dollars, non-callable U.S.
government obligations, or a combination thereof, in such amounts as will
be sufficient, in the opinion of a nationally recognized firm of
independent public accountants selected by the Company, to pay the
principal of, premium, if any, and interest on the notes on the stated date
of payment thereof or on the applicable redemption date, as the case may
be;
(2) in the case of Legal Defeasance, the Company shall have delivered
to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Company has received
from, or there has been published by, the Internal Revenue Service a ruling
or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and
based thereon such opinion of counsel shall confirm that, the holders will
not recognize income, gain or loss for federal income tax purposes as a
result of such Legal Defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would have
been the case if such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that the holders will not
recognize income, gain or loss for federal income tax purposes as a result
of such Covenant Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have
been the case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period
ending on the 91st day after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of or constitute a default under the Indenture or any
other material agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries
is bound;
(6) the Company shall have delivered to the Trustee an officers'
certificate stating that the deposit was not made by the Company with the
intent of preferring the holders over any other creditors of the Company or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Company or others;
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(7) the Company shall have delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that all conditions
precedent provided for or relating to the Legal Defeasance or the Covenant
Defeasance have been complied with;
(8) the Company shall have delivered to the Trustee an opinion of
counsel to the effect that (A) the trust funds will not be subject to any
rights of holders of Senior Debt, including, without limitation, those
arising under the Indenture, and (B) after the 91st day following the
deposit, the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; and
(9) certain other customary conditions precedent are satisfied.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
notes and subordination provisions, as expressly provided for in the Indenture)
as to all outstanding notes when:
(1) either (a) all the notes theretofore authenticated and delivered
(except lost, stolen or destroyed notes which have been replaced or paid
and notes for whose payment money has theretofore been deposited in trust
or segregated and held in trust by the Company and thereafter repaid to the
Company or discharged from such trust) have been delivered to the Trustee
for cancellation or (b) all notes not theretofore delivered to the Trustee
for cancellation have become due and payable and the Company has
irrevocably deposited or caused to be deposited with the Trustee funds in
an amount sufficient to pay and discharge the entire Indebtedness on the
notes not theretofore delivered to the Trustee for cancellation, for
principal of, premium, if any, and interest on the notes to the date of
deposit together with irrevocable instructions from the Company directing
the Trustee to apply such funds to the payment thereof at maturity or
redemption, as the case may be;
(2) the Company and/or the Guarantors have paid all other sums payable
under the Indenture; and
(3) the Company has delivered to the Trustee an officers' certificate
and an opinion of counsel stating that all conditions precedent under the
Indenture relating to the satisfaction and discharge of the Indenture have
been complied with.
MODIFICATION OF THE INDENTURE
From time to time, the Company and the Trustee, without the consent of the
holders, may amend the Indenture for certain specified purposes, including
curing ambiguities, defects or inconsistencies, so long as such change does not,
in the opinion of the Trustee, adversely affect the rights of any of the holders
in any material respect. In formulating its opinion on such matters, the Trustee
will be entitled to rely on such evidence as it deems appropriate, including,
without limitation, solely on an opinion of counsel. Other modifications and
amendments of the Indenture may be made with the consent of the holders of a
majority in principal amount of the then outstanding notes issued under the
Indenture, except that, without the consent of each holder affected thereby, no
amendment may:
(1) reduce the amount of notes whose holders must consent to an
amendment;
(2) reduce the rate of or change or have the effect of changing the
time for payment of interest, including defaulted interest, on any notes;
(3) reduce the principal of or change or have the effect of changing
the fixed maturity of any notes, or change the date on which any notes may
be subject to redemption or repurchase, or reduce the redemption or
repurchase price therefor;
(4) make any notes payable in money other than that stated in the
notes;
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(5) make any change in provisions of the Indenture protecting the
right of each holder to receive payment of principal of, premium, if any,
and interest on such notes on or after the stated due date thereof or to
bring suit to enforce such payment, or permitting holders of a majority in
principal amount of the then outstanding notes to waive Defaults or Events
of Default;
(6) amend, change or modify in any material respect the obligation of
the Company to make and consummate a Change of Control Offer after the
occurrence of a Change of Control or make and consummate a Net Proceeds
Offer with respect to any Asset Sale that has been consummated or modify
any of the provisions or definitions with respect thereto;
(7) modify or change any provision of the Indenture or the related
definitions affecting the subordination or ranking of the notes or any
Guarantee in a manner which adversely affects the holders;
(8) modify the provisions of "-- Certain Covenants -- Payments for
Consent" in any manner adverse to a holder of notes; or
(9) release any Guarantor from any of its obligations under its
Guarantee or the Indenture otherwise than in accordance with the terms of
the Indenture.
GOVERNING LAW
The Indenture provides that it, the notes and any Guarantees will be
governed by, and construed in accordance with, the laws of the State of New York
but without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be required
thereby.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it by the Indenture, and use the same
degree of care and skill in its exercise, as a prudent Person would exercise or
use under the circumstances in the conduct of its own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
Trustee will be permitted to engage in other transactions; provided that if the
Trustee acquires any conflicting interest as described in the TIA, it must
eliminate such conflict or resign.
BOOK-ENTRY; DELIVERY AND FORM
Except as set forth below, the new notes will be issued in registered,
global form in minimum denominations of $1,000 and integral multiples of $1,000
in excess thereof.
The new notes initially will be represented by one or more permanent
certificates in registered, global form without interest coupons (the "new
global notes"). The new global notes will be deposited upon issuance with the
trustee as custodian for The Depository Trust Company ("DTC"), in New York, New
York, and registered in the name of DTC or its nominee, in each case for credit
to an account of a direct or indirect participant in DTC as described below.
Except as set forth below, the new global notes may be transferred, in
whole, and not in part, only to another nominee of DTC or to a successor of DTC
or its nominee. Beneficial interests in the new global notes may not be
exchanged for notes in certificated form except in the limited circumstances
described below. See "--Exchange of Book-Entry Notes for Certificated Notes."
Except in the limited
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circumstances described below, owners of beneficial interests in the new global
notes will not be entitled to receive physical delivery of certificated notes.
In addition, transfers of beneficial interests in the new global notes will
be subject to the applicable rules and procedures of DTC and its direct or
indirect participants, including, if applicable, those of the Euroclear System
and Cedel, S.A., which may change from time to time.
Initially, the Trustee will act as paying agent and registrar. The notes
may be presented for registration of transfer and exchange at the offices of the
registrar.
DEPOSITORY PROCEDURES FOR NEW NOTES
The following information regarding the operations and procedures of DTC,
Euroclear and Cedel has been provided by those organizations and is provided
solely as a matter of convenience. These operations and procedures are solely
within the control of the respective settlement systems and are subject to
change by them from time to time. We take no responsibility for these operations
and procedures (or the description thereof) and urge investors to contact the
system or their participants directly to discuss these matters.
DTC has advised us that it is a limited-purpose trust company created to
hold securities for its participating organizations (collectively, the
"Participants") and to facilitate the clearance and settlement of transactions
in those securities between Participants through electronic book-entry changes
in accounts of its Participants. The Participants include securities brokers and
dealers (including the initial purchasers), banks, trust companies, clearing
corporations and certain other organizations. Access to DTC's system is also
available to other entities such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly (collectively, the "Indirect Participants").
Persons who are not Participants may beneficially own securities held by or on
behalf of DTC only through the Participants or the Indirect Participants. The
ownership interests in, and transfers of ownership interests in, each security
held by or on behalf of DTC are recorded on the records of the Participants and
Indirect Participants.
DTC has also advised us that, pursuant to procedures established by it, (1)
upon deposit of the new global notes, DTC will credit the accounts of
Participants with portions of the principal amount of the new global notes and
(2) ownership of interests in the new global notes will be shown on, and the
transfer of ownership will be effected only through, records maintained by DTC,
with respect to the Participants, or by the Participants and the Indirect
Participants, with respect to other owners of beneficial interests in the new
global notes.
Investors in the new global notes may hold their interests directly through
DTC, if they are Participants in the system, or indirectly through
organizations, including Euroclear and Cedel, which are Participants in the
system. All interests in a new global note, including those held through
Euroclear or Cedel, may be subject to the procedures and requirements of DTC.
Those interests held through Euroclear or Cedel may also be subject to the
procedures and requirements of those systems. The laws of some states require
that some persons take physical delivery in definitive form of securities that
they own. Consequently, the ability to transfer beneficial interests in a new
global note to those persons will be limited to that extent. Because DTC can act
only on behalf of Participants, which in turn act on behalf of Indirect
Participants and some banks, the ability of a person having beneficial interests
in a new global note to pledge such interests to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
interests, may be affected by the lack of a physical certificate evidencing
those interests.
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE NEW GLOBAL NOTES WILL
NOT HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
"HOLDERS" THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of, and premium, if any, and interest
on a new global note registered in the name of DTC or its nominee will be
payable to DTC in its capacity as the registered
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holder under the Indenture. Under the terms of the Indenture, the Company and
the Trustee will treat the persons in whose names the notes, including the new
global notes, are registered as the owners thereof for the purpose of receiving
payments and for all other purposes. Consequently, neither we, the Trustee nor
any of our agents has or will have any responsibility or liability for (1) any
aspect of DTC's records or any Participant's or Indirect Participant's records
relating to or payments made on account of beneficial ownership interests in the
new global notes, or for maintaining, supervising or reviewing any of DTC's
records or any Participant's or Indirect Participant's records relating to the
beneficial ownership interests in the new global notes or (2) any other matter
relating to the actions and practices of DTC or any of its Participants or
Indirect Participants. DTC has advised the Company that its current practice,
upon receipt of any payment in respect of securities such as the notes
(including principal and interest), is to credit the accounts of the relevant
Participants with the payment on the payment date, in amounts proportionate to
their respective holdings in the principal amount of beneficial interest in the
relevant security as shown on the records of DTC, unless DTC has reason to
believe it will not receive payment on such payment date. Payments by the
Participants and the Indirect Participants to the beneficial owners of notes
will be governed by standing instructions and customary practices and will be
the responsibility of the Participants or the Indirect Participants, as the case
may be, and will not be the responsibility of DTC, the Trustee or the Company.
Neither the Company nor the Trustee will be liable for any delay by DTC or any
of its Participants or Indirect Participants in identifying the beneficial
owners of the notes, and the Company and the Trustee may conclusively rely on
and will be protected in relying on instructions from DTC or its nominee for all
purposes.
Interests in the new global notes are expected to be eligible to trade in
DTC's Same-Day Funds Settlement System and secondary market trading activity in
those interests will, therefore, settle in immediately available funds, subject
in all cases to the rules and procedures of DTC and its Participants. See
"-- Same-Day Settlement and Payment."
Transfers between Participants in DTC will be made in accordance with DTC's
procedures, and will be settled in same-day funds, and transfers between
indirect Participants who hold through a Participant will be made in accordance
with their respective rules and operating procedures of such Participant.
DTC has advised us that it will take any action permitted to be taken by a
holder of notes only at the direction of one or more Participants to whose
account DTC has credited the interests in the new global notes and only in
respect of the portion of the aggregate principal amount of the notes as to
which a Participant has given such direction. However, if there is an Event of
Default with respect to the notes, DTC reserves the right to exchange the new
global notes for legended notes in certificated form, and to distribute those
notes to its Participants.
Although DTC has agreed to the above procedures to facilitate transfers of
interests in new global notes among Participants in DTC, they are under no
obligation to perform or to continue to perform those procedures, and those
procedures may be discontinued at any time. Neither we nor the Trustee nor any
of our respective agents will have any responsibility for the performance by DTC
or their respective Participants or Indirect Participants of their respective
obligations under the rules and procedures governing their operations.
EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES
A new global note is exchangeable for definitive notes in registered
certificated form only if (1) DTC either notifies us that it is unwilling or
unable to continue as depositary for the new global notes and fails to appoint a
successor depositary within 90 days or has ceased to be a clearing agency
registered under the Exchange Act, (2) we, at our option, notify the Trustee in
writing that we elect to cause the issuance of the notes or (3) there has
occurred and is continuing an Event of Default with respect to the notes. In
addition, beneficial interests in a new global note may be exchanged for notes
upon request but only upon prior written notice given to the Trustee by or on
behalf of DTC in accordance with the Indenture. In all cases, notes delivered in
exchange for any new global note or beneficial interests will be registered in
the
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names, and issued in any approved denominations, requested by or on behalf of
the depositary, in accordance with its customary procedures.
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the new notes
represented by the new global notes (including principal, premium, if any, and
interest) be made by wire transfer of immediately available funds to the
accounts specified by the holder of the new global notes. With respect to notes
in certificated form, we will make all payments of principal, premium, if any,
and interest on the notes at the office or agency of the company maintained for
that purpose within the City and State of New York (initially the office of the
paying agent maintained for that purpose) or, at our option, by check mailed to
the holders at their respective addresses in the register of holders of notes;
however all payments of principal, premium, if any, and interest on notes in
certificated form the holders of which have given wire transfer instructions to
us will be required to be made by wire transfer of immediately available funds
to the accounts specified by the holders. The new notes represented by the new
global notes are expected to be eligible to trade in the PORTAL market and to
trade in DTC's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in those notes will, therefore, be required by DTC to be
settled in immediately available funds. We expect that secondary trading in any
certificated notes will also be settled in immediately available funds.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Accounts Receivable Entity" means a Person, including, without limitation,
a Subsidiary of the Company, whose operations consist solely of owning and/or
selling accounts receivable of the Company and its Subsidiaries and engaging in
other activities in connection with transactions that are Permitted Receivables
Financings.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary or
at the time it merges or consolidates with the Company or any of the Restricted
Subsidiaries or assumed by the Company or any Restricted Subsidiary in
connection with the acquisition of assets from such Person and in each case not
incurred by such Person in connection with, or in anticipation or contemplation
of, such Person becoming a Restricted Subsidiary or such acquisition, merger or
consolidation.
"Acquired Subsidiary" means a Person which becomes a Restricted Subsidiary
after the Spin-Off Date; provided that such Person has outstanding voting
Capital Stock prior to becoming a Subsidiary of the Company and a majority of
such voting Capital Stock was owned by Persons other than the Company and its
Restricted Subsidiaries.
"Affiliate" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the foregoing.
"Affiliate Transaction" has the meaning set forth under "-- Certain
Covenants -- Limitation on Transactions with Affiliates."
"Asset Acquisition" means (1) an Investment by the Company or any
Restricted Subsidiary in any other Person pursuant to which such Person shall
become a Restricted Subsidiary, or shall be merged with or into the Company or
any Restricted Subsidiary, or (2) the acquisition by the Company or any
Restricted Subsidiary of the assets of any Person (other than a Restricted
Subsidiary) which constitute all
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or substantially all of the assets of such Person or comprises any division or
line of business of such Person or any other properties or assets of such Person
other than in the ordinary course of business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance, lease
(other than operating leases entered into in the ordinary course of business),
assignment or other transfer (other than the granting of a Lien in accordance
with the Indenture) for value by the Company or any of the Restricted
Subsidiaries (including any Sale and Leaseback Transaction) to any Person other
than the Company or a Restricted Subsidiary of (a) any Capital Stock of any
Restricted Subsidiary; or (b) any other property or assets of the Company or any
Restricted Subsidiary other than in the ordinary course of business; provided,
however, that Asset Sales shall not include:
(1) a transaction or series of related transactions for which the
Company or the Restricted Subsidiaries receive aggregate consideration of
less than $5 million;
(2) the sale, lease, conveyance, disposition or other transfer of all
or substantially all of the assets of the Company as permitted by the
covenant described under "-- Certain Covenants -- Merger, Consolidation and
Sale of Assets";
(3) any Restricted Payment made in accordance with the covenant
described under "-- Certain Covenants -- Limitation on Restricted
Payments";
(4) sales of accounts receivable pursuant to a Permitted Receivables
Financing made in accordance with the covenant described under "-- Certain
Covenants -- Limitation on Incurrence of Additional Indebtedness"; or
(5) transactions consummated on the Spin-Off Date in connection with
the Spin-Off Transactions.
"Blockage Period" has the meaning set forth under "-- Subordination."
"Board of Directors" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Capital Stock" means (1) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of Common Stock and Preferred Stock of such Person and (2) with respect to any
Person that is not a corporation, any and all partnership or other equity
interests of such Person.
"Cash Equivalents" means:
(1) marketable direct obligations issued by, or unconditionally
guaranteed by, the United States Government or issued by any agency thereof
and backed by the full faith and credit of the United States, in each case
maturing within one year from the date of acquisition thereof;
(2) marketable direct obligations issued by any state of the United
States of America or any political subdivision of any such state or any
public instrumentality thereof maturing within one year from the date of
acquisition thereof and, at the time of acquisition, having one of the two
highest ratings obtainable from either Standard & Poor's Corporation
("S&P") or Moody's Investors Service, Inc. ("Moody's");
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(3) commercial paper maturing no more than one year from the date of
creation thereof and, at the time of acquisition, having a rating of at
least A-1 from S&P or at least P-1 from Moody's;
(4) certificates of deposit or bankers' acceptances maturing within
one year from the date of acquisition thereof issued by any bank organized
under the laws of the United States of America or any state thereof or the
District of Columbia or any U.S. branch of a foreign bank having at the
date of acquisition thereof combined capital and surplus of not less than
$250 million;
(5) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (1) above entered
into with any bank meeting the qualifications specified in clause (4)
above; and
(6) investments in money market funds which invest substantially all
their assets in securities of the types described in clauses (1) through
(5) above.
"Change of Control" means the occurrence of one or more of the following
events:
(1) any sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all or substantially all of the assets
of the Company to any Person or group of related Persons for purposes of
Section 13(d) of the Exchange Act (a "Group"), together with any Affiliates
thereof (whether or not otherwise in compliance with the provisions of the
Indenture);
(2) the approval by the holders of Capital Stock of the Company of any
plan or proposal for the liquidation or dissolution of the Company (whether
or not otherwise in compliance with the provisions of the Indenture);
(3) any Person or Group shall become the beneficial owner, directly or
indirectly, of shares representing more than 35% of the aggregate ordinary
voting power represented by the issued and outstanding Capital Stock of the
Company; or
(4) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors (together with
any new directors whose election by such Board of Directors or whose
nomination for election by the stockholders of the Company was approved
pursuant to a vote of a majority of the directors then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors then in office.
"Change of Control Offer" has the meaning set forth under "-- Change of
Control."
"Change of Control Payment Date" has the meaning set forth under "-- Change
of Control."
"Combined EBITDA" means, with respect to the Restricted Subsidiaries that
are not Guarantors (and are not a Finance Subsidiary or an Accounts Receivable
Entity that is a Domestic Restricted Subsidiary), for any period, the sum
(without duplication) of:
(1) Combined Net Income; and
(2) to the extent Combined Net Income has been reduced thereby:
(A) all income taxes of the Restricted Subsidiaries that are not
Guarantors (and are not a Finance Subsidiary or an Accounts Receivable
Entity that is a Domestic Restricted Subsidiary) paid or accrued in
accordance with GAAP for such period;
(B) Combined Interest Expense; and
(C) Combined Non-cash Charges,
less any non-cash items increasing Combined Net Income for such period, all as
determined on a combined basis for the Restricted Subsidiaries that are not
Guarantors (and are not a Finance Subsidiary or an Accounts Receivable Entity
that is a Domestic Restricted Subsidiary) in accordance with GAAP.
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"Combined Fixed Charge Coverage Ratio" means, with respect to the
Restricted Subsidiaries that are not Guarantors (and are not a Finance
Subsidiary or an Accounts Receivable Entity that is a Domestic Restricted
Subsidiary), the ratio of Combined EBITDA during the four full fiscal quarters
(the "Four Quarter Period") ending on or prior to the date of the transaction
giving rise to the need to calculate the Combined Fixed Charge Coverage Ratio
(the "Transaction Date") to Combined Fixed Charges for the Four Quarter Period.
In addition to and without limitation of the foregoing, for purposes of this
definition, "Combined EBITDA" and "Combined Fixed Charges" shall be calculated
after giving effect on a pro forma basis for the period of such calculation to:
(1) the incurrence or repayment of any Indebtedness of any of the
Restricted Subsidiaries that are not Guarantors (and are not a Finance
Subsidiary or an Accounts Receivable Entity that is a Domestic Restricted
Subsidiary) (and the application of the proceeds thereof) giving rise to
the need to make such calculation and any incurrence or repayment of other
Indebtedness (and the application of the proceeds thereof), other than the
incurrence or repayment of Indebtedness in the ordinary course of business
for working capital purposes pursuant to working capital facilities,
occurring during the Four Quarter Period or at any time subsequent to the
last day of the Four Quarter Period and on or prior to the Transaction
Date, as if such incurrence or repayment, as the case may be, (and the
application of the proceeds thereof) occurred on the first day of the Four
Quarter Period; and
(2) any Asset Sales or other disposition or Asset Acquisitions
(including, without limitation, any Asset Acquisition giving rise to the
need to make such calculation as a result of one of the Restricted
Subsidiaries that are not Guarantors (and are not a Finance Subsidiary or
an Accounts Receivable Entity that is a Domestic Restricted Subsidiary)
(including any Person who becomes such a Restricted Subsidiary as a result
of the Asset Acquisition) incurring, assuming or otherwise being liable for
Acquired Indebtedness and also including any Combined EBITDA (provided that
such Combined EBITDA shall be included only to the extent includable
pursuant to the definition of "Combined Net Income") attributable to the
assets which are the subject of the Asset Acquisition or Asset Sale or
other disposition during the Four Quarter Period) occurring during the Four
Quarter Period or at any time subsequent to the last day of the Four
Quarter Period and on or prior to the Transaction Date as if such Asset
Sale or Asset Acquisition or other disposition (including the incurrence,
assumption or liability for any such Acquired Indebtedness) occurred on the
first day of the Four Quarter Period.
If any of the Restricted Subsidiaries that are not Guarantors (and are not
a Finance Subsidiary or Accounts Receivable Entity that is a Domestic Restricted
Subsidiary) directly or indirectly guarantee Indebtedness of a third Person, the
preceding sentence shall give effect to the incurrence of such guaranteed
Indebtedness as if the Restricted Subsidiary had directly incurred or otherwise
assumed such guaranteed Indebtedness. Furthermore, in calculating "Combined
Fixed Charges" for purposes of determining the denominator (but not the
numerator) of this "Combined Fixed Charge Coverage Ratio":
(1) interest on outstanding Indebtedness determined on a fluctuating
basis as of the Transaction Date and which will continue to be so
determined thereafter shall be deemed to have accrued at a fixed rate per
annum equal to the rate of interest on such Indebtedness in effect on the
Transaction Date;
(2) if interest on any Indebtedness actually incurred on the
Transaction Date may optionally be determined at an interest rate based
upon a factor of a prime or similar rate, a eurocurrency interbank offered
rate, or other rates, then the interest rate in effect on the Transaction
Date will be deemed to have been in effect during the Four Quarter Period;
and
(3) notwithstanding clause (1) above, interest on Indebtedness
determined on a fluctuating basis, to the extent such interest is covered
by agreements relating to Interest Swap Obligations, shall be deemed to
accrue at the rate per annum in effect on the Transaction Date resulting
after giving effect to the operation of such agreements on such date.
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"Combined Fixed Charges" means, with respect to the Restricted Subsidiaries
that are not Guarantors (and are not a Finance Subsidiary or Accounts Receivable
Entity that is a Domestic Restricted Subsidiary) for any period, the sum,
without duplication, of:
(1) Combined Interest Expense, plus
(2) the product of (x) the amount of all dividend payments on any
series of Preferred Stock of the Restricted Subsidiaries that are not
Guarantors (other than Finance Subsidiaries and Accounts Receivable
Entities that are Domestic Restricted Subsidiaries) paid, accrued and/or
scheduled to be paid or accrued during such period times (y) a fraction,
the numerator of which is one and the denominator of which is one minus the
then current effective consolidated federal, state and local income tax
rate of the Company, expressed as a decimal.
"Combined Interest Expense" means, with respect to the Restricted
Subsidiaries that are not Guarantors (and are not a Finance Subsidiary or
Accounts Receivable Entity that is a Domestic Restricted Subsidiary) for any
period, the sum of, without duplication:
(1) the aggregate of the interest expense of the Restricted
Subsidiaries that are not Guarantors (and are not a Finance Subsidiary or
Accounts Receivable Entity that is a Domestic Restricted Subsidiary) for
such period determined on a combined basis in accordance with GAAP,
including without limitation,
(A) any amortization of debt discount,
(B) the net costs under Interest Swap Obligations,
(C) all capitalized interest, and
(D) the interest portion of any deferred payment obligation;
(2) the interest component of Capitalized Lease Obligations paid,
accrued and/or scheduled to be paid or accrued by the Restricted
Subsidiaries that are not Guarantors (and are not a Finance Subsidiary or
Accounts Receivable Entity that is a Domestic Restricted Subsidiary) during
such period as determined on a consolidated basis in accordance with GAAP;
and
(3) net losses relating to sales of accounts receivable pursuant to
Permitted Receivable Financings during such period as determined on a
combined basis in accordance with GAAP;
provided that Combined Interest Expense shall not include any of the
foregoing to the extent owing to the Company or any Restricted Subsidiary
or to the extent owed by a Finance Subsidiary or an Accounts Receivable
Entity that is a Domestic Restricted Subsidiary.
"Combined Net Income" means, with respect to the Restricted Subsidiaries
that are not Guarantors (and are not Finance Subsidiaries or Accounts Receivable
Entities that are Domestic Restricted Subsidiaries), for any period, the
aggregate net income (or loss) of the Restricted Subsidiaries that are not
Guarantors (and are not Finance Subsidiaries or Accounts Receivable Entities
that are Domestic Restricted Subsidiaries) for such period as determined on a
combined basis in accordance with GAAP; provided that there shall be excluded
therefrom:
(1) after-tax gains and losses from Asset Sales or abandonments or
reserves relating thereto;
(2) extraordinary or non-recurring gains or losses (determined on an
after-tax basis);
(3) the net income of any Person acquired in a "pooling of interests"
transaction accrued prior to the date it becomes a Restricted Subsidiary or
is merged or consolidated with any Restricted Subsidiary that is not a
Guarantor (and are not Finance Subsidiaries or Accounts Receivable Entities
that are Domestic Restricted Subsidiaries);
(4) the net income of any Person, other than a Restricted Subsidiary,
except to the extent of cash dividends or distributions paid to the
Restricted Subsidiaries that are not Guarantors (and are
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not Finance Subsidiaries or Accounts Receivable Entities that are Domestic
Restricted Subsidiaries) by such Person;
(5) any restoration to income of any contingency reserve, except to
the extent that (x) provision for such reserve was made out of Combined Net
Income accrued at any time following the Issue Date or (y) the restoration
is with respect to a charge or reserve contemplated by clause (7) below;
(6) income or loss attributable to discontinued operations (including,
without limitation, operations disposed of during such period whether or
not such operations were classified as discontinued);
(7) restructuring charges of not more than $55.0 million to the extent
incurred in the quarter ending December 31, 1999 by Restricted Subsidiaries
that are not Guarantors (and are not Finance Subsidiaries or Accounts
Receivable Entities that are Domestic Restricted Subsidiaries); and
(8) any fees or expenses incurred in connection with the Spin-Off
Transactions.
"Combined Non-cash Charges" means, with respect to the Restricted
Subsidiaries that are not Guarantors (and are not Finance Subsidiaries or
Accounts Receivable Entities that are Domestic Restricted Subsidiaries), for any
period, the aggregate depreciation, amortization and other non-cash expenses of
the Restricted Subsidiaries that are not Guarantors (and are not Finance
Subsidiaries or Accounts Receivable Entities that are Domestic Restricted
Subsidiaries) reducing Combined Net Income for such period, determined on a
combined basis in accordance with GAAP (excluding any such charge which requires
an accrual of or a reserve for cash charges for any future period).
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, or if at any time after the execution of the Indenture such
Commission is not existing and performing the applicable duties now assigned to
it, then the body or bodies performing such duties at such time.
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the
Spin-Off Date or issued after the Spin-Off Date, and includes, without
limitation, all series and classes of such common stock.
"Consolidated EBITDA" means, with respect to the Company, for any period,
the sum (without duplication) of:
(1) Consolidated Net Income; and
(2) to the extent Consolidated Net Income has been reduced thereby:
(A) all income taxes of the Company and the Restricted Subsidiaries
paid or accrued in accordance with GAAP for such period;
(B) Consolidated Interest Expense; and
(C) Consolidated Non-cash Charges,
less any non-cash items increasing Consolidated Net Income for such period, all
as determined on a consolidated basis for the Company and the Restricted
Subsidiaries in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to the
Company, the ratio of Consolidated EBITDA of the Company during the Four Quarter
Period ending on or prior to the Transaction Date to Consolidated Fixed Charges
of the Company for the Four Quarter Period. In addition to and without
limitation of the foregoing, for purposes of this definition, "Consolidated
EBITDA" and "Consolidated Fixed Charges" shall be calculated after giving effect
on a pro forma basis for the period of such calculation to:
(1) the incurrence or repayment of any Indebtedness of the Company or
any of the Restricted Subsidiaries (and the application of the proceeds
thereof) giving rise to the need to make such calculation and any
incurrence or repayment of other Indebtedness (and the application of the
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proceeds thereof), other than the incurrence or repayment of Indebtedness
in the ordinary course of business for working capital purposes pursuant to
working capital facilities, occurring during the Four Quarter Period or at
any time subsequent to the last day of the Four Quarter Period and on or
prior to the Transaction Date, as if such incurrence or repayment, as the
case may be, (and the application of the proceeds thereof) occurred on the
first day of the Four Quarter Period; and
(2) any Asset Sales or other disposition or Asset Acquisitions
(including, without limitation, any Asset Acquisition giving rise to the
need to make such calculation as a result of the Company or one of the
Restricted Subsidiaries (including any Person who becomes a Restricted
Subsidiary as a result of the Asset Acquisition) incurring, assuming or
otherwise being liable for Acquired Indebtedness and also including any
Consolidated EBITDA (provided that such Consolidated EBITDA shall be
included only to the extent includable pursuant to the definition of
"Consolidated Net Income") attributable to the assets which are the subject
of the Asset Acquisition or Asset Sale or other disposition during the Four
Quarter Period) occurring during the Four Quarter Period or at any time
subsequent to the last day of the Four Quarter Period and on or prior to
the Transaction Date as if such Asset Sale or Asset Acquisition or other
disposition (including the incurrence, assumption or liability for any such
Acquired Indebtedness) occurred on the first day of the Four Quarter
Period.
