-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WISYV+oVh0f6E6PaYOFkuTEwRXwLXQxY7UGRiaYm8JL8yTo6LAwCkQBMXosNqC0F uXyPmSYODpYcy7UQ0/GUnQ== 0000950137-08-003112.txt : 20080229 0000950137-08-003112.hdr.sgml : 20080229 20080229164752 ACCESSION NUMBER: 0000950137-08-003112 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 20071231 FILED AS OF DATE: 20080229 DATE AS OF CHANGE: 20080229 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TENNECO INC CENTRAL INDEX KEY: 0001024725 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 760515284 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12387 FILM NUMBER: 08656499 BUSINESS ADDRESS: STREET 1: 500 NORTH FIELD DRIVE CITY: LAKE FOREST STATE: IL ZIP: 60045 BUSINESS PHONE: 847-482-50 MAIL ADDRESS: STREET 1: 500 N FIELD DR STREET 2: ROOM T 2560B CITY: LAKE FOREST STATE: IL ZIP: 60045 FORMER COMPANY: FORMER CONFORMED NAME: TENNECO AUTOMOTIVE INC DATE OF NAME CHANGE: 19991112 FORMER COMPANY: FORMER CONFORMED NAME: NEW TENNECO INC DATE OF NAME CHANGE: 19961011 10-K 1 c23259e10vk.txt ANNUAL REPORT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-12387 TENNECO INC. (Exact name of registrant as specified in its charter)
DELAWARE 76-0515284 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 500 NORTH FIELD DRIVE 60045 LAKE FOREST, IL (Zip Code) (Address of principal executive offices)
Registrant's telephone number, including area code: (847) 482-5000 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- 7.45% Debentures due 2025; New York Stock Exchange 9.20% Debentures due 2012; New York Stock Exchange 10.20% Debentures due 2008 New York Stock Exchange Common Stock, par value $.01 per share New York, Chicago, and London Stock Exchanges Preferred Share Purchase Rights New York, Chicago, and London Stock Exchanges
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ______ No X Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ______ No X Note -- Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ______ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer X Accelerated filer ___ Non-accelerated filer ___ Smaller reporting company ___ (Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ______ No X State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter.
CLASS OF COMMON EQUITY AND NUMBER OF SHARES HELD BY NON-AFFILIATES AT JUNE 30, 2007 MARKET VALUE HELD BY NON-AFFILIATES* ------------------------------------------- ------------------------------------ Common Stock, 44,925,882 shares $1,574,202,905
- -------------- * Based upon the closing sale price on the New York Stock Exchange Composite Tape for the Common Stock on June 30, 2007. INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. Common Stock, par value $.01 per share, 46,584,982 shares outstanding as of February 22, 2008. DOCUMENTS INCORPORATED BY REFERENCE:
PART OF THE FORM 10-K DOCUMENT INTO WHICH INCORPORATED -------- ----------------------- Portions of Tenneco Inc.'s Definitive Proxy Statement for the Annual Meeting of Stockholders to be held May 6, 2008 Part III
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Annual Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning, among other things, the prospects and developments of the Company (as defined) and business strategies for our operations, all of which are subject to risks and uncertainties. These forward-looking statements are included in various sections of this report, including the section entitled "Outlook" appearing in Item 7 of this report. These statements are identified as "forward-looking statements" or by their use of terms (and variations thereof) such as "will," "may," "can," "anticipate," "intend," "continue," "estimate," "expect," "plan," "should," "outlook," "believe," and "seek" and similar terms (and variations thereof) and phrases. When a forward-looking statement includes a statement of the assumptions or bases underlying the forward-looking statement, we caution that, while we believe such assumptions or bases to be reasonable and make them in good faith, assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending upon the circumstances. Where, in any forward-looking statement, we or our management expresses an expectation or belief as to future results, we express that expectation or belief in good faith and believe it has a reasonable basis, but we can give no assurance that the statement of expectation or belief will result or be achieved or accomplished. Our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include the matters described in the section entitled "Risk Factors" appearing in Item 1A of this report and the following: - general economic, business and market conditions; - potential legislation, regulatory changes and other governmental actions, including the ability to receive regulatory approvals and the timing of such approvals; - new technologies that reduce the demand for certain of our products or otherwise render them obsolete; - changes in distribution channels or competitive conditions in the markets and countries where we operate; - capital availability or costs, including changes in interest rates, our leverage, market perceptions of the industries in which we operate or ratings of securities; - increases in the cost of compliance with regulations, including environmental regulations, and environmental liabilities in excess of the amount reserved; - changes by the Financial Accounting Standards Board or the Securities and Exchange Commission of authoritative accounting principles generally accepted in the United States of America; - acts of war or terrorism, including, but not limited to, the events taking place in the Middle East, the current military action in Iraq and the continuing war on terrorism, as well as actions taken or to be taken by the United States and other governments as a result of further acts or threats of terrorism, and the impact of these acts on economic, financial and social conditions in the countries where we operate; and - the timing and occurrence (or non-occurrence) of transactions and events which may be subject to circumstances beyond our control. i TABLE OF CONTENTS PART I Item 1. Business......................................................... 1 Tenneco Inc. .................................................... 1 Contributions of Major Businesses................................ 4 Description of Our Business...................................... 5 Item 1A. Risk Factors..................................................... 21 Item 1B. Unresolved Staff Comments........................................ 27 Item 2. Properties....................................................... 27 Item 3. Legal Proceedings................................................ 27 Item 4. Submission of Matters to a Vote of Security Holders.............. 28 Item 4.1. Executive Officers of the Registrant............................. 29 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities................................. 31 Item 6. Selected Financial Data.......................................... 33 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................ 35 Item 7A. Quantitative and Qualitative Disclosures About Market Risk....... 65 Item 8. Financial Statements and Supplementary Data...................... 66 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................. 129 Item 9A. Controls and Procedures.......................................... 129 Item 9B. Other Information................................................ 129 PART III Item 10. Directors, Executive Officers and Corporate Governance........... 130 Item 11. Executive Compensation........................................... 130 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.................................. 130 Item 13. Certain Relationships and Related Transactions, and Director Independence..................................................... 131 Item 14. Principal Accountant Fees and Services........................... 131 PART IV Item 15. Exhibits and Financial Statement Schedules....................... 132
ii PART I ITEM 1. BUSINESS. TENNECO INC. GENERAL Our company, Tenneco Inc., is one of the world's largest producers of automotive emission control and ride control products and systems. Our company serves both original equipment vehicle manufacturers ("OEMs") and the repair and replacement markets, or aftermarket, worldwide. As used herein, the term "Tenneco", "we", "us", "our", or the "Company" refers to Tenneco Inc. and its consolidated subsidiaries. Tenneco was incorporated in Delaware in 1996. In 2005, we changed our name from Tenneco Automotive Inc. back to Tenneco Inc. The name Tenneco better represents the expanding number of markets we serve through our commercial and specialty vehicle businesses. Building a stronger presence in these markets complements our core businesses of supplying ride control and emission control products and systems for light vehicles to automotive original equipment and aftermarket customers worldwide. Our common stock continues to trade on the New York Stock Exchange under the symbol "TEN". CORPORATE GOVERNANCE AND AVAILABLE INFORMATION We have established a comprehensive corporate governance plan for the purpose of defining responsibilities, setting high standards of professional and personal conduct and assuring compliance with such responsibilities and standards. As part of its annual review process, the Board of Directors monitors developments in the area of corporate governance. Listed below are some of the key elements of our corporate governance plan. For more information about these matters, see our definitive Proxy Statement for the Annual Meeting of Stockholders to be held May 6, 2008. INDEPENDENCE OF DIRECTORS - Eight of our nine directors are independent under the New York Stock Exchange ("NYSE") listing standards. - Independent directors are scheduled to meet separately in executive session after every regularly scheduled Board of Directors meeting. - We have a lead independent director, Mr. Paul T. Stecko. AUDIT COMMITTEE - All members meet the independence standards for audit committee membership under the NYSE listing standards and applicable Securities and Exchange Commission ("SEC") rules. - One member of the Audit Committee, Mr. Charles Cramb, has been designated by the Board as an "audit committee financial expert," as defined in the SEC rules, and the remaining members of the Audit Committee satisfy the NYSE's financial literacy requirements. Mr. Dennis Letham also meets the requirements to be considered a financial expert under SEC rules. - The Audit Committee operates under a written charter which governs its duties and responsibilities, including its sole authority to appoint, review, evaluate and replace our independent auditors. - The Audit Committee has adopted policies and procedures governing the pre-approval of all audit, audit-related, tax and other services provided by our independent auditors. 1 COMPENSATION/NOMINATING/GOVERNANCE COMMITTEE - All members meet the independence standards for compensation and nominating committee membership under the NYSE listing standards. - The Compensation/Nominating/Governance Committee operates under a written charter that governs its duties and responsibilities, including the responsibility for executive compensation. - In December 2005, an Executive Compensation Subcommittee was formed which has the responsibility to consider and approve equity based compensation for our executive officers which is intended to qualify as "performance based compensation" under Section 162(m) of the Internal Revenue Code of 1986, as amended. CORPORATE GOVERNANCE PRINCIPLES - We have adopted Corporate Governance Principles, including qualification and independence standards for directors. STOCK OWNERSHIP GUIDELINES - We have adopted Stock Ownership Guidelines to align the interests of our executives with the interests of stockholders and promote our commitment to sound corporate governance. - The Stock Ownership Guidelines apply to the independent directors, the Chairman and Chief Executive Officer, all Executive Vice Presidents and all Senior Vice Presidents. COMMUNICATION WITH DIRECTORS - The Audit Committee has established a process for confidential and anonymous submission by our employees, as well as submissions by other interested parties, regarding questionable accounting or auditing matters. - Additionally, the Board of Directors has established a process for stockholders to communicate with the Board of Directors, as a whole, or any independent director. CODES OF BUSINESS CONDUCT AND ETHICS - We have adopted a Code of Ethical Conduct for Financial Managers, which applies to our Chief Executive Officer, Chief Financial Officer, Controller and other key financial managers. This code is filed as Exhibit 14 to this report. - We also operate under a Statement of Business Principles that applies to all directors, officers and employees and includes provisions ranging from restrictions on gifts to conflicts of interests. All salaried employees are required to affirm in writing their acceptance of these principles. RELATED PARTY TRANSACTIONS POLICY - We have adopted a Policy and Procedure for Transactions With Related Persons, under which our Audit Committee must generally pre-approve transactions involving more than $120,000 with our directors, executive officers, five percent or greater stockholders and their immediate family members. EQUITY AWARD POLICY - We have adopted a written policy to be followed for all issuances by our company of compensatory awards in the form of our common stock or any derivative of the common stock. 2 PERSONAL LOANS TO EXECUTIVE OFFICERS AND DIRECTORS - We comply with and operate in a manner consistent with the legislation outlawing extensions of credit in the form of a personal loan to or for our directors or executive officers. Our Internet address is www.tenneco.com. We make our proxy statements, annual report to stockholders, annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, as filed with or furnished to the SEC, available free of charge on our Internet website as soon as reasonably practicable after submission to the SEC. Securities ownership reports on Forms 3, 4 and 5 are also available free of charge on our website as soon as reasonably practicable after submission to the SEC. The contents of our website are not, however, a part of this report. Our Audit Committee, Compensation/Nominating/Governance Committee and Executive Compensation Subcommittee Charters, Corporate Governance Principles, Stock Ownership Guidelines, Audit Committee policy regarding accounting complaints, Code of Ethical Conduct for Financial Managers, Statement of Business Principles, Policy and Procedures for Transactions with Related Persons, Equity Award Policy, policy for communicating with the Board of Directors and Audit Committee policy regarding the pre-approval of audit, non- audit, tax and other services are available free of charge on our website at www.tenneco.com. In addition, we will make a copy of any of these documents available to any person, without charge, upon written request to Tenneco Inc., 500 North Field Drive, Lake Forest, Illinois 60045, Attn: General Counsel. We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K and applicable NYSE rules regarding amendments to or waivers of our Code of Ethical Conduct for Financial Managers and Statement of Business Principles by posting this information on our website at www.tenneco.com. CEO AND CFO CERTIFICATIONS In 2007 our chief executive officer provided to the NYSE and the Chicago Stock Exchange the annual CEO certification regarding our compliance with the corporate governance listing standards of those exchanges. In addition, our chief executive officer and chief financial officer filed with the Securities and Exchange Commission all required certifications regarding the quality of our disclosures in our fiscal 2007 SEC reports. There were no qualifications to these certifications. 3 CONTRIBUTIONS OF MAJOR BUSINESSES For information concerning our operating segments, geographic areas and major products or groups of products, see Note 11 to the consolidated financial statements of Tenneco Inc. and Consolidated Subsidiaries included in Item 8. The following tables summarize for each of our operating segments for the periods indicated: (i) net sales and operating revenues; (ii) earnings before interest expense, income taxes and minority interest ("EBIT"); and (iii) expenditures for plant, property and equipment. You should also read "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 for information about certain costs and charges included in our results. NET SALES AND OPERATING REVENUES:
2007 2006 2005 ------------ ------------ ------------ (DOLLAR AMOUNTS IN MILLIONS) North America............................... $2,910 47% $1,963 42% $2,033 46% Europe, South America and India............. 3,135 51 2,387 51 2,110 48 Asia Pacific................................ 560 9 436 9 371 8 Intergroup sales............................ (421) (7) (104) (2) (74) (2) ------ --- ------ --- ------ --- Total..................................... $6,184 100% $4,682 100% $4,440 100% ====== === ====== === ====== ===
EBIT:
2007 2006 2005 ---------- ---------- ---------- (DOLLAR AMOUNTS IN MILLIONS) North America................................... $120 48% $103 53% $148 69% Europe, South America and India................. 99 39 81 41 53 24 Asia Pacific.................................... 33 13 12 6 16 7 ---- --- ---- --- ---- --- Total......................................... $252 100% $196 100% $217 100% ==== === ==== === ==== ===
EXPENDITURES FOR PLANT, PROPERTY AND EQUIPMENT:
2007 2006 2005 ---------- ---------- ---------- (DOLLAR AMOUNTS IN MILLIONS) North America................................... $106 54% $100 59% $ 74 51% Europe, South America and India................. 74 37 51 30 54 38 Asia Pacific.................................... 18 9 19 11 16 11 ---- --- ---- --- ---- --- Total......................................... $198 100% $170 100% $144 100% ==== === ==== === ==== ===
Interest expense, income taxes, and minority interest that were not allocated to our operating segments are:
2007 2006 2005 ---- ---- ---- (MILLIONS) Interest expense (net of interest capitalized)............... $164 $136 $133 Income tax expense........................................... 83 5 26 Minority interest............................................ 10 6 2
4 DESCRIPTION OF OUR BUSINESS We design, manufacture and sell automotive emission control and ride control systems and products, with 2007 revenues of $6.2 billion. We serve both original equipment manufacturers and replacement markets worldwide through leading brands, including Monroe(R), Rancho(R), Clevite(R) Elastomers, and Fric Rot(TM) ride control products and Walker(R), Fonos(TM), and Gillet(TM) emission control products. As an automotive parts supplier, we produce 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 most leading OEMs 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 for use by OEMs; 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 OEMs, and "Tier 2" or "Tier 3" suppliers, who sell their products principally to other suppliers for combination into the other suppliers' own product offerings. Demand for automotive parts in the OE market is generally a function of the number of new vehicles produced, which in turn is a function of prevailing economic conditions and consumer preferences. In 2007, the number of light vehicles (i.e. passenger cars and light trucks) produced was 15.0 million in North America, 29.4 million in Europe, South America and India and 26.3 million in Asia Pacific. Worldwide new light vehicle production is forecasted to increase to 73.4 million units in 2008 from approximately 70.7 million units in 2007. Although OE demand is tied to planned vehicle production, parts suppliers also have the opportunity to grow through increasing their product content per vehicle, by further penetrating business with existing customers and by gaining new customers and markets. Companies with global presence and advanced technology, engineering, manufacturing and support capabilities, such as our company, are, we believe, well positioned to take advantage of these opportunities. Demand for aftermarket products is driven by the quality of OE parts, the number of vehicles in operation, the age of the vehicle fleet, vehicle usage and the average useful life of vehicle parts. Although more vehicles are on the road than ever before, the aftermarket has experienced longer replacement cycles due to improved quality of OE parts and increases in average useful lives of automotive parts as a result of technological innovation. Suppliers are increasingly being required to deliver innovative aftermarket products that upgrade the performance or safety of a vehicle's original components to drive aftermarket demand. INDUSTRY TRENDS Currently, we believe several significant existing and emerging trends are dramatically impacting 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: INCREASING ENVIRONMENTAL STANDARDS Automotive parts suppliers and OE manufacturers are designing products and developing materials to respond to increasingly stringent environmental requirements, a growing diesel market and the demand for better fuel economy. 