If the Company or any of the Restricted Subsidiaries directly or indirectly
guarantees Indebtedness of a third Person, the preceding sentence shall give
effect to the incurrence of such guaranteed Indebtedness as if the Company or
any Restricted Subsidiary had directly incurred or otherwise assumed such
guaranteed Indebtedness. Furthermore, in calculating "Consolidated Fixed
Charges" for purposes of determining the denominator (but not the numerator) of
this "Consolidated Fixed Charge Coverage Ratio":
(1) interest on outstanding Indebtedness determined on a fluctuating
basis as of the Transaction Date and which will continue to be so
determined thereafter shall be deemed to have accrued at a fixed rate per
annum equal to the rate of interest on such Indebtedness in effect on the
Transaction Date;
(2) if interest on any Indebtedness actually incurred on the
Transaction Date may optionally be determined at an interest rate based
upon a factor of a prime or similar rate, a eurocurrency interbank offered
rate, or other rates, then the interest rate in effect on the Transaction
Date will be deemed to have been in effect during the Four Quarter Period;
and
(3) notwithstanding clause (1) above, interest on Indebtedness
determined on a fluctuating basis, to the extent such interest is covered
by agreements relating to Interest Swap Obligations, shall be deemed to
accrue at the rate per annum in effect on the Transaction Date resulting
after giving effect to the operation of such agreements on such date.
"Consolidated Fixed Charges" means, with respect to the Company for any
period, the sum, without duplication, of:
(1) Consolidated Interest Expense, plus
(2) the product of (x) the amount of all dividend payments on any
series of Preferred Stock of the Company (other than dividends paid in
Qualified Capital Stock) or any Restricted Subsidiary paid, accrued and/or
scheduled to be paid or accrued during such period times (y) a fraction,
the numerator of which is one and the denominator of which is one minus the
then current effective consolidated federal, state and local income tax
rate of the Company, expressed as a decimal.
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"Consolidated Interest Expense" means, with respect to the Company for any
period, the sum of, without duplication:
(1) the aggregate of the interest expense of the Company and the
Restricted Subsidiaries for such period determined on a consolidated basis
in accordance with GAAP, including without limitation,
(A) any amortization of debt discount,
(B) the net costs under Interest Swap Obligations,
(C) all capitalized interest, and
(D) the interest portion of any deferred payment obligation;
(2) the interest component of Capitalized Lease Obligations paid,
accrued and/or scheduled to be paid or accrued by the Company and the
Restricted Subsidiaries during such period as determined on a consolidated
basis in accordance with GAAP; and
(3) net losses relating to sales of accounts receivable pursuant to
Permitted Receivable Financings during such period as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to the Company, for any
period, the aggregate net income (or loss) of the Company and the Restricted
Subsidiaries for such period as determined on a consolidated basis in accordance
with GAAP; provided that there shall be excluded therefrom:
(1) after-tax gains and losses from Asset Sales or abandonments or
reserves relating thereto;
(2) extraordinary or non-recurring gains or losses (determined on an
after-tax basis);
(3) the net income of any Person acquired in a "pooling of interests"
transaction accrued prior to the date it becomes a Restricted Subsidiary or
is merged or consolidated with the Company or any Restricted Subsidiary;
(4) the net income (but not loss) of any Restricted Subsidiary to the
extent that the declaration of dividends or similar distributions by that
Restricted Subsidiary of that income is restricted by a contract, operation
of law or otherwise;
(5) the net income of any Person, other than a Restricted Subsidiary,
except to the extent of cash dividends or distributions paid to the Company
or to a Restricted Subsidiary by such Person;
(6) any restoration to income of any contingency reserve, except to
the extent that (x) provision for such reserve was made out of Consolidated
Net Income accrued at any time following the Spin-Off Date or (y) the
restoration is with respect to a charge or reserve contemplated by clause
(9) below;
(7) income or loss attributable to discontinued operations (including,
without limitation, operations disposed of during such period whether or
not such operations were classified as discontinued);
(8) in the case of a successor to the Company by consolidation or
merger or as a transferee of the Company's assets, any earnings of the
successor corporation prior to such consolidation, merger or transfer of
assets;
(9) restructuring charges of not more than $55.0 million to the extent
incurred in the fiscal quarter ending December 31, 1999; and
(10) any fees or expenses incurred in connection with the Spin-Off
Transactions.
"Consolidated Net Tangible Assets" means, as of any date of determination,
the total assets, less goodwill and other intangibles (other than patents,
trademarks, copyrights, licenses and other intellectual property), shown on the
balance sheet of the Company and its Restricted Subsidiaries for the most
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recently ended fiscal quarter for which financial statements are available,
determined on a consolidated basis in accordance with GAAP.
"Consolidated Non-cash Charges" means, with respect to the Company, for any
period, the aggregate depreciation, amortization and other non-cash expenses of
the Company and the Restricted Subsidiaries reducing Consolidated Net Income of
the Company for such period, determined on a consolidated basis in accordance
with GAAP (excluding any such charge which requires an accrual of or a reserve
for cash charges for any future period).
"Corporate Restructuring" means the restructuring by the Company of the
assets, liabilities and operations of (x) its packaging business and
administrative services operations, so that such assets, liabilities and
operations are owned directly and indirectly by Packaging and its Subsidiaries,
and (y) its automotive business, so that such assets, liabilities and operations
are owned directly or indirectly by the Company and its Subsidiaries, in each
case in a manner consistent, in all material respects, with the description
thereof in this prospectus.
"Covenant Defeasance" has the meaning set forth under "-- Legal Defeasance
and Covenant Defeasance."
"Credit Agreement" means the Credit Agreement dated as of September 30,
1999, among the Company, the Guarantors, the lenders party thereto in their
capacities as lenders thereunder and Commerzbank and Bank of America, as
co-documentation agents, Citibank, N.A., as syndication agent and The Chase
Manhattan Bank, as administrative agent, together with the related documents
thereto (including, without limitation, any guarantee agreements and security
documents), in each case as such agreements may be amended (including any
amendment and restatement thereof), supplemented or otherwise modified from time
to time, including any agreement extending the maturity of, refinancing,
replacing or otherwise restructuring (including increasing the amount of
available borrowings thereunder (provided that such increase in borrowings is
permitted by the covenant described under "-- Certain Covenants -- Limitation on
Incurrence of Additional Indebtedness" (including the definition of Permitted
Indebtedness)) or adding Subsidiaries as additional borrowers or guarantors
thereunder) all or any portion of the Indebtedness under such agreement or any
successor or replacement agreement and whether by the same or any other agent,
lender or group of lenders.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary against fluctuations in currency values.
"Debt Realignment" means the realignment of all of the Company's
Indebtedness through a combination of tender offers, exchange offers,
prepayments and/or other refinancings, the purpose of which is to allocate
Indebtedness between the Company and Packaging before the separation of the
Company and Packaging effected by means of the Corporate Restructuring and the
Packaging Distribution and consistent in all material respects with the
description thereof in this prospectus insofar as such matters relate to the
Company.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice of both would be, an Event of Default.
"Default Notice" has the meaning set forth under "-- Subordination."
"Designated Senior Debt" means (1) Indebtedness under or in respect of the
Credit Agreement and (2) any other Indebtedness constituting Senior Debt which,
at the time of determination, has an aggregate principal amount of at least $50
million and is specifically designated in the instrument evidencing such Senior
Debt as "Designated Senior Debt" by the Company.
"Designation" has the meaning set forth under "-- Certain Covenants
- -- Limitation on Designations of Unrestricted Subsidiaries."
"Designation Amount" has the meaning set forth under "-- Certain Covenants
- -- Limitation on Designations of Unrestricted Subsidiaries."
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"Disqualified Capital Stock" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is mandatorily exchangeable for Indebtedness, or is redeemable or exchangeable
for Indebtedness, at the sole option of the holder thereof on or prior to the
final maturity date of the notes.
"Domestic Restricted Subsidiary" means a Restricted Subsidiary incorporated
or otherwise organized under the laws of the United States or any state thereof
or the District of Columbia.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor statute or statutes thereto, and the rules and regulations of the
Commission promulgated thereunder.
"Fair Market Value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair Market Value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company.
"Finance Subsidiary" means a Restricted Subsidiary that is organized solely
for the purpose of owning Indebtedness of the Company and/or other Restricted
Subsidiaries and issuing securities the proceeds of which are utilized by the
Company and/or other Restricted Subsidiaries, and which engages only in such
activities and activities incident thereto.
"Foreign Restricted Subsidiary" means any Restricted Subsidiary that is
organized and existing under the laws of a jurisdiction other than the United
States, any State thereof or the District of Columbia.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accounts and statements and pronouncements of the
Financial Accounting Standards Board or in such other statements by such other
entity as may be approved by a significant segment of the accounting profession
of the United States, which are in effect as of the Issue Date.
"Guarantee" has the meaning set forth under "-- Certain Covenants
- -- Issuance of Subsidiary Guarantees."
"Guarantor" means (1) each Wholly-Owned Domestic Restricted Subsidiary of
the Company (other than any Immaterial Domestic Subsidiaries) as of the Spin-Off
Date (after giving effect to the Spin-Off Transactions) and (2) each other
Restricted Subsidiary that in the future executes a Guarantee pursuant to the
covenant described under "-- Certain Covenants -- Issuance of Subsidiary
Guarantees" or otherwise; provided that any Person constituting a Guarantor as
described above shall cease to constitute a Guarantor when its Guarantee is
released in accordance with the terms of the Indenture.
"Guarantor Senior Debt" means, with respect to any Guarantor, the principal
of, premium, if any, and interest (including any interest accruing subsequent to
the filing of a petition of bankruptcy at the rate provided for in the
documentation with respect thereto, whether or not such interest is an allowed
claim under applicable law) on any Indebtedness of such Guarantor, whether
outstanding on the Spin-Off Date (after giving effect to the Spin-Off
Transactions) or thereafter created, incurred or assumed, unless, in the case of
any particular Indebtedness, the instrument creating or evidencing the same or
pursuant to which the same is outstanding expressly provides that such
Indebtedness shall not be senior in right of payment to the Guarantee of such
Guarantor. Without limiting the generality of the foregoing, "Guarantor Senior
Debt" shall also include the principal of, premium, if any, interest (including
any interest accruing subsequent to the filing of a petition of bankruptcy at
the rate provided for in the documentation with respect thereto, whether or not
such interest is an allowed claim under applicable law) on, and all other
amounts owing in respect of:
(x) all monetary obligations of every nature of the Company or any
Guarantor with respect to the Credit Agreement, including, without
limitation, obligations to pay principal and interest, reimbursement
obligations under letters of credit, fees, expenses and indemnities;
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(y) all Interest Swap Obligations; and
(z) all obligations under Currency Agreements.
Notwithstanding the foregoing, "Guarantor Senior Debt" shall not include:
(1) any Indebtedness of such Guarantor owing to a Subsidiary of such
Guarantor or any Affiliate of such Guarantor or any of such Affiliate's
Subsidiaries;
(2) Indebtedness to, or guaranteed on behalf of, any shareholder,
director, officer or employee of such Guarantor or any Subsidiary of such
Guarantor (including, without limitation, amounts owed for compensation);
(3) Indebtedness to trade creditors and other amounts incurred in
connection with obtaining goods, materials or services;
(4) Indebtedness represented by Disqualified Capital Stock;
(5) any liability for federal, state, local or other taxes owed or
owing by such Guarantor;
(6) Indebtedness incurred in violation of the covenant described under
"-- Certain Covenants -- Limitation on Incurrence of Additional
Indebtedness";
(7) Indebtedness which, when incurred and without respect to any
election under Section 1111(b) of Title 11, United States Code, is without
recourse to such Guarantor; and
(8) any Indebtedness which is, by its express terms, subordinated in
right of payment to any other Indebtedness of such Guarantor.
"Immaterial Domestic Subsidiaries" means at any time, any Domestic
Restricted Subsidiary of the Company having total assets (as determined in
accordance with GAAP) in an amount of less than 1% of the consolidated total
assets of the Company and its Domestic Restricted Subsidiaries (as determined in
accordance with GAAP); provided, however, that the total assets (as so
determined) of all Immaterial Domestic Subsidiaries shall not exceed 5% of
consolidated total assets of the Company and its Domestic Subsidiaries (as so
determined). In the event that the total assets of all Immaterial Domestic
Subsidiaries exceeds 5% of consolidated total assets of the Company and its
Domestic Restricted Subsidiaries, the Company will designate Domestic Restricted
Subsidiaries that would otherwise be Immaterial Domestic Subsidiaries to be
excluded as Immaterial Domestic Subsidiaries until such 5% threshold is met.
Notwithstanding the foregoing, no Domestic Restricted Subsidiary that guarantees
the Credit Agreement shall be deemed an Immaterial Domestic Restricted
Subsidiary.
"Incur" has the meaning set forth under "-- Certain Covenants -- Limitation
on Incurrence on Additional Indebtedness."
"Indebtedness" means, with respect to any Person, without duplication:
(1) all Obligations of such Person for borrowed money;
(2) all Obligations of such Person evidenced by bonds, debentures,
notes or other similar instruments;
(3) all Capitalized Lease Obligations of such Person;
(4) all Obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations and all
Obligations under any title retention agreement (but excluding trade
accounts payable and other accrued liabilities arising in the ordinary
course of business that are not overdue by 90 days or more or are being
contested in good faith by appropriate proceedings promptly instituted and
diligently conducted);
(5) all Obligations for the reimbursement of any obligor on any letter
of credit, banker's acceptance or similar credit transaction;
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(6) guarantees and other contingent obligations in respect of
Indebtedness of any other Person referred to in clauses (1) through (5)
above and clauses (8) and (10) below;
(7) all Obligations of any other Person of the type referred to in
clauses (1) through (6) which are secured by any Lien on any property or
asset of such Person, the amount of such Obligation being deemed to be the
lesser of the Fair Market Value of such property or asset or the amount of
the Obligation so secured;
(8) all Obligations under currency agreements and interest swap
agreements of such Person;
(9) all Disqualified Capital Stock of the Company and all Preferred
Stock of a Restricted Subsidiary with the amount of Indebtedness
represented by such Disqualified Capital Stock or Preferred Stock being
equal to the greater of its voluntary or involuntary liquidation preference
and its maximum fixed repurchase price, but excluding accrued and unpaid
dividends, if any; and
(10) all Outstanding Permitted Receivables Financings.
For purposes hereof, the "maximum fixed repurchase price" of any
Disqualified Capital Stock or Preferred Stock which does not have a fixed
repurchase price shall be calculated in accordance with the terms of such
Disqualified Capital Stock or Preferred Stock as if such Disqualified Capital
Stock or Preferred Stock were purchased on any date on which Indebtedness shall
be required to be determined pursuant to the Indenture, and if such price is
based upon, or measured by, the Fair Market Value of such Disqualified Capital
Stock or Preferred Stock, such Fair Market Value shall be determined reasonably
and in good faith by the Board of Directors of the issuer of such Disqualified
Capital Stock or Preferred Stock.
"Independent Financial Advisor" means a firm (1) which does not, and whose
directors, officers and employees and Affiliates do not, have a direct or
indirect material financial interest in the Company and (2) which, in the
judgment of the Board of Directors of the Company, is otherwise independent and
qualified to perform the task for which it is to be engaged.
"Initial Purchasers" means Salomon Smith Barney Inc., Banc of America
Securities LLC, Bear, Stearns & Co. Inc., Chase Securities Inc., Credit Suisse
First Boston Corporation, Morgan Stanley & Co. Incorporated, Banc One Capital
Markets, Inc., BNY Capital Markets, Inc., Commerzbank Capital Markets
Corporation, First Union Securities, Inc., ING Barings LLC, Nesbitt Burns
Securities Inc., Scotia Capital Markets (USA) Inc., SG Cowen Securities
Corporation and TD Securities (USA) Inc.
"Interest Swap Obligations" means the obligations of the Company and the
Restricted Subsidiaries pursuant to any arrangement with any other Person,
whereby, directly or indirectly, the Company or any Restricted Subsidiary is
entitled to receive from time to time periodic payments calculated by applying
either a floating or a fixed rate of interest on a stated notional amount in
exchange for periodic payments made by such other Person calculated by applying
a fixed or a floating rate of interest on the same notional amount and shall
include, without limitation, interest rate swaps, caps, floors, collars and
similar agreements.
"Investment" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person. "Investment" shall exclude extensions of trade credit by the
Company and the Restricted Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or such Restricted
Subsidiaries, as the case may be. If the Company or any Restricted Subsidiary
sells or otherwise disposes of any Capital Stock of any Restricted Subsidiary
(the "Referent Subsidiary") such that, after giving effect to any such sale or
disposition, the Referent Subsidiary shall cease to be a Restricted Subsidiary,
the Company shall be deemed to have made an Investment on the date of any such
sale or disposition equal to the Fair Market Value of the Capital Stock of the
Referent Subsidiary not sold or disposed of.
"Issue Date" means the date of original issuance of the notes.
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"Legal Defeasance" has the meaning set forth under "-- Legal Defeasance and
Covenant Defeasance."
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents, including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents (other
than the portion of any such deferred payment constituting interest), received
by the Company or any of the Restricted Subsidiaries from such Asset Sale net
of:
(1) reasonable out-of-pocket expenses and fees relating to such Asset
Sale (including, without limitation, legal, accounting and investment
banking fees, sales commissions and relocation expenses);
(2) taxes paid or payable after taking into account any reduction in
consolidated tax liability due to available tax credits or deductions and
any tax sharing arrangements;
(3) repayments of Indebtedness secured by the property or assets
subject to such Asset Sale that is required to be repaid in connection with
such Asset Sale; and
(4) appropriate amounts to be determined by the Company or any
Restricted Subsidiary, as the case may be, as a reserve, in accordance with
GAAP, against any liabilities associated with such Asset Sale and retained
by the Company or any Restricted Subsidiary, as the case may be, after such
Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated
with such Asset Sale.
"Net Proceeds Offer" has the meaning set forth under "-- Certain
Covenants -- Limitation on Asset Sales."
"Net Proceeds Offer Amount" has the meaning set forth under "-- Certain
Covenants -- Limitation on Asset Sales."
"Net Proceeds Offer Payment Date" had the meaning set forth under
"-- Certain Covenants -- Limitation on Asset Sales."
"Net Proceeds Offer Trigger Date" has the meaning set forth under
"-- Certain Covenants -- Limitation on Asset Sales."
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Outstanding Permitted Receivables Financings" means the aggregate amount
of the receivables sold or financed pursuant to a Permitted Receivables
Financing that remain uncollected at any one time.
"Packaging" means Pactiv Corporation, a Delaware corporation formerly known
as Tenneco Packaging Inc.
"Packaging Distribution" means the distribution by the Company of all of
the issued and outstanding common stock of Packaging to the holders of the
Company's common stock consistent in all material respects with the description
thereof in the offering memorandum relating to the initial issuance of the
outstanding notes.
"Permitted Indebtedness" means, without duplication, each of the following:
(1) Indebtedness under the notes, the Indenture and any Guarantees not
to exceed $500.0 million in aggregate principal amount;
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(2) Indebtedness incurred pursuant to the Credit Agreement in an
aggregate principal amount at any time outstanding not to exceed the
greater of:
(x) $1,550 million (reduced by any required permanent repayments
with the proceeds of Asset Sales (which are accompanied by a
corresponding permanent commitment reduction) thereunder); and
(y) the sum of (A) 85% of the net book value of the accounts
receivable of the Company and the Restricted Subsidiaries and (B) 50% of
the net book value of the inventory of the Company and the Restricted
Subsidiaries;
(3) other Indebtedness of the Company and the Restricted Subsidiaries
outstanding on the Spin-Off Date reduced by the amount of any scheduled
amortization payments or mandatory prepayments when actually paid or
permanent reductions thereon;
(4) Interest Swap Obligations of the Company covering Indebtedness of
the Company or any Guarantor and Interest Swap Obligations of any
Restricted Subsidiary covering Indebtedness of such Restricted Subsidiary;
provided, however, that such Interest Swap Obligations are entered into to
protect the Company and the Restricted Subsidiaries from fluctuations in
interest rates on Indebtedness incurred in accordance with the Indenture to
the extent the notional principal amount of such Interest Swap Obligations
does not exceed the principal amount of the Indebtedness to which such
Interest Swap Obligations relates;
(5) Indebtedness under Currency Agreements; provided that in the case
of Currency Agreements which relate to Indebtedness, such Currency
Agreements do not increase the Indebtedness of the Company and the
Restricted Subsidiaries outstanding other than as a result of fluctuations
in foreign currency exchange rates or by reason of fees, indemnities and
compensation payable thereunder;
(6) Indebtedness of a Restricted Subsidiary to the Company or another
Restricted Subsidiary for so long as such Indebtedness is held by the
Company or a Restricted Subsidiary, in each case subject to no Lien held by
a Person other than the Company or a Restricted Subsidiary; provided that
if as of any date any Person other than the Company or a Restricted
Subsidiary owns or holds any such Indebtedness or holds a Lien in respect
of such Indebtedness, such date shall be deemed the incurrence of
Indebtedness not constituting Permitted Indebtedness by the issuer of such
Indebtedness;
(7) Indebtedness of the Company to a Restricted Subsidiary for so long
as such Indebtedness is held by a Restricted Subsidiary, in each case
subject to no Lien; provided that (A) any Indebtedness of the Company to
any Restricted Subsidiary is unsecured and (B) if as of any date any Person
other than a Restricted Subsidiary owns or holds any such Indebtedness or
any Person holds a Lien in respect of such Indebtedness, such date shall be
deemed the incurrence of Indebtedness not constituting Permitted
Indebtedness by the Company;
(8) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient
funds in the ordinary course of business; provided, however, that such
Indebtedness is extinguished within five business days after incurrence;
(9) Indebtedness of the Company or any of the Restricted Subsidiaries
represented by letters of credit for the account of the Company or any such
Restricted Subsidiary, as the case may be, in order to provide security for
workers' compensation claims, payment obligations in connection with self-
insurance or similar requirements in the ordinary course of business;
(10) Refinancing Indebtedness;
(11) additional Indebtedness of the Company and the Restricted
Subsidiaries in an aggregate principal amount not to exceed $75.0 million
at any one time outstanding;
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(12) Purchase Money Indebtedness and Capitalized Lease Obligations
(and any Indebtedness incurred to Refinance such Purchase Money
Indebtedness or Capitalized Lease Obligations) not to exceed 5% of
Consolidated Net Tangible Assets at any one time outstanding; and
(13) Outstanding Permitted Receivables Financings not to exceed $150.0
million at any one time outstanding;
If any Indebtedness incurred by the Company or any Restricted Subsidiary
would qualify in more than one of the categories of Permitted Indebtedness as
set forth in clauses (1) through (13) of this definition, the Company may
designate under which category such incurrence shall be deemed to have been
made.
"Permitted Investments" means:
(1) Investments by the Company or any Restricted Subsidiary in any
Person that is or will become immediately after such Investment a
Restricted Subsidiary or that will merge or consolidate into the Company or
a Restricted Subsidiary;
(2) Investments in the Company by any Restricted Subsidiary; provided
that any Indebtedness evidencing such Investment is unsecured;
(3) Investments in cash and Cash Equivalents;
(4) loans and advances to employees, officers and directors of the
Company and the Restricted Subsidiaries in the ordinary course of business
for bona fide business purposes not in excess of an aggregate of $15.0
million at any one time outstanding;
(5) Currency Agreements and Interest Swap Obligations entered into in
the ordinary course of the Company's or a Restricted Subsidiary's
businesses and otherwise in compliance with the Indenture;
(6) Investments in securities of trade creditors or customers received
pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of such trade creditors or customers;
(7) Investments made by the Company or the Restricted Subsidiaries as
a result of consideration received in connection with an Asset Sale made in
compliance with the covenant described under "-- Certain Covenants
-- Limitation on Asset Sales";
(8) Investments in Persons, including, without limitation,
Unrestricted Subsidiaries and joint ventures, engaged in a business similar
or related to or logical extensions of the businesses in which the Company
and the Restricted Subsidiaries are engaged on the Spin-Off Date, not to
exceed 5% of Consolidated Net Tangible Assets at any one time outstanding;
(9) Investments in the notes; and
(10) Investments in an Accounts Receivable Entity.
"Permitted Liens" means the following types of Liens:
(1) Liens for taxes, assessments or governmental charges or claims
either (A) not delinquent or (B) contested in good faith by appropriate
proceedings and, in each case, as to which the Company or any Restricted
Subsidiary shall have set aside on its books such reserves as may be
required pursuant to GAAP;
(2) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
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(3) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit
issued in the ordinary course of business consistent with past practice in
connection therewith, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, contracts, performance
and return-of-money bonds and other similar obligations (exclusive of
obligations for the payment of borrowed money);
(4) judgment Liens not giving rise to an Event of Default so long as
such Lien is adequately bonded and any appropriate legal proceedings which
may have been duly initiated for the review of such judgment shall not have
been finally terminated or the period within which such proceedings may be
initiated shall not have expired;
(5) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not impairing in any
material respect the ordinary conduct of the business of the Company or any
of the Restricted Subsidiaries;
(6) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or
assets which is not leased property subject to such Capitalized Lease
Obligation;
(7) purchase money Liens securing Indebtedness incurred to finance
property or assets of the Company or any Restricted Subsidiary acquired in
the ordinary course of business, and Liens securing Indebtedness which
Refinances any such Indebtedness; provided, however, that (A) the related
purchase money Indebtedness (or Refinancing Indebtedness) shall not exceed
the cost of such property or assets and shall not be secured by any
property or assets of the Company or any Restricted Subsidiary other than
the property and assets so acquired and (B) the Lien securing the purchase
money Indebtedness shall be created within 90 days after such acquisition;
(8) Liens upon specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods;
(9) Liens securing reimbursement obligations with respect to
commercial letters of credit which encumber documents and other property
relating to such letters of credit and products and proceeds thereof;
(10) Liens encumbering deposits made to secure obligations arising
from statutory, regulatory, contractual or warranty requirements of the
Company or any of the Restricted Subsidiaries, including rights of offset
and set-off;
(11) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture;
(12) Liens securing Indebtedness under Currency Agreements;
(13) Liens securing Acquired Indebtedness (and any Indebtedness which
Refinances such Acquired Indebtedness) incurred in accordance with the
covenant described under "-- Certain Covenants -- Limitation on Incurrence
of Additional Indebtedness"; provided that (A) such Liens secured the
Acquired Indebtedness at the time of and prior to the incurrence of such
Acquired Indebtedness by the Company or a Restricted Subsidiary and were
not granted in connection with, or in anticipation of the incurrence of
such Acquired Indebtedness by the Company or a Restricted Subsidiary and
(B) such Liens do not extend to or cover any property or assets of the
Company or of any of the Restricted Subsidiaries other than the property or
assets that secured the Acquired Indebtedness prior to the time such
Indebtedness became Acquired Indebtedness of the Company or a Restricted
Subsidiary;
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(14) Liens securing Indebtedness of Foreign Restricted Subsidiaries
incurred in accordance with the Indenture; provided that such Liens do not
extend to any property or assets other than property or assets of Foreign
Restricted Subsidiaries; and
(15) Liens incurred in connection with a Permitted Receivables
Financing.
"Permitted Receivables Financing" means any sale by the Company or a
Restricted Subsidiary of accounts receivable intended to be (and which shall be
treated for purposes of the Indenture as) a true sale transaction with customary
limited recourse based upon the collectibility of the receivables sold and the
corresponding sale or pledge of such accounts receivable (or an interest
therein), in each case without any guarantee by the Company or any Restricted
Subsidiary other than an Accounts Receivable Entity.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Public Equity Offering" has the meaning set forth under "-- Redemption
- -- Optional Redemption upon Public Equity Offerings."
"Purchase Money Indebtedness" means Indebtedness of the Company or any
Restricted Subsidiary incurred for the purpose of financing all or any part of
the purchase price or the cost of an Asset Acquisition or construction or
improvement of any property; provided that the aggregate principal amount of
such Indebtedness does not exceed such purchase price or cost.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Reference Date" has the meaning set forth under "-- Certain Covenants
- -- Limitation on Restricted Payments."
"Refinance" means in respect of any security or Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a
security or Indebtedness in exchange or replacement for, such security or
Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have
correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Company or any
Restricted Subsidiary of Indebtedness incurred in accordance with the covenant
described under "-- Certain Covenants -- Limitation on Incurrence of Additional
Indebtedness" (other than pursuant to clause (2), (4), (5), (6), (7), (8), (9),
(11), (12) or (13) of the definition of Permitted Indebtedness), in each case
that does not:
(1) result in an increase in the aggregate principal amount of any
Indebtedness of such Person as of the date of such proposed Refinancing
(plus the amount of any premium reasonably necessary to Refinance such
Indebtedness and plus the amount of reasonable expenses incurred by the
Company in connection with such Refinancing); or
(2) create Indebtedness with (A) a Weighted Average Life to Maturity
that is less than the Weighted Average Life to Maturity of the Indebtedness
being Refinanced or (B) a final maturity earlier than the final maturity of
the Indebtedness being Refinanced;
provided that if such Indebtedness being Refinanced is Indebtedness of the
Company and/or a Guarantor, then such Refinancing Indebtedness shall be
Indebtedness solely of the Company and/or such Guarantor.
"Registration Rights Agreement" means the Registration Rights Agreement
dated the Issue Date among the Company, the Guarantors and the Initial
Purchasers.
"Replacement Assets" means assets and property that will be used in the
business of the Company and/or its Restricted Subsidiaries as existing on the
Spin-Off Date (after consummation of the Spin-Off Transactions) or in a business
the same, similar or reasonably related thereto (including Capital Stock of a
Person which becomes a Restricted Subsidiary).