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 emission 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 emission control systems with strong technical capabilities, we believe we are well positioned to benefit from more rigorous environmental standards. For example, we developed the diesel particulate filter to meet stricter air quality regulations in Europe. Diesel particulate filters are produced in both Europe on the Mercedes Benz Sprinter 5 and E-class and North America on the GM Duramax, Ford Super Duty, Dodge Ram and ITEC Medium duty. Our particulate filter and De-NOx converter can reduce particulate emissions by up to 90 percent and nitrogen oxide emissions by up to 85 percent. We also have numerous development contracts with North American, European and Asian light and medium-duty truck manufacturers for our selective catalytic reduction (SCR) systems. In addition, we are actively working on development of a non-road emission aftertreatment system for multiple manufacturers, in order to meet Tier 4 environmental regulations. In China, we have development contracts for complete turnkey SCR systems, including the Elim- NOx urea dosing technology which we acquired in 2007. Several customers have also purchased prototypes of our hydrocarbon injector, acquired with the ELIM- NOx technology, for the purpose of actively regenerating diesel particulate filters and Lean NOx Traps through hydrocarbon injection directly into the exhaust system. INCREASING TECHNOLOGICALLY SOPHISTICATED CONTENT As consumers continue to demand competitively priced vehicles with increased performance and functionality, the number of sophisticated components utilized in vehicles is increasing. By replacing mechanical functions with electronics and by integrating mechanical and electronic functions within a vehicle, OE manufacturers are achieving improved emission control, improved safety and more sophisticated features at lower costs. Automotive parts customers are increasingly demanding technological innovation from suppliers to address more stringent emission and other regulatory standards and to improve vehicle performance. To develop innovative products, systems and modules, we have invested $114 million for 2007, $88 million for 2006 and $83 million for 2005, net of customer reimbursements, into engineering, research and development and we continuously seek to take advantage of our technology investments and brand strength by extending our products into new markets and categories. For example, we were the first supplier to develop and commercialize a diesel particulate filter that can virtually eliminate carbon and hydrocarbon emissions with minimal impact on engine performance. We have expanded our competence in diesel particulate filters in Europe and are winning business in North America on these same applications. In addition, we supply Volvo, Audi, Ford and Mercedes Benz with a computerized electronic suspension system that we co-developed with Ohlins Racing AB. As other examples, we are sponsoring funded University Research for advanced technologies for both emission control and ride control, and we are participating in the HyTRAN consortium in Europe for the development of practical fuel cell reformers and auxiliary power units. Our customers reimburse us for engineering, research, and development costs on some platforms when we prepare prototypes and incur costs before platform awards. Our engineering, research and development expense for 2007, 2006, and 2005 has been reduced by $72 million, $61 million, and $51 million, respectively, for these reimbursements. ENHANCED VEHICLE SAFETY Vehicle safety continues to gain increased industry attention and play a critical role in consumer purchasing decisions. As such, OEMs are seeking out suppliers with new technologies, capabilities and products that have the ability to advance vehicle safety. Continued research and development by select automotive suppliers in roll-over protection systems, smart airbag systems, braking electronics and safer, more durable materials has dramatically advanced the market for safety products and its evolving functional demands. Those suppliers who are able to enhance vehicle safety through innovative products and technologies have a distinct competitive advantage with the consumer, and thus their OEM customers. In the Aftermarket, Tenneco has promoted the "Safety Triangle" of Steering-Stopping-Stability to educate consumers of the detrimental effect of worn shock absorbers on vehicle steering and stopping distances. We further strengthened this message with the introduction of Monroe(R) branded brakes as an Aftermarket product offering during 2007. Also during 2007, the new Federal Motor Vehicle Safety Standard (FMVSS) 126 was introduced for electronic stability control (ECS) systems, making those systems mandatory by 2012. We believe that this 6 legislation will encourage more vehicle manufacturers to specify products like CES and Kinetic, and we are sponsoring University Research to establish the synergistic impact of our technologies to ECS systems. OUTSOURCING AND DEMAND FOR SYSTEMS AND MODULES OE manufacturers have been steadily moving towards outsourcing automotive parts and systems to simplify the vehicle assembly process, lower costs and reduce vehicle development time. Outsourcing allows OE 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. Furthermore, 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 OE 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 OEM for installation in a vehicle as a unit. Integrated shock and spring units, 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. Emission control systems, anti-lock braking systems, safety restraint systems, roll control systems and powertrain systems are examples. This shift in demand towards fully integrated systems has created the role of the Tier 1 systems integrator. These systems integrators 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 more than ten years of product integration experience. We have modules or systems for various vehicle platforms in production worldwide and modules or systems for additional platforms under development. For example, we supply ride control modules for the GM Chevy Silverado, GM Sierra and the VW Transporter and the emission control system for the Ford Super Duty, Toyota Tundra, Chrysler Dodge Ram, Ford Focus, and the GM Acadia, Enclave and Outlook. GLOBAL REACH OF OE CUSTOMERS OEMs are increasingly requesting suppliers to provide parts on a global basis to support global vehicle platforms. Also, as the customer base of OEMs has consolidated and emerging markets have become more important to achieving growth, suppliers must be prepared to provide products any place in the world. - Growing Importance of Emerging Markets: Because the North American and Western European automotive markets are relatively mature, OE manufacturers are increasingly focusing on emerging markets for growth opportunities, particularly the so-called BRIC economies, including Brazil, Russia, India, China and Eastern Europe. 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: OE manufacturers and parts suppliers have relocated production globally on an "onsite" 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. 7 GLOBAL RATIONALIZATION OF OE VEHICLE PLATFORMS OE 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 more than one region. Thus, OE 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 OE manufacturers reduce variations in components. We also expect parts suppliers to experience higher production volumes per platform and greater economies of scale, as well as reduced total investment costs for molds, dies and prototype development. Light vehicle platforms of over one million units are expected to grow from 34 percent to 45 percent of global OE production from 2007 to 2012. 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, although more vehicles are on the road than ever before, the global aftermarket has not grown as fast as the number of vehicles on the road. 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 believe we are well positioned to leverage our products and technology into the aftermarket. CHANGING AFTERMARKET DISTRIBUTION CHANNELS From 1997 to 2007, the number of retail automotive parts stores increased significantly while the number of jobber stores declined more than 16 percent in North America. 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. This enables the retailers 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 believe we are well positioned to respond to this trend in the aftermarket because of our focus on cost reduction and high- quality, premium brands. CONTRACTING SUPPLIER BASE Over the past few years, automotive suppliers have been consolidating in an effort to become more global, have a broad integrated product and service offering, and gain economies of scale in order to remain competitive amidst growing pricing pressures and increased outsourcing opportunities from the OEMs. One industry consultant projects that the number of automotive supplier companies will decrease from 5,600 in 2000 to 2,800 by 2015. A supplier's viability in this market will depend, in part, on its ability to maintain and increase operating efficiencies and provide value-added services. 8 ANALYSIS OF REVENUES The table below provides, for each of the years 2007 through 2005, information relating to our net sales and operating revenues, by primary product lines and customer categories. You should read Note 4 to the consolidated financial statements of Tenneco Inc. and Consolidated Subsidiaries included in Item 8 for a discussion of the changes in our results due to the restatement described therein.
NET SALES YEAR ENDED DECEMBER 31, ------------------------ 2007 2006 2005 ------ ------ ------ (MILLIONS) EMISSION CONTROL SYSTEMS & PRODUCTS Aftermarket............................................. $ 370 $ 384 $ 368 Original Equipment market OE Value-add......................................... 2,288 1,665 1,709 OE Substrate(1)...................................... 1,673 927 681 ------ ------ ------ 3,961 2,592 2,390 ------ ------ ------ 4,331 2,976 2,758 ------ ------ ------ RIDE CONTROL SYSTEMS & PRODUCTS Aftermarket............................................. 734 690 653 Original Equipment market............................... 1,119 1,016 1,029 ------ ------ ------ 1,853 1,706 1,682 ------ ------ ------ Total Revenues....................................... $6,184 $4,682 $4,440 ====== ====== ======
- -------- (1) See "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 for a discussion of substrate sales. BRANDS In each of our operating segments, we manufacture and market leading brand names. Monroe(R) ride control products and Walker(R) exhaust products are two of the most recognized brand names in the automotive parts industry. We emphasize product value differentiation with these and other key brands such as Monroe Sensa-Trac(R) and Reflex(R) (shock absorbers and struts), Quiet-Flow(R) (mufflers), DynoMax(R) (performance exhaust products), Rancho(R) (ride control products for the high performance light truck market) and Clevite(R) Elastomers (elastomeric vibration control components), and Lukey (performance exhaust and filters). In Europe, our Gillet(TM) brand is recognized as a leader in developing highly engineered exhaust systems for OE customers. CUSTOMERS We have developed long-standing business relationships with our customers around the world. In each of our operating segments, 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 believe we are well-positioned to meet customer needs. We believe 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. 9 Worldwide we serve more than 39 different OE manufacturers, and our products or systems are included on 8 of the top 10 passenger car models produced for sale in Europe and 9 of the top 10 SUV and light truck models produced for sale in North America for 2007. During 2007, our OE customers included:
NORTH AMERICA EUROPE ASIA AM General BMW BMW CAMI Automotive Daimler Brilliance JinBei Automotive Caterpillar Fiat Co. Chrysler Ford Chang'an Automobile Club Car General Motors Chery Automobile E-Z Go Golf Car Nissan Daimler Ford Paccar First Auto Works General Motors Porsche Ford Harley-Davidson PSA Peugeot Citroen General Motors Honda Renault Great Wall Motor Co. John Deere Scania Isuzu Motor Coach Industries Suzuki Jiangling Motors Navistar (International) Toyota Mazda Nissan Volkswagen Mitsubishi Paccar Volvo Truck Nissan Toyota PSA Peugeot Citroen Volkswagen Group SOUTH AMERICA Shanghai Automotive (SAIC) Volvo Truck Daimler Toyota Fiat Volkswagen Group AUSTRALIA Ford Club Car General Motors INDIA Ford PSA Peugeot Citroen Club Car General Motors Renault E-Z Go Golf Car Mazda Scania General Motors Mitsubishi Toyota Mahindra & Mahindra Toyota Volkswagen Group Suzuki TATA Motors TVS Motors
The following customers accounted for 10 percent or more of our net sales in any of the last three years.