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"Representative" means the indenture trustee or other trustee, agent or
representative in respect of any Designated Senior Debt; provided that if, and
for so long as, any Designated Senior Debt lacks such a representative, then the
Representative for such Designated Senior Debt shall at all times constitute the
holders of a majority in outstanding principal amount of such Designated Senior
Debt in respect of any Designated Senior Debt.
"Restricted Payment" has the meaning set forth under "-- Certain Covenants
- -- Limitation on Restricted Payments."
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated by the Board of Directors of the Company, by a Board Resolution
delivered to the Trustee, as an Unrestricted Subsidiary pursuant to and in
compliance with the covenant described under "-- Certain Covenants -- Limitation
on Designations of Unrestricted Subsidiaries." Any such Designation may be
revoked by a Board Resolution of the Company delivered to the Trustee, subject
to the provisions of such covenant.
"Revocation" has the meaning set forth under "-- Certain Covenants
- -- Limitation on Designations of Unrestricted Subsidiaries."
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether owned
by the Company or any Restricted Subsidiary at the Spin-Off Date (after
consummation of the Spin-Off Transactions) or later acquired, which has been or
is to be sold or transferred by the Company or such Restricted Subsidiary to
such Person or to any other Person from whom funds have been or are to be
advanced on the security of such Property.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor statute or statutes thereto, and the rules and regulations of the
Commission promulgated thereunder.
"Senior Debt" means the principal of, premium, if any, and interest
(including any interest accruing subsequent to the filing of a petition of
bankruptcy at the rate provided for in the documentation with respect thereto,
whether or not such interest is an allowed claim under applicable law) on any
Indebtedness of the Company, whether outstanding on the Spin-Off Date (after
consummation of the Spin-Off Transactions) or thereafter created, incurred or
assumed, unless, in the case of any particular Indebtedness, the instrument
creating or evidencing the same or pursuant to which the same is outstanding
expressly provides that such Indebtedness shall not be senior in right of
payment to the notes. Without limiting the generality of the foregoing, "Senior
Debt" shall also include the principal of, premium, if any, interest (including
any interest accruing subsequent to the filing of a petition of bankruptcy at
the rate provided for in the documentation with respect thereto, whether or not
such interest is an allowed claim under applicable law) on, and all other
amounts owing in respect of:
(x) all monetary obligations of every nature of the Company under the
Credit Agreement, including, without limitation, obligations to pay
principal and interest, reimbursement obligations under letters of credit,
fees, expenses and indemnities;
(y) all Interest Swap Obligations; and
(z) all obligations under Currency Agreements.
Notwithstanding the foregoing, "Senior Debt" shall not include:
(1) any Indebtedness of the Company to a Restricted Subsidiary or any
Affiliate of the Company or any of such Affiliate's Subsidiaries;
(2) Indebtedness to, or guaranteed on behalf of, any shareholder,
director, officer or employee of the Company or any Restricted Subsidiary
(including without limitation, amounts owed for compensation);
(3) Indebtedness to trade creditors and other amounts incurred in
connection with obtaining goods, materials or services;
(4) Indebtedness represented by Disqualified Capital Stock;
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(5) any liability for federal, state, local or other taxes owed by the
Company;
(6) Indebtedness incurred in violation of the covenant described under
"-- Certain Covenants -- Limitation on Incurrence of Additional
Indebtedness";
(7) Indebtedness which, when incurred and without respect to any
election under Section 1111(b) of Title 11, United States Code, is without
recourse to the Company; and
(8) any Indebtedness which is, by its express terms, subordinated in
right of payment to any other Indebtedness of the Company.
"Significant Subsidiary" means, with respect to any Person, any Restricted
Subsidiary of such Person that satisfies the criteria for a "significant
subsidiary" set forth in Rule 1.02(w) of Regulation S-X under the Securities
Act.
"Spin-Off Date" means the date on which all of the Spin-Off Transactions
shall have been consummated, which is November 4, 1999.
"Spin-Off Transactions" means each of (1) the Corporate Restructuring, (2)
the Debt Realignment, and (3) the Packaging Distribution.
"Spin-Off Transaction Agreements" means the Distribution Agreement, Human
Resources Agreement, Tax Sharing Agreement, Transition Services Agreement,
Insurance Agreement and Trademark Transition License Agreement, each as entered
into in connection with the Spin-off Transactions and consistent in all material
respects with the description thereof in the offering memorandum relating to the
original issuance of the outstanding notes.
"Stub Debt" means any Indebtedness outstanding under the Indenture dated
November 1, 1996 by and between the Company and The Chase Manhattan Bank, after
the Company has consummated the Debt Realignment.
"Subsidiary," with respect to any Person, means (1) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or (2) any
other Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"Surviving Entity" has the meaning set forth under "-- Certain Covenants --
Merger, Consolidation and Sale of Assets."
"Transaction Date" has the meaning set forth in the definition of Combined
Fixed Charge Coverage Ratio.
"Unrestricted Subsidiary" means any Subsidiary of the Company designated as
such pursuant to and in compliance with the covenant described under "-- Certain
Covenants -- Limitation on Designations of Unrestricted Subsidiaries." Any such
designation may be revoked by a Board Resolution of the Company delivered to the
Trustee, subject to the provisions of such covenant.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (A) the then outstanding
aggregate principal amount of such Indebtedness into (B) the sum of the total of
the products obtained by multiplying (I) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (II) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly Owned Domestic Restricted Subsidiary" means a Wholly Owned
Restricted Subsidiary that is also a Domestic Restricted Subsidiary.
"Wholly Owned Restricted Subsidiary" of the Company means any Restricted
Subsidiary of which all the outstanding voting securities (other than in the
case of a Foreign Restricted Subsidiary, directors'
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qualifying shares or an immaterial amount of shares required to be owned by
other Persons pursuant to applicable law) are owned by the Company or any other
Wholly Owned Restricted Subsidiary.
"Working Capital Borrowings" means Indebtedness incurred by the Company or
the Restricted Subsidiaries prior to the consummation of the Spin-Off
Transactions incurred on a short-term basis to fund working capital
requirements.
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UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of various United States federal
income tax consequences associated with the exchange of outstanding notes for
new notes pursuant to the exchange offer and the ownership and disposition of
the new notes. This discussion is the opinion of Jenner & Block, our tax counsel
in connection with the exchange offers. Except as otherwise indicated, it
applies only if you are a U.S. holder (as defined below) and are a beneficial
owner of new notes. The following discussion is based on current provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), applicable Treasury
Regulations (the "Regulations"), judicial authority and current administrative
rulings and pronouncements of the Internal Revenue Service ("IRS"). There can be
no assurance that the IRS will not take a contrary view, and no ruling from the
IRS has been or is expected to be sought with respect to such consequences.
Legislative, judicial, or administrative changes or interpretations may be
forthcoming that could alter or modify the statements and conclusions described
in this prospectus. Any such changes or interpretations may or may not be
retroactive and could affect the tax consequences to holders of the notes.
We assume in our discussion below that the notes are held as capital
assets. This discussion is for general information only, and does not address
all of the tax consequences that may be relevant to particular holders in light
of their personal circumstances. For instance, special rules may apply to
certain types of holders such as:
- banks and other financial institutions;
- real estate investment trusts;
- regulated investment companies;
- insurance companies;
- tax-exempt organizations;
- S corporations;
- brokers and dealers in securities; or
- persons whose functional currency is not the U.S. Dollar.
In addition, special rules may apply to integrated transactions such as
certain hedging transactions, conversion transactions or "straddle"
transactions. Finally, this discussion does not include any description of the
tax laws of any state, local or foreign government that may be applicable to a
particular holder.
When we use the term "U.S. holder" we generally mean a beneficial owner of
new notes who (for U.S. federal income tax purposes):
- is an individual who is a citizen or resident of the United States (as
determined under U.S. federal income tax laws);
- is a corporation or partnership created or organized in or under the laws
of the United States or any political subdivision thereof (except in the
case of a partnership, as provided by Treasury Regulations that may be
issued in the future);
- is an estate whose income is includible in gross income for U.S. federal
income tax purposes regardless of its source; or
- is a trust if (1) a court within the United States is able to exercise
primary supervision over the administration of the trust and (2) at least
one U.S. person (alone or with other U.S. persons) has authority to
control all substantial decisions of the trust.
When we use the term "non-U.S. holder," we mean a beneficial owner of new
notes that is not a U.S. holder.
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WE ADVISE YOU TO CONSULT WITH YOUR OWN TAX ADVISORS REGARDING THE TAX
CONSEQUENCES TO YOU OF THE ACQUISITION, OWNERSHIP AND SALE OF THE NEW NOTES,
INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF
ACQUISITION, OWNERSHIP AND SALE OF THE NEW NOTES AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
TAX CONSEQUENCES TO U.S. HOLDERS
Exchange of Notes. The exchange of outstanding notes for new notes pursuant
to the exchange offer will not be treated as a taxable event for U.S. federal
income tax purposes because the new notes do not differ materially in kind or
extent from the outstanding notes. As a result: (i) a U.S. holder will not
recognize any gain or loss on the exchange of outstanding notes for new notes;
(ii) the adjusted tax basis in the new notes will be the same as the adjusted
tax basis in the outstanding notes exchanged therefor; (iii) the holding period
of the new notes will include the holding period of the outstanding notes
exchanged therefor; and (iv) the adjusted issue price of the new notes will be
the same as the adjusted issue price of the outstanding notes exchanged
therefor.
The exchange offer will result in no U.S. Federal income tax consequences
to non-exchanging U.S. holders.
Original Issue Discount. The new notes will be treated as issued with
original issue discount ("OID"), which each holder will be required to include
in its gross income. In general, a holder must include OID in income as ordinary
interest income as it accrues on the basis of a constant yield to maturity.
Generally, OID must be included in income in advance of the receipt of cash
representing such income. The amount of OID with respect to a new note will be
equal to the excess of the stated redemption price at maturity over the issue
price of the outstanding note exchanged for such new note. The stated redemption
price at maturity of a new note will equal the sum of all payments other than
any "qualified stated interest" payments. Qualified stated interest is stated
interest that is unconditionally payable in cash or in property (other than debt
instruments of the issuer) at least annually at a single fixed rate.
A holder must generally include in gross income, for all days during its
tax year in which it holds such note, the sum of the "daily portion" of OID. The
daily portions are determined by allocating to each day in an "accrual period"
(generally the period between interest payments or compounding dates) a pro rata
portion of the original issue discount that accrued during such accrual period.
The amount of OID that will accrue during the accrual period is the product of
the "adjusted issued price" of the new note at the beginning of the accrual
period and its yield to maturity (determined on the basis of compounding at the
end of each accrual period and properly adjusted for the length of the
particular accrual period). The adjusted issue price of the new note is the sum
of the issue price of the outstanding note, plus prior accruals of OID, reduced
by the total payments made with respect to such note other than a payment of
qualified stated interest.
Acquisition Premium. To the extent a holder had acquisition premium with
respect to an outstanding note, the holder generally will have acquisition
premium with respect to a new note. A holder will reduce the OID includible in
gross income by a fraction the numerator of which is the acquisition premium,
and the denominator of which is the OID remaining to be accrued. Rather than
applying this constant fraction, a holder of an outstanding note with
acquisition premium may elect to compute OID accruals arising the constant yield
method described above.
Market Discount. If you purchased the outstanding notes after the original
issue but before this exchange offer for an amount that was less than the issue
price of the new notes, the new notes will be considered to have market
discount. Any gain recognized on the disposition of the new notes that have
market discount or, to the extent provided in Regulations, on the disposition of
exchanged basis property received in exchange for new notes that have market
discount, will be treated as ordinary income to the extent of the market
discount that accrued on the new notes while they were held by you.
Alternatively, you may elect to include market discount in income currently over
the life of the new notes. Such an election will apply to any bonds with market
discount acquired on or after the first day of the first taxable
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year to which such election applies and is revocable only with the consent of
the IRS. Market discount will accrue on a straight-line basis unless you elect
to accrue the market discount on a constant-yield method. Such an election will
apply to those new notes to which it is made and is irrevocable. Unless you
elect to include market discount in income on a current basis, as described
above, you could be required to defer the deduction of a portion of the interest
paid on any indebtedness incurred or maintained to purchase or carry the new
notes.
Election to Treat all Interest as OID. A holder may elect to treat all
"interest" on any outstanding note, and as a result, any new note received in
the exchange, as OID and calculated under the constant yield method described
above. For this purpose, "interest" includes stated interest, acquisition
discount, OID, de minimis OID, market discount and unstated interest, as
adjusted by any amortizable original premium or acquisition premium. The
election must be made for the taxable year in which the holder acquired the
outstanding note and may not be revoked without the consent of the IRS. An
election may also be made with respect to any new note not acquired in the
exchange. The election would be made in the taxable year in which such new note
was acquired.
Disposition of the New Notes. You will recognize taxable gain or loss on
the sale, exchange, redemption, retirement or other taxable disposition of the
new notes. The amount of your gain or loss equals the difference between the
amount you receive for the new note (in cash or other property, valued at fair
market value), minus the amount attributable to accrued interest on the note,
minus your adjusted tax basis in the new note. Your initial tax basis in a note
equals the price you paid for the note.
Your gain or loss will generally be a long-term gain or loss if you have
held the note for more than one year. Otherwise, it will be short-term capital
gain or loss. Payments attributable to accrued interest which you have not yet
included in income will be taxed as ordinary interest income.
Information Reporting and Backup Withholding. We will report to holders of
the new notes and the IRS the amount of any "reportable payments" and any amount
withheld with respect to the new notes during the calendar year.
In general, U.S. holders may be subject to information reporting
requirements and backup withholding at a rate of 31% with respect to (1)
interest (including OID) paid in respect of the notes and (2) proceeds received
on the sale, exchange or redemption of the notes unless the holder:
- is a corporation or comes within other applicable exempt categories and,
when required, demonstrates this fact; or
- provides a correct taxpayer identification number, certifies as to no
loss of exemption from backup withholding and otherwise complies with
applicable requirements of the backup withholding rules.
A U.S. holder who does not provide us with the correct taxpayer
identification number may be subject to penalties imposed by the IRS. Any amount
withheld under these rules will be creditable against the United States federal
tax liability of a U.S. holder, and will be refundable to the extent that it
results in an overpayment of tax.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
Exchange of Notes. The U.S. federal income tax consequences to non-U.S.
holders of an exchange of outstanding notes for new notes are identical to those
discussed above for U.S. holders. The exchange will not be a taxable event for
U.S. federal income tax purposes. Similarly, the exchange offer will result in
no U.S. federal income tax consequences to non-exchanging non-U.S. holders.
Interest on the New Notes. Under present United States federal income tax
law, and subject to the discussion below concerning backup withholding, the
"portfolio interest" exemption provides that no
147
<PAGE> 150
withholding of United States federal income tax will be required with respect to
the payment by us or any paying agent of principal or interest on a new note
owned by a non-U.S. holder, if:
- the beneficial owner does not actually or constructively own 10% or more
of the total combined voting power of all classes of stock of ours
entitled to vote within the meaning of section 871(h)(3) of the Code and
the related regulations;
- the beneficial owner is not a controlled foreign corporation that is
related to us through stock ownership;
- the beneficial owner is not a bank whose receipt of interest on a new
note is described in section 881(c)(3)(A) of the Code; and
- the beneficial owner satisfies the "statement requirement" (described
generally below) set forth in section 871(h) and section 881(c) of the
Code and the related Regulations.
To satisfy the "statement requirement," the beneficial owner of the new
note, or a financial institution holding the new note on behalf of the owner,
must provide, in accordance with specified procedures, us or our paying agent
with a statement to the effect that the beneficial owner is not a U.S. person.
According to current temporary Regulations, these requirements will be met if:
- the beneficial owner provides his name and address, and certifies, under
penalties of perjury, that he is not a U.S. person (which certification
may be made on an IRS Form W-8 (or successor form)); or
- a financial institution holding the new note on behalf of the beneficial
owner certifies, under penalties of perjury, that such statement has been
received by it and furnishes a paying agent with a copy of the statement.
The beneficial owner must inform us or our paying agent or the financial
institution within 30 days of any change of information to satisfy the
"statement requirement."
If a non-U.S. holder cannot satisfy the requirements of the "portfolio
interest" exception described above, payments of interest made to that non-U.S.
holder will be subject to a 30% withholding tax unless the beneficial owner of
the new note provides us or our paying agent, as the case may be, with a
properly executed:
- IRS Form 1001 (or successor form) claiming an exemption from withholding
under the benefit of an applicable tax treaty; or
- IRS Form 4224 (or successor form) stating that interest paid on the note
is not subject to withholding tax because it is effectively connected
with the beneficial owner's conduct of a trade or business in the United
States.
If a non-U.S. holder is engaged in a trade or business in the United States
and premium, if any, or interest on the new note is effectively connected with
the conduct of that trade or business, the non-U.S. holder, although exempt from
the withholding tax discussed above, will be subject to United States federal
income tax at applicable graduated individual or corporate rates on the interest
in the same manner as if it were a U.S. Holder. In addition, if the holder is a
foreign corporation, it may be subject to a branch profits tax equal to 30% of
its effectively connected earnings and profits for the taxable year, subject to
adjustments. For this purpose, interest on a new note will be included in the
foreign corporation's earnings and profits.
Sale, Exchange, Redemption or other Disposition of the New Notes. A
non-U.S. holder will generally not be subject to United States federal income
tax with respect to gain recognized on a sale, exchange, redemption or other
disposition of the new notes, unless:
- the gain is "effectively connected" with a trade or business of the
non-U.S. holder in the United States, or, if a tax treaty applies, is
attributable to a United States permanent establishment of the non-U.S.
holder; or
148
<PAGE> 151
- in the case of a non-U.S. holder who is an individual, such holder is
present in the United States for 183 or more days in the taxable year of
the sale or other disposition and certain other conditions are met.
If an individual non-U.S. holder meets the "effectively connected"
requirement described above, the individual will be taxed on the net gain
derived from the sale or other disposition under regular graduated United States
federal income tax rates. If an individual non-U.S. holder meets the 183 day
requirement described above, the individual will be subject to a flat 30% tax on
the gain derived from the sale or other disposition, which may be offset by
United States source capital losses recognized within the same taxable year as
the sale or other disposition (notwithstanding the fact that he is not
considered a resident of the United States).
If a non-U.S. holder that is a foreign corporation meets the "effectively
connected" requirement described above, it will be taxed on its gain under
regular graduated United States federal income tax rates and, in addition, may
be subject to the branch profits tax equal to 30% of its effectively connected
earnings and profits within the meaning of the Code for the taxable year, as
adjusted for specified items, unless it qualifies for a lower rate under an
applicable income tax treaty.
Federal Estate Tax. A new note beneficially owned by an individual who at
the time of death is a non-U.S. holder will not be subject to United States
federal estate tax as a result of his death if:
- he does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of ours entitled to vote
within the meaning of section 871(h)(3) of the Code; and
- the interest payments with respect to his notes would not have been, if
received at the time of his death, effectively connected with his conduct
of a United States trade or business.
Information Reporting and Backup Withholding. We will report to holders of
the new notes and the IRS the amount of any "reportable payments" and any amount
withheld with respect to the new notes during the calendar year.
No information reporting or backup withholding will be required with
respect to payments made by us or any paying agent to non-U.S. holders if the
"statement requirement" described under "Tax Consequences to Non-U.S.
Holders--Interest on the New Notes" has been received and the payor does not
have actual knowledge that the beneficial owner is a United States person.
In addition, backup withholding and information reporting will not apply if
payments of interest on the notes are paid or collected by a foreign office of a
custodian, nominee or other foreign agent on behalf of the beneficial owner of
the new notes, or if a foreign office of a broker (as defined in applicable
Treasury regulations) pays the proceeds of the sale of the notes to the owner.
If, however, such nominee, custodian, agent or broker is, for United States
federal income tax purposes, a U.S. person, a controlled foreign corporation or
a foreign person that derives 50% or more of its gross income for specified
periods from the conduct of a trade or business in the United States or, with
respect to payments made after December 31, 2000, a foreign partnership, if at
any time during its tax year, one or more of its partners are United States
persons who, in the aggregate, hold more than 50% of the income or capital
interest in the partnership or if, at any time during its tax year, such foreign
partnership is engaged in a United States trade or business, interest payments
will not be subject to backup withholding but will be subject to information
reporting, unless:
- such custodian, nominee, agent or broker has documentary evidence in its
records that the beneficial owner is not a U.S. person and certain other
conditions are met, or
- the beneficial owner otherwise establishes an exemption.
Temporary Treasury Regulations provide that the Treasury is considering
whether backup withholding will apply with respect to payments of principal,
interest or the proceeds of a sale that are not subject to backup withholding
under the current regulations.
149
<PAGE> 152
Payments of principal and interest on notes paid to the beneficial owner of
notes by a United States office of a custodian, nominee or agent, or the payment
by the United States office of a broker of the proceeds of sale of notes will be
subject to both backup withholding and information reporting unless the
beneficial owner satisfies the "statement requirement" described above and the
company does not have actual knowledge that the beneficial owner is a United
States person or otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against a non-U.S. holder's U.S. federal income tax
liability if the required information is furnished to the IRS.
New Withholding Regulations. New regulations relating to withholding tax
on income paid to foreign persons will generally be effective for payments made
after December 31, 2000, subject to various transition rules. The new
withholding regulations modify and, in general, unify the way in which you
establish your status as a non-United States "beneficial owner" eligible for
withholding exemptions, including the "portfolio interest" exemption, a reduced
treaty rate or an exemption from backup withholding. For example, the new
withholding regulations will require new forms, which you generally will have to
provide earlier than you would have had to provide replacements for expiring
existing forms.
150
<PAGE> 153
PLAN OF DISTRIBUTION
Each broker-dealer that receives new notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such new notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of new notes received in exchange for outstanding notes
where such outstanding notes were acquired as a result of market-making
activities or other trading activities. We have agreed that for a period of 180
days after the exchange offer is completed, we will make this prospectus, as
amended or supplemented, available to any broker-dealer for use in connection
with any such resale. All resales must be made in compliance with state
securities or blue sky laws. We assume no responsibility with regard to
compliance with these requirements.
We will not receive any proceeds from any sale of new notes by
broker-dealers. New notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time:
- in one or more transactions in the over-the-counter market,
- in negotiated transactions,
- through the writing of options on the new notes, or
- a combination of such methods of resale.
Such notes may be sold:
- at market prices prevailing at the time of resale,
- at prices related to such prevailing market prices, or
- at negotiated prices.
Any such resale may be made directly to purchasers or to or through brokers
or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer or the purchasers of any such new notes.
Any broker-dealer that resells new notes that were received by it for its
own account pursuant to the exchange offer and any broker or dealer that
participates in a distribution of such new notes may be deemed to be an
"underwriter" within the meaning of the Securities Act. Any profit on any such
resale of new notes and any commissions or concessions received by any of them
may be deemed to be underwriting compensation under the Securities Act. The
letter of transmittal states that by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
151
<PAGE> 154
LEGAL MATTERS
Legal matters regarding the new notes will be passed upon for us by Jenner
& Block, Chicago, Illinois. Theodore R. Tetzlaff, a partner of Jenner & Block
and our former General Counsel, was the beneficial owner of 13,847 shares of our
common stock as of December 31, 1999.
EXPERTS
The financial statements and schedule included in this document to the
extent and for the periods indicated in their report have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report with
respect thereto, and are included in this document in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
report.
152
<PAGE> 155
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE OF
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED
DECEMBER 31, 1998
Report of independent public accountants.................... F-2
Statements of income for each of the three years in the
period ended December 31, 1998............................ F-3
Balance sheets -- December 31, 1998 and 1997................ F-4
Statements of cash flows for each of the three years in the
period ended December 31, 1998............................ F-5
Statements of changes in shareowners' equity for each of the
three years in the period ended December 31, 1998......... F-6
Statements of comprehensive income for each of the three
years in the period ended December 31, 1998............... F-7
Notes to financial statements............................... F-8
UNAUDITED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998
Statements of income for the nine month periods ended
September 30, 1999 and 1998............................... F-47
Statements of cash flows for the nine month periods ended
September 30, 1999 and 1998............................... F-48
Balance Sheets -- September 30, 1999, December 31, 1998 and
September 30, 1998........................................ F-49
Statements of changes in shareowners' equity for the nine
month periods ended September 30, 1999 and 1998........... F-50
Statements of comprehensive income for the nine month
periods ended September 30, 1999 and 1998................. F-51
Notes to financial statements............................... F-52
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS............ S-1
</TABLE>
F-1
<PAGE> 156
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Tenneco Automotive Inc.:
We have audited the accompanying balance sheets of Tenneco Automotive Inc.
(formerly known as Tenneco Inc.) (a Delaware corporation) and consolidated
subsidiaries (see Note 1) as of December 31, 1998 and 1997, and the related
statements of income, cash flows, changes in shareowners' equity and
comprehensive income for each of the three years in the period ended December
31, 1998. These financial statements and the schedule referred to below are the
responsibility of Tenneco Automotive Inc.'s management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Tenneco Automotive Inc. and
consolidated subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in the fourth quarter
of 1997, Tenneco Automotive Inc. and consolidated subsidiaries changed their
method of accounting for certain costs incurred in connection with information
technology transformation projects.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule listed in the
index to the financial statements and schedule relating to Tenneco Automotive
Inc. and consolidated subsidiaries is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. The supplemental schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
of Tenneco Automotive Inc. and consolidated subsidiaries taken as a whole.
ARTHUR ANDERSEN LLP
Houston, Texas
February 17, 1999
(except with respect to the
matters discussed in Notes 2 and 14
as to which the date is
August 20, 1999, and the
matters discussed in Note 15
as to which the date is
November 5, 1999)
F-2
<PAGE> 157
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(MILLIONS EXCEPT SHARE AND PER SHARE
AMOUNTS)
<S> <C> <C> <C>
REVENUES
Net sales and operating revenues.......................... $ 3,237 $ 3,226 $ 2,980
Other income, net......................................... (25) 37 (22)
---------- ---------- ----------
3,212 3,263 2,958
---------- ---------- ----------
COSTS AND EXPENSES
Cost of sales (exclusive of depreciation shown below)..... 2,332 2,303 2,140
Engineering, research, and development.................... 31 34 70
Selling, general, and administrative...................... 472 421 412
Depreciation and amortization............................. 150 110 94
---------- ---------- ----------
2,985 2,868 2,716
---------- ---------- ----------
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY
INTEREST.................................................. 227 395 242
Interest expense (net of interest capitalized).......... 69 58 60
Income tax expense...................................... 13 80 79
Minority interest....................................... 29 23 21
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS........................... 116 234 82
Income from discontinued operations, net of income tax...... 139 127 564
---------- ---------- ----------
Income before extraordinary loss............................ 255 361 646
Extraordinary loss, net of income tax....................... -- -- (236)
---------- ---------- ----------
Income before cumulative effect of change in accounting
principle................................................. 255 361 410
Cumulative effect of change in accounting principle, net of
income tax................................................ -- (46) --
---------- ---------- ----------
NET INCOME.................................................. 255 315 410
Preferred stock dividends................................... -- -- 12
---------- ---------- ----------
NET INCOME TO COMMON STOCK.................................. $ 255 $ 315 $ 398
========== ========== ==========
EARNINGS PER SHARE
Average shares of common stock outstanding --
Basic................................................... 33,701,115 34,052,946 33,921,875
Diluted................................................. 33,766,906 34,160,327 34,105,223
Basic earnings per share of common stock --
Continuing operations................................... $ 3.45 $ 6.87 $ 2.45
Discontinued operations................................. 4.13 3.73 16.27
Extraordinary loss...................................... -- -- (6.96)
Cumulative effect of change in accounting principle..... -- (1.35) --
---------- ---------- ----------
$ 7.58 $ 9.25 $ 11.76
========== ========== ==========
Diluted earnings per share of common stock --
Continuing operations................................... $ 3.44 $ 6.85 $ 2.43
Discontinued operations................................. 4.12 3.72 16.18
Extraordinary loss...................................... -- -- (6.96)
Cumulative effect of change in accounting principle..... -- (1.35) --
---------- ---------- ----------
$ 7.56 $ 9.22 $ 11.65
========== ========== ==========
Cash dividends per share of common stock.................... $ 6.00 $ 6.00 $ 9.00
========== ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements of income.