CUSTOMER 2007 2006 2005 - -------- ---- ---- ---- General Motors........................................... 20% 14% 17% Ford..................................................... 14% 11% 12% Volkswagen Group......................................... 9% 11% 9% DaimlerChrysler(1)....................................... -- 11% 9%
- -------- (1) In 2007, DaimlerChrysler sold approximately 80% of its interest in its U.S. unit, Chrysler Group, to Cerberus Capital Management L.P. Daimler AG accounted for approximately 8 percent of our 2007 net sales. The Chrysler Group accounted for approximately 2 percent of our 2007 net sales. During 2007, our aftermarket customers were comprised of full-line and specialty warehouse distributors, retailers, jobbers, installer chains and car dealers. These customers included such wholesalers and retailers such as National Auto Parts Association (NAPA), Advance Auto Parts, Uni-Select and O'Reilly Automotive in North America and Temot, Group Auto Union, Mekonoman Grossist and Auto Distribution International in Europe. We believe we have a balanced mix of aftermarket customers, with our top 10 aftermarket customers accounting for 38 percent of our total net aftermarket sales and only 7 percent of our total net sales for 2007. 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, high quality value-added products and timely delivery. Product pricing and services provided are other important competitive factors. 10 In both the OE market and aftermarket, we compete with the 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 two suppliers in the world for both emission control and ride control products and systems for light vehicles. In the aftermarket, we believe that we are the market share leader in the supply of both emission control and ride control products for light vehicles in the markets we serve throughout the world. SEASONALITY Our business is somewhat seasonal. OE manufacturers' production requirements have historically been higher in the first two quarters of the year as compared to the last two quarters. Production requirements tend to decrease in the third quarter due to plant shutdowns for model changeovers. In addition, we believe this seasonality is due, in part, to consumer demand for new vehicles softening during the holiday season and as a result of the winter months in North America and Europe. Also, the major North American OE manufacturers generally close their production facilities for the last two weeks of the year. Our aftermarket business also experiences seasonality. Demand for aftermarket products increases during the spring as drivers prepare for the summer driving season. Although seasonality does impact our business, actual results may vary from the above trends due to timing of platform launches and other production related events. EMISSION CONTROL SYSTEMS Vehicle emission control products and systems play a critical role in safely conveying noxious exhaust gases away from the passenger compartment and 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 products and systems designed to reduce pollution and optimize engine performance, acoustic tuning and weight, including the following: - Catalytic converters and diesel oxidation catalysts -- Devices consisting of a substrate coated with precious metals enclosed in a steel casing used to reduce harmful gaseous emissions, such as carbon monoxide, below the EPA regulated limits for emissions; - Diesel Particulate Filters -- Devices to eliminate particulate matter emitted from diesel engines; - Selective Catalytic Reduction (SCR) systems -- Devices which reduce Nitrogen Oxide (NOx) emissions from diesel powertrains; - Mufflers and resonators -- Devices to provide noise elimination and acoustic tuning; - Exhaust manifolds -- Components that collect gases from individual cylinders of a vehicle's engine and direct them into a single exhaust pipe; - Pipes -- Utilized to connect various parts of both the hot and cold ends of an exhaust system; - Hydroformed assemblies -- Forms into various geometric shapes, such as Y- pipes or T-pipes, which provides optimization in both design and installation as compared to conventional pipes; and - Hangers and isolators -- Used for system installation and noise and vibration elimination; We entered the emission control product line in 1967 with the acquisition of Walker Manufacturing Company, which was founded in 1888. With the acquisition of Heinrich Gillet GmbH & Co. in 1994, we also became one of Europe's leading OE emission control systems suppliers. When the term "Walker" is used in this document, it refers to our subsidiaries and affiliates that produce emission control products and systems. We supply our emission control offerings to over 38 vehicle-makers for use on over 160 vehicle models, including 6 of the top 10 passenger cars produced for sale in Europe and 7 of the top 10 SUVs and light trucks produced for sale in North America in 2007. We also supply OE EC products to heavy duty and 11 specialty vehicle manufacturers including Harley-Davidson, BMW Motorcycle, Daimler Trucks, and International Truck and Engine (Navistar). With respect to catalytic converters, we buy the substrate coated with precious metals, or sometimes the completed catalytic converter, from third parties, use them in our manufacturing process and sell them as part of the completed system. This often occurs at the direction of the OE customers. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" for more information on our sales of these products. In the aftermarket, we manufacture, market and distribute replacement mufflers for virtually all North American, European, and Asian makes of light vehicles under brand names including Quiet-Flow(R), TruFit(R) and Aluminox Pro(TM), in addition to offering a variety of other related products such as pipes and catalytic converters (Walker Perfection(R)). We also serve the specialty exhaust aftermarket, where our key offerings include Mega-Flow(TM) exhaust products for heavy-duty vehicle applications and DynoMax(R) high performance exhaust products. We continue to emphasize product value differentiation with other aftermarket brands such as Thrush(R) and Fonos(TM). The following table provides, for each of the years 2007 through 2005, information relating to our sales of emission control products and systems for certain geographic areas:
PERCENTAGE OF NET SALES YEAR ENDED DECEMBER 31, ----------------------- 2007 2006 2005 ---- ---- ---- UNITED STATES Aftermarket.......................................... 10% 19% 18% OE market............................................ 90 81 82 --- --- --- 100% 100% 100% === === === FOREIGN SALES Aftermarket.......................................... 8% 10% 11% OE market............................................ 92 90 89 --- --- --- 100% 100% 100% === === === TOTAL SALES BY GEOGRAPHIC AREA United States........................................ 34% 29% 33% Foreign.............................................. 66 71 67 --- --- --- 100% 100% 100% === === ===
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 -- A broad range of mechanical shock absorbers and related components for light- and heavy-duty vehicles. We supply both twin-tube and monotube shock absorbers to vehicle manufacturers and the aftermarket; 12 - Struts -- A complete line of struts and strut assemblies for light vehicles; - Vibration control components (Clevite(R) Elastomers) -- Generally rubber- to-metal bushings and mountings to reduce vibration between metal parts of a vehicle. Our offerings include a broad range of suspension arms, rods and links for light- and heavy-duty vehicles; - Kinetic(R) Suspension Technology -- A suite of roll control, near equal wheel loading systems ranging from simple mechanical systems to complex hydraulic systems featuring proprietary and patented technology. The Kinetic(R) Suspension Technology was incorporated on the Citroen World Rally Car that was featured in the World Rally Championship 2003, 2004 and 2005. Additionally, the Kinetic(R) Suspension Technology was incorporated on the Lexus GX 470 sport utility vehicle which resulted in our winning the PACE Award; - Advanced suspension systems -- Electronically adjustable shock absorbers and suspension systems that change performance based on vehicle inputs such as steering and braking; and - Other -- We also offer other ride control products such as load assist products, springs, steering stabilizers, adjustable suspension systems, suspension kits and modular assemblies. We supply our ride control offerings to over 37 vehicle-makers for use on over 155 vehicle models, including 8 of the top 10 SUV and light truck models produced for sale in North America for 2007. We also supply OE ride control products and systems to a range of heavy-duty and specialty vehicle manufacturers including Volvo Truck, Scania, International Truck and Engine (Navistar), and PACCAR. In the ride control aftermarket, we manufacture, market and distribute replacement shock absorbers for virtually all North American, European and Asian makes of light vehicles under several brand names including Gas Matic(R), Sensa- Trac(R), Monroe Reflex(R) and Monroe Adventure(R), as well as Clevite(R) Elastomers for elastomeric vibration control components. We also sell ride control offerings for the heavy duty, off-road and specialty aftermarket, such as our Gas-Magnum(R) shock absorbers for the North American heavy-duty category. We entered the ride control product line in 1977 with the acquisition of Monroe Auto Equipment Company, which was founded in 1916 and introduced the world's first modern tubular shock absorber in 1930. When the term "Monroe" is used in this document it refers to our subsidiaries and affiliates that produce ride control products and systems. The following table provides, for each of the years 2007 through 2005, information relating to our sales of ride control equipment for certain geographic areas:
PERCENTAGE OF NET SALES YEAR ENDED DECEMBER 31, ----------------------- 2007 2006 2005 ---- ---- ---- UNITED STATES Aftermarket.......................................... 58% 53% 46% OE market............................................ 42 47 54 --- --- --- 100% 100% 100% === === === FOREIGN SALES Aftermarket.......................................... 31% 33% 33% OE market............................................ 69 67 67 --- --- --- 100% 100% 100% === === === TOTAL SALES BY GEOGRAPHIC AREA United States........................................ 32% 38% 42% Foreign.............................................. 68 62 58 --- --- --- 100% 100% 100% === === ===
13 FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS Refer to Note 11 of the consolidated financial statements of Tenneco Inc. and Consolidated Subsidiaries included in Item 8 of this report for financial information about geographic areas. SALES, MARKETING AND DISTRIBUTION We have separate and distinct sales and marketing efforts for our OE and aftermarket businesses. For OE sales, our sales and marketing team is an integrated group of professionals, including skilled engineers and program managers that are organized by customer and product type (e.g., ride control and emission control). Our sales and marketing team provides the appropriate mix of operational and technical expertise needed to interface successfully with the OEMs. Our new business "capture process" involves working closely with the OEM platform engineering and purchasing team. Bidding on OE automotive platforms typically encompasses many months of engineering and business development activity. Throughout the process, our sales team, program managers and product engineers assist the OE customer in defining the project's technical and business requirements. A normal part of the process includes our engineering and sales personnel working on customers' integrated product teams, and assisting with the development of component/system specifications and test procedures. Given that the OE business involves long-term production contracts awarded on a platform-by-platform basis, our strategy is to leverage our engineering expertise and strong customer relationships to obtain platform awards and increase operating margins. For aftermarket sales and marketing, our sales force is generally organized by customer and region and covers multiple product lines. We sell aftermarket products through four 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; and (4) direct sales to installer chains. Our aftermarket sales and marketing representatives cover all levels of the distribution channel, stimulating interest in our products and helping our products move through the distribution system. Also, to generate demand for our products from end-users, we run print and television advertisements and offer pricing promotions. We were one of the first parts manufacturers to offer business-to-business services to customers with TA-Direct, an on-line order entry and customer service tool. In addition, we maintain detailed web sites for each of the Walker(R), Monroe(R), Rancho(R) and DynoMax(R) brands and our heavy duty products. MANUFACTURING AND ENGINEERING We focus on achieving superior product quality at the lowest operating costs possible and generally use state-of-the-art manufacturing processes to achieve that goal. Our manufacturing strategy centers on a lean production system designed to reduce overall costs ,while maintaining quality standards and reducing manufacturing cycle time. In addition, we have implemented