F-3
<PAGE> 158
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
------ ------
(MILLIONS)
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments....................... $ 29 $ 29
Receivables --
Customer notes and accounts, net....................... 430 402
Income taxes........................................... 3 38
Other.................................................. 10 4
Inventories............................................... 414 378
Deferred income taxes..................................... 39 21
Prepayments and other..................................... 139 178
------ ------
1,064 1,050
------ ------
Other assets:
Long-term notes receivable, net........................... 23 26
Goodwill and intangibles, net............................. 499 505
Deferred income taxes..................................... 39 55
Pension assets............................................ 101 93
Other..................................................... 201 153
------ ------
863 832
------ ------
Plant, property, and equipment, at cost..................... 1,944 1,767
Less -- Reserves for depreciation and amortization........ 851 738
------ ------
1,093 1,029
------ ------
Net assets of discontinued operations....................... 1,739 1,771
------ ------
$4,759 $4,682
====== ======
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt (including current maturities on long-term
debt).................................................. $ 304 $ 75
Trade payables............................................ 337 286
Taxes accrued............................................. 31 73
Accrued liabilities....................................... 161 141
Other..................................................... 76 116
------ ------
909 691
------ ------
Long-term debt.............................................. 671 713
------ ------
Deferred income taxes....................................... 98 165
------ ------
Postretirement benefits..................................... 139 110
------ ------
Deferred credits and other liabilities...................... 31 67
------ ------
Commitments and contingencies
Minority interest........................................... 407 408
------ ------
Shareowners' equity:
Common stock.............................................. -- --
Premium on common stock and other capital surplus......... 2,712 2,681
Accumulated other comprehensive income (loss)............. (91) (122)
Retained earnings......................................... 142 89
------ ------
2,763 2,648
Less -- Shares held as treasury stock, at cost............ 259 120
------ ------
2,504 2,528
------ ------
$4,759 $4,682
====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-4
<PAGE> 159
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1998 1997 1996
----- ----- -------
(MILLIONS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations........................... $ 116 $ 234 $ 82
Adjustments to reconcile income from continuing operations
to cash provided (used) by continuing operations--
Depreciation and amortization........................... 150 110 94
Deferred income taxes................................... (76) 31 10
(Gain) loss on sale of businesses and assets, net....... 20 20 1
Changes in components of working capital--
(Increase) decrease in receivables.................... (88) (25) 128
(Increase) decrease in inventories.................... (32) (12) 22
(Increase) decrease in prepayments and other current
assets............................................... 26 (79) 45
Increase (decrease) in payables....................... (12) 107 (39)
Increase (decrease) in taxes accrued.................. (9) (8) (9)
Increase (decrease) in interest accrued............... -- 30 6
Increase (decrease) in other current liabilities...... 10 (108) 45
Other................................................... (42) (89) (117)
----- ----- -------
Cash provided (used) by continuing operations............... 63 211 268
Cash provided (used) by discontinued operations............. 469 308 (15)
----- ----- -------
Net cash provided (used) by operating activities............ 532 519 253
----- ----- -------
INVESTING ACTIVITIES
Net proceeds related to the sale of discontinued
operations................................................ 22 24 1,197
Net proceeds from sale of businesses and assets............. 10 5 3
Expenditures for plant, property, and equipment............. (195) (221) (188)
Acquisitions of businesses.................................. (3) (29) (425)
Expenditures for plant, property, and equipment and business
acquisitions--discontinued operations..................... (498) (622) (1,106)
Investments and other....................................... (90) (44) (166)
----- ----- -------
Net cash provided (used) by investing activities............ (754) (887) (685)
----- ----- -------
FINANCING ACTIVITIES
Issuance of common, treasury, and SECT shares............... 50 48 164
Purchase of common stock.................................... (154) (132) (172)
Issuance of NPS Preferred Stock............................. -- -- 296
Issuance of equity securities by a subsidiary............... -- 99 --
Redemption of preferred stock............................... -- -- (20)
Issuance of long-term debt.................................. 4 597 2,800
Retirement of long-term debt................................ (21) (23) (2,288)
Net increase (decrease) in short-term debt excluding current
maturities on long-term debt.............................. 540 (31) (221)
Cash transferred in Merger and Distributions................ -- -- (99)
Dividends (common and preferred)............................ (203) (204) (313)
----- ----- -------
Net cash provided (used) by financing activities............ 216 354 147
----- ----- -------
Effect of foreign exchange rate changes on cash and
temporary cash investments................................ 6 3 1
----- ----- -------
Increase (decrease) in cash and temporary cash
investments............................................... -- (11) (284)
Cash and temporary cash investments, January 1.............. 29 40 324
----- ----- -------
Cash and temporary cash investments, December 31 (Note)..... $ 29 $ 29 $ 40
===== ===== =======
Cash paid during the year for interest...................... $ 259 $ 206 $ 489
Cash paid during the year for income taxes (net of
refunds).................................................. $ 80 $(145) $ 685
</TABLE>
- -------------------------
Note: Cash and temporary cash investments include highly liquid investments with
a maturity of three months or less at the date of purchase.
The accompanying notes to financial statements are an integral part of these
statements of cash flows.
F-5
<PAGE> 160
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------- ----------- ------- ----------- ------
(MILLIONS EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
PREFERRED STOCK
Balance January 1................................ -- $ -- -- $ -- -- $ --
Issuance of NPS Preferred Stock................ -- -- -- -- 6,000,000 296
Merger of energy business...................... -- -- -- -- (6,000,000) (296)
----------- ------ ----------- ------ ----------- ------
Balance December 31.............................. -- -- -- -- -- --
=========== ------ =========== ------ =========== ------
COMMON STOCK
Balance January 1................................ 34,513,977 -- 34,313,531 -- 38,270,323 957
Issued pursuant to benefit plans............... 220,062 -- 200,446 -- 16,959 --
Recapitalization of New Tenneco................ -- -- -- -- (3,973,751) (957)
----------- ------ ----------- ------ ----------- ------
Balance December 31.............................. 34,734,039 -- 34,513,977 -- 34,313,531 --
=========== ------ =========== ------ =========== ------
STOCK EMPLOYEE COMPENSATION TRUST (SECT)
Balance January 1................................ -- -- (215)
Shares issued.................................. -- -- 216
Adjustment to market value..................... -- -- (1)
------ ------ ------
Balance December 31.............................. -- -- --
------ ------ ------
PREMIUM ON COMMON STOCK AND OTHER CAPITAL SURPLUS
Balance January 1................................ 2,681 2,644 3,602
Premium on common stock issued pursuant to
benefit plans................................ 31 37 28
Adjustment of SECT to market value............. -- -- 1
Merger of energy business...................... -- -- (372)
Distribution of shipbuilding business.......... -- -- (270)
Recapitalization of New Tenneco................ -- -- (346)
Other.......................................... -- -- 1
------ ------ ------
Balance December 31.............................. 2,712 2,681 2,644
------ ------ ------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance January 1................................ (122) 23 26
Other comprehensive income..................... 31 (145) (3)
------ ------ ------
Balance December 31.............................. (91) (122) 23
------ ------ ------
RETAINED EARNINGS (ACCUMULATED DEFICIT)
Balance January 1................................ 89 (21) (469)
Net income..................................... 255 315 410
Dividends--
Preferred stock.............................. -- -- (9)
Common stock................................. (202) (205) (312)
Accretion of excess of redemption value of
preferred stock over fair value at date of
issue........................................ -- -- (3)
Recapitalization of New Tenneco................ -- -- 362
------ ------ ------
Balance December 31.............................. 142 89 (21)
------ ------ ------
LESS -- COMMON STOCK HELD AS TREASURY STOCK, AT
COST
Balance January 1................................ 585,637 120 -- -- 3,284,524 753
Shares acquired................................ 876,076 161 656,151 134 1,023,781 267
Shares issued pursuant to benefit and dividend
reinvestment plans........................... (110,178) (22) (70,514) (14) (334,554) (79)
Recapitalization of New Tenneco................ -- -- -- -- (3,973,751) (941)
----------- ------ ----------- ------ ----------- ------
Balance December 31.............................. 1,351,535 259 585,637 120 -- --
=========== ------ =========== ------ =========== ------
Total........................................ $2,504 $2,528 $2,646
====== ====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements of changes in shareowners' equity.
F-6
<PAGE> 161
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
ACCUMULATED ACCUMULATED ACCUMULATED
OTHER OTHER OTHER
COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE
INCOME INCOME INCOME INCOME INCOME INCOME
------------- ------------- ------------- ------------- ------------- -------------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
NET INCOME........................ $ 255 $ 315 $ 410
----------- ----------- -----------
ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS)
CUMULATIVE TRANSLATION
ADJUSTMENT
Balance January 1............... $ (122) $ 23 $ 26
Translation of foreign
currency statements......... 40 40 (160) (160) 39 39
Hedges of net investment in
foreign subsidiaries........ -- -- 23 23 (47) (47)
Income tax benefit
(expense)................... -- -- (8) (8) 16 16
Reclassification adjustment
for disposition of
investments in foreign
subsidiaries................ -- -- -- -- (11) (11)
----------- ----------- -----------
Balance December 31............. (82) (122) 23
----------- ----------- -----------
ADDITIONAL MINIMUM PENSION
LIABILITY ADJUSTMENT
Balance January 1............... -- -- --
Additional minimum pension
liability adjustment........ (15) (15) -- -- -- --
Income tax benefit
(expense)................... 6 6 -- -- -- --
----------- ----------- -----------
Balance December 31............. (9) -- --
----------- ----------- -----------
Balance December 31............... $ (91) $ (122) $ 23
============= ============= =============
----------- ----------- -----------
Other comprehensive income
(loss).......................... 31 (145) (3)
----------- ----------- -----------
COMPREHENSIVE INCOME.............. $ 286 $ 170 $ 407
============= ============= =============
</TABLE>
The accompanying notes to financial statements are an integral part
of these statements of comprehensive income.
F-7
<PAGE> 162
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
Consolidation and Presentation
The financial statements of Tenneco Automotive Inc. and consolidated
subsidiaries ("Tenneco") include all majority-owned subsidiaries. Investments in
20% to 50% owned companies where Tenneco has the ability to exert significant
influence over operating and financial policies are carried at cost plus equity
in undistributed earnings since the date of acquisition and cumulative
translation adjustments. Tenneco has no investments in 20% to 50% owned
companies where it does not carry the investment at cost plus equity in
undistributed earnings. All significant intercompany transactions have been
eliminated.
Prior to November 1999, Tenneco was known as Tenneco Inc. Tenneco changed
its name to Tenneco Automotive Inc. following the spin-off of its packaging
business in November 1999. This transaction is more fully described in Note 2.
In December 1996, Tenneco was spun-off from the company then known as Tenneco
Inc. ("Old Tenneco") in a series of transactions (the "Transaction"), which
included distributions (the "Distributions") to Old Tenneco shareowners and a
subsequent merger (the "Merger"). Following the Transaction, Tenneco owned the
automotive parts ("Automotive"), packaging ("Specialty Packaging" and
"Paperboard Packaging") and administrative services ("Tenneco Business
Services") businesses of Old Tenneco. These transactions and their accounting
treatment are described in more detail in Note 2, "Discontinued Operations,
Disposition of Assets, and Extraordinary Loss."
Beginning in January 1999, Tenneco began a series of transactions that
ultimately resulted in the discontinuance of its Paperboard Packaging operations
in June 1999 and its Specialty Packaging operations in August 1999. See Note 2
for information regarding these transactions.
For purposes of these financial statements, "Tenneco" or the "Company"
refers to (1) Old Tenneco and its subsidiaries before the Transaction; (2)
Tenneco Inc., formerly known as New Tenneco Inc. ("New Tenneco"), and its
subsidiaries for the period after the Transaction through the spin-off; and (3)
Tenneco Automotive Inc. and its subsidiaries for all periods following the
spin-off.
Changes in Accounting Principles
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes new
accounting and reporting standards requiring that all derivative instruments
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income statement
and requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. This statement
cannot be applied retroactively and is effective for all fiscal years beginning
after June 15, 2000. Tenneco is currently evaluating the new standard but has
not yet determined the impact it will have on its financial position or results
of operations.
In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-Up Activities," which requires costs of start-up activities to be expensed
as incurred. This statement is effective for fiscal years beginning after
December 15, 1998. The statement requires previously capitalized costs related
to start-up activities to be expensed as a cumulative effect of a change in
accounting principle when the statement is adopted. Prior to January 1, 1999,
Tenneco capitalized certain costs related to start-up activities, primarily
engineering costs for new automobile original equipment platforms. Tenneco
expects to record an after-tax charge for
F-8
<PAGE> 163
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the cumulative effect of this change in accounting principle upon adoption of
approximately $100 million. Tenneco will adopt this new accounting principle in
the first quarter of 1999.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which establishes new
accounting and reporting standards for the costs of computer software developed
or obtained for internal use. This statement will be applied prospectively and
is effective for fiscal years beginning after December 15, 1998. The impact of
this new standard will not have a significant effect on Tenneco's financial
position or results of operations.
Tenneco adopted FAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information," and FAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," in 1998. Disclosures required by
these statements for earlier periods presented have been restated on a
comparative basis.
As required by the FASB's Emerging Issues Task Force ("EITF") Issue 97-13,
"Accounting for Costs Incurred in Connection with a Consulting Contract that
Combines Business Process Reengineering and Information Technology
Transformation," Tenneco recorded an after-tax charge of $46 million ($1.35 per
common share on both the basic and diluted bases), net of a tax benefit of $28
million, in the fourth quarter of 1997. EITF 97-13 establishes the accounting
treatment and an allocation methodology for certain consulting and other costs
incurred in connection with information technology transformation efforts. This
charge was reported as a cumulative effect of change in accounting principle.
Inventories
At December 31, 1998 and 1997, inventory by major classification was as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(MILLIONS)
<S> <C> <C>
Finished goods.............................................. $221 $187
Work in process............................................. 79 72
Raw materials............................................... 73 76
Materials and supplies...................................... 41 43
---- ----
$414 $378
==== ====
</TABLE>
Inventories are stated at the lower of cost or market. A portion of total
inventories (28% and 31% at December 31, 1998 and 1997, respectively) is valued
using the "last-in, first-out" method. All other inventories are valued on the
"first-in, first-out" ("FIFO") or "average" methods. If the FIFO or average
method of inventory accounting had been used by Tenneco for all inventories,
inventories would have been $15 million and $16 million higher at December 31,
1998 and 1997, respectively.
Customer Acquisition Costs
Tenneco capitalizes certain costs it incurs in connection with the
acquisition of new customer contracts to sell its automotive aftermarket
products. These new customer acquisition costs are incurred in exchange for
contracts in which the aftermarket customer agrees to purchase Tenneco's
automotive aftermarket products exclusively for periods of time ranging up to
three years. These costs are amortized over the initial contract period. At
December 31, 1998 and 1997, the net capitalized costs related to these
activities was $54 million and $47 million, respectively.
F-9
<PAGE> 164
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Goodwill and Intangibles, net
At December 31, 1998 and 1997, goodwill and intangibles, net of
amortization, by major category were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(MILLIONS)
<S> <C> <C>
Goodwill.................................................... $487 $497
Other intangible assets..................................... 12 8
---- ----
$499 $505
==== ====
</TABLE>
Goodwill is being amortized on a straight-line basis over periods ranging
from 20 years to 40 years. Such amortization amounted to $16 million, $14
million, and $7 million for 1998, 1997, and 1996, respectively, and is included
in the statements of income caption "Depreciation and amortization."
Tenneco has capitalized certain intangible assets, primarily trademarks and
patents, based on their estimated fair value at date of acquisition.
Amortization is provided on these intangible assets on a straight-line basis
over periods ranging from 5 to 40 years. Such amortization amounted to $2
million, $6 million, and $2 million in 1998, 1997, and 1996, respectively, and
is included in the statements of income caption "Depreciation and amortization."
Plant, Property, and Equipment, at Cost
At December 31, 1998 and 1997, plant, property, and equipment, at cost, by
major category was as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
(MILLIONS)
<S> <C> <C>
Land, buildings, and improvements........................... $ 341 $ 265
Machinery and equipment..................................... 1,395 1,320
Other, including construction in progress................... 208 182
------ ------
$1,944 $1,767
====== ======
</TABLE>
Depreciation of Tenneco's properties is provided on a straight-line basis
over the estimated useful lives of the assets. Useful lives range from 10 to 40
years for buildings and improvements and from 3 to 25 years for machinery and
equipment.
Notes Receivable and Allowance for Doubtful Accounts
Short and long-term notes receivable of $36 million and $37 million were
outstanding at December 31, 1998 and 1997, respectively.
At December 31, 1998 and 1997, the short and long-term allowance for
doubtful accounts on accounts and notes receivable was $39 million and $20
million, respectively.
Other Long-Term Assets
Tenneco capitalizes certain costs related to start-up activities, primarily
engineering costs for new automobile original equipment platforms, which are
included in the balance sheet caption "Other assets -- Other." The platform
engineering costs are amortized over the life of the underlying supply
agreements and other start-up costs are amortized over the periods benefited,
generally two years. Start-up costs capitalized, net of amortization, at
December 31, 1998 and 1997, were $111 million and $79 million,
F-10
<PAGE> 165
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
respectively, for continuing operations and $41 million and $20 million,
respectively, for discontinued operations. Tenneco will adopt a new accounting
standard in the first quarter of 1999, which will require these costs to be
expensed. Refer to "Changes in Accounting Principles" discussed previously in
this footnote.
Tenneco capitalizes certain costs related to the purchase and development
of software which is used in its business operations. The costs attributable to
these software systems are amortized over their estimated useful lives, ranging
from 3 to 12 years, based on various factors such as the effects of
obsolescence, technology and other economic factors. Capitalized software
development costs, net of amortization, at December 31, 1998 and 1997, were $67
million and $47 million, respectively, for continuing operations and $140
million and $104 million, respectively, for discontinued operations. As
described previously in this footnote, Tenneco will adopt SOP 98-1 regarding
software cost capitalization. The impact of this new standard will not have a
significant effect on Tenneco's financial position or results of operations.
Environmental Liabilities
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations and
that do not contribute to current or future revenue generation are expensed.
Liabilities are recorded when environmental assessments indicate that remedial
efforts are probable and the costs can be reasonably estimated. Estimates of the
liability are based upon currently available facts, existing technology, and
presently enacted laws and regulations taking into consideration the likely
effects of inflation and other societal and economic factors. All available
evidence is considered including prior experience in remediation of contaminated
sites, other companies' clean-up experience, and data released by the United
States Environmental Protection Agency or other organizations. These estimated
liabilities are subject to revision in future periods based on actual costs or
new information. These liabilities are included in the balance sheet at their
undiscounted amounts. Recoveries are evaluated separately from the liability
and, when assured, are recorded and reported separately from the associated
liability in the financial statements. For further information on this subject,
refer to Note 13, "Commitments and Contingencies."
Income Taxes
Tenneco utilizes the liability method of accounting for income taxes
whereby it recognizes deferred tax assets and liabilities for the future tax
consequences of temporary differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements. Deferred tax
assets are reduced by a valuation allowance when, based upon management's
estimates, it is more likely than not that a portion of the deferred tax assets
will not be realized in a future period. The estimates utilized in the
recognition of deferred tax assets are subject to revision in future periods
based on new facts or circumstances.
Tenneco does not provide for U.S. income taxes on unremitted earnings of
foreign subsidiaries as it is the present intention of management to reinvest
the unremitted earnings in its foreign operations. Unremitted earnings of
foreign subsidiaries are approximately $755 million for continuing operations
and $95 million for discontinued operations at December 31, 1998. It is not
practicable to determine the amount of U.S. income taxes that would be payable
upon remittance of the assets that represent those earnings.
F-11
<PAGE> 166
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Earnings Per Share
According to the requirements of FAS No. 128, "Earnings Per Share," basic
earnings per share are computed by dividing income available to common
shareowners by the weighted-average number of common shares outstanding. The
computation of diluted earnings per share is similar to the computation of basic
earnings per share except that the weighted-average number of shares outstanding
is adjusted to include estimates of additional shares that would be issued if
potentially dilutive common shares had been issued. In addition, income
available to common shareowners is adjusted to include any changes in income or
loss that would result from the assumed issuance of the dilutive common shares.
In 1996, Tenneco's preferred stock outstanding before the Merger was
converted into El Paso Natural Gas Company ("El Paso") common stock as part of
the Merger; therefore, preferred stock dividends have been deducted from income
from discontinued operations in determining earnings per share. For more
information regarding the Merger, see Note 2, "Discontinued Operations,
Disposition of Assets, and Extraordinary Loss."
Allocation of Corporate Debt and Interest Expense
Tenneco's historical practice has been to incur indebtedness for its
consolidated group at the parent company level or at a limited number of
subsidiaries, rather than at the operating company level, and to centrally
manage various cash functions. Consequently, corporate debt of Tenneco has been
allocated to discontinued operations based upon the ratio of the discontinued
operations' net assets to Tenneco's consolidated net assets plus debt. Interest
expense, net of tax, has been allocated to Tenneco's discontinued operations
based on the same allocation methodology. See Note 2, "Discontinued Operations,
Disposition of Assets, and Extraordinary Loss," for further discussion.
Research and Development
Research and development costs are expensed as incurred. Research and
development expenses were $30 million, $19 million, and $36 million for 1998,
1997, and 1996, respectively, and are included in the income statement caption
"Engineering, research, and development expenses."
Realignment Charges
In 1996, the Company recorded charges to income from continuing operations
of approximately $64 million in connection with the realignment of Automotive's:
(i) Walker exhaust system original equipment and aftermarket manufacturing
operations in Europe, (ii) Walker aftermarket operations in North America, and
(iii) Monroe ride control product line. All actions related to the realignment
plan have been completed.
Foreign Currency Translation
Financial statements of international operations are translated into U.S.
dollars using the exchange rate at each balance sheet date for assets and
liabilities and the weighted average exchange rate for each applicable period
for revenues, expenses, and gains and losses. Translation adjustments are
reflected in the balance sheet caption "Accumulated other comprehensive income
(loss)."
Risk Management Activities
Tenneco uses derivative financial instruments, principally foreign currency
forward purchase and sale contracts with terms of less than one year, to hedge
its exposure to changes in foreign currency exchange rates. Tenneco's primary
exposure to changes in foreign currency rates results from intercompany loans
made between Tenneco affiliates to minimize the need for borrowings from third
parties. Net gains or
F-12
<PAGE> 167
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
losses on these foreign currency exchange contracts that are designated as
hedges are recognized in the income statement to offset the foreign currency
gain or loss on the underlying transaction. Additionally, Tenneco enters into
foreign currency forward purchase and sale contracts to mitigate its exposure to
changes in exchange rates on intercompany and third party trade receivables and
payables. Since these anticipated transactions are not firm commitments, Tenneco
marks these forward contracts to market each period and records any gain or loss
in the income statement. Tenneco has from time to time also entered into forward
contracts to hedge its net investment in foreign subsidiaries. The after-tax net
gains or losses on these contracts are recognized on the accrual basis in the
balance sheet caption "Accumulated other comprehensive income (loss)." In the
statement of cash flows, cash receipts or payments related to these exchange
contracts are classified consistent with the cash flows from the transaction
being hedged.
Tenneco does not currently enter into derivative financial instruments for
speculative purposes.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions in determining the reported amounts of Tenneco's assets,
liabilities, revenues, and expenses. Reference is made to the "Income Taxes" and
"Environmental Liabilities" sections of this footnote and Notes 11 and 13 for
additional information on significant estimates included in Tenneco's financial
statements.
Reclassifications
Prior years' financial statements have been reclassified where appropriate
to conform to 1998 presentations.
2. DISCONTINUED OPERATIONS, DISPOSITION OF ASSETS, AND EXTRAORDINARY LOSS
Strategic Alternatives Analysis
In July 1998, Tenneco's Board of Directors authorized management to develop
a broad range of strategic alternatives to separate the automotive,
containerboard packaging, and specialty packaging businesses. Subsequently,
Tenneco completed the following actions:
- In January 1999, Tenneco reached an agreement to contribute the
containerboard assets of its paperboard packaging segment to a new joint
venture with an affiliate of Madison Dearborn Partners, Inc. The
contribution of the containerboard assets to the joint venture was
completed in April 1999. Tenneco received consideration of cash and debt
assumption totaling approximately $2 billion and a 45 percent common
equity interest in the joint venture (now 43 percent due to subsequent
management equity issuances) valued at approximately $200 million.
- In April 1999, Tenneco reached an agreement to sell the paperboard
packaging segment's other assets, its folding carton operations, to
Caraustar Industries. This transaction closed in June 1999.
- Also in April 1999, Tenneco announced that its Board of Directors had
approved the separation of its automotive and specialty packaging
businesses into two separate, independent companies. The spin-off and
related transactions described in this Note 2 were subsequently
completed in November 1999. See Note 15, "Subsequent Events."
The separation of the automotive and packaging businesses will be
accomplished by the spin-off of the common stock of Tenneco Packaging Inc.
("Packaging") to Tenneco shareowners (the "Spin-off"). At the time of the
Spin-off, Packaging will include Tenneco's specialty packaging business,
Tenneco's administrative services operations and the remaining interest in the
containerboard joint venture.
F-13
<PAGE> 168
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Before the Spin-off, Tenneco will realign substantially all of its existing
debt through some combination of tender offers, exchange offers, prepayments,
and other refinancings. This debt realignment will be financed with internally
generated cash, borrowings by Tenneco under a new credit facility, the issuance
by Tenneco of subordinated debt, and borrowings by Packaging under new credit
facilities.
The Spin-off is subject to conditions, including formal declaration of the
Spin-off by the Tenneco Board of Directors, Tenneco's receipt, and the continued
effectiveness of a determination that the Spin-off will be tax-free for U.S.
federal income tax purposes, and the successful completion of the debt
realignment and the corporate restructuring transactions. In August 1999,
Tenneco received a letter ruling from the Internal Revenue Service that the
Spin-off will be tax-free for U.S. federal income tax purposes to Tenneco and
its shareowners.
Discontinued Operations
The Specialty Packaging Business
In April 1999, Tenneco Automotive Inc.'s Board of Directors approved the
separation of its automotive and specialty packaging businesses into two
separate, independent companies. This separation will be accomplished by the
Spin-off, contingent upon, among other things, Tenneco's receipt, and the
continued effectiveness of a determination that the Spin-off will be tax-free
for U.S. federal income tax purposes. In August 1999, Tenneco received a letter
ruling from the Internal Revenue Service that the Spin-off will be tax-free for
U.S. federal income tax purposes to Tenneco and its shareowners, and as a result
has restated its financial statements to reflect its specialty packaging segment
as a discontinued operation. Since Tenneco would not have proceeded with the
Spin-off absent the receipt of a determination that the Spin-off would be
tax-free, the establishment of a measurement date for discontinued operations
did not occur until that determination was received.
Net assets as of December 31, 1998, 1997, and 1996, and results of
operations for the years then ended for the specialty packaging business were as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Net assets at December 31................................... $1,373 $1,348 $1,424
====== ====== ======
Net sales and operating revenues............................ $2,791 $2,563 $1,987
====== ====== ======
Income before income taxes and interest allocation.......... 280 302 231
Income tax (expense) benefit................................ (113) (118) (103)
------ ------ ------
Income before interest allocation........................... 167 184 128
Allocated interest expense, net of income tax (Note)........ (85) (78) (63)
------ ------ ------
Income from discontinued operations......................... $ 82 $ 106 $ 65
====== ====== ======
</TABLE>
- ---------------
Note: Reference is made to Note 1, "Summary of Accounting Policies -- Allocation
of Corporate Debt and Interest Expense," for a discussion of the
allocation of corporate debt and interest expense to discontinued
operations.
The Paperboard Packaging Business
In connection with the containerboard transaction, in April 1999, Tenneco
received consideration of cash and debt assumption totaling approximately $2
billion and a 45 percent interest in the joint venture (now 43 percent due to
subsequent management equity issuances) valued at approximately $200 million.
The containerboard assets contributed to the joint venture represented
substantially all of the assets of the paperboard packaging segment and included
four mills, 67 corrugated products plants, and an ownership or controlling
interest in approximately 950,000 acres of timberland. Before the transaction,
Tenneco
F-14
<PAGE> 169
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Packaging borrowed approximately $1.8 billion and used approximately $1.2
billion to acquire assets used by the containerboard business under operating
leases and timber cutting rights and to purchase containerboard business
accounts receivable that had previously been sold to a third party. The
remainder of the borrowings was remitted to Tenneco and used to repay a portion
of short-term debt. Packaging then contributed the containerboard business
assets (subject to the new indebtedness and the containerboard business
liabilities) to the joint venture in exchange for $247 million in cash and the
45 percent interest in the joint venture. As a result of the sale transaction,
Tenneco recognized a pre-tax loss of $293 million, $178 million after-tax or
$5.35 per diluted common share in the first quarter of 1999, based on the amount
by which the carrying amount of the containerboard assets exceeded the fair
value of those assets, less cost to sell. The estimate of fair value of the
containerboard assets was based on the fair value of the consideration received
by Tenneco from the joint venture.
In April 1999, Tenneco reached an agreement to sell the paperboard
packaging segment's other assets, its folding carton operations, to Caraustar
Industries. This transaction closed in June 1999.
Net assets as of December 31, 1998, 1997, and 1996, and results of
operations for the years then ended for the paperboard packaging business were
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Net assets at December 31................................... $ 366 $ 423 $ 459
====== ====== ======
Net sales and operating revenues............................ $1,570 $1,431 $1,605
====== ====== ======
Income before income taxes and interest allocation.......... $ 131 $ 63 $ 152
Income tax (expense) benefit................................ (48) (19) (60)
------ ------ ------
Income before interest allocation........................... 83 44 92
Allocated interest expense, net of income tax (Note)........ (26) (23) (21)
------ ------ ------
Income from discontinued operations......................... $ 57 $ 21 $ 71
====== ====== ======
</TABLE>
- -------------------------
Note: Reference is made to Note 1, "Summary of Accounting Policies -- Allocation
of Corporate Debt and Interest Expense," for a discussion of the
allocation of corporate debt and interest expense to discontinued
operations.
The Energy Business and Shipbuilding Business
Tenneco was spun-off from Old Tenneco on December 11, 1996, following a
series of transactions undertaken to realign the assets, liabilities, and
operations of Old Tenneco such that Automotive, Specialty Packaging, Paperboard
Packaging, and Tenneco Business Services were owned by New Tenneco and the
shipbuilding business was owned by Newport News Shipbuilding Inc. ("Newport
News"). On December 11, 1996, Old Tenneco distributed the shares of New Tenneco
and Newport News to its shareowners. On December 12, 1996, Old Tenneco, which
then consisted primarily of the energy business and certain previously
discontinued operations of Old Tenneco, merged with a subsidiary of El Paso.
Although the separation of Tenneco from Old Tenneco was structured as a
spin-off for legal, tax, and other reasons, Tenneco kept certain important
aspects of Old Tenneco, including its executive management, Board of Directors,
and headquarters. Most importantly, the combined assets, revenues, and operating
income of Automotive, Specialty Packaging and Paperboard Packaging represented
more than half the assets, revenues, and operating income of Old Tenneco before
the Distributions and Merger. Consequently, Tenneco's financial statements for
periods before the Distributions and Merger present the net assets and results
of operations of Old Tenneco's shipbuilding and energy businesses, as well as
its farm and construction equipment business which was disposed of before the
Distributions and Merger, as discontinued operations.