Six Sigma in our processes to minimize product defects and improve operational efficiencies. We deploy new technology to differentiate our products from our competitors' or to achieve higher quality and productivity. We continue to adapt our capacity to customer demand, both expanding capabilities in growth areas as well as reallocating capacity away from demand segments in decline. EMISSION CONTROL Our consolidated businesses operate 13 emission control manufacturing facilities in the U.S. and 39 emission control manufacturing facilities outside of the U.S. We operate 11 of these international manufacturing facilities through joint ventures in which we own a controlling interest. We operate 5 emission control engineering and technical facilities worldwide and share two other such facilities with our ride control operations. In addition, three joint ventures in which we hold a noncontrolling interest operate a total of three manufacturing facilities outside the U.S. Within each of our emission control manufacturing facilities, operations are organized by component (muffler, catalytic converter, pipe, resonator and manifold). Our manufacturing systems incorporate cell-based 14 designs, allowing work-in-process to move through the operation with greater speed and flexibility. We continue to invest in plant and equipment to stay competitive in the industry. For instance, in our Smithville, Tennessee, OE manufacturing facility, we have developed a muffler assembly cell that utilizes laser welding. This allows for quicker change over times in the process as well as less material used and less weight for the product. There is also a reduced cycle time compared to traditional joining and increased manufacturing precision for superior durability and performance. In 2007, we introduced the Measured and Matched Converter technique in North America. This allows us to maintain the optimum GBD (Gap Bulk Density) in our converter manufacturing operations with Tenneco proprietary processing. This process, coupled with cold spinning of the converter body versus traditional cone to can welding, allows for more effective use of material through reduced welding, lower cost, and better performance of the product. In an effort to further improve our OE customer service and position ourselves as a Tier-1 OE systems supplier, we have been developing some of our emission control manufacturing operations into "just-in-time" or "JIT" systems. In this system, a JIT facility located close to our OE customer's manufacturing plant receives product components from both our manufacturing operations and independent suppliers, assembles and then ships products to the OEMs on an as- needed basis. To manage the JIT functions and material flow, we have advanced computerized material requirements planning systems linked with our customers' and supplier partners' resource management systems. We have 4 emission control JIT assembly facilities in the United States and 20 in the rest of the world. Our engineering capabilities include advanced predictive design tools, advanced prototyping processes and state-of-the-art testing equipment. This technological capability makes us a "full system" integrator, supplying complete emission control systems from the manifold to the tailpipe, to provide full emission and noise control. We have expanded our engineering capabilities with the recent acquisition of Combustion Component Associates Elim-NOx(R) mobile emission technology to include urea and hydrocarbon injection, and electronic controls and software for selective catalytic reduction. We have also developed advanced predictive engineering tools, including KBM&E (Knowledge Based Manufacturing & Engineering). The innovation of our KBM&E (which we call TEN- KBM&E) is a modular toolbox set of CAD embedded applications for manufacturing and engineering compliant design. The encapsulated TEN-KBM&E content is driven by an analytical method which continuously captures and updates the knowledge of our main manufacturing and engineering processes. RIDE CONTROL Our consolidated businesses operate 7 ride control manufacturing facilities in the U.S. and 21 ride control manufacturing facilities outside the U.S. We operate 2 of these international facilities through joint ventures in which we own a controlling interest. We operate 8 engineering and technical facilities worldwide and share 2 other such facilities with our emission control operations. Within each of our ride control manufacturing facilities, operations are organized by product (shocks, struts and vibration control products) and include computer numerically controlled and conventional machine centers; tube milling and drawn-over-mandrel manufacturing equipment; metal inert gas and resistance welding; powdered metal pressing and sintering; chrome plating; stamping; and assembly/test capabilities. Our manufacturing systems incorporate cell-based designs, allowing work-in-process to move through the operation with greater speed and flexibility. As in the emission control business, in an effort to further improve our OE customer service and position us as a Tier 1 OE module supplier, we have been developing some of our manufacturing operations into JIT systems. We have 3 JIT ride control facilities outside the U.S. In designing our shock absorbers and struts, we use advanced engineering and test capabilities to provide product reliability, endurance and performance. Our engineering capabilities feature advanced computer aided 15 design equipment and testing facilities. Our dedication to innovative solutions has led to such technological advances as: - Adaptive damping systems -- adapt to the vehicle's motion to better control undesirable vehicle motions; - Electronically adjustable suspensions -- change 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. Our innovative grooved-tube, gas-charged shock absorbers and struts provide both ride comfort and vehicle control, resulting in improved handling, reduced vibration and a wider range of vehicle control. This technology can be found in our premium quality Sensa-Trac(R) shock absorbers. We further enhanced this technology by adding the SafeTech(TM) fluon banded piston, which improves shock absorber performance and durability. We introduced the Monroe Reflex(R) shock absorber, which incorporates our Impact Sensor(TM) device. This technology permits the shock absorber to automatically switch in milliseconds between firm and soft compression damping when the vehicle encounters rough road conditions, thus maintaining better tire-to-road contact and improving handling and safety. We have also developed an innovative computerized electronic suspension system, which features dampers developed by Tenneco and electronic valves designed by Ohlins Racing AB. The continuously controlled electronic suspension ("CES") ride control system is featured on Audi, Volvo, Ford and Mercedes Benz vehicles. QUALITY CONTROL Quality control is an important part of our production process. Our quality engineers establish performance and reliability standards in the product's design stage, and use prototypes to confirm the component/system can be manufactured to specifications. Quality control is also integrated into the manufacturing process, with shop operators being responsible for quality control of their specific work product. In addition, our inspectors test work-in- progress at various stages to ensure components are being fabricated to meet customers' requirements. We believe our commitment to quality control and sound management practices and policies is demonstrated by our successful participation in the International Standards Organization/Quality Management Systems certification process ("ISO/TS"). ISO/TS certifications are semi-annual or annual audits that certify that a company's facilities meet stringent quality and business systems requirements. Without ISO or TS certification, we would not be able to supply our products for the aftermarket or the OE market, respectively, either locally or globally. Of those manufacturing facilities where we have determined that TS certification is required to service our customers or would provide us with an advantage in securing additional business, 95 percent have achieved TS 16949:2002 certification. We plan to complete the certification of the remaining plants by year end 2008. Of those manufacturing facilities where we have determined that ISO 9000 certification is required or would provide us with an advantage in securing additional business, all have achieved ISO 9000 certification. BUSINESS STRATEGY Our objective is to enhance profitability by leveraging our global position in the manufacture of emission 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 and specialty industries. The key components of our business strategy are described below. LEVERAGE GLOBAL ENGINEERING AND ADVANCED SYSTEM CAPABILITIES We continue to focus on the development of highly engineered systems and complex assemblies and modules, which are designed to provide value-added solutions to customers and generally increase vehicle 16 content and carry higher profit margins than individualized components. We have developed integrated, electronically linked global engineering and manufacturing facilities, which we believe help us to maintain our presence on top-selling vehicles. We have more than 11 years of experience in integrating systems and modules. In addition, our JIT and in-line sequencing manufacturing and distribution capabilities have enabled us to better respond to our customers' needs. We operate 27 JIT facilities worldwide. "OWN" THE PRODUCT LIFE CYCLE We seek to leverage our aftermarket expertise, which provides us with valuable consumer demand information, to strengthen our competitive position with OEMs. Our market knowledge, coupled with our leading aftermarket presence, strengthens our ties with our OE customer base and drives OE acceptance of our aftermarket products and technologies for use in original equipment vehicle manufacturing. COMMERCIALIZE INNOVATIVE, VALUE-ADDED PRODUCTS To differentiate our offerings from those of our competitors, we focus on commercializing innovative, value-added products, both on our own and through strategic alliances, with emphasis on highly engineered systems and complex assemblies and modules. We seek to continually identify and target new, fast- growing niche markets and commercialize our new technologies for these markets, as well as our existing markets. For example, our exclusive Kinetic(R) Dynamic Suspension System, a version of the Kinetic(R) Reversible Function Stabilizer Technology, is featured as an option on the Lexus GX470 sports utility vehicle and LX470 Land Cruiser through a licensing arrangement between us and Toyota. EXPAND OUR AFTERMARKET BUSINESS We manufacture and market leading brand name products. Monroe(R) ride control products and Walker(R) emission control products, which have been offered to consumers for approximately 76 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 our other primary brands, including: - The Monroe Reflex(R) shock absorber which features an Acceleration Sensitive Damping Technology (ASD) to maintain better tire-to-road contact and improve handling and safety for high center of gravity vehicles (SUVs and light trucks) requiring more control; - The Monroe Sensa-Trac(R) line of shock absorbers, that has been enhanced by the PSD (Position Sensitive Damping) technology which offers both comfort and control when you need it; - Walker's Quiet-Flow(R) muffler, which features an open flow design that increases exhaust flow, improves sound quality and significantly reduces exhaust back pressure when compared to other replacement mufflers; - Rancho(R) ride control products provide on and off road performance for both stock or raised light truck vehicles; - DynoMax(R), which offers a complete line of mufflers, cat-back performance exhaust systems, headers and pipes engineered to increase the efficiency, horsepower, torque and sound of virtually any car, truck, or light vehicle; - Walker Ultra(TM) catalytic converters, which offer a higher loading of precious metals to help problematic vehicles pass emissions testing; - Monroe(R) Dynamics and Ceramics brakes offer the Complete Solution, combining wire wear sensors, hardware and lube allowing installers to do the job right the first time; and - In European markets, Walker(TM) and Aluminox Pro(TM) mufflers. We are capitalizing on our brand strength by incorporating newly acquired product lines within existing product families. We believe brand equity is a key asset in a time of customer consolidation and merging channels of distribution. 17 Our plans to expand our aftermarket business are focused on four key marketing initiatives: new product introductions; building customer and industry awareness of the maintenance, performance and other benefits of ensuring that a vehicle's ride control systems are in good working condition; adding coverage to current brands; and extending our brands and aftermarket penetration to new product segments. For example, in North America we introduced a ride control line extension with the Quick Strut. This strut is a completed module that incorporates the spring and upper mount, resulting in a much easier installation. This allows installers quicker turn over of vehicles in their bay and the opportunity for do it yourself consumers to perform a task that previously required special tools and skills. In addition, Monroe(R) Dynamics and Ceramic Disc brake pads were introduced in the United States in 2006. We also created the Monroe(R) 50,000 mile replacement campaign to help increase customer and industry awareness. The campaign is being advertised via radio and outdoor billboards throughout the United States and Canada stating "Monroe(R) Recommends Replacing Your Shocks and Struts at 50,000 Miles." We will continue to carry that message to consumers and the trade in 2008, again utilizing billboards, radio spots and ads in both trade and consumer magazines. We are exploring a number of opportunities to extend our existing well-known brands, such as Monroe(R), and our product line generally, to aftermarket product segments not previously served. We believe that, when combined with our expansive customer service network, these initiatives will yield incremental aftermarket revenues. ACHIEVE GREATER CONTENT PER VEHICLE As a result of increasing emissions standards we believe that available emission control content per light vehicle will rise over the next several years. We believe that consumers' greater emphasis on automotive safety could also allow available ride control content per light vehicle to rise. In addition, advanced technologies and modular assemblies represent an opportunity to increase vehicle content. For example, our innovative CES system, which we supply on several Volvo, Audi, Ford and Mercedes Benz passenger cars, increases our content revenues seven-fold compared to a standard shock offering. We plan to take advantage of these trends by leveraging our existing position on many top-selling vehicle platforms and by continuing to enhance our modular/systems capabilities. EXECUTE FOCUSED TRANSACTIONS 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 in new geographic markets. We have developed a strategic alliance with Futaba, a leading exhaust manufacturer in Japan that also includes a joint venture operation in Burnley, England. We also have an alliance with Hitachi (as successor to Tokico Ltd. following its acquisition of Tokico), a leading Japanese ride control manufacturer. These alliances help us grow our business with Japan-based OEMs by leveraging the geographical presence of each partner to serve Japan-based global platforms. We have established a presence in Thailand through a joint venture that supplies exhaust components for GM Isuzu. Our joint venture operations in Dalian and Shanghai, China have established us as one of the leading exhaust suppliers in the rapidly growing Chinese automotive market. We also operate joint ventures with Eberspacher International GmbH to supply emission control products and systems for luxury cars produced by BMW and Audi in China, and with Chengdu Lingchuan Mechanical Plant to supply emission control products and systems for various Ford platforms produced in China. We are expanding our operations in China with investment in both manufacturing and engineering facilities. We opened our first wholly-owned operation in China, an elastomer manufacturing facility in Suzhou. In addition, we extended our joint venture with Shanghai Tractor and Engine Company, a subsidiary of Shanghai Automotive Industry Corp., by establishing an engineering center to develop automotive exhaust products. Finally, we increased our ownership stake in the Beijing Monroe Shock Absorber Co. Ltd. (a joint venture with Beijing Automotive Industry Corp.) from 51 percent to 65 percent in 2006. In September 2007, we acquired the mobile emissions business of Combustion Components Associates, Inc., a manufacturer of air pollution control technologies. The acquisition enhances Tenneco's complete system 18 integration capabilities for selective catalyst reduction emissions control technologies designed to meet future more stringent diesel emissions regulations for passenger cars and trucks and is an example of our strategy to grow through expansion of our offerings. Where appropriate, we intend to continue to pursue strategic alliances, joint ventures, acquisitions and other transactions that complement or enhance our existing products, technology, systems development efforts, customer base and/or domestic or international presence. We strive to align with strong local partners to help us further develop our leadership in systems integration and to penetrate international markets. In addition, we align with companies that have proven products, proprietary technology, research capabilities and/or market penetration to help us achieve further leadership in product offerings, customer relationships, and systems integration and overall presence. GROWTH IN ADJACENT MARKETS One of our goals is to apply our existing design, engineering and manufacturing capabilities to penetrate a variety of adjacent markets and to achieve growth in higher-margin businesses. For example, we are aggressively leveraging our technology and engineering leadership in emission and ride control into adjacent markets, such as the heavy-duty market for trucks, buses, agricultural equipment, construction machinery and other commercial vehicles. As an established leading supplier of heavy-duty ride control and elastomer products, we are already serving customers like Volvo Truck, Navistar (International), Freightliner and PACCAR. We also see tremendous opportunity to expand our presence in the heavy-duty market with our emission control products and systems, having recently entered this market in both North America and Europe with diesel technologies that will help customers meet environmental requirements. IMPROVE EFFICIENCY AND REDUCE COSTS We are a process-oriented company and have implemented and are continuing to implement several programs designed to improve efficiency and reduce costs. Our recent restructuring activities began in the fourth quarter of 2001, when our Board of Directors approved a restructuring plan, a project known as Project Genesis, which was designed to lower our fixed costs, relocate capacity, reduce our work force, improve efficiency and utilization, and better optimize our global footprint. We have subsequently engaged in various other restructuring projects related to Project Genesis. We incurred $27 million in restructuring and restructuring-related costs during 2006, of which $23 million was recorded in cost of sales and $4 million was recorded in selling, general and administrative expense. During 2007, we incurred $25 million in restructuring and restructuring-related costs of which $22 million was recorded in cost of sales, $2 million of which related to a charge for asset impairments, and $3 million in selling, general and administrative expense. The majority of the 2007 charges were related to the planned closing of our emission control plant in Wissembourg, France. Since Project Genesis was initiated, we have incurred costs of $155 million through December 31, 2007. Under the terms of our amended and restated senior credit agreement that took effect on March 16, 2007, we are allowed to exclude $80 million of cash charges and expenses, before taxes, related to cost reduction initiatives incurred after March 16, 2007 from the calculation of the financial covenant ratios required under our senior credit facility. As of December 31, 2007, we have excluded $23 million in allowable charges relating to restructuring initiatives against the $80 million available under the terms of the March 2007 amendment and restatement of the senior credit facility. In addition to the announced actions, we will continue to evaluate additional opportunities and expect that we will initiate actions that will reduce our costs through implementing the most appropriate and efficient logistics, distribution and manufacturing footprint for the future. We expect to continue to undertake additional restructuring actions as deemed necessary, however there can be no assurances we will undertake such actions. Actions that we take, if any, will require the approval of our Board of Directors, or its authorized committee. We plan to conduct any workforce reductions that result in compliance with all legal and contractual requirements including obligations to consult with workers' councils, union representatives and others. 19 IMPROVE CASH FLOW We are focused on a core set of goals designed to improve cash flow: (i) continuing to reduce selling, general and administrative expenses plus engineering, research and development costs ("SGA&E") as a percentage of sales, while continuing to invest in sales and engineering; (ii) extracting significant cash flow from working capital initiatives; (iii) offsetting to the greatest extent possible pressures on overall gross margins in a challenging economic environment; and (iv) strengthening existing customer relationships and winning new long-term OE business. We intend to continue to use our cash flow after capital expenditures and other investments in our business to repay our borrowings. ENVIRONMENTAL MATTERS We estimate that we and our subsidiaries will make expenditures for plant, property and equipment for environmental matters of approximately $12 million in 2008 and approximately $3 million in 2009. For additional information regarding environmental matters, see Item 3, "Legal Proceedings," Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Environmental and Other Matters," and Note 12 to the consolidated financial statements of Tenneco Inc. and Consolidated Subsidiaries included in Item 8. EMPLOYEES As of December 31, 2007, we had approximately 21,000 employees of which approximately 51 percent are covered by collective bargaining agreements. Of the employees covered by collective bargaining agreements, 47 percent are also governed by European works councils. Several of our existing labor agreements in the United States and Mexico are scheduled for renegotiation in 2008, in addition to fair agreements expiring in Europe covering plants in Spain, France, Portugal and the United Kingdom. We regard our employee relations as generally satisfactory. OTHER The principal raw material utilized by us is steel. We obtain steel from a number of sources pursuant to various contractual and other arrangements. We believe that an adequate supply of steel can presently be obtained from a number of different domestic and foreign suppliers. However, we are actively addressing higher steels costs which are expected to continue through 2008. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Outlook" included in Item 7 for more information. 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. The patents, trademarks and other intellectual property owned by or licensed to us are important in the manufacturing, marketing and distribution of our products. 20 ITEM 1A. RISK FACTORS. AN ECONOMIC DOWNTURN OR OTHER FACTORS THAT REDUCE CONSUMER DEMAND FOR OUR PRODUCTS OR REDUCE PRICES COULD MATERIALLY AND ADVERSELY IMPACT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS, AND OUR DEBT MAKES US MORE SENSITIVE TO THESE EFFECTS. Demand for and pricing of our products are subject to economic conditions and other factors present in the various domestic and international markets where the products are sold. Demand for our OE products is subject to the level of consumer demand for new vehicles that are equipped with our parts. The level of new light vehicle purchases is cyclical, affected by such factors as general economic conditions, interest rates, consumer confidence, consumer preferences, patterns of consumer spending, fuel cost and the automobile replacement cycle. For example, in 2006 North American light vehicle production of light trucks and SUVs decreased 8.8 percent from 2005 to 2006 as consumers shifted their preferences from light trucks and SUVs to other vehicles in light of higher fuel costs. Because the percentage of our North American OE revenues related to light trucks and SUVs is greater than the percentage of the total North American light vehicle build rate represented by light trucks and SUVs, our North American OE business is sensitive to this type of change in consumer preferences. 