F-15
<PAGE> 170
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the Distributions, one share of New Tenneco common stock
($.01 par value) was issued for each share of Old Tenneco common stock ($5.00
par value) and one share of Newport News common stock was issued for each five
shares of Old Tenneco common stock. Also, in connection with the Merger, Old
Tenneco shareowners received shares of El Paso common stock valued at
approximately $914 million in the aggregate in exchange for their shares of Old
Tenneco common and preferred stock. The treasury shares held by Old Tenneco did
not participate in the Merger and Distributions and were retained by Old Tenneco
in the Merger. Subsequent to the Transaction, the common equity of Tenneco
relates solely to the shares of New Tenneco common stock issued in the
Distributions. In connection with the Transaction, the retained earnings
(accumulated deficit) of Old Tenneco was eliminated. Retained earnings
(accumulated deficit) shown on the balance sheets represents net earnings
(losses) accumulated after the date of the Transaction. The effects of the
issuance of New Tenneco common stock in the Distributions, the retention of
treasury shares by Old Tenneco, and the elimination of Old Tenneco's retained
earnings (accumulated deficit) have been reflected in the statements of changes
in shareowners' equity as "Recapitalization of New Tenneco."
Results of operations for the year ended December 31, 1996, for the energy
business were as follows:
<TABLE>
<CAPTION>
(MILLIONS)
<S> <C>
Net sales and operating revenues............................ $2,512
======
Income before income taxes and interest allocation.......... $ 291
Income tax expense.......................................... (78)
------
Income before interest allocation........................... 213
Allocated interest expense, net of income tax (Note)........ (86)
------
Income from discontinued operations before transaction
costs..................................................... $ 127
======
</TABLE>
- -------------------------
Note: Reference is made to Note 1, "Summary of Accounting Policies -- Allocation
of Corporate Debt and Interest Expense," for a discussion of the
allocation of corporate debt and interest expense to discontinued
operations.
On December 11, 1996, one day before the Merger, Old Tenneco completed the
distribution of the common stock of Newport News to the holders of Old Tenneco
common stock. As part of the Distributions, Newport News retained the net assets
of the shipbuilding business, including approximately $600 million of debt that
had been issued during November 1996.
Results of operations for the year ended December 31, 1996, for the
shipbuilding business were as follows:
<TABLE>
<CAPTION>
(MILLIONS)
<S> <C>
Net sales and operating revenues............................ $1,822
======
Income before income taxes and interest allocation.......... $ 133
Income tax expense.......................................... (43)
------
Income before interest allocation........................... 90
Allocated interest expense, net of income tax (Note)........ (20)
------
Income from discontinued operations before transaction
costs..................................................... $ 70
======
</TABLE>
- -------------------------
Note: Reference is made to Note 1, "Summary of Accounting Policies -- Allocation
of Corporate Debt and Interest Expense," for a discussion of the
allocation of corporate debt and interest expense to discontinued
operations.
The costs incurred to complete the Transaction, consisting primarily of
financial advisory, legal, accounting, printing, and other costs, of
approximately $108 million, net of a $17 million income tax benefit, were
recorded as a component of 1996 income from discontinued operations.
F-16
<PAGE> 171
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Farm and Construction Equipment Operations
In June 1994, Tenneco completed an initial public offering ("IPO") of
approximately 29% of the common stock of Case Corporation ("Case"), the holder
of Tenneco's farm and construction equipment segment. In November 1994, a
secondary offering of Case common stock reduced Tenneco's ownership interest in
Case to approximately 44%. Combined proceeds from the two transactions was $694
million, net of commissions and offering expenses. The combined gain on the
transactions was $36 million, including a $7 million tax benefit. In an August
1995 public offering, Tenneco sold an additional 16.1 million shares of Case
common stock for net proceeds of approximately $540 million. The sale resulted
in a gain of $101 million and reduced Tenneco's ownership in Case from 44% to
21%. In December 1995, Tenneco sold to a third party a subordinated note
receivable due from Case, which was received as part of the reorganization
preceding the Case IPO, for net proceeds of $298 million and recognized a gain
of $32 million. In March 1996, Tenneco sold its remaining 15.2 million shares of
common stock of Case in a public offering. Net proceeds of approximately $788
million were received, resulting in a gain of $340 million, net of $83 million
in income tax expense.
Results of operations for the year ended December 31, 1996, for the farm
and construction equipment segment were as follows:
<TABLE>
<CAPTION>
(MILLIONS)
<S> <C>
Net sales and operating revenues............................ $ --
====
Income before income taxes and interest allocation.......... $ 1
Income tax benefit.......................................... --
----
Income before interest allocation........................... 1
Allocated interest expense, net of income tax (Note)........ (2)
----
Loss from operations........................................ (1)
----
Gain on disposition......................................... 423
Income tax expense from disposition......................... (83)
----
Net gain on disposition..................................... 340
----
Income from discontinued operations......................... $339
====
</TABLE>
- -------------------------
Note: Reference is made to Note 1, "Summary of Accounting Policies -- Allocation
of Corporate Debt and Interest Expense," for a discussion of the
allocation of corporate debt and interest expense to discontinued
operations.
Disposition of Assets
Gains and losses on the sale of businesses and assets have been included in
the caption "Other income, net" in the accompanying statements of income.
Extraordinary Loss
In preparation for the Transaction, Old Tenneco realigned $3.8 billion of
indebtedness (the "1996 Debt Realignment") through various cash tender offers,
debt exchanges, defeasances, and other retirements. The cash funding required to
consummate the 1996 Debt Realignment was financed through internally generated
cash, borrowings under new credit facilities of both Old Tenneco and New
Tenneco, borrowings under a new credit facility and other financings at Newport
News, and proceeds from the issuance of 8 1/4% cumulative junior preferred stock
("NPS Preferred Stock"), which was retained by Old Tenneco in the Merger. As a
result of the Merger, El Paso indirectly acquired approximately $2.8 billion of
debt and preferred stock obligations as well as certain liabilities related to
operations previously discontinued by Old Tenneco.
As a result of the 1996 Debt Realignment, Tenneco recognized an
extraordinary loss of approximately $236 million, net of a tax benefit of
approximately $126 million. This extraordinary loss consists principally
F-17
<PAGE> 172
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of the fair value paid in the cash tender offers and the fair value of debt
exchanged in the debt exchange offers in excess of the historical net carrying
value for the debt tendered and exchanged.
3. RESTRUCTURING AND OTHER CHARGES
On July 21, 1998, Tenneco announced its intention to initiate a
restructuring plan designed to reduce administrative and operational overhead
costs in every part of Tenneco's business. In the fourth quarter of 1998,
Tenneco's Board of Directors approved an extensive restructuring plan to
accomplish the overhead reduction goals as well as to consolidate the
manufacturing and distribution operations of Automotive's North American
aftermarket business. Tenneco recorded a pre-tax charge to income from
continuing operations of $53 million, $34 million after-tax or $1.02 per share,
in the fourth quarter of 1998 related to this restructuring plan. Of the pre-tax
charge, for operational restructuring plans, $36 million is related to the
Automotive aftermarket restructuring. A staff and related cost reduction plan,
which covers staff reductions at the Automotive operating unit and corporate
operations, is expected to cost $17 million.
The Automotive aftermarket restructuring involves closing two plant
locations and five distribution centers and the elimination of 302 positions at
those locations. The staff and related cost reduction plan involves the
elimination of 454 administrative positions.
The fixed assets at the locations to be closed were written down to their
fair value, less costs to sell, in the fourth quarter of 1998. As a result of
the single-purpose nature of the assets, fair value was estimated at scrap value
less cost to dispose. No significant net cash proceeds are expected to be
received from the ultimate disposal of these assets, which should be complete by
the fourth quarter of 2000. The effect of suspending depreciation for these
impaired assets is a reduction in depreciation and amortization of approximately
$2 million on an annual basis.
As of December 31, 1998, approximately 350 employees had been terminated.
Amounts related to the restructuring plan are shown in the following table:
<TABLE>
<CAPTION>
FOURTH
1998 QUARTER CHARGED BALANCE AT
RESTRUCTURING 1998 TO ASSET DECEMBER 31,
CHARGE PAYMENTS ACCOUNTS 1998
------------- -------- -------- ------------
(MILLIONS)
<S> <C> <C> <C> <C>
Severance.................................. $19 $ 4 $-- $15
Asset impairments.......................... 33 -- 33 --
Facility exit costs........................ 1 -- -- 1
--- --- --- ---
$53 $ 4 $33 $16
=== === === ===
</TABLE>
4. ACQUISITIONS
In 1998, Tenneco made one acquisition in the Automotive business for
approximately $3 million. During 1997, Tenneco completed acquisitions or
investments in the Automotive business for total consideration of approximately
$29 million.
In June 1996, Tenneco entered into agreements to acquire Clevite for $328
million. Clevite makes suspension bushings and other elastomeric parts for cars
and trucks. Upon completion of the Clevite acquisition in July 1996, Clevite's
operations became part of Automotive. Also during 1996, Tenneco completed the
acquisitions of or investments in various other businesses and joint ventures in
the automotive parts industry for total consideration of approximately $96
million.
The acquisitions discussed above have been accounted for as purchases;
accordingly, the purchase price has been allocated to the assets purchased and
the liabilities assumed based on their fair values. The
F-18
<PAGE> 173
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
excess of the purchase price over the fair value of the net assets acquired is
included in the balance sheet caption "Goodwill and intangibles, net."
5. LONG-TERM DEBT, SHORT-TERM DEBT, AND FINANCING ARRANGEMENTS
Long-Term Debt
A summary of long-term debt obligations of Tenneco at December 31, 1998 and
1997, is set forth in the following table:
<TABLE>
<CAPTION>
1998 1997
------ ------
(MILLIONS)
<S> <C> <C>
Tenneco Automotive Inc. --
Debentures due 2008 through 2027, average effective
interest rate 7.5% in 1998 and in 1997 (net of $64
million in 1998 and $68 million in 1997 of unamortized
premium)............................................... $1,213 $1,217
Notes due 1999 through 2007, average effective interest
rate 6.7% in 1998 and in 1997 (net of $33 million in
1998 and $47 million in 1997 of unamortized premium)... 1,344 1,358
Other subsidiaries --
Notes due 1999 through 2016, average effective interest
rate 10.7% in 1998 and 11.2% in 1997 (net of $22
million in 1998 and $24 million in 1997 of unamortized
discount).............................................. 53 64
------ ------
2,610 2,639
Less -- current maturities.................................. 250 6
------ ------
Total long-term debt........................................ 2,360 2,633
Less -- long-term corporate debt allocated to net assets of
discontinued operations................................... 1,689 1,920
------ ------
Total long-term debt, net of allocation to net assets of
discontinued operations................................... $ 671 $ 713
====== ======
</TABLE>
The aggregate maturities and sinking fund requirements applicable to the
issues outstanding at December 31, 1998, are $250 million, $10 million, $187
million, $498 million, and $7 million for 1999, 2000, 2001, 2002, and 2003,
respectively.
F-19
<PAGE> 174
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Short-Term Debt
Tenneco uses commercial paper, lines of credit, and overnight borrowings to
finance its short-term capital requirements. Information regarding short-term
debt as of and for the years ended December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------- -------------------------
COMMERCIAL CREDIT COMMERCIAL CREDIT
PAPER AGREEMENTS* PAPER AGREEMENTS*
---------- ----------- ---------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Outstanding borrowings at end of year........... $576 $245 $203 $ 69
Weighted average interest rate on outstanding
borrowings at end of year..................... 5.8% 6.3% 5.9% 6.7%
Approximate maximum month-end outstanding
borrowings during year........................ $576 $245 $613 $123
Approximate average month-end outstanding
borrowings during year........................ $447 $157 $372 $ 52
Weighted average interest rate on approximate
average month-end outstanding borrowings
during year................................... 5.8% 6.9% 5.7% 8.4%
</TABLE>
- -------------------------
* Includes borrowings under both committed credit facilities and uncommitted
lines of credit and similar arrangements.
Short-Term Corporate Debt Allocation
<TABLE>
<CAPTION>
1998 1997
------ ------
(MILLIONS)
<S> <C> <C>
Current maturities on long-term debt........................ $ 250 $ 6
Commercial paper............................................ 576 203
Credit agreements........................................... 245 69
------ ------
Total short-term debt....................................... 1,071 278
Less -- short-term corporate debt allocated to net assets of
discontinued operations................................... 767 203
------ ------
Total short-term debt, net of allocation to discontinued
operations................................................ $ 304 $ 75
====== ======
</TABLE>
Financing Arrangements
<TABLE>
<CAPTION>
COMMITTED CREDIT FACILITIES(A)
-------------------------------------------------
TERM COMMITMENTS UTILIZED AVAILABLE
------- ----------- -------- ---------
(MILLIONS)
<S> <C> <C> <C> <C>
Tenneco Automotive Inc. credit agreements............ 2001 $1,750 $576(b) $1,174
Subsidiaries' credit agreements...................... Various 131 123 8
------ ---- ------
$1,881 $699 $1,182
====== ==== ======
</TABLE>
- -------------------------
Notes: (a) Tenneco and its subsidiaries generally are required to pay commitment
fees on the unused portion of the total commitment and facility fees
on the total commitment.
(b) Tenneco's committed long-term credit facilities support its
commercial paper borrowings; consequently, the amount available under
the committed long-term credit facilities is reduced by outstanding
commercial paper borrowings.
F-20
<PAGE> 175
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1998, Tenneco's principal credit facility, which expires in
2001, was a $1.75 billion committed financing arrangement with a syndicate of
banks and other financial institutions. Committed borrowings under this credit
facility bear interest at an annual rate equal to, at the borrower's option,
either (i) a rate consisting of the higher of Morgan Guaranty Trust Company of
New York's prime rate or the federal funds rate plus 50 basis points; (ii) a
rate of LIBOR plus a margin determined based on the credit rating of Tenneco's
long-term debt; or (iii) a rate based on money market rates pursuant to
competitive bids by the syndicate banks.
The credit facility requires that the Company's consolidated ratio of debt
to total capitalization, as defined in the credit facility, not exceed 70%.
Compliance with this requirement is a condition for any incremental borrowings
under the credit facility and failure to meet the requirement enables the
syndicate banks to require repayment of any outstanding loans after a 30-day
cure period. At December 31, 1998, Tenneco's ratio of debt to total
capitalization as defined in the credit facility was 57.9%. In addition, the
credit facility imposes certain other restrictions, none of which are expected
to limit the Company's ability to operate its business in the ordinary course.
Before the Spin-off, Tenneco will realign substantially all of its debt and
enter into a new credit facility. See Note 2, "Discontinued Operations,
Dispositions of Assets, and Extraordinary Loss," for further discussion.
6. FINANCIAL INSTRUMENTS
The carrying and estimated fair values of Tenneco's financial instruments
by class at December 31, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
(MILLIONS)
ASSETS (LIABILITIES)
<S> <C> <C> <C> <C>
Long-term debt (including current maturities) (Note).... $(2,610) $(2,606) $(2,639) $(2,606)
Instruments With Off-Balance-Sheet Risk
Foreign currency contracts............................ 1 1 2 2
Financial guarantees.................................. -- (13) -- (15)
</TABLE>
- -------------------------
Note: The carrying amounts and estimated fair value of long-term debt are before
allocation of corporate debt to discontinued operations. Reference is made
to Note 1 for information concerning corporate debt allocated to
discontinued operations.
Asset and Liability Instruments
The fair value of cash and temporary cash investments, short and long-term
receivables, accounts payable, and short-term debt was considered to be the same
as or was not determined to be materially different from the carrying amount.
Long-term debt -- The fair value of fixed-rate long-term debt was based on
the market value of debt with similar maturities and interest rates.
Instruments With Off-Balance-Sheet Risk
Foreign Currency Contracts -- Note 1, "Summary of Accounting Policies --
Risk Management Activities" describes Tenneco's use of and accounting for
foreign currency exchange contracts. The
F-21
<PAGE> 176
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
following table summarizes by major currency the contractual amounts of foreign
currency contracts utilized by Tenneco:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT
------------------------------------
DECEMBER 31, DECEMBER 31,
1998 1997
---------------- ----------------
PURCHASE SELL PURCHASE SELL
-------- ---- -------- ----
(MILLIONS)
<S> <C> <C> <C> <C>
Foreign currency contracts (in US$):
Belgian Francs............................................ $ 17 $ 19 $ 24 $ 6
British Pounds............................................ 163 252 156 257
Canadian Dollars.......................................... 73 115 58 16
French Francs............................................. 89 17 52 1
German Marks.............................................. 2 33 4 121
Spanish Pesetas........................................... 32 2 12 1
U.S. Dollars.............................................. 105 33 92 --
Other..................................................... 40 49 61 55
---- ---- ---- ----
$521 $520 $459 $457
==== ==== ==== ====
</TABLE>
Based on exchange rates at December 31, 1998 and 1997, the cost of
replacing these contracts in the event of non-performance by the counterparties
would not have been material.
Guarantees -- Tenneco had guaranteed payment and performance of
approximately $13 million and $15 million at December 31, 1998 and 1997,
respectively, primarily with respect to letters of credit and other guarantees
supporting various financing and operating activities.
7. INCOME TAXES
The domestic and foreign components of income from continuing operations
before income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1998 1997 1996
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
U.S. income before income taxes............................. $(65) $ 91 $ 21
Foreign income before income taxes.......................... 223 246 161
---- ---- ----
Income before income taxes.................................. $158 $337 $182
==== ==== ====
</TABLE>
F-22
<PAGE> 177
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Following is a comparative analysis of the components of income tax expense
applicable to continuing operations:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------
1998 1997 1996
----- ---- ----
(MILLIONS)
<S> <C> <C> <C>
Current --
U.S. ..................................................... $ 72 $(5) $14
State and local........................................... (21) -- 2
Foreign................................................... 38 54 53
----- --- ---
89 49 69
----- --- ---
Deferred --
U.S. ..................................................... (109) 13 3
Foreign, state and other.................................. 33 18 7
----- --- ---
(76) 31 10
----- --- ---
Income tax expense.......................................... $ 13 $80 $79
===== === ===
</TABLE>
Following is a reconciliation of income taxes computed at the statutory
U.S. federal income tax rate (35% for all years presented) to the income tax
expense reflected in the statements of income:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1998 1997 1996
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
Tax expense computed at the statutory U.S. federal income
tax rate.................................................... $ 55 $118 $64
Increases (reductions) in income tax expense resulting from:
Foreign income taxed at different rates and foreign losses
with no tax benefit.................................... (12) (25) 8
State and local taxes on income, net of U.S. federal
income tax benefit..................................... (8) 4 (1)
Recognition of previously unbenefited loss
carryforwards.......................................... (5) (11) --
Amortization of nondeductible goodwill.................... 3 2 3
Other..................................................... (20) (8) 5
---- ---- ---
Income tax expense.......................................... $ 13 $ 80 $79
==== ==== ===
</TABLE>
F-23
<PAGE> 178
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The components of Tenneco's net deferred tax liability were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1997
---- ----
(MILLIONS)
<S> <C> <C>
Deferred tax assets --
Tax loss carryforwards:
U.S. .................................................. $104 $ 55
State.................................................. 7 --
Foreign................................................ 58 77
Postretirement benefits other than pensions............... 32 26
Other..................................................... 26 7
Valuation allowance....................................... (30) (25)
---- ----
Net deferred tax asset............................... 197 140
---- ----
Deferred tax liabilities --
Tax over book depreciation................................ 113 91
Pensions.................................................. 27 23
Other..................................................... 77 115
---- ----
Total deferred tax liability......................... 217 229
---- ----
Net deferred tax liability................................ $ 20 $ 89
==== ====
</TABLE>
As reflected by the valuation allowance in the table above, Tenneco had
potential tax benefits of $30 million and $25 million at December 31, 1998 and
1997, respectively, which were not recognized in the statements of income when
generated. These unrecognized tax benefits resulted primarily from foreign tax
loss carryforwards which are available to reduce future foreign tax liabilities.
Of the $298 million of U.S. tax loss carryforwards which exist at December
31, 1998, $139 million expire in 2012 and $159 million expire in 2018. The $82
million of state tax loss carryforwards which exist at December 31, 1998, will
expire in varying amounts over the period from 2000 to 2012. Of the $142 million
of foreign tax loss carryforwards which exist at December 31, 1998, $118 million
do not expire and the remainder expires in varying amounts over the period from
1999 to 2008.
In connection with the 1996 corporate reorganization transactions discussed
in Note 2, "Discontinued Operations, Disposition of Assets, and Extraordinary
Loss," Tenneco entered into a tax sharing agreement with Newport News, Old
Tenneco, and El Paso. The tax sharing agreement provides, among other things,
for the allocation among the parties of tax liabilities arising before, as a
result of, and after the Distributions. For periods after the Distributions,
Tenneco will be liable for taxes imposed on its businesses, Old Tenneco will be
liable for taxes imposed on the energy business, and Newport News will be liable
for taxes imposed on the shipbuilding business. In the case of federal income
taxes imposed on the activities of the Old Tenneco consolidated group before the
Distributions, Tenneco and Newport News are generally liable to Old Tenneco for
federal income taxes attributable to their respective businesses, and those
entities have been allocated an agreed-upon share of estimated tax payments made
by Old Tenneco.
8. COMMON STOCK
On October 25, 1999, Tenneco's shareholders approved a reverse stock split
whereby every five shares of Tenneco common stock were converted into one share
of Tenneco's new common stock on the day following the spin-off of Pactiv. In
addition, the stock options outstanding on the date of the spin-off were
adjusted such that Pactiv employees received options in Pactiv and Tenneco
Automotive employees received options in Tenneco. The number of shares subject
to these options, as well as their exercise
F-24
<PAGE> 179
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
prices, were adjusted so that the options immediately after the spin-off had
equivalent economic terms to the options immediately before the spin-off. All
share prices and amounts in this footnote, with the exception of the earnings
per share table, are presented before the effect of the spin-off and reverse
stock split. All other share and per share amounts in these financial statements
and notes give effect to the reverse stock split.
Tenneco Inc. has authorized 350 million shares ($.01 par value) of common
stock, of which 173,670,197 shares and 172,569,889 shares were issued at
December 31, 1998 and 1997, respectively. Tenneco Inc. held 6,757,678 shares and
2,928,189 shares of treasury stock at December 31, 1998 and 1997, respectively.
Stock Repurchase Plans
During 1997, Tenneco initiated a common stock repurchase program to acquire
up to 8.5 million shares. Approximately 7.5 million shares have been acquired
under this program at a total cost of approximately $289 million. All purchases
executed through this program were in the open market or negotiated purchases.
Reserved
The total number of shares of Tenneco Automotive Inc. common stock reserved
at December 31, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
ORIGINAL ISSUE SHARES 1998 1997
--------------------- ---------- ----------
<S> <C> <C>
Thrift Plan............................................ 74,576 167,223
Restricted Stock Plans................................. -- 33,796
Stock Ownership Plan................................... 16,199,114 16,556,126
Employee Stock Purchase Plan........................... 1,642,037 2,255,232
---------- ----------
17,915,727 19,012,377
========== ==========
<CAPTION>
TREASURY STOCK
- --------------
<S> <C> <C>
Thrift Plan............................................ 201,541 42,434
========== ==========
</TABLE>
Stock Plans
Tenneco Automotive Inc. Stock Ownership Plan -- In December 1996, Tenneco
adopted the 1996 Stock Ownership Plan, which permits the granting of a variety
of awards, including common stock, restricted stock, performance shares, stock
appreciation rights ("SARs"), and stock options to directors, officers, and
employees of Tenneco. Tenneco can issue up to 17,000,000 shares of common stock
under the 1996 Stock Ownership Plan, which will terminate December 31, 2001. All
Old Tenneco stock options granted to New Tenneco employees before the
Distributions were, in connection with the Distributions, cancelled and replaced
with options to purchase New Tenneco common stock according to the provisions of
the 1996 Stock Ownership Plan. The options were replaced with the appropriate
number of New Tenneco options so that the aggregate option value immediately
after the Distributions equaled the aggregate value immediately before the
Distributions. The 1994 Stock Ownership Plan was terminated effective as of
December 11, 1996.
Restricted Stock and Performance Shares -- Tenneco has granted restricted
stock and restricted units under the 1996 Stock Ownership Plan to certain key
employees. These awards generally require, among other things, that the employee
remain an employee of Tenneco during the restriction period. Tenneco has
F-25
<PAGE> 180
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
also granted performance shares to certain key employees which will vest based
upon the attainment of specified performance goals within four years from the
date of grant. During 1998, 1997, and 1996, Tenneco granted 640,810, 494,350,
and 465,075 shares and units, respectively, with a weighted average fair value
based on the price of Tenneco's stock on the grant date of $38.03, $43.08, and
$48.54 per share, respectively. Any restricted stock and performance shares
awarded after the Distributions are issued under the 1996 Stock Ownership Plan.
At December 31, 1998, 351,220 restricted shares at an average price of $37.76
per share, 562,145 performance shares at an average price of $41.35 per share,
and 31,000 restricted units at an average price of $37.72 per unit were
outstanding under this plan.
Under another arrangement, restricted stock or restricted units are issued
annually to each member of the Board of Directors who is not also an officer of
Tenneco. From January 1, 1996, through October 31, 1996, 3,300 restricted shares
were issued with a weighted average fair value based on the price of Tenneco's
stock on the grant date of $48.25 per share. On November 1, 1996, all
outstanding restricted shares were vested. In December 1996, Tenneco adopted a
new restricted stock and unit plan for each member of the Board of Directors who
is not also an officer of Tenneco. During 1998, 1997, and 1996, 1,700, 5,040,
and 23,464 restricted shares and units, respectively, were issued under the new
plan at a weighted average fair value of Tenneco's stock on the grant date of
$37.31, $45.19, and $45.31 per share, respectively. At December 31, 1998, 27,696
restricted shares at an average price of $44.80 per share and 300 restricted
units at an average price of $45.19 per unit were outstanding under the new
plan.
In conjunction with the Transaction, all outstanding restricted shares and
performance shares as of November 1, 1996, were vested and Tenneco recognized an
after-tax compensation expense of $18 million, of which approximately $7 million
related to restricted stock and performance shares awarded to employees of the
energy business and shipbuilding business.
Employee Stock Purchase Plan -- In June 1992, Tenneco initiated an Employee
Stock Purchase Plan (the "1992 ESPP"). The 1992 ESPP was terminated as of the
date of the Distributions. Effective April 1, 1997, Tenneco adopted a new ESPP
with provisions similar to the 1992 ESPP. The ESPP allows U.S. and Canadian
Tenneco employees to purchase Tenneco Automotive Inc. common stock at a 15%
discount. Each year employees participating in the ESPP may purchase shares with
a discounted value not to exceed $21,250. Under the respective ESPPs, Tenneco
sold 613,195, 244,768, and 657,936 shares to employees in 1998, 1997, and 1996,
respectively. The weighted average fair value of the employee purchase right,
which was estimated using the Black-Scholes option pricing model and the
assumptions described below except that the average life of each purchase right
was assumed to be 90 days, was $6.31, $11.16, and $10.84 in 1998, 1997, and
1996, respectively.
F-26
<PAGE> 181
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Stock Options -- The following table reflects the status and activity for
all stock options issued by Tenneco, including those outside the option plans
discussed above, for the periods indicated:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVG. SHARES AVG. SHARES AVG.
UNDER EXERCISE UNDER EXERCISE UNDER EXERCISE
STOCK OPTIONS OPTION PRICES OPTION PRICES OPTION PRICES
------------- ---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year.... 11,924,072 $43.42 10,877,758 $43.41 3,019,116 $46.99
Granted -- Options.............. 1,745,480 37.30 2,928,669 42.91 8,178,600 46.17
Exercised -- Options............ (122,609) 38.58 (312,979) 39.64 (817,212) 45.29
-- SARs.............. -- -- -- -- (25,741) 36.23
Issuance of New Tenneco
options...................... -- -- -- -- 5,015,258 41.19
Cancelled....................... (1,123,639) 43.53 (1,569,376) 43.19 (4,492,263) 46.01
---------- ---------- ----------
Outstanding, end of year.......... 12,423,304 $42.58 11,924,072 $43.42 10,877,758 $43.41
========== ========== ==========
Options exercisable at end of
year............................ 7,522,654 $42.84 2,703,948 $40.84 1,809,596 $41.67
Weighted average fair value of
options granted during the
year............................ $ 10.82 $ 12.62 $ 11.37
</TABLE>
The fair value of each option granted during 1998, 1997, and 1996 is
estimated on the date of grant using the Black-Scholes option pricing model
using the following weighted-average assumptions for grants in 1998, 1997, and
1996, respectively: (i) risk-free interest rates of 5.7%, 6.6%, and 5.9%; (ii)
expected lives of 9.9, 7.5, and 5.0 years; (iii) expected volatility 25.6%,
25.6%, and 25.1%; and (iv) dividend yield of 3.2%, 2.8%, and 3.4%.
The following table reflects summarized information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ----------------------
WEIGHTED AVG. WEIGHTED WEIGHTED
NUMBER REMAINING AVG. NUMBER AVG.
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICE AT 12/31/98 LIFE PRICE AT 12/31/98 PRICE
----------------------- ----------- ------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$31 to $38............................... 2,525,490 13.8 years $36.40 1,323,014 $35.82
$38 to $44............................... 2,771,004 11.7 40.91 1,638,084 41.10
$44 to $51............................... 7,126,810 11.9 45.42 4,561,556 45.51
---------- ---------
12,423,304 7,522,654
========== =========
</TABLE>
Tenneco applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," to account for its stock-based compensation plans.
Tenneco recognized after-tax stock-based compensation expense in 1998 of $3
million, in 1997 of $5 million, and in 1996 of $27 million, of which $3 million,
$4 million, and $24 million, respectively, related to restricted stock and
performance shares awarded to employees of its discontinued operations. Had
compensation costs for Tenneco's stock-based compensation plans been determined
in accordance with FAS No. 123, "Accounting for Stock-Based Compensation," based
on the fair value at the grant dates for the awards under those plans, Tenneco's
pro forma net income to common stock and earnings per share of common stock for
the years ended December 31, 1998, 1997, and 1996, would have been lower by $33
million or $.19 per both basic and diluted common share, $34 million or $.20 per
both basic and diluted common share, and $14 million or $.08 per both basic and
diluted common share, respectively. The increase in compensation expense for
1997 versus 1996 was primarily the result of stock options issued subsequent to
the Transaction.
F-27
<PAGE> 182
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Stock Employee Compensation Trust (SECT)
In November 1992, Tenneco established the SECT to fund a portion of its
obligations arising from its various employee compensation and benefit plans.
Tenneco issued 12 million shares of treasury stock to the SECT in exchange for a
promissory note of $432 million that accrued interest at the rate of 7.8% per
annum. At December 31, 1996, all shares had been utilized.
Grantor Trust
In August 1998, Tenneco established a grantor trust and issued 1.9 million
shares of common stock to the trust. This grantor trust is a so-called "rabbi
trust" designed to assure the payment of deferred compensation and supplemental
pension benefits. The trust is consolidated in Tenneco's financial statements
and the shares are reflected in the financial statements as treasury stock.
Consequently, the shares of common stock issued to the trust are not considered
to be outstanding in the computation of earnings per share.
Qualified Offer Rights Plan
On September 9, 1998, Tenneco adopted a Qualified Offer Rights Plan and
established an independent Board committee to review it every three years. The
Qualified Offer Rights Plan was adopted to deter coercive takeover tactics and
to prevent a potential acquiror from gaining control of Tenneco in a transaction
which is not in the best interests of Tenneco shareholders. Generally, under the
Qualified Offer Rights Plan, if a person becomes the beneficial owner of 20
percent or more of Tenneco's outstanding common stock, other than pursuant to a
"qualified offer", each right will entitle its holder to purchase, at the
right's exercise price, a number of shares of common stock of Tenneco or, under
certain circumstances, of the acquiring person having a market value of twice
the right's exercise price. Rights held by the 20 percent or more holder will
become void and will not be exercisable.
The rights will not become exercisable in connection with a "qualified
offer," which is an all-cash tender offer for all outstanding common stock that
is fully financed, remains open for a period of at least 60 business days,
results in the offeror owning at least 85% of the common stock after
consummation of the offer, assures a prompt second-step acquisition of shares
not purchased in the initial offer, at the same price as the initial offer, and
meets certain other requirements.
In connection with the adoption of the Qualified Offer Rights Plan, the
Board of Directors also adopted a three-year independent director evaluation
("TIDE") mechanism. Under the TIDE mechanism, an independent Board committee
will review, on an ongoing basis, the Qualified Offer Rights Plan and
developments in rights plans generally, and, if it deems appropriate, recommend
modification or termination of the Qualified Offer Rights Plan. The independent
committee will report to Tenneco's Board at least every three years as to
whether the Qualified Offer Rights Plan continues to be in the best interests of
Tenneco's shareholders.
Dividend Reinvestment and Stock Purchase Plan
Under the Tenneco Dividend Reinvestment and Stock Purchase Plan, holders of
Tenneco common stock may apply their cash dividends and optional cash
investments to the purchase of additional shares of Tenneco common stock.
F-28
<PAGE> 183
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Earnings Per Share
Earnings per share of common stock outstanding were computed in the
following table. Following the spin-off, Tenneco executed a one-for-five reverse
stock split as previously described.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(MILLIONS EXCEPT SHARE AND PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Basic Earnings Per Share --
Income from continuing operations(a)................... $ 116 $ 234 $ 82
========== ========== ==========
Average shares of common stock outstanding(b).......... 33,701,115 34,052,946 33,921,875
========== ========== ==========
Earnings from continuing operations per average share
of common stock..................................... $ 3.45 $ 6.87 $ 2.45
========== ========== ==========
Diluted Earnings Per Share --
Income from continuing operations(a)................... $ 116 $ 234 $ 82
========== ========== ==========
Average shares of common stock outstanding(b).......... 33,701,115 34,052,946 33,921,875
Effect of dilutive securities:
Restricted stock.................................. 10,586 -- 103,267
Stock options..................................... 17,647 90,573 80,080
Performance shares................................ 37,558 16,808 --
---------- ---------- ----------
Average shares of common stock outstanding including
dilutive securities................................. 33,766,906 34,160,327 34,105,222
========== ========== ==========
Earnings from continuing operations per average share
of common stock..................................... $ 3.44 $ 6.85 $ 2.43
========== ========== ==========
</TABLE>
- -------------------------
Notes: (a) All preferred stock outstanding before the Merger was acquired by El
Paso. Therefore, preferred stock dividends were included in the
computation of earnings per share from discontinued operations for
1996. There was no preferred stock outstanding in 1998 or 1997.
(b) In 1992, without giving effect to the reverse stock split, 12 million
shares of common stock were issued to the SECT. Shares of common
stock issued to a related trust are not considered to be outstanding
in the computation of average shares until the shares are used to
fund the obligations of the trust. During the year ended December 31,
1996, the SECT used 4,358,084 shares without giving effect to the
reverse stock split. At December 31, 1996, all shares were used.
Stock repurchase plans also affect common stock outstanding. Refer to
"Stock Employee Compensation Trust (SECT)" and "Stock Repurchase
Plans" discussed previously in this footnote.
9. PREFERRED STOCK
Tenneco had 50 million shares of preferred stock ($.01 par value)
authorized at December 31, 1998 and 1997. No shares of preferred stock were
outstanding at the respective dates. Tenneco has designated and reserved 2.0
million shares of the preferred stock as junior preferred stock for the
Qualified Offer Rights Plan.
As part of the Merger, Tenneco's $7.40 and $4.50 preferred stock (the
"Preferred Stock") was acquired by El Paso in exchange for El Paso common stock.
Consequently, Preferred Stock dividends have been subtracted from discontinued
operations to compute basic and diluted earnings per share. Before the Merger,
Tenneco made periodic accretions of the excess of the redemption value over the
fair value of the Preferred Stock at the date of issue. Such accretions have
been included in the statements of income
F-29
<PAGE> 184
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
caption, "Preferred stock dividends" as a reduction of net income to arrive at
net income to common stock.
In connection with the Transaction and as part of the 1996 Debt
Realignment, Old Tenneco issued the NPS Preferred Stock in November 1996 for
proceeds of approximately $296 million. The proceeds from the issuance were used
to fund a portion of the cash tender offers made in connection with the 1996
Debt Realignment and other cash requirements preceding the Merger. As a result
of the Merger, the obligations relating to the NPS Preferred Stock remained with
Old Tenneco.
Changes in Preferred Stock with Mandatory Redemption Provisions
<TABLE>
<CAPTION>
1996
-----------------------
SHARES AMOUNT
---------- ------
(MILLIONS EXCEPT SHARE
AMOUNTS)
<S> <C> <C>
Balance January 1........................................... 1,390,993 $ 130
Shares redeemed........................................... (195,751) (20)
Merger of energy business................................. (1,195,242) (113)
Accretion of excess of redemption value over fair value at
date of issue.......................................... -- 3
---------- -----
Balance December 31......................................... -- $ --
========== =====
</TABLE>
10. MINORITY INTEREST
At December 31, 1998 and 1997, Tenneco reported minority interest in the
balance sheet of $407 million and $408 million, respectively. At December 31,
1998, $394 million of minority interest resulted from the December 1994 and
December 1997 sales of preferred stock ($300 million and $100 million,
respectively) of Tenneco International Holding Corp. ("TIHC") to a financial
investor. Subsequent to each sale, the investor had approximately a 25% interest
in TIHC, consisting of 100% of the issued and outstanding variable rate voting
preferred stock of TIHC. Tenneco and certain of its subsidiaries hold 100% of
the issued and outstanding $8.00 junior preferred stock and common stock of
TIHC. TIHC holds certain assets including the capital stock of Tenneco Canada
Inc., S.A. Monroe Europe N.V., Monroe Australia Proprietary Limited, Walker
France S.A., and other subsidiaries. For financial reporting purposes, the
assets, liabilities, and earnings of TIHC and its subsidiaries are consolidated
in Tenneco's financial statements, and the investor's preferred stock interest
has been recorded as "Minority interest" in the balance sheet.
As of December 31, 1998, dividends on the TIHC preferred stock are based on
the aggregate issue price of $400 million times a rate per annum equal to .92%
over LIBOR and are payable quarterly in arrears on the last business day of each
quarter. The weighted average rate paid on TIHC preferred stock was 6.66%,
6.92%, and 6.83% for 1998, 1997, and 1996, respectively. Additionally, the
holder of the preferred stock is entitled to receive, when and if declared by
the Board of Directors of TIHC, participating dividends based on the operating
income growth rate of TIHC and its subsidiaries. For financial reporting
purposes, dividends paid by TIHC to its financial investor have been recorded in
Tenneco's statements of income as "Minority interest."
11. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Tenneco has various defined benefit pension plans that cover substantially
all of its employees. Benefits are based on years of service and, for most
salaried employees, on final average compensation. Tenneco's funding policies
are to contribute to the plans amounts necessary to satisfy the funding
F-30
<PAGE> 185
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
requirement of federal laws and regulations. Plan assets consist principally of
listed equity and fixed income securities. Certain employees of Tenneco
participate in the Tenneco Retirement Plan.
Tenneco has postretirement health care and life insurance plans that cover
a majority of its domestic employees. For salaried employees, the plans cover
employees retiring from Tenneco on or after attaining age 55 who have had at
least 10 years service with Tenneco after attaining age 45. For hourly
employees, the postretirement benefit plans generally cover employees who retire
according to one of Tenneco's hourly employee retirement plans. All of these
benefits may be subject to deductibles, copayment provisions, and other
limitations, and Tenneco has reserved the right to change these benefits.
Tenneco's postretirement benefit plans are not funded.
A summary of the change in benefit obligation, the change in plan assets,
the development of net amount recognized, and the amounts recognized in the
statement of financial position for the pension plans and postretirement benefit
plans follows:
<TABLE>
<CAPTION>
PENSION POSTRETIREMENT
----------- ---------------
1998 1997 1998 1997
---- ---- ------ ------
(MILLIONS)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at September 30 of the previous year... $491 $444 $ 105 $ 100
Service cost.............................................. 13 12 3 4
Interest cost............................................. 36 33 8 7
Plan amendments........................................... 1 -- -- --
Actuarial loss (gain)..................................... 41 29 7 --
Benefits paid............................................. (30) (27) (8) (6)
---- ---- ----- -----
Benefit obligation at September 30........................ $552 $491 $ 115 $ 105
==== ==== ===== =====
Change in plan assets:
Fair value at September 30 of the previous year........... $593 $493 $ -- $ --
Currency rate conversion.................................. (1) -- -- --
Actual return on plan assets.............................. 13 121 -- --
Employer contributions.................................... 7 6 8 6
Participants' contributions............................... 1 -- -- --
Benefits paid............................................. (30) (27) (8) (6)
---- ---- ----- -----
Fair value at September 30................................ $583 $593 $ -- $ --
==== ==== ===== =====
Development of net amount recognized:
Funded status at September 30............................. $ 31 $102 $(115) $(105)
Contributions during the fourth quarter................... 1 1 2 2
Unrecognized cost:
Actuarial loss (gain).................................. 20 (55) 27 22
Prior service cost..................................... 12 14 (1) (3)
Transition liability (asset)........................... (7) (11) -- --
---- ---- ----- -----
Net amount recognized at December 31...................... $ 57 $ 51 $ (87) $ (84)
==== ==== ===== =====
Amounts recognized in the statement of financial position:
Prepaid benefit cost...................................... $ 81 $ 80 $ -- $ --
Accrued benefit cost...................................... (39) (33) (87) (84)
Intangible asset.......................................... 4 4 -- --
Accumulated other comprehensive income.................... 11 -- -- --
---- ---- ----- -----
Net amount recognized..................................... $ 57 $ 51 $ (87) $ (84)
==== ==== ===== =====
</TABLE>
- -------------------------
Notes: Assets of one plan may not be utilized to pay benefits of other plans.
Additionally, the prepaid (accrued) benefit cost has been recorded based
upon certain actuarial estimates as described below. Those estimates are
subject to revision in future periods given new facts or circumstances.
F-31
<PAGE> 186
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Amounts included in the above table reflect the participation of
Automotive employees in the Tenneco Retirement Plan ("TRP"), however,
Automotive employees will not accrue additional benefits under the TRP
following the Spin-off. The prepaid pension costs related to the TRP will
be transferred to Packaging in connection with the corporate
restructuring transactions. Packaging will become the sponsor of the TRP.
Amounts in the table are for continuing operations only. Amounts
recognized in the statement of financial position for discontinued
operations include the following:
<TABLE>
<CAPTION>
PENSION POSTRETIREMENT
----------- ---------------
1998 1997 1998 1997
---- ---- ------ ------
<S> <C> <C> <C> <C>
Net assets of discontinued operations....................... $630 $585 $(61) $(63)
Accumulated other comprehensive income...................... 4 -- -- --
---- ---- ---- ----
$634 $585 $(61) $(63)
==== ==== ==== ====
</TABLE>
Net periodic pension costs (income) from continuing operations for the
years 1998, 1997, and 1996, consist of the following components:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
Service cost -- benefits earned during the year............. $ 13 $ 12 $ 11
Interest on prior year's projected benefit obligation....... 36 33 22
Expected return on plan assets.............................. (48) (45) (30)
Net amortization:
Actuarial loss (gain)..................................... 1 -- --
Prior service cost........................................ 1 1 1
Transition liability (asset).............................. (2) (2) (2)
---- ---- ----
Net pension costs (income).................................. $ 1 $ (1) $ 2
==== ==== ====
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for all pension plans with accumulated benefit obligations
in excess of plan assets were $114 million, $108 million, and $68 million,
respectively, as of September 30, 1998, and $40 million, $39 million, and $9
million, respectively, as of September 30, 1997.
The weighted average discount rates (which are based on long-term market
rates) used in determining the 1998, 1997, and 1996 actuarial present value of
the benefit obligations were 6.9%, 7.6%, and 7.7%, respectively. The rate of
increase in future compensation was 4.7%, 5.0%, and 5.2%, for 1998, 1997, and
1996, respectively. The weighted average expected long-term rate of return on
plan assets for 1998, 1997, and 1996 was 9.8%, 9.9%, and 9.9%, respectively.
Net periodic postretirement benefit cost from continuing operations for the
years 1998, 1997, and 1996 consist of the following components:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
Service cost -- benefits earned during the year............. $ 2 $ 4 $ 3
Interest on accumulated postretirement benefit obligation... 8 7 6
Net amortization of actuarial loss (gain)................... 1 -- 1
--- --- ---
Net periodic postretirement benefit cost.................... $11 $11 $10
=== === ===
</TABLE>
F-32
<PAGE> 187
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The initial weighted average assumed health care cost trend rate used in
determining the 1998, 1997, and 1996 accumulated postretirement benefit
obligation was 5%, 5%, and 6%, respectively, declining to 5% in 1997 and
remaining at that level thereafter.
Increasing the assumed health care cost trend rate by one percentage point
in each year would increase the 1998, 1997, and 1996 accumulated postretirement
benefit obligations by approximately $13 million, $12 million, and $11 million,
respectively, and would increase the aggregate of the service cost and interest
cost components of the net periodic postretirement benefit cost by approximately
$2 million each year for 1998, 1997, and 1996.
Decreasing the assumed health care cost trend rate by one percentage point
in each year would decrease the 1998 accumulated postretirement benefit
obligation by approximately $12 million and would decrease the aggregate of
service cost and interest cost components of the net periodic postretirement
benefit cost by $2 million.
The discount rates (which are based on long-term market rates) used in
determining the 1998, 1997, and 1996 accumulated postretirement benefit
obligations were 7.00%, 7.75%, and 7.75%, respectively.
12. SEGMENT AND GEOGRAPHIC AREA INFORMATION
Tenneco is a global manufacturer with a single operating segment:
Automotive -- Manufacture and sale of exhaust and ride control systems
for both the original equipment and replacement markets.
The accounting policies of the segments are the same as those described in
Note 1, "Summary of Accounting Policies." Tenneco evaluates operating
performance based primarily on income before interest expense, income taxes, and
minority interest. Individual operating segments have not been aggregated within
this reportable segment.
Products are transferred between geographic areas on a basis intended to
reflect as nearly as possible the "market value" of the products.
The following table sets forth information relating to Tenneco's external
customer and intersegment revenues for each product or each group of similar
products:
<TABLE>
<CAPTION>
NET SALES AND
OPERATING REVENUES
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
AUTOMOTIVE
Exhaust systems products.................................. $1,814 $1,753 $1,699
Ride control products..................................... 1,423 1,473 1,281
------ ------ ------
Consolidated........................................... $3,237 $3,226 $2,980
====== ====== ======
</TABLE>
During 1998, sales to two major customers comprised approximately 12.8% and
10.9% of consolidated net sales and operating revenues. During 1997, sales to
one major customer comprised 13.2% of consolidated net sales and operating
revenues. During 1996, sales to two major customers comprised approximately
11.5% and 9.6% of consolidated net sales and operating revenues.
F-33
<PAGE> 188
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following tables summarize certain Tenneco segment and geographic
information:
<TABLE>
<CAPTION>
SEGMENT RECLASS
------------------- &
AUTOMOTIVE OTHER ELIMS CONSOLIDATED
---------- ------ ------- ------------
(MILLIONS)
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1998, AND FOR THE YEAR THEN ENDED
Revenues from external customers............................ $3,237 $ -- $ -- $3,237
Interest income............................................. 5 -- -- 5
Depreciation and amortization............................... 150 -- -- 150
Income before interest, income taxes, and minority
interest.................................................. 248 (21) -- 227
Extraordinary loss.......................................... -- -- -- --
Cumulative effect of change in accounting principle......... -- -- -- --
Total assets (Note)......................................... 2,827 1,976 (44) 4,759
Net assets of discontinued operations....................... -- 1,739 -- 1,739
Investment in affiliated companies.......................... 1 -- -- 1
Capital expenditures for continuing operations.............. 195 -- -- 195
Noncash items other than depreciation, depletion, and
amortization.............................................. (13) 20 -- 7
AT DECEMBER 31, 1997, AND FOR THE YEAR THEN ENDED
Revenues from external customers............................ $3,226 $ -- $ -- $3,226
Interest income............................................. 3 -- -- 3
Depreciation and amortization............................... 110 -- -- 110
Income before interest, income taxes, and minority
interest.................................................. 407 (12) -- 395
Extraordinary loss.......................................... -- -- -- --
Cumulative effect of change in accounting principle......... (7) (39) -- (46)
Total assets (Note)......................................... 2,754 1,997 (69) 4,682
Net assets of discontinued operations....................... -- 1,771 -- 1,771
Investment in affiliated companies.......................... 2 -- -- 2
Capital expenditures for continuing operations.............. 211 10 -- 221
Noncash items other than depreciation, depletion, and
amortization.............................................. (23) 17 -- (6)
AT DECEMBER 31, 1996, AND FOR THE YEAR THEN ENDED
Revenues from external customers............................ $2,980 $ -- $ -- $2,980
Interest income............................................. 3 4 -- 7
Depreciation and amortization............................... 94 -- -- 94
Income before interest, income taxes, and minority
interest.................................................. 249 (7) -- 242
Extraordinary loss.......................................... -- (236) -- (236)
Cumulative effect of change in accounting principle......... -- -- -- --
Total assets (Note)......................................... 2,557 2,098 (2) 4,653
Net assets of discontinued operations....................... -- 1,883 -- 1,883
Investment in affiliated companies.......................... 2 -- -- 2
Capital expenditures for continuing operations.............. 177 11 -- 188
Noncash items other than depreciation, depletion, and
amortization.............................................. (3) (5) -- (8)
</TABLE>
- -------------------------
Note: The Other segment's total assets include the net assets of discontinued
operations.
F-34
<PAGE> 189
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
GEOGRAPHIC AREA
-------------------
UNITED RECLASS &
STATES FOREIGN(A) ELIMS CONSOLIDATED
------ ---------- --------- ------------
(MILLIONS)
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1998, AND FOR THE YEAR THEN ENDED
Revenues from external customers(b)................... $1,432 $1,805 $ -- $3,237
Long-lived assets(c).................................. 648 770 -- 1,418
Total assets.......................................... 2,733 2,070 (44) 4,759
AT DECEMBER 31, 1997, AND FOR THE YEAR THEN ENDED
Revenues from external customers(b)................... $1,502 $1,724 $ -- $3,226
Long-lived assets(c).................................. 634 667 -- 1,301
Total assets.......................................... 2,982 1,740 (40) 4,682
AT DECEMBER 31, 1996, AND FOR THE YEAR THEN ENDED
Revenues from external customers(b)................... $1,344 $1,636 $ -- $2,980
Long-lived assets(c).................................. 545 658 -- 1,203
Total assets.......................................... 3,103 1,617 (67) 4,653
</TABLE>
- -------------------------
Notes: (a) Revenues from external customers and long-lived assets for individual
foreign countries are not material.
(b) Revenues are attributed to countries based on location of the seller.
(c) Long-lived assets include all long-term assets except net assets from
discontinued operations, goodwill, intangibles, and deferred tax
assets.
13. COMMITMENTS AND CONTINGENCIES
Capital Commitments
Tenneco estimates that expenditures aggregating approximately $231 million
will be required after December 31, 1998, to complete facilities and projects
authorized at such date, and substantial commitments have been made in
connection therewith. Of this amount, $121 million is in support of continuing
operations and $110 million is in support of discontinued operations.
Lease Commitments
Tenneco holds certain of its facilities, equipment, and other assets under
long-term leases. The minimum lease payments under non-cancelable operating
leases with lease terms in excess of one year are $15 million, $17 million, $16
million, $14 million, and $12 million for the years 1999, 2000, 2001, 2002, and
2003, respectively, and $58 million for subsequent years.
Commitments under capital leases were not significant to the accompanying
financial statements. Total rental expense for continuing operations for the
years 1998, 1997, and 1996, was $31 million, $30 million, and $35 million,
respectively, including minimum rentals under non-cancelable operating leases of
$16 million, $29 million, and $11 million for the corresponding periods.
Litigation
Tenneco and Newport News have received letters from the Defense Contract
Audit Agency (the "DCAA"), inquiring about certain aspects of the Distributions,
including the disposition of the Tenneco Retirement Plan ("TRP"), which covers
salaried employees of Newport News and other Tenneco divisions and the 1986
asset valuation for the TRP and its cost accounting treatment. On January 15,
1999, Newport News entered into a settlement agreement with the Federal
Government regarding the
F-35
<PAGE> 190
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
TRP. Tenneco agreed to pay Newport News $14.5 million with respect to this and
other matters. This payment had no material impact on Tenneco's financial
position or results of operations.
Tenneco Automotive Inc. and its subsidiaries are parties to various other
legal proceedings arising from their operations. Tenneco believes that the
outcome of these proceedings, individually and in the aggregate, will have no
material effect on the financial position or results of operations of Tenneco
Automotive Inc. and its subsidiaries.
Environmental Matters
Tenneco Automotive Inc. and its subsidiaries are subject to a variety of
environmental and pollution control laws and regulations in all jurisdictions in
which they operate. Tenneco has provided reserves for compliance with these laws
and regulations where it is probable that a liability exists and where Tenneco
can make a reasonable estimate of the liability. The estimated liabilities
recorded are subject to change as more information becomes available regarding
the magnitude of possible clean-up costs and the timing, varying costs, and
effectiveness of alternative clean-up technologies. However, Tenneco believes
that any additional costs which arise as more information becomes available will
not have a material effect on the financial condition or results of operations
of Tenneco.
14. SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Basis of Presentation
Tenneco is offering $500,000,000 in aggregate principal amount of Senior
Subordinated Notes Due 2009 (the Notes) as a component of a plan to realign its
debt prior to the Spin-off. See Note 2, "Discontinued Operations, Disposition of
Assets, and Extraordinary Loss" for further discussion of the Spin-off and debt
realignment. Effective upon the Spin-off, all of Tenneco's then existing and
future material domestic wholly owned subsidiaries (the Guarantor Subsidiaries)
will fully and unconditionally guarantee the Notes on a joint and several basis.
Tenneco management believes separate financial statements and other disclosures
concerning each of the Guarantor Subsidiaries would not provide additional
information that is material to investors. Therefore, the Guarantor Subsidiaries
are combined in the presentation below.
Included in the financial information of the Guarantor Subsidiaries for
each period presented are the financial position and results of operations of a
domestic subsidiary, Tenneco International Holding Corp., which has issued
preferred stock to a third party (See Note 10, "Minority Interest"). Prior to
the Spin-off, Tenneco will acquire the subsidiary preferred stock outstanding,
following which such subsidiary will become a Guarantor Subsidiary.
These condensed consolidating financial statements are presented on the
equity method. Under this method, investments are recorded at cost and adjusted
for a company's ownership share of a subsidiary's cumulative results of
operations, capital contributions and distributions, and other equity changes.
The balance sheet caption "Investment in affiliated companies" includes
investments in continuing and discontinued subsidiaries. The condensed
consolidating financial statements of the Guarantor Subsidiaries should be read
in connection with the financial statements of Tenneco Automotive Inc. and
Consolidated Subsidiaries and notes thereto of which this note is an integral
part.
Distributions
There are no significant restrictions on the ability of the Guarantor
Subsidiaries to make distributions to Tenneco Automotive Inc.