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. Demand for our aftermarket, or replacement, products varies based upon such factors as general economic conditions, the level of new vehicle purchases, which initially displaces demand for aftermarket products, the severity of winter weather, which increases the demand for certain aftermarket products, and other factors, including the average useful life of parts and number of miles driven. The highly cyclical nature of the automotive industry presents a risk that is outside our control and that cannot be accurately predicted. For example, many predict an economic downturn in the United States in 2008 and we cannot assure you that we would be able to maintain or improve our results of operations in a stagnant or recessionary economic environment. Further decreases in demand for automobiles and automotive products generally, or in the demand for our products in particular, could materially and adversely impact our financial condition and results of operations. Our significant amount of debt makes us more vulnerable to changes in our results of operations because we must devote a significant portion of our cash flow to debt service, maintain financial ratios in our debt agreements and comply with covenants in our debt agreements that limit our flexibility in planning for or reacting to changes in our business and our industry. Our failure to maintain or improve our cash flows and other results of operations or our decision to otherwise increase our leverage could have an adverse effect on our ability to service our indebtedness, repay our debt at maturity, meet other obligations and fund other liquidity needs, all of which could have a material adverse effect on us. WE MAY BE UNABLE TO REALIZE SALES REPRESENTED BY OUR AWARDED BUSINESS, WHICH COULD MATERIALLY AND ADVERSELY IMPACT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The realization of future sales from awarded business is inherently subject to a number of important risks and uncertainties, including 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. Substantially all of our North American vehicle manufacturing customers have slowed or maintained at relatively flat levels new vehicle production for the past several years. More recently, new vehicle production has varied year- over-year from negative growth to positive growth. For example, production rates for SUVs and light trucks increased 2.4 percent in 2007 compared to 2006 and decreased 8.8 percent in 2006 compared to 2005. Production rates for passenger cars decreased 6.4 percent in 2007 compared to 2006 and increased 5.1 percent in 2006 compared to 2005. We remain cautious regarding production volumes for 2008 due to rising oil and steel prices, current OE manufacturers' inventory levels and uncertainty regarding the willingness of OE manufacturers to continue to support vehicle sales. Production rates for SUVs and light trucks in North America are expected to decrease by 5.7 percent and passenger car production rates are expected to decrease by 3.7 percent in 2008. We expect the light vehicle build for Asia to significantly increase in 2008 and production rates in Eastern Europe and South America to increase slightly. All other regions are expected to remain flat. In addition, our customers generally have the right to replace us with another supplier at any time for a variety of 21 reasons and have increasingly demanded price decreases over the life of awarded business. Accordingly, we cannot assure you that we will in fact realize any or all of the future sales represented by our awarded business. Any failure to realize these sales could have a material adverse effect on our financial condition and results of operations. In many cases, we must commit substantial resources in preparation for production under awarded OE business well in advance of the customer's production start date. In certain instances, the terms of our OE customer arrangements permit us to recover these pre-production costs if the customer cancels the business through no fault of our company. Although we have been successful in recovering these costs under appropriate circumstances in the past, we can give no assurance that our results of operations will not be materially impacted in the future if we are unable to recover these types of pre-production costs related to OE cancellation of awarded business. WE ARE DEPENDENT ON LARGE CUSTOMERS FOR FUTURE REVENUE. THE LOSS OF ANY OF THESE CUSTOMERS OR THE LOSS OF MARKET SHARE BY THESE CUSTOMERS COULD HAVE A MATERIAL ADVERSE IMPACT ON US. We depend on major vehicle manufacturers for a substantial portion of our net sales. For example, during 2007, General Motors, Ford, Volkswagen, and Daimler AG accounted for 20 percent, 14 percent, 9 percent, and 8 percent 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. During the past several years, General Motors, Ford and Chrysler have lost market share particularly in the United States, primarily to Asian competitors. While we are actively targeting Chinese and Korean automakers, any further market share loss by these North American-based and European-based automakers could, if we are unable to achieve increased sales to the Asian OE manufacturers, have a material adverse effect on our business. FINANCIAL DIFFICULTIES FACING OTHER AUTOMOTIVE COMPANIES MAY HAVE AN ADVERSE IMPACT ON US. A number of companies in the automotive industry are, and over the last several years have been, facing severe financial difficulties. As a result, there have been numerous recent bankruptcies of companies in the automotive industry, including the 2005 bankruptcy of Delphi Corporation, one of the world's largest automotive parts suppliers. In February 2008, Plastech Engineered Products filed for Chapter 11 protection. Severe financial difficulties at any major automotive manufacturer or automotive supplier could have a significantly disruptive effect on the automotive industry in general, including by leading to labor unrest, supply chain disruptions and weakness in demand. In particular, severe financial difficulties at any of our major suppliers could have a material adverse effect on us if we are unable to obtain on a timely basis the quantity and quality of components we require to produce our products. In addition, such financial difficulties at any of our major customers could have a material adverse impact on us if such customer were unable to pay for the products we provide or we experienced a loss of, or material reduction in, business from such customer. THE HOURLY WORKFORCE IN THE AUTOMOTIVE INDUSTRY IS HIGHLY UNIONIZED AND OUR BUSINESS COULD BE ADVERSELY AFFECTED BY LABOR DISRUPTIONS. Although we consider our current relations with our employees to be satisfactory, if major work disruptions were to occur, our business could be adversely affected by, for instance, a loss of revenues, increased costs or reduced profitability. We have not experienced a material labor disruption in our workforce in the last ten years, but there can be no assurance that we will not experience a material labor disruption at one of our facilities in the future in the course of renegotiation of our labor arrangements or otherwise. In addition, substantially all of the hourly employees of North American vehicle manufacturers and many of their other suppliers are represented by the United Automobile, Aerospace and Agricultural Implement Workers of 22 America under collective bargaining agreements. Vehicle manufacturers and such suppliers and their employees in other countries are also subject to labor agreements. A work stoppage or strike at our production facilities, at those of a significant customer, or at a significant supplier of ours or any of our customers could have an adverse impact on us by disrupting demand for our products and/or our ability to manufacture our products. WE HAVE EXPERIENCED SIGNIFICANT INCREASES IN RAW MATERIALS PRICING, AND FURTHER CHANGES IN THE PRICES OF RAW MATERIALS COULD HAVE A MATERIAL ADVERSE IMPACT ON US. Significant increases in the cost of certain raw materials used in our products, to the extent they are not timely reflected in the price we charge our customers or otherwise mitigated, could materially and adversely impact our results. For example, since 2004, we have experienced significant increases in processed metal and steel prices. High steel prices are expected to continue into the foreseeable future. We expect that the pricing environment for steel will increase our costs by up to $40 million in 2008. We addressed this increase in 2005, 2006 and 2007 and will continue to address this issue in 2008 by evaluating alternative materials and processes, reviewing material substitution opportunities, increasing component and assembly outsourcing to low cost countries and aggressively negotiating with our customers to allow us to recover these higher costs from them. In addition to these actions, we continue to pursue productivity initiatives and review opportunities to reduce costs through restructuring activities. The situation remains fluid as we continue to pursue these actions and, at this point, we cannot assure you that these actions will be effective in containing margin pressures from these significant raw materials price increases. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations -- Outlook" included in Item 7 for more information. WE MAY BE UNABLE TO REALIZE OUR BUSINESS STRATEGY OF IMPROVING OPERATING PERFORMANCE, GROWING OUR BUSINESS AND GENERATING SAVINGS AND IMPROVEMENTS TO HELP OFFSET PRICING PRESSURES FROM OUR SUPPLIERS AND CUSTOMERS AND TO OTHERWISE IMPROVE OUR RESULTS. We regularly implement strategic and other initiatives designed to improve our operating performance and grow our business. 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 suppliers and our customers, as described above. Furthermore, the terms of our senior credit agreement may restrict the types of initiatives we undertake, as the agreement restricts our uses of cash, requires us to maintain financial ratios and otherwise prohibits us from undertaking certain activities. In the past we have been successful in obtaining the consent of our senior lenders where appropriate in connection with our initiatives. We cannot assure you, however, that we will be able to pursue, successfully implement or realize the expected benefits of any initiative or that we will be able to sustain improvements made to date. In addition, we believe that increasingly stringent environmental standards for automotive emissions have presented and will continue to present an important opportunity for us to grow our emissions control business. We cannot assure you, however, that environmental standards for automotive emissions will continue to become more stringent or that the adoption of any new standards will not be delayed beyond our expectations. WE MAY INCUR MATERIAL COSTS RELATED TO PRODUCT WARRANTIES, ENVIRONMENTAL AND REGULATORY MATTERS AND OTHER CLAIMS, WHICH COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS. From time to time, we receive product warranty claims from our customers, pursuant to which we may be required to bear costs of repair or replacement of certain of our products. Vehicle manufacturers are increasingly requiring their outside suppliers to guarantee or warrant their products and to be responsible for the operation of these component products in new vehicles sold to consumers. Warranty claims may range from individual customer claims to full recalls of all products in the field. We cannot assure you that costs associated with providing product warranties will not be material, or that those costs will not exceed any amounts reserved for them in our consolidated financial statements. For a description of our accounting policies regarding warranty reserves, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Critical Accounting Policies" included in Item 7. 23 Additionally, we are subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which we operate. Soil and groundwater remediation activities are being conducted at certain of our current and former real properties. We record liabilities for these activities when environmental assessments indicate that the remedial efforts are probable and the costs can be reasonably estimated. On this basis, we have established reserves that we believe are adequate for the remediation activities at our current and former real properties for which we could be held responsible. Although we believe our estimates of remediation costs are reasonable and are based on the latest available information, the cleanup costs are estimates and are subject to revision as more information becomes available about the extent of remediation required. In future periods, we could be subject to cash or non- cash charges to earnings if we are required to undertake material additional remediation efforts based on the results of our ongoing analyses of the environmental status of our properties, as more information becomes available to us. We also from time to time are involved in legal proceedings, claims or investigations that are incidental to the conduct of our business. Some of these proceedings allege damages against us relating to environmental liabilities, intellectual property matters, personal injury claims, taxes, employment matters or commercial or contractual disputes. For example, we are subject to a number of lawsuits initiated by a significant number of claimants alleging health problems as a result of exposure to asbestos. Many of these cases involve significant numbers of individual claimants. Many of these cases also involve numerous defendants, with the number of defendants in some cases exceeding 200 defendants from a variety of industries. As major asbestos manufacturers or other companies that used asbestos in their manufacturing processes continue to go out of business, we may experience an increased number of these claims. We vigorously defend ourselves in connection with all of the matters described above. We cannot, however, assure you that the costs, charges and liabilities associated with these matters will not be material, or that those costs, charges and liabilities will not exceed any amounts reserved for them in our consolidated financial statements. In future periods, we could be subject to cash costs or non-cash charges to earnings if any of these matters is resolved unfavorably to us. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Environmental and Other Matters," included in Item 7 for further description. WE MAY HAVE DIFFICULTY COMPETING 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 include price, quality, service, product performance, design and engineering capabilities, new product innovation, global presence and timely delivery. As a result, many suppliers have established or are establishing themselves in emerging, low-cost markets to reduce their costs of production and be more conveniently located for customers. Although we are also pursuing a low-cost country production strategy and otherwise continue to seek process improvements to reduce costs, 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. THE DECREASING NUMBER OF 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 decreasing 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, requested to reduce prices as part of our initial business quotations and over the life of vehicle platforms we have been awarded. 