F-36
<PAGE> 191
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ ------------ ------- ------------
) (MILLIONS
<S> <C> <C> <C> <C> <C>
REVENUES
Net sales and operating revenues --
External......................... $1,429 $1,804 $ 4 $ -- $3,237
Affiliated companies............. 90 74 -- (164) --
Other income, net................... (25) (1) 1 -- (25)
------ ------ ------ ------ ------
1,494 1,877 5 (164) 3,212
------ ------ ------ ------ ------
COSTS AND EXPENSES
Costs of sales (exclusive of
depreciation shown below)........ 1,086 1,408 2 (164) 2,332
Engineering, research, and
development...................... 19 12 -- -- 31
Selling, general, and
administrative................... 276 195 1 -- 472
Depreciation and amortization....... 79 71 -- -- 150
------ ------ ------ ------ ------
1,460 1,686 3 (164) 2,985
------ ------ ------ ------ ------
INCOME FROM CONTINUING OPERATIONS
BEFORE INTEREST EXPENSE, INCOME
TAXES, MINORITY INTEREST, AND EQUITY
IN NET INCOME FROM CONTINUING
OPERATIONS OF AFFILIATED
COMPANIES........................... 34 191 2 -- 227
Interest expense --
External (net of interest
capitalized)................... 2 17 50 -- 69
Affiliated companies (net of
interest income)............ 58 4 (62) -- --
Income tax expense (benefit)..... (35) 50 (2) -- 13
Minority interest................ -- 1 -- 28 29
------ ------ ------ ------ ------
9 119 16 (28) 116
Equity in net income from
continuing operations of
affiliated companies........... 97 -- 100 (197) --
------ ------ ------ ------ ------
INCOME FROM CONTINUING OPERATIONS..... 106 119 116 (225) 116
Income from discontinued operations,
net of income tax................... 24 269 139 (293) 139
------ ------ ------ ------ ------
Income before extraordinary loss...... 130 388 255 (518) 255
Extraordinary loss, net of income
tax................................. -- -- -- -- --
------ ------ ------ ------ ------
Income before cumulative effect of
change in accounting principle...... 130 388 255 (518) 255
Cumulative effect of change in
accounting principle, net of income
tax................................. -- -- -- -- --
------ ------ ------ ------ ------
NET INCOME............................ 130 388 255 (518) 255
Preferred stock dividends............. 28 -- -- (28) --
------ ------ ------ ------ ------
NET INCOME TO COMMON STOCK............ $ 102 $ 388 $ 255 $ (490) $ 255
====== ====== ====== ====== ======
</TABLE>
F-37
<PAGE> 192
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ ------------ ------- ------------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
REVENUES
Net sales and operating revenues --
External.......................... $1,492 $1,723 $ 11 $ -- $3,226
Affiliated companies.............. 97 97 -- (194) --
Other income, net.................... 7 30 -- -- 37
------ ------ ----- ----- ------
1,596 1,850 11 (194) 3,263
------ ------ ----- ----- ------
COSTS AND EXPENSES
Cost of sales (exclusive of
depreciation shown below)......... 1,130 1,359 8 (194) 2,303
Engineering, research, and
development....................... 19 15 -- -- 34
Selling, general, and
administrative.................... 226 194 1 -- 421
Depreciation and amortization........ 64 46 -- -- 110
------ ------ ----- ----- ------
1,439 1,614 9 (194) 2,868
------ ------ ----- ----- ------
INCOME FROM CONTINUING OPERATIONS
BEFORE INTEREST EXPENSE, INCOME
TAXES, MINORITY INTEREST, AND EQUITY
IN NET INCOME FROM CONTINUING
OPERATIONS OF AFFILIATED COMPANIES... 157 236 2 -- 395
Interest expense -- External (net
of interest capitalized)........ (3) 14 47 -- 58
Affiliated companies (net of
interest income)............. (31) (10) 41 -- --
Income tax expense (benefit)...... 65 58 (43) -- 80
Minority interest................. -- 2 -- 21 23
------ ------ ----- ----- ------
126 172 (43) (21) 234
Equity in net income from
continuing operations of
affiliated companies............ 100 -- 277 (377) --
------ ------ ----- ----- ------
INCOME FROM CONTINUING OPERATIONS...... 226 172 234 (398) 234
Income from discontinued operations,
net of income tax.................... 16 229 127 (245) 127
------ ------ ----- ----- ------
Income before extraordinary loss....... 242 401 361 (643) 361
Extraordinary loss, net of income
tax.................................. -- -- -- -- --
------ ------ ----- ----- ------
Income before cumulative effect of
change in accounting principle....... 242 401 361 (643) 361
Cumulative effect of change in
accounting principle, net of income
tax.................................. (7) (41) (46) 48 (46)
------ ------ ----- ----- ------
NET INCOME............................. 235 360 315 (595) 315
Preferred stock dividends.............. 21 -- -- (21) --
------ ------ ----- ----- ------
NET INCOME TO COMMON STOCK............. $ 214 $ 360 $ 315 $(574) $ 315
====== ====== ===== ===== ======
</TABLE>
F-38
<PAGE> 193
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ ------------ ------- ------------
) (MILLIONS
<S> <C> <C> <C> <C> <C>
REVENUES
Net sales and operating revenues --
External......................... $1,344 $1,636 $ -- $ -- $2,980
Affiliated companies............. 78 82 -- (160) --
Other income, net................... (63) 40 1 -- (22)
------ ------ ----- ----- ------
1,359 1,758 1 (160) 2,958
------ ------ ----- ----- ------
COSTS AND EXPENSES
Cost of sales (exclusive of
depreciation shown below)........ 1,005 1,295 -- (160) 2,140
Engineering, research, and
development...................... 28 42 -- -- 70
Selling, general, and
administrative................... 227 185 -- -- 412
Depreciation and amortization....... 42 52 -- -- 94
------ ------ ----- ----- ------
1,302 1,574 -- (160) 2,716
------ ------ ----- ----- ------
INCOME FROM CONTINUING OPERATIONS
BEFORE INTEREST EXPENSE, INCOME
TAXES, MINORITY INTEREST, AND EQUITY
IN NET INCOME FROM CONTINUING
OPERATIONS OF AFFILIATED
COMPANIES........................... 57 184 1 -- 242
Interest expense --
External (net of interest
capitalized)................ 4 2 54 -- 60
Affiliated companies (net of
interest income)............ (12) -- 12 -- --
Income tax expense (benefit)..... 41 56 (18) -- 79
Minority interest................ -- -- -- 21 21
------ ------ ----- ----- ------
24 126 (47) (21) 82
Equity in net income from
continuing operations of
affiliated companies........... 18 -- 129 (147) --
------ ------ ----- ----- ------
INCOME FROM CONTINUING OPERATIONS 42 126 82 (168) 82
Income from discontinued operations,
net of income tax................... 5 555 564 (560) 564
------ ------ ----- ----- ------
Income before extraordinary loss...... 47 681 646 (728) 646
Extraordinary loss, net of income
tax................................. -- -- (236) -- (236)
------ ------ ----- ----- ------
Income before cumulative effect of
change in accounting principle...... 47 681 410 (728) 410
Cumulative effect of change in
accounting principle, net of income
tax................................. -- -- -- -- --
------ ------ ----- ----- ------
NET INCOME............................ 47 681 410 (728) 410
Preferred stock dividends............. 21 -- 12 (21) 12
------ ------ ----- ----- ------
NET INCOME TO COMMON STOCK............ $ 26 $ 681 $ 398 $(707) $ 398
====== ====== ===== ===== ======
</TABLE>
F-39
<PAGE> 194
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ ------------ ------- ------------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments............ $ 1 $ 25 $ 3 $ -- $ 29
Receivables.................................... 277 307 32 (173) 443
Inventories.................................... 149 265 -- -- 414
Deferred income taxes.......................... 48 (9) -- -- 39
Prepayments and other.......................... 94 45 -- -- 139
------ ------ ------- ------- ------
569 633 35 (173) 1,064
------ ------ ------- ------- ------
Other assets:
Investment in affiliated companies............. 733 -- 5,387 (6,120) --
Notes and advances receivable from
affiliates................................... 635 -- 2,772 (3,407) --
Long-term notes receivable, net................ 12 9 2 -- 23
Goodwill and intangibles, net.................. 348 151 -- -- 499
Deferred income taxes.......................... -- 39 -- -- 39
Pension assets................................. 83 18 -- -- 101
Other.......................................... 89 106 6 -- 201
------ ------ ------- ------- ------
1,900 323 8,167 (9,527) 863
------ ------ ------- ------- ------
Plant, property, and equipment, at cost.......... 875 1,069 -- -- 1,944
Less -- Reserves for depreciation and
amortization................................. 419 432 -- -- 851
------ ------ ------- ------- ------
456 637 -- -- 1,093
------ ------ ------- ------- ------
Net assets of discontinued operations............ 1,649 3,119 (3,029) -- 1,739
------ ------ ------- ------- ------
$4,574 $4,712 $ 5,173 $(9,700) $4,759
====== ====== ======= ======= ======
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt (including current maturities
on long-term debt)........................... $ 26 $ 124 $ 229 $ (75) $ 304
Trade payables................................. 148 258 10 (79) 337
Taxes accrued.................................. (3) 34 -- -- 31
Other.......................................... 130 71 36 -- 237
------ ------ ------- ------- ------
301 487 275 (154) 909
Long-term debt................................... 1,571 25 2,480 (3,405) 671
Deferred income taxes............................ 137 47 (86) -- 98
Postretirement benefits and other liabilities.... 126 44 -- -- 170
Commitments and contingencies
Minority interest................................ -- 13 -- 394 407
Preferred stock with mandatory redemption
provisions..................................... 394 -- -- (394) --
Shareowners' equity.............................. 2,045 4,096 2,504 (6,141) 2,504
------ ------ ------- ------- ------
$4,574 $4,712 $ 5,173 $(9,700) $4,759
====== ====== ======= ======= ======
</TABLE>
F-40
<PAGE> 195
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ ------------ ------- ------------
) (MILLIONS
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments..... $ 3 $ 26 $ -- $ -- $ 29
Receivables............................. 231 290 102 (179) 444
Inventories............................. 153 223 2 -- 378
Deferred income taxes................... (8) (13) 42 -- 21
Prepayments and other................... 118 60 -- -- 178
------ ------ ------- ------- ------
497 586 146 (179) 1,050
------ ------ ------- ------- ------
Other assets:
Investment in affiliated companies...... 752 -- 5,486 (6,238) --
Notes and advances receivable
from affiliates....................... 757 92 1,949 (2,798) --
Long-term notes receivable, net......... 12 10 4 -- 26
Goodwill and intangibles, net........... 354 151 -- -- 505
Deferred income taxes................... -- 55 -- -- 55
Pension assets.......................... 76 17 -- -- 93
Other................................... 93 54 6 -- 153
------ ------ ------- ------- ------
2,044 379 7,445 (9,036) 832
------ ------ ------- ------- ------
Plant, property, and equipment, at cost... 816 951 -- -- 1,767
Less -- Reserves for depreciation and
amortization.......................... 369 369 -- -- 738
------ ------ ------- ------- ------
447 582 -- -- 1,029
------ ------ ------- ------- ------
Net assets of discontinued operations..... 1,582 2,939 (2,750) -- 1,771
------ ------ ------- ------- ------
$4,570 $4,486 $ 4,841 $(9,215) $4,682
====== ====== ======= ======= ======
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt (including current
maturities on long-term debt)......... $ 26 $ 109 $ 43 $ (103) $ 75
Trade payables.......................... 118 220 22 (74) 286
Taxes accrued........................... 10 59 4 -- 73
Other................................... 124 97 36 -- 257
------ ------ ------- ------- ------
278 485 105 (177) 691
Long-term debt............................ 1,255 43 2,209 (2,794) 713
Deferred income taxes..................... 131 35 (1) -- 165
Postretirement benefits and other
liabilities............................. 127 50 -- -- 177
Commitments and contingencies
Minority interest......................... -- 16 -- 392 408
Preferred stock with mandatory redemption
provisions.............................. 392 -- -- (392) --
Shareowners' equity....................... 2,387 3,857 2,528 (6,244) 2,528
------ ------ ------- ------- ------
$4,570 $4,486 $ 4,841 $(9,215) $4,682
====== ====== ======= ======= ======
</TABLE>
F-41
<PAGE> 196
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ ------------ ------- ------------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net cash provided (used) by operating activities...... $ 238 $ 577 $(255) $ (28) $ 532
----- ----- ----- ----- -----
INVESTING ACTIVITIES
Net proceeds related to the sale of discontinued
operations.......................................... -- 22 -- -- 22
Net proceeds from sale of businesses and assets....... 7 3 -- -- 10
Expenditures for plant, property, and equipment....... (82) (113) -- -- (195)
Acquisitions of businesses............................ -- (3) -- -- (3)
Expenditures for plant, property, and equipment and
businesses acquisitions -- discontinued
operations.......................................... -- (498) -- -- (498)
Investments and other................................. (49) (43) 2 -- (90)
----- ----- ----- ----- -----
Net cash provided (used) by investing activities...... (124) (632) 2 -- (754)
----- ----- ----- ----- -----
FINANCING ACTIVITIES
Issuance of common and treasury shares................ -- -- 50 -- 50
Purchase of common stock.............................. -- -- (154) -- (154)
Issuance of long-term debt............................ -- 4 -- -- 4
Retirement of long-term debt.......................... (1) (20) -- -- (21)
Net increase (decrease) in short-term debt excluding
current maturities on long-term debt................ -- 115 425 -- 540
Intercompany dividends and net increase (decrease) in
intercompany obligations............................ (87) (51) 138 -- --
Dividends (common and preferred)...................... (28) -- (203) 28 (203)
----- ----- ----- ----- -----
Net cash provided (used) by financing activities...... (116) 48 256 28 216
----- ----- ----- ----- -----
Effect of foreign exchange rate changes on cash and
temporary cash investments.......................... -- 6 -- -- 6
----- ----- ----- ----- -----
Increase (decrease) in cash and temporary cash
investments......................................... (2) (1) 3 -- --
Cash and temporary cash investments, January 1........ 3 26 -- -- 29
----- ----- ----- ----- -----
Cash and temporary cash investments, December 31
(Note).............................................. $ 1 $ 25 $ 3 $ -- $ 29
===== ===== ===== ===== =====
</TABLE>
- ---------------
Note: Cash and temporary cash investments include highly liquid investments with
a maturity of three months or less at the date of purchase.
F-42
<PAGE> 197
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ ------------ ------- ------------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net cash provided (used) by operating activities..... $ 22 $ 552 $ (34) $ (21) $ 519
----- ----- ----- ----- -----
INVESTING ACTIVITIES
Net proceeds related to the sale of discontinued
operations......................................... -- 24 -- -- 24
Net proceeds from the sale of businesses and
assets............................................. -- 5 -- -- 5
Expenditures for plant, property, and equipment...... (69) (152) -- -- (221)
Acquisitions of businesses........................... (7) (22) -- -- (29)
Expenditures for plant, property, and equipment and
business acquisitions -- discontinued operations... -- (622) -- -- (622)
Investments and other................................ (11) (51) 18 -- (44)
----- ----- ----- ----- -----
Net cash provided (used) by investing activities..... (87) (818) 18 -- (887)
----- ----- ----- ----- -----
FINANCING ACTIVITIES
Issuance of common and treasury shares............... -- -- 48 -- 48
Purchase of common stock............................. -- -- (132) -- (132)
Issuance of equity securities by a subsidiary........ 99 -- -- -- 99
Issuance of long-term debt........................... -- 7 590 -- 597
Retirement of long-term debt......................... (1) (22) -- -- (23)
Net increase (decrease) in short-term debt excluding
current maturities on long-term debt............... 25 (74) 18 -- (31)
Intercompany dividends and net increase (decrease) in
intercompany obligations........................... (40) 344 (304) -- --
Dividends (common and preferred)..................... (21) -- (204) 21 (204)
----- ----- ----- ----- -----
Net cash provided (used) by financing activities..... 62 255 16 21 354
----- ----- ----- ----- -----
Effect of foreign exchange rate changes on cash and
temporary cash investments......................... -- 3 -- -- 3
----- ----- ----- ----- -----
Increase (decrease) in cash and temporary cash
investments........................................ (3) (8) -- -- (11)
Cash and temporary cash investments, January 1....... 6 34 -- -- 40
----- ----- ----- ----- -----
Cash and temporary cash investments, December 31
(Note)............................................. $ 3 $ 26 $ -- $ -- $ 29
===== ===== ===== ===== =====
</TABLE>
- ---------------
Note: Cash and temporary cash investments include highly liquid investments with
a maturity of three months or less at the date of purchase.
F-43
<PAGE> 198
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ ------------ ------- ------------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net cash provided (used) by operating activities........ $ 16 $ (796) $ 1,054 $(21) $ 253
----- ------- ------- ---- -------
INVESTING ACTIVITIES
Net proceeds related to the sale of discontinued
operations............................................ -- 658 539 -- 1,197
Net proceeds from sale of businesses and assets......... -- 3 -- -- 3
Expenditures for plant, property, and equipment......... (75) (113) -- -- (188)
Acquisitions of businesses.............................. (347) (78) -- -- (425)
Expenditures for plant, property, and equipment and
business acquisitions -- discontinued operations...... -- (1,106) -- -- (1,106)
Investments and other................................... (29) (42) (95) -- (166)
----- ------- ------- ---- -------
Net cash provided (used) by investing activities........ (451) (678) 444 -- (685)
----- ------- ------- ---- -------
FINANCING ACTIVITIES
Issuance of common, treasury, and SECT shares........... -- -- 164 -- 164
Purchase of common stock................................ -- -- (172) -- (172)
Issuance of NPS Preferred Stock......................... -- -- 296 -- 296
Redemption of preferred stock........................... -- -- (20) -- (20)
Issuance of long-term debt.............................. -- 636 2,164 -- 2,800
Retirement of long-term debt............................ -- (1,759) (529) -- (2,288)
Net increase (decrease) in short-term debt excluding
current maturities on long-term debt.................. -- 58 (279) -- (221)
Cash transferred in Merger and Distributions............ -- -- (99) -- (99)
Intercompany dividends and net increase (decrease) in
intercompany obligations.............................. 437 2,273 (2,710) -- --
Dividends (common and preferred)........................ (21) -- (313) 21 (313)
----- ------- ------- ---- -------
Net cash provided (used) by financing activities........ 416 1,208 (1,498) 21 147
----- ------- ------- ---- -------
Effect of foreign exchange rate changes on cash and
temporary cash investments............................ -- 1 -- -- 1
----- ------- ------- ---- -------
Increase (decrease) in cash and temporary cash
investments........................................... (19) (265) -- -- (284)
Cash and temporary cash investments, January 1.......... 24 300 -- -- 324
----- ------- ------- ---- -------
Cash and temporary cash investments, December 31
(Note)................................................ $ 5 $ 35 $ -- $ -- $ 40
===== ======= ======= ==== =======
</TABLE>
- ---------------
Note: Cash and temporary cash investments include highly liquid investments with
a maturity of three months at the date of purchase.
F-44
<PAGE> 199
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
15. SUBSEQUENT EVENTS
On November 4, 1999 Tenneco completed the spin-off of the common stock of
Tenneco Packaging, Inc., now known as "Pactiv", to the Tenneco shareowners. At
the time of the spin-off, Packaging included Tenneco's specialty packaging
business, the remaining interest in the containerboard joint venture and
Tenneco's administrative service operations. The morning after the spin-off,
Tenneco changed its name from "Tenneco Inc." to "Tenneco Automotive Inc." and
effected a reverse stock split whereby every five shares of Tenneco common stock
were converted into one share of Tenneco's new common stock.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
INCOME (LOSS)
INCOME BEFORE BEFORE CUMULATIVE
NET SALES INTEREST EXPENSE, CUMULATIVE EFFECT OF
AND INCOME TAXES, INCOME FROM INCOME FROM EFFECT OF CHANGE CHANGE IN
OPERATING AND MINORITY CONTINUING DISCONTINUED IN ACCOUNTING ACCOUNTING NET INCOME
QUARTER REVENUES INTEREST OPERATIONS OPERATIONS PRINCIPLE PRINCIPLE (LOSS)
- ------- --------- ----------------- ----------- ------------ ---------------- ---------- ----------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
1998
1st................ $ 800 $ 83 $ 43 $ 32 $ 75 $ -- $ 75
2nd................ 864 124 63 74 137 -- 137
3rd................ 804 81 63 40 103 -- 103
4th................ 769 (61) (53) (7) (60) -- (60)
------ ---- ---- ---- ---- ---- ----
$3,237 $227 $116 $139 $255 $ -- $255
====== ==== ==== ==== ==== ==== ====
1997
1st................ $ 778 $ 80 $ 54 $ 22 $ 76 $ -- $ 76
2nd................ 873 134 84 20 104 -- 104
3rd................ 785 114 62 43 105 -- 105
4th................ 790 67 34 42 76 (46) 30
------ ---- ---- ---- ---- ---- ----
$3,226 $395 $234 $127 $361 $(46) $315
====== ==== ==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK
----------------------------------------------------------------------
BEFORE CUMULATIVE
CUMULATIVE EFFECT OF
FROM FROM EFFECT OF CHANGE CHANGE IN
CONTINUING DISCONTINUED IN ACCOUNTING ACCOUNTING NET INCOME
QUARTER OPERATIONS OPERATIONS PRINCIPLE PRINCIPLE (LOSS)
- ------- ---------- ------------ ---------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1998
1st............................... $ 1.26 $ .95 $ 2.21 $ -- $ 2.21
2nd............................... 1.88 2.16 4.04 -- 4.04
3rd............................... 1.85 1.24 3.09 -- 3.09
4th............................... (1.57) (.23) (1.80) -- (1.80)
------ ----- ------ ------ ------
$ 3.45 $4.13 $ 7.58 $ -- $ 7.58
====== ===== ====== ====== ======
1997
1st............................... $ 1.59 $ .63 $ 2.22 $ -- $ 2.22
2nd............................... 2.45 .61 3.06 -- 3.06
3rd............................... 1.84 1.27 3.11 -- 3.11
4th............................... 1.00 1.22 .87 (1.35) .87
------ ----- ------ ------ ------
$ 6.87 $3.73 $10.60 $(1.35) $ 9.25
====== ===== ====== ====== ======
</TABLE>
F-45
<PAGE> 200
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK
---------------------------------------------------------------------------
BEFORE CUMULATIVE
CUMULATIVE EFFECT EFFECT OF
FROM FROM OF CHANGE CHANGE IN
CONTINUING DISCONTINUED IN ACCOUNTING ACCOUNTING NET INCOME
QUARTER OPERATIONS OPERATIONS PRINCIPLE PRINCIPLE (LOSS)
------- ---------- ------------ ----------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1998
1st.............................. $ 1.26 $ .94 $ 2.20 $ -- $ 2.20
2nd.............................. 1.88 2.15 4.03 -- 4.03
3rd.............................. 1.84 1.24 3.08 -- 3.08
4th.............................. (1.57) (.23) (1.80) -- (1.80)
------ ----- ------ ------ ------
$ 3.44 $4.12 $ 7.56 $ -- $ 7.56
====== ===== ====== ====== ======
1997
1st.............................. $ 1.59 $ .63 $ 2.22 $ -- $ 2.22
2nd.............................. 2.44 .61 3.05 -- 3.05
3rd.............................. 1.82 1.27 3.09 -- 3.09
4th.............................. 1.00 1.22 2.22 (1.35) .87
------ ----- ------ ------ ------
$ 6.85 $3.72 $10.57 $(1.35) $ 9.22
====== ===== ====== ====== ======
</TABLE>
- -------------------------
Note: Reference is made to Notes 1, 2, 3, 4 and 8 and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for items
affecting quarterly results. The sum of the quarters may not equal the
total of the respective year's earnings per share on either a basic or
diluted basis due to changes in the weighted average shares outstanding
throughout the year.
(The preceding notes are an integral part of the foregoing financial
statements.)
F-46
<PAGE> 201
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1999 1998
------------ ------------
(MILLIONS EXCEPT SHARE AND
PER SHARE AMOUNTS)
<S> <C> <C>
REVENUES
Net sales and operating revenues........................ $ 2,473 $ 2,468
Other income --
Gain (loss) on sale of businesses and assets,
net.............................................. (5) (14)
Other income, net.................................. 15 26
----------- -----------
2,483 2,480
----------- -----------
COSTS AND EXPENSES
Cost of sales (exclusive of depreciation shown below)... 1,812 1,731
Engineering, research, and development.................. 39 18
Selling, general, and administrative.................... 303 333
Depreciation and amortization........................... 110 110
----------- -----------
2,264 2,192
----------- -----------
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY
INTEREST.................................................. 219 288
Interest expense........................................ 58 49
Income tax expense (benefit)............................ 60 48
Minority interest....................................... 21 22
----------- -----------
INCOME FROM CONTINUING OPERATIONS........................... 80 169
Income (loss) from discontinued operations, net of income
tax....................................................... (99) 146
----------- -----------
Income (loss) before extraordinary loss..................... (19) 315
Extraordinary loss, net of income tax....................... (7) --
----------- -----------
Income (loss) before cumulative effect of change in
accounting principle...................................... (26) 315
Cumulative effect of change in accounting principle, net of
income tax................................................ (134) --
----------- -----------
NET INCOME (LOSS)........................................... $ (160) $ 315
=========== ===========
EARNINGS (LOSS) PER SHARE
Average shares of common stock outstanding --
Basic................................................... 33,423,014 33,785,955
Diluted................................................. 33,491,690 33,876,785
Basic earnings (loss) per share of common stock --
Continuing operations................................... $ 2.40 $ 4.99
Discontinued operations................................. (2.98) 4.35
Extraordinary loss...................................... (.20) --
Cumulative effect of change in accounting principle..... (4.00) --
----------- -----------
$ (4.78) $ 9.34
=========== ===========
Diluted earnings (loss) per share of common stock --
Continuing operations................................... $ 2.40 $ 4.97
Discontinued operations................................. (2.98) 4.34
Extraordinary loss...................................... (.20) --
Cumulative effect of change in accounting principle..... (4.00) --
----------- -----------
$ (4.78) $ 9.31
=========== ===========
Cash dividends per share of common stock.................... $ 4.50 $ 4.50
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements of income (loss).
F-47
<PAGE> 202
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1999 1998
-------- ------
(MILLIONS)
<S> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations........................... $ 80 $ 169
Adjustments to reconcile income from continuing operations
to cash provided (used) by operating activities --
Depreciation and amortization.......................... 110 110
Deferred income taxes.................................. 44 27
(Gain) loss on sale of businesses and assets, net...... 5 14
Changes in components of working capital --
(Increase) decrease in receivables................ (244) (179)
(Increase) decrease in inventories................ (7) (16)
(Increase) decrease in prepayments and other
current assets................................... 15 (7)
Increase (decrease) in payables................... 44 7
Increase (decrease) in taxes accrued.............. (74) (18)
Increase (decrease) in interest accrued........... 39 30
Increase (decrease) in other current
liabilities...................................... (62) (43)
Other.................................................. (50) (61)
------- -----
Cash provided (used) by continuing operations............... (100) 33
Cash provided (used) by discontinued operations............. (66) 332
------- -----
Net cash provided (used) by operating activities............ (166) 365
------- -----
INVESTING ACTIVITIES
Net proceeds related to the sale of discontinued
operations................................................ 342 13
Net proceeds from sale of assets............................ 8 10
Expenditures for plant, property, and equipment............. (104) (121)
Acquisition of businesses................................... (36) --
Expenditures for plant, property, and equipment and business
acquisitions -- discontinued operations................... (1,249) (301)
Investments and other....................................... (29) (70)
------- -----
Net cash provided (used) by investing activities............ (1,068) (469)
------- -----
FINANCING ACTIVITIES
Issuance of common and treasury shares...................... 28 39
Purchase of common stock.................................... (4) (104)
Issuance of long-term debt.................................. 1,761 3
Retirement of long-term debt................................ (30) (18)
Net increase (decrease) in short-term debt excluding current
maturities on long-term debt.............................. (360) 328
Dividends (common).......................................... (151) (152)
------- -----
Net cash provided (used) by financing activities............ 1,244 96
------- -----
Effect of foreign exchange rate changes on cash and
temporary cash investments................................ 3 3
------- -----
Increase (decrease) in cash and temporary cash
investments............................................... 13 (5)
Cash and temporary cash investments, January 1.............. 29 29
------- -----
Cash and temporary cash investments, September 30 (Note).... $ 42 $ 24
======= =====
Cash paid during the period for interest.................... $ 150 $ 162
Cash paid during the period for income taxes (net of
refunds).................................................. $ 77 $ 25
NON-CASH INVESTING AND FINANCING ACTIVITIES
Common equity interest received related to the sale of
containerboard operations................................. $ 194 $ --
Principal amount of long-term debt assumed by buyers of
containerboard operations................................. $(1,760) $ --
</TABLE>
- -------------------------
Note: Cash and temporary cash investments include highly liquid investments with
a maturity of three months or less at the date of purchase.
The accompanying notes to financial statements are an integral part of these
statements of cash flows.
F-48
<PAGE> 203
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ------------
1999 1998
------------- ------------
(MILLIONS)
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments..................... $ 42 $ 29
Receivables --
Customer notes and accounts, net................... 657 430
Income taxes....................................... -- 3
Other.............................................. 23 10
Inventories --
Finished goods..................................... 209 221
Work in process.................................... 84 79
Raw materials...................................... 72 73
Materials and supplies............................. 38 41
Deferred income taxes................................... 28 39
Prepayments and other................................... 63 139
------ ------
1,216 1,064
------ ------
Other assets:
Long-term notes receivable, net......................... 30 23
Goodwill and intangibles, net........................... 505 499
Deferred income taxes................................... -- 39
Pension assets.......................................... 99 101
Other................................................... 106 201
------ ------
740 863
------ ------
Plant, property, and equipment, at cost..................... 1,936 1,944
Less -- Reserves for depreciation and amortization...... 881 851
------ ------
1,055 1,093
------ ------
Net assets of discontinued operations....................... 1,483 1,739
------ ------
$4,494 $4,759
====== ======
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt (including current maturities on
long-term debt)........................................ $ 237 $ 304
Trade payables.......................................... 365 337
Taxes accrued........................................... 46 31
Accrued liabilities..................................... 194 161
Other................................................... 46 76
------ ------
888 909
------ ------
Long-term debt.............................................. 796 671
------ ------
Deferred income taxes....................................... 104 98
------ ------
Postretirement benefits..................................... 136 139
------ ------
Deferred credits and other liabilities...................... 19 31
------ ------
Commitments and contingencies
Minority interest........................................... 411 407
------ ------
Shareowners' equity:
Common stock............................................ -- --
Premium on common stock and other capital surplus....... 2,723 2,712
Accumulated other comprehensive income (loss)........... (174) (91)
Retained earnings (accumulated deficit)................. (168) 142
------ ------
2,381 2,763
Less -- Shares held as treasury stock, at cost.......... 241 259
------ ------
2,140 2,504
------ ------
$4,494 $4,759
====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-49
<PAGE> 204
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
1999 1998
------------------- -------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------ ---------- ------
(MILLIONS EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
COMMON STOCK
Balance January 1.................................... 34,734,039 $ -- 34,513,978 $ --
Issued pursuant to benefit plans................ 109,004 -- 183,742 --
---------- ------ ---------- ------
Balance September 30................................. 34,843,043 -- 34,697,720 --
========== ------ ========== ------
PREMIUM ON COMMON STOCK AND OTHER CAPITAL SURPLUS
Balance January 1.................................... 2,712 2,681
Premium on common stock issued pursuant to
benefit plans................................. 11 25
------ ------
Balance September 30................................. 2,723 2,706
------ ------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance January 1.................................... (91) (122)
Other comprehensive income (loss)............... (83) 38
------ ------
Balance September 30................................. (174) (84)
------ ------
RETAINED EARNINGS (ACCUMULATED DEFICIT)
Balance January 1.................................... 142 89
Net income (loss)............................... (160) 315
Dividends on common stock....................... (150) (151)
------ ------
Balance September 30................................. (168) 253
------ ------
LESS -- COMMON STOCK HELD AS TREASURY STOCK, AT COST
Balance January 1.................................... 1,351,536 259 585,638 120
Shares acquired................................. 34,669 5 553,162 107
Shares issued pursuant to benefit and dividend
reinvestment plans............................ (118,166) (23) (80,584) (16)
---------- ------ ---------- ------
Balance September 30................................. 1,268,039 241 1,058,216 211
========== ------ ========== ------
Total........................................... $2,140 $2,664
====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements of changes in shareowners' equity.
F-50
<PAGE> 205
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------
1999 1998
----------------------------- -----------------------------
ACCUMULATED ACCUMULATED
OTHER OTHER
COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE
INCOME INCOME INCOME INCOME
------------- ------------- ------------- -------------
(MILLIONS)
<S> <C> <C> <C> <C>
NET INCOME (LOSS)........................ $(160) $315
----- ----
ACCUMULATED OTHER COMPREHENSIVE INCOME
(LOSS)
CUMULATIVE TRANSLATION ADJUSTMENT
Balance January 1...................... $ (82) $(122)
Translation of foreign currency
statements........................ (83) (83) 38 38
----- -----
Balance September 30................... (165) (84)
----- -----
ADDITIONAL MINIMUM PENSION LIABILITY
ADJUSTMENT
Balance January 1...................... (9) --
Additional minimum pension liability
adjustment........................ -- -- -- --
----- -----
Balance September 30................... (9) --
----- -----
Balance September 30..................... $(174) $ (84)
===== =====
----- ----
Other comprehensive income (loss)........ (83) 38
----- ----
COMPREHENSIVE INCOME (LOSS).............. $(243) $353
===== ====
</TABLE>
The accompanying notes to financial statements are an integral part
of these statements of comprehensive income (loss).
F-51
<PAGE> 206
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) Tenneco Automotive Inc. was known as Tenneco Inc. before the spin-off
on November 4, 1999 of Tenneco Inc.'s packaging business, as described in Note
2. In these notes, discussions of Tenneco refer to Tenneco Inc. and its
subsidiaries before the spin-off and to Tenneco Automotive Inc. and its
subsidiaries after the spin-off.
In the opinion of Tenneco, the accompanying unaudited financial statements
contain all adjustments (consisting of normal recurring adjustments) necessary
to present fairly the financial position, results of operations, cash flows,
changes in shareowners' equity, and comprehensive income for the periods
indicated. The unaudited interim consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles. The consolidated
financial statements of Tenneco include all majority-owned subsidiaries.
Investments in 20% to 50% owned companies where Tenneco has the ability to exert
significant influence over operating and financial policies are carried at cost
plus equity in undistributed earnings and cumulative translation adjustments
since date of acquisition. Tenneco has no investments in 20% to 50% owned
companies where it does not carry the investment at cost plus equity in
undistributed earnings.
Prior year's financial statements have been reclassified where appropriate
to conform to 1999 presentations.
(2) In July 1998, Tenneco's Board of Directors authorized management to
develop a broad range of strategic alternatives to separate the automotive,
paperboard packaging and specialty packaging businesses. Subsequently, Tenneco
completed the following actions:
- In January 1999, Tenneco announced an agreement to contribute its
containerboard business to a new joint venture with an affiliate of
Madison Dearborn Partners. The proceeds from the transaction, including
debt assumed by the new joint venture, were approximately $2 billion. The
transaction closed in April 1999. Tenneco retained a 43% percent interest
in the joint venture.
- In April 1999, Tenneco announced an agreement to sell its folding carton
operations to Caraustar Industries. This transaction closed in June 1999.
The folding carton operations and the containerboard business together
represented Tenneco's paperboard packaging operating segment.
- On November 4, 1999, Tenneco completed the spin-off of Tenneco Packaging
Inc., now known as Pactiv Corporation ("Packaging"). The morning
following the spin-off, Tenneco changed its name from "Tenneco Inc. " to
"Tenneco Automotive Inc." and effected a reverse stock split whereby
every five shares of Tenneco common stock were converted into one share
of Tenneco's new common stock.
The separation of the automotive and packaging businesses was accomplished
by the spin-off of the common stock of Packaging to Tenneco shareowners. At the
time of the spin-off, Packaging included Tenneco's specialty packaging business,
the remaining interest in the containerboard joint venture and Tenneco's
administrative services operations. In August 1999, Tenneco received a letter
ruling from the Internal Revenue Service that the spin-off would be tax-free for
U.S. federal income tax purposes to Tenneco and its shareowners.
Before the spin-off, Tenneco realigned substantially all of its existing
debt through a combination of tender offers, exchange offers, and other
refinancings. The company's debt realignment was financed by borrowings by
Tenneco under new credit facilities, the issuance by Tenneco of subordinated
debt, and borrowings by Packaging under new credit facilities, and the issuance
by Packaging of its new publicly-traded debt in exchange for certain series of
the publicly-traded debt of Tenneco that was outstanding
F-52
<PAGE> 207
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
before the spin-off and debt realignment. The debt of Packaging was rated
investment grade and the debt of Tenneco was rated non-investment grade by both
Standard & Poor's and Moody's debt rating agencies.
As a result of these transactions, Tenneco's former specialty and
paperboard packaging operating segments are presented as discontinued operations
in the accompanying financial statements. Tenneco's sole continuing operation is
its automotive segment. Refer to Note 3 for further information related to
discontinued operations.
(3) Revenues and income for the paperboard packaging discontinued
operations are shown in the following table:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
--------------
1999 1998
----- ------
(MILLIONS)
<S> <C> <C>
Net sales and operating revenues............................ $ 445 $1,185
===== ======
Income before income taxes and interest allocation.......... $ 30 $ 101
Income tax (expense) benefit................................ (11) (38)
----- ------
Income before interest allocation........................... 19 63
Allocated interest expense, net of income tax............... (5) (20)
----- ------
Income from discontinued operations before disposition...... 14 43
Gain (loss) on disposition, net of income tax............... (169) 19
----- ------
Income (loss) from discontinued operations.................. $(155) $ 62
===== ======
</TABLE>
Revenues and income for the specialty packaging discontinued operations are
shown in the following table:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
---------------
1999 1998
------ ------
(MILLIONS)
<S> <C> <C>
Net sales and operating revenues............................ $2,158 $2,067
====== ======
Income before income taxes and interest allocation.......... $ 213 $ 247
Income tax (expense) benefit................................ (87) (96)
------ ------
Income before interest allocation........................... 126 151
Allocated interest expense, net of income tax............... (70) (67)
------ ------
Income (loss) from discontinued operations.................. $ 56 $ 84
====== ======
</TABLE>
Net assets of discontinued operations includes $1,985 million and $2,456
million of debt allocated to discontinued operations as of September 30, 1999,
and December 31, 1998, respectively.
(4) In the fourth quarter of 1998, Tenneco's Board of Directors approved an
extensive restructuring plan designed to reduce administrative and operational
overhead costs. Tenneco recorded a pre-tax charge to income from continuing
operations of $53 million, $34 million after-tax, or $1.02 per diluted common
share. Of the pre-tax charge, for operational restructuring plans, $36 million
related to the consolidation of the manufacturing and distribution operations of
the North American automotive aftermarket business. A staff and related cost
reduction plan, which covers employees in both the operating units and corporate
operations, is expected to cost $17 million.
F-53
<PAGE> 208
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The automotive aftermarket restructuring involves closing two plant
locations and five distribution centers, resulting in the elimination of 302
positions. The staff and related cost reduction plan involves the elimination of
454 administrative positions.
The fixed assets at the locations to be closed were written down to their
fair value, less costs to sell, in the fourth quarter of 1998. As a result of
the single-purpose nature of the assets, fair value was estimated at scrap value
less cost to dispose. No significant net cash proceeds are expected to be
received from the ultimate disposal of these assets, which should be complete by
the fourth quarter of 2000. The effect of suspending depreciation for these
impaired assets is a reduction in depreciation and amortization of approximately
$2 million on an annual basis.
As of September 30, 1999, approximately 670 employees have been terminated.
To address customer service and production transfer issues, the closure of one
plant location and one aftermarket distribution center has been delayed until
the first and second quarters of 2000, respectively. All other restructuring
actions, with the exception of the final disposal of certain assets, are being
executed according to the initial plan and are expected to be complete by the
fourth quarter of 1999. During the nine months ended September 30, 1999, the
automotive aftermarket business closed one plant location and four distribution
centers.
Amounts related to the restructuring plan are shown in the following table:
<TABLE>
<CAPTION>
CASH
PAYMENTS
NINE MONTHS
DECEMBER 31, 1998 ENDED BALANCE AT
RESTRUCTURING SEPTEMBER 30, SEPTEMBER 30,
CHARGE BALANCE 1999 1999
----------------- ------------- -------------
(MILLIONS)
<S> <C> <C> <C>
Severance........................................... $15 $ 6 $ 9
Facility exit costs................................. 1 1 --
--- --- ---
$16 $ 7 $ 9
=== === ===
</TABLE>
(5) Tenneco is a party to various legal proceedings arising from its
operations. Tenneco believes that the outcome of these proceedings, individually
and in the aggregate, will not have a material adverse effect on its financial
position or results of operations.
(6) Tenneco is subject to a variety of environmental and pollution control
laws and regulations in all jurisdictions in which it operates. Tenneco has
provided reserves for compliance with these laws and regulations where it is
probable that a liability exists and where Tenneco can make a reasonable
estimate of the liability. The estimated liabilities recorded are subject to
change as more information becomes available regarding the magnitude of possible
cleanup costs and the timing, varying costs, and effectiveness of alternative
cleanup technologies. However, Tenneco believes that any additional costs which
may arise as more information becomes available will not have a material adverse
effect on its financial position or results of operations.
(7) In the first quarter of 1999, Tenneco recorded an extraordinary loss
for extinguishment of debt of $7 million (net of a $3 million income tax
benefit), or $.20 per diluted common share. The loss related to early retirement
of debt in connection with the sale of the containerboard assets.
(8) In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes new
accounting and reporting standards requiring that all derivative
F-54
<PAGE> 209
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
instruments (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement and requires that a company must formally document,
designate, and assess the effectiveness of transactions that receive hedge
accounting treatment. This statement cannot be applied retroactively and is
effective for all fiscal years beginning after June 15, 2000. Tenneco is
currently evaluating the new standard but has not yet determined the impact it
will have on its financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-Up Activities," which requires costs of start-up activities to be expensed
as incurred. This statement is effective for fiscal years beginning after
December 15, 1998. The statement requires previously capitalized costs related
to start-up activities to be expensed as a cumulative effect of a change in
accounting principle when the statement is adopted. Prior to January 1, 1999,
Tenneco capitalized certain costs related to start-up activities, primarily
engineering costs for new automobile original equipment platforms. Tenneco
adopted SOP 98-5 on January 1, 1999, and recorded an after-tax charge for the
cumulative effect of this change in accounting principle of $102 million (net of
a $50 million tax benefit), or $3.05 per diluted common share. The change in
accounting principle decreased income from continuing operations by $11 million
(net of a $8 million tax benefit), or $.33 per diluted common share for the nine
months ended September 30, 1999. If the new accounting method had been applied
retroactively, income from continuing operations for the nine months ended
September 30, 1998, would have been lower by $10 million (net of a $7 million
tax benefit), or $.30 per diluted common share. For the three months ended
September 30, 1999, the change in accounting principle decreased income from
continuing operations by $6 million (net of a $4 million tax benefit), or $.18
per diluted common share. If the new accounting method had been applied
retroactively, income from continuing operations for the three months ended
September 30, 1998, would have been lower by $5 million (net of a $3 million tax
benefit), or $.15 per diluted common share.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which establishes new
accounting and reporting standards for the costs of computer software developed
or obtained for internal use. This statement requires prospective application
for fiscal years beginning after December 15, 1998. Tenneco adopted SOP 98-1 on
January 1, 1999. The impact of this new standard did not have a significant
effect on Tenneco's financial position or results of operations.
Effective January 1, 1999, Tenneco changed its method of accounting for
customer acquisition costs from a deferral method to an expense-as-incurred
method. In connection with Tenneco's decision to separate its automotive and
specialty packaging businesses into independent public companies, Tenneco
determined that a change to an expense-as-incurred method of accounting for
automotive aftermarket customer acquisition costs was preferable in order to
permit improved comparability of stand-alone financial results with its
aftermarket industry competitors. Tenneco recorded an after-tax charge for the
cumulative effect of this change in accounting principle of $32 million (net of
a $22 million tax benefit), or $.95 per diluted common share. The change in
accounting principle increased income from continuing operations by $8 million
(net of $5 million in income tax expense), or $.24 per diluted common share for
the nine months ended September 30, 1999. If the new accounting principle had
been applied retroactively, income from continuing operations for the nine
months ended September 30, 1998, would have been higher by $1 million (net of $1
million in income tax expense), or $.03 per diluted common share. For the three
months ended September 30, 1999, the change in accounting principle increased
F-55
<PAGE> 210
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
income from continuing operations by $3 million (net of $1 million in income tax
expense), or $.09 per diluted common share. If the new accounting principle had
been applied retroactively, income from continuing operations for the three
months ended September 30, 1998, would have been higher by $3 million (net of $2
million in income tax expense), or $.09 per diluted common share.
(9) In October 1999, Tenneco's shareowners approved an amendment to the
Certificate of Incorporation providing for a one-for-five reverse stock split of
Tenneco's common stock. The reverse stock split is reflected for all periods
presented in the accompanying financial statements, other footnotes, and this
computation of earnings from continuing operations per share of common stock
outstanding.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1999 1998
------------ ------------
(MILLIONS EXCEPT SHARE AND
PER SHARE AMOUNTS)
<S> <C> <C>
Basic Earnings Per Share --
Income from continuing operations...................... $ 80 $ 169
========== ==========
Average shares of common stock outstanding............. 33,423,014 33,785,955
========== ==========
Earnings from continuing operations per average share
of common stock...................................... $ 2.40 $ 4.99
========== ==========
Diluted Earnings Per Share --
Income from continuing operations...................... $ 80 $ 169
========== ==========
Average shares of common stock outstanding............. 33,423,014 33,785,955
Effect of dilutive securities:
Restricted stock.................................. 9,973 8,888
Stock options..................................... -- 32,984
Performance shares................................ 58,703 48,958
---------- ----------
Average shares of common stock outstanding including
dilutive securities.................................. 33,491,690 33,876,785
========== ==========
Earnings from continuing operations per average share
of common stock...................................... $ 2.40 $ 4.97
========== ==========
</TABLE>
(10) Tenneco is a global manufacturer with a single operating segment:
Automotive -- Manufacture and sale of exhaust and ride control systems
for both the original equipment market and the aftermarket.
Tenneco evaluates business segment operating performance based primarily on
income before interest expense, income taxes, and minority interest, exclusive
of restructuring charges and other unusual items. Individual operating segments
have not been aggregated within this reportable segment.
F-56
<PAGE> 211
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The following table summarizes certain Tenneco segment information:
<TABLE>
<CAPTION>
SEGMENT
------------------- RECLASS
AUTOMOTIVE OTHER & ELIMS CONSOLIDATED
---------- ------ ------- ------------
(MILLIONS)
<S> <C> <C> <C> <C>
AT SEPTEMBER 30, 1999, AND FOR THE NINE MONTHS THEN
ENDED
Revenues from external customers...................... $2,473 $ -- $ -- $2,473
Income (loss) before interest, income taxes, and
minority interest................................... 223 (4) -- 219
Extraordinary loss.................................... -- (7) -- (7)
Cumulative effect of change in accounting principle... (33) (101) -- (134)
Total assets (Note)................................... 2,977 1,548 (31) 4,494
Net assets of discontinued operations................. -- 1,483 -- 1,483
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenues from external customers...................... $2,468 $ -- $ -- $2,468
Income (loss) before interest, income taxes, and
minority interest................................... 305 (17) -- 288
</TABLE>
- ---------------
Note: The Other segment's total assets include the net assets of discontinued
operations.
(11) Some of Tenneco's subsidiaries have guaranteed Tenneco debt.
Supplemental guarantor condensed consolidating financial statements are
presented below.
Basis of Presentation
On October 14, 1999, Tenneco issued $500,000,000 in aggregate principal
amount of Senior Subordinated Notes Due 2009 ("the Notes") as a component of a
plan to realign its debt prior to the spin-off. See Note 2 for further
discussion of the spin-off and debt realignment. Effective upon the spin-off,
all of Tenneco's then existing and future material domestic wholly owned
subsidiaries (the Guarantor Subsidiaries) fully and unconditionally guaranteed
the Notes on a joint and several basis. Additionally, the Guarantor Subsidiaries
fully and unconditionally guarantee Tenneco's senior secured credit facility.
Tenneco management believes separate financial statements and other disclosures
concerning each of the Guarantor Subsidiaries would not provide additional
information that is material to investors. Therefore, the Guarantor Subsidiaries
are combined in the presentation below.
These condensed consolidating financial statements are presented on the
equity method. Under this method, investments are recorded at cost and adjusted
for a company's ownership share of a subsidiary's cumulative results of
operations, capital contributions and distributions, and other equity changes.
The balance sheet caption "Investment in affiliated companies" includes
investments in continuing and discontinued subsidiaries. The condensed
consolidating financial statements of the Guarantor Subsidiaries should be read
in connection with the financial statements of Tenneco Automotive Inc. and
Consolidated Subsidiaries and notes thereto of which this note is an integral
part.
Distributions
There are no significant restrictions on the ability of the Guarantor
Subsidiaries to make distributions to Tenneco Automotive Inc.
F-57
<PAGE> 212
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
STATEMENT OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
----------------------------------------------------------------------
TENNECO
AUTOMOTIVE INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ --------------- ------- ------------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
REVENUES
Net sales and operating revenues --
External.......................... $1,089 $1,383 $ 1 $ -- $2,473
Affiliated companies.............. 61 52 -- (113) --
Other income, net.................... 9 2 -- (1) 10
------ ------ ----- ----- ------
1,159 1,437 1 (114) 2,483
------ ------ ----- ----- ------
COSTS AND EXPENSES
Cost of sales (exclusive of
depreciation shown below)......... 821 1,104 1 (114) 1,812
Engineering, research, and
development....................... 21 18 -- -- 39
Selling, general, and
administrative.................... 160 142 1 -- 303
Depreciation and amortization........ 54 56 -- -- 110
------ ------ ----- ----- ------
1,056 1,320 2 (114) 2,264
------ ------ ----- ----- ------
INCOME FROM CONTINUING OPERATIONS
BEFORE INTEREST EXPENSE, INCOME
TAXES, MINORITY INTEREST, AND EQUITY
IN NET INCOME FROM CONTINUING
OPERATIONS OF AFFILIATED COMPANIES... 103 117 (1) -- 219
Interest expense --
External (net of interest
capitalized)................. 2 13 42 1 58
Affiliated companies (net of
interest income)............. 56 6 (62) -- --
Income tax expense (benefit)...... 45 14 12 (11) 60
Minority interest................. -- 1 -- 20 21
------ ------ ----- ----- ------
-- 83 7 (10) 80
Equity in net income from
continuing operations of
affiliated companies............ 52 -- 73 (125) --
------ ------ ----- ----- ------
INCOME FROM CONTINUING OPERATIONS...... 52 83 80 (135) 80
Income (loss) from discontinued
operations, net of income tax........ 1 9 (99) (10) (99)
------ ------ ----- ----- ------
Income (loss) before extraordinary
loss................................. 53 92 (19) (145) (19)
Extraordinary loss, net of income
tax.................................. -- (7) (7) 7 (7)
------ ------ ----- ----- ------
Income (loss) before cumulative effect
of change in accounting principle.... 53 85 (26) (138) (26)
Cumulative effect of change in
accounting principle, net of income
tax.................................. (64) (70) (134) 134 (134)
------ ------ ----- ----- ------
NET INCOME (LOSS)...................... (11) 15 (160) (4) (160)
Preferred stock dividends.............. 20 -- -- (20) --
------ ------ ----- ----- ------
NET INCOME (LOSS) TO COMMON STOCK...... $ (31) $ 15 $(160) $ 16 $ (160)
====== ====== ===== ===== ======
</TABLE>
F-58
<PAGE> 213
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
STATEMENT OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
----------------------------------------------------------------------
TENNECO
AUTOMOTIVE INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ --------------- ------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES
Net sales and operating revenues --
External.......................... $1,099 $1,366 $ 3 $ -- $2,468
Affiliated companies.............. 70 57 -- (127) --
Other income, net.................... 21 (9) -- -- 12
------ ------ ---- ----- ------
1,190 1,414 3 (127) 2,480
------ ------ ---- ----- ------
COSTS AND EXPENSES
Cost of sales (exclusive of
depreciation shown below)......... 812 1,044 2 (127) 1,731
Engineering, research, and
development....................... 11 7 -- -- 18
Selling, general, and
administrative.................... 198 134 1 -- 333
Depreciation and amortization........ 58 52 -- -- 110
------ ------ ---- ----- ------
1,079 1,237 3 (127) 2,192
------ ------ ---- ----- ------
INCOME FROM CONTINUING OPERATIONS
BEFORE INTEREST EXPENSE, INCOME
TAXES, MINORITY INTEREST, AND EQUITY
IN NET INCOME FROM CONTINUING
OPERATIONS OF AFFILIATED COMPANIES... 111 177 -- -- 288
Interest expense --
External (net of interest
capitalized)................. 2 11 36 -- 49
Affiliated companies (net of
interest income)............. 37 4 (41) -- --
Income tax expense (benefit)...... 5 46 14 (17) 48
Minority interest................. -- 1 -- 21 22
------ ------ ---- ----- ------
67 115 (9) (4) 169
Equity in net income from
continuing operations of
affiliated companies............ 84 -- 178 (262) --
------ ------ ---- ----- ------
INCOME FROM CONTINUING OPERATIONS...... 151 115 169 (266) 169
Income from discontinued operations,
net of income tax.................... 18 220 146 (238) 146
------ ------ ---- ----- ------
Income before extraordinary loss....... 169 335 315 (504) 315
Extraordinary loss, net of income
tax.................................. -- -- -- -- --
------ ------ ---- ----- ------
Income before cumulative effect of
change in accounting principle....... 169 335 315 (504) 315
Cumulative effect of change in
accounting principle, net of income
tax.................................. -- -- -- -- --
------ ------ ---- ----- ------
NET INCOME............................. 169 335 315 (504) 315
Preferred stock dividends.............. 21 -- -- (21) --
------ ------ ---- ----- ------
NET INCOME TO COMMON STOCK............. $ 148 $ 335 $315 $(483) $ 315
====== ====== ==== ===== ======
</TABLE>
F-59
<PAGE> 214
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
----------------------------------------------------------------------
TENNECO
AUTOMOTIVE INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ --------------- ------- ------------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net cash provided (used) by operating
activities............................. $(148) $ 85 $ (83) $(20) $ (166)
----- ------- ----- ---- -------
INVESTING ACTIVITIES
Net proceeds related to the sale of
discontinued operations................ -- 342 -- -- 342
Net proceeds from sale of businesses and
assets................................. 6 2 -- -- 8
Expenditures for plant, property, and
equipment.............................. (39) (65) -- -- (104)
Acquisitions of businesses............... (2) (34) -- -- (36)
Expenditures for plant, property, and
equipment and business acquisitions --
discontinued operations................ -- (1,249) -- -- (1,249)
Investments and other.................... (8) (24) 3 -- (29)
----- ------- ----- ---- -------
Net cash provided (used) by investing
activities............................. (43) (1,028) 3 -- (1,068)
----- ------- ----- ---- -------
FINANCING ACTIVITIES
Issuance of common and treasury shares... -- -- 28 -- 28
Purchase of common stock................. -- -- (4) -- (4)
Issuance of long-term debt............... -- 1,761 -- -- 1,761
Retirement of long-term debt............. (1) (35) 6 -- (30)
Net increase (decrease) in short-term
debt excluding current maturities on
long-term debt......................... (25) (48) (287) -- (360)
Intercompany dividends and net increase
(decrease) in intercompany
obligations............................ 236 (742) 506 -- --
Dividends (common and preferred)......... (20) -- (151) 20 (151)
----- ------- ----- ---- -------
Net cash provided (used) by financing
activities............................. 190 936 98 20 1,244
----- ------- ----- ---- -------
Effect of foreign exchange rate changes
on cash and temporary cash
investments............................ -- 3 -- -- 3
----- ------- ----- ---- -------
Increase (decrease) in cash and temporary
cash investments....................... (1) (4) 18 -- 13
Cash and temporary cash investments,
January 1.............................. 3 26 -- -- 29
----- ------- ----- ---- -------
Cash and temporary cash investments,
September 30 (Note).................... $ 2 $ 22 $ 18 $ -- $ 42
===== ======= ===== ==== =======
NON-CASH INVESTING AND FINANCING
ACTIVITIES
Common equity interest received related
to the sale of containerboard
operations............................. $ -- $ 194 $ -- $ -- $ 194
Principal amount of long-term debt
assumed by buyers of containerboard
operations............................. $ -- $(1,760) $ -- $ -- $(1,760)
</TABLE>
- ---------------
Note: Cash and temporary cash investments include highly liquid investments with
a maturity of three months or less at the date of purchase.
F-60
<PAGE> 215
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
----------------------------------------------------------------------
TENNECO
AUTOMOTIVE INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ --------------- ------- ------------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net cash provided (used) by operating
activities.......................... $ 54 $ 428 $ (97) $(20) $ 365
---- ----- ----- ---- -----
INVESTING ACTIVITIES
Net proceeds related to the sale of
discontinued operations............. -- 13 -- -- 13
Net proceeds from sale of businesses
and assets.......................... 6 4 -- -- 10
Expenditures for plant, property, and
equipment........................... (52) (69) -- -- (121)
Acquisitions of businesses............ -- -- -- -- --
Expenditures for plant, property, and
equipment and business
acquisitions -- discontinued
operations.......................... -- (301) -- -- (301)
Investments and other................. (33) (38) 1 -- (70)
---- ----- ----- ---- -----
Net cash provided (used) by investing
activities.......................... (79) (391) 1 -- (469)
---- ----- ----- ---- -----
FINANCING ACTIVITIES
Issuance of common and treasury
shares.............................. -- -- 39 -- 39
Purchase of common stock.............. -- -- (104) -- (104)
Issuance of long-term debt............ -- 3 -- -- 3
Retirement of long-term debt.......... (1) (17) -- -- (18)
Net increase (decrease) in short-term
debt excluding current maturities on
long-term debt...................... -- 57 271 -- 328
Intercompany dividends and net
increase (decrease) in intercompany
obligations......................... 44 (91) 47 -- --
Dividends (common and preferred)...... (20) -- (152) 20 (152)
---- ----- ----- ---- -----
Net cash provided (used) by financing
activities.......................... 23 (48) 101 20 96
---- ----- ----- ---- -----
Effect of foreign exchange rate
changes on cash and temporary cash
investments......................... -- 3 -- -- 3
---- ----- ----- ---- -----
Increase (decrease) in cash and
temporary cash investments.......... (2) (8) 5 -- (5)
Cash and temporary cash investments,
January 1........................... 3 26 -- -- 29
---- ----- ----- ---- -----
Cash and temporary cash investments,
September 30 (Note)................. $ 1 $ 18 $ 5 $ -- $ 24
==== ===== ===== ==== =====
</TABLE>
- ---------------
Note: Cash and temporary cash investments include highly liquid investments with
a maturity of three months or less at the date of purchase.
F-61
<PAGE> 216
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-----------------------------------------------------------------------
TENNECO
AUTOMOTIVE INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ --------------- -------- ------------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments..... $ 2 $ 22 $ 18 $ -- $ 42
Receivables............................. 363 374 28 (85) 680
Inventories............................. 151 252 -- -- 403
Deferred income taxes................... 39 (11) -- -- 28
Prepayments and other................... 27 36 -- -- 63
------ ------ ------- -------- ------
582 673 46 (85) 1,216
------ ------ ------- -------- ------
Other assets:
Investment in affiliated companies...... 351 -- 4,935 (5,286) --
Notes and advances receivable from
affiliates............................ 2,417 9 3,334 (5,760) --
Long-term notes receivable, net......... 13 17 -- -- 30
Goodwill and intangibles, net........... 334 171 -- -- 505
Pension assets.......................... 92 7 -- -- 99
Other................................... 43 54 9 -- 106
------ ------ ------- -------- ------
3,250 258 8,278 (11,046) 740
------ ------ ------- -------- ------
Plant, property, and equipment, at cost..... 888 1,047 1 -- 1,936
Less -- Reserves for depreciation and
amortization.......................... 433 448 -- -- 881
------ ------ ------- -------- ------
455 599 1 -- 1,055
------ ------ ------- -------- ------
Net assets of discontinued operations....... 27 2,812 (1,356) -- 1,483
------ ------ ------- -------- ------
$4,314 $4,342 $ 6,969 $(11,131) $4,494
====== ====== ======= ======== ======
LIABILITIES AND SHAREOWNERS'
EQUITY
Current liabilities:
Short-term debt (including current
maturities on long-term debt)......... $ 1 $ 537 $ 420 $ (721) $ 237
Trade payables.......................... 160 276 11 (82) 365
Taxes accrued........................... (1) 28 130 (111) 46
Other................................... 100 67 73 -- 240
------ ------ ------- -------- ------
260 908 634 (914) 888
Long-term debt.............................. 1,558 24 4,262 (5,048) 796
Deferred income taxes....................... (27) 18 (67) 180 104
Postretirement benefits and other
liabilities............................... 132 23 -- -- 155
Commitments and contingencies
Minority interest........................... -- 16 -- 395 411
Preferred stock with mandatory redemption
provisions................................ 395 -- -- (395) --
Shareowners' equity......................... 1,996 3,353 2,140 (5,349) 2,140
------ ------ ------- -------- ------
$4,314 $4,342 $ 6,969 $(11,131) $4,494
====== ====== ======= ======== ======
</TABLE>
F-62
<PAGE> 217
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------------------------------
TENNECO
AUTOMOTIVE INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ --------------- ------- ------------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments...... $ 1 $ 25 $ 3 $ -- $ 29
Receivables.............................. 277 307 32 (173) 443
Inventories.............................. 149 265 -- -- 414
Deferred income taxes.................... 48 (9) -- -- 39
Prepayments and other.................... 94 45 -- -- 139
------ ------ ------- ------- ------
569 633 35 (173) 1,064
------ ------ ------- ------- ------
Other assets:
Investment in affiliated companies....... 733 -- 5,387 (6,120) --
Notes and advances receivable from
affiliates............................. 635 -- 2,772 (3,407) --
Long-term notes receivable, net.......... 12 9 2 -- 23
Goodwill and intangibles, net............ 348 151 -- -- 499
Deferred income taxes.................... -- 39 -- -- 39
Pension assets........................... 83 18 -- -- 101
Other.................................... 89 106 6 -- 201
------ ------ ------- ------- ------
1,900 323 8,167 (9,527) 863
------ ------ ------- ------- ------
Plant, property, and equipment, at cost...... 875 1,069 -- -- 1,944
Less -- Reserves for depreciation and
amortization........................... 419 432 -- -- 851
------ ------ ------- ------- ------
456 637 -- -- 1,093
------ ------ ------- ------- ------
Net assets of discontinued operations........ 1,649 3,119 (3,029) -- 1,739
------ ------ ------- ------- ------
$4,574 $4,712 $ 5,173 $(9,700) $4,759
====== ====== ======= ======= ======
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt (including current
maturities on long-term debt).......... $ 26 $ 124 $ 229 $ (75) $ 304
Trade payables........................... 148 258 10 (79) 337
Taxes accrued............................ (3) 34 -- -- 31
Other.................................... 130 71 36 -- 237
------ ------ ------- ------- ------
301 487 275 (154) 909
Long-term debt............................... 1,571 25 2,480 (3,405) 671
Deferred income taxes........................ 137 47 (86) -- 98
Postretirement benefits and other
liabilities................................ 126 44 -- -- 170
Commitments and contingencies
Minority interest............................ -- 13 -- 394 407
Preferred stock with mandatory redemption
provisions................................. 394 -- -- (394) --
Shareowners' equity.......................... 2,045 4,096 2,504 (6,141) 2,504
------ ------ ------- ------- ------
$4,574 $4,712 $ 5,173 $(9,700) $4,759
====== ====== ======= ======= ======
</TABLE>
F-63
<PAGE> 218
SCHEDULE II
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(MILLIONS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------- --------- -------------------- ---------- --------
ADDITIONS
--------------------
BALANCE CHARGED CHARGED
AT TO TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
- ------------------------------------------- --------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts and Notes
Deducted from Assets to Which it Applies:
Year Ended December 31, 1998.......... $20 $20 $ 5 $ 6 $39
=== === === === ===
Year Ended December 31, 1997.......... $10 $ 6 $ 4 $-- $20
=== === === === ===
Year Ended December 31, 1996.......... $10 $ 1 $-- $ 1 $10
=== === === === ===
</TABLE>
S-1
<PAGE> 219
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$500,000,000
TENNECO AUTOMOTIVE INC.
(FORMERLY KNOWN AS TENNECO INC.)
11 5/8% SENIOR SUBORDINATED NOTES DUE 2009
EXCHANGE OFFER
[TENNECO LOGO]
------------------------
PROSPECTUS
February 7, 2000
------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