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 requested by existing customers and necessary to win additional business. 24 Furthermore, the trend toward consolidation and bankruptcies 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. 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 occasionally been requested to offer price concessions to them. 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. LONGER PRODUCT LIVES OF AUTOMOTIVE PARTS ARE ADVERSELY AFFECTING AFTERMARKET DEMAND FOR SOME OF OUR PRODUCTS. The average useful life of automotive parts has steadily increased 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. This has adversely impacted, and could continue to adversely impact, our aftermarket sales. Also, any additional increases in the average useful lives of automotive parts would further adversely affect the demand for our aftermarket products. Recently, we have experienced relative stabilization in our aftermarket business due to our ability to win new customers and recover steel price increases through selling price increases. However, there can be no assurance that we will be able to maintain this stabilization. Aftermarket sales represented approximately 18 percent and 23 percent of our net sales in 2007 and 2006, respectively. ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND SERIOUSLY HARM OUR FINANCIAL CONDITION. We may, from time to time, consider acquisitions of complementary companies, products or technologies. Acquisitions involve numerous risks, including difficulties in the assimilation of the acquired businesses, the diversion of our management's attention from other business concerns and potential adverse effects on existing business relationships with current customers and suppliers. In addition, any acquisitions could involve the incurrence of substantial additional indebtedness. We cannot assure you that we will be able to successfully integrate any acquisitions that we pursue or that such acquisitions will perform as planned or prove to be beneficial to our operations and cash flow. Any such failure could seriously harm our business, financial condition and results of operations. WE ARE SUBJECT TO RISKS RELATED TO OUR INTERNATIONAL OPERATIONS. We have manufacturing and distribution facilities in many regions and countries, including Australia, China, India, North America, Europe and South America, and sell our products worldwide. For 2007, approximately 53 percent 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 a foreign government; - exposure to local social unrest, including any resultant acts of war, terrorism or similar events; - exposure to local public health issues and the resultant impact on economic and political conditions; 25 - currency exchange rate fluctuations; - hyperinflation in certain foreign countries; - controls on the repatriation of cash, including imposition or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries; and - export and import restrictions. 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 the foreign currency in which our costs are paid appreciates against the currency in which we generate revenue because the appreciation effectively increases our cost in that country. 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 generally will have a negative impact on our reported revenues and operating profit while depreciation of the U.S. dollar against these foreign currencies will generally have a positive effect on reported revenues and operating profit. For example, our European operations were positively impacted in 2007 and 2006 due to the strengthening of the Euro against the U.S. dollar. However, in 2005, the dollar strengthened against the Euro which had a negative effect on our results of operations. Our South American operations were negatively impacted by the devaluation in 2000 of the Brazilian currency as well as by the devaluation of the Argentine currency in 2002. We do not generally seek to mitigate this translation effect through the use of derivative financial instruments. WE HAVE DISCLOSED A MATERIAL WEAKNESS IN OUR INTERNAL CONTROL OVER FINANCIAL REPORTING RELATING TO OUR ACCOUNTING FOR INCOME TAXES WHICH COULD ADVERSELY AFFECT OUR ABILITY TO REPORT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS ACCURATELY AND ON A TIMELY BASIS. In connection with our assessment of internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, we identified a material weakness in our internal control over financial reporting relating to our accounting for income taxes as of December 31, 2006. Although we believe our processes have improved, during 2007, we believe we have a material weakness in accounting for income taxes as of December 31, 2007. For a discussion of our internal control over financial reporting and a description of the identified material weakness, see "Management's Report on Internal Control over Financial Reporting" under Item 8, "Financial Statements and Supplementary Data." A material weakness in our internal control over financial reporting could adversely impact our ability to provide timely and accurate financial information. While we have taken measures to strengthen our internal controls in response to the identified material weakness related to accounting for income taxes, and engaged outside professionals to assist us in our efforts, additional work remains to be done to address the identified material weakness. If we are unsuccessful in implementing or following our remediation plan, we may not be able to timely or accurately report our financial condition, results of operations or cash flows or maintain effective disclosure controls and procedures. If we are unable to report financial information timely and accurately or to maintain effective disclosure controls and procedures, we could be subject to, among other things, regulatory or enforcement actions by the SEC and the NYSE, including a delisting from the NYSE, securities litigation, debt rating agency downgrades or rating withdrawals, and a general loss of investor confidence, any one of which could adversely affect our business prospects and the valuation of our common stock. 26 ITEM 1B. UNRESOLVED STAFF COMMENTS. NONE. ITEM 2. PROPERTIES. We lease our principal executive offices, which are located at 500 North Field Drive, Lake Forest, Illinois, 60045. Walker's consolidated businesses operate 13 manufacturing facilities in the U.S. and 39 manufacturing facilities outside of the U.S., operate 5 engineering and technical facilities worldwide and share 2 other such facilities with Monroe. Twenty-four of these manufacturing plants are JIT facilities. In addition, three joint ventures in which we hold a noncontrolling interest operate a total of three manufacturing facilities outside the U.S., 2 of which are JIT facilities. Monroe's consolidated businesses operate 7 manufacturing facilities in the U.S. and 21 manufacturing facilities outside the U.S., operate 8 engineering and technical facilities worldwide and share 2 other such facilities with Walker. Three of these manufacturing plants are JIT facilities. The above-described manufacturing locations outside of the U.S. are located in Argentina, Australia, Belgium, Brazil, Canada, China, the Czech Republic, France, Germany, India, Mexico, New Zealand, Poland, Portugal, Russia, Spain, South Africa, Sweden, Thailand and the United Kingdom. We also have sales offices located in Croatia, Egypt, Greece, Hungary, Italy, Japan, Korea, Lithuania, Singapore, Turkey and the Ukraine. We own approximately one half of the properties described above and lease the other half. We hold 13 of the above-described international manufacturing facilities through 7 joint ventures in which we own a controlling interest. In addition, three joint ventures in which we hold a noncontrolling interest operate a total of three manufacturing facilities outside the U.S. We also have distribution facilities at our manufacturing sites and at a few offsite locations, substantially all of which we lease. 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. ITEM 3. LEGAL PROCEEDINGS. As of December 31, 2007, we are designated as a potentially responsible party in one Superfund site. Including the Superfund site, we may have the obligation to remediate current or former facilities, and we estimate our share of environmental remediation costs at these facilities to be approximately $11 million. For the Superfund site and the current and former facilities, we have established reserves that we believe are adequate for these costs. Although we believe our estimates of remediation costs are reasonable and are based on the latest available information, the cleanup costs are estimates and are subject to revision as more information becomes available about the extent of remediation required. At some sites, we expect that other parties will contribute to the remediation costs. In addition, at the Superfund site, the Comprehensive Environmental Response, Compensation and Liability Act provides that our liability could be joint and several, meaning that we could be required to pay in excess of our share of remediation costs. Our understanding of the financial strength of other potentially responsible parties at the Superfund site, and of other liable parties at our current and former facilities, has been considered, where appropriate, in our determination of our estimated liability. We believe that any potential costs associated with our current status as a potentially responsible party in the Superfund site, or as a liable party at our current or former facilities, will not be material to our results of operations or consolidated financial position. From time to time we are subject to product warranty claims whereby we are required to bear costs of repair or replacement of certain of our products. Warranty claims may range from individual customer claims to full recalls of all products in the field. We believe that our warranty reserve is appropriate; however, actual 27 claims incurred could differ from the original estimates requiring adjustments to the reserve. The reserve is included in current and long-term liabilities on the balance sheet. See Note 12 to the consolidated financial statements of Tenneco Inc. and Consolidated Subsidiaries included in Item 8 for information regarding our warranty reserves. We also from time to time are involved in legal proceedings, claims or investigations that are incidental to the conduct of our business. Some of these proceedings allege damages against us relating to environmental liabilities (including toxic tort, property damage and remediation), intellectual property matters (including patent, trademark and copyright infringement, and licensing disputes), personal injury claims (including injuries due to product failure, design or warnings issues, and other product liability related matters), taxes, employment matters, and commercial or contractual disputes, sometimes related to acquisitions or divestitures. We vigorously defend ourselves against all of these claims. In future periods, we could be subjected to cash costs or non-cash charges to earnings if any of these matters is resolved on unfavorable terms. However, although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including our assessment of the merits of the particular claim, we do not expect that these legal proceedings or claims will have any material adverse impact on our future consolidated financial position or results of operations. In addition, we are subject to a number of lawsuits initiated by a significant number of claimants alleging health problems as a result of exposure to asbestos. A small percentage of claims have been asserted by railroad workers alleging exposure to asbestos products in railroad cars manufactured by The Pullman Company, one of our subsidiaries. Nearly all of the claims are related to alleged exposure to asbestos in our automotive emission control products. Only a small percentage of these claimants allege that they were automobile mechanics and a significant number appear to involve workers in other industries or otherwise do not include sufficient information to determine whether there is any basis for a claim against us. We believe, based on scientific and other evidence, it is unlikely that mechanics were exposed to asbestos by our former muffler products and that, in any event, they would not be at increased risk of asbestos-related disease based on their work with these products. Further, many of these cases involve numerous defendants, with the number of each in some cases exceeding 200 defendants from a variety of industries. Additionally, the plaintiffs either do not specify any, or specify the jurisdictional minimum, dollar amount for damages. As major asbestos manufacturers continue to go out of business or file for bankruptcy, we may experience an increased number of these claims. We vigorously defend ourselves against these claims as part of our ordinary course of business. In future periods, we could be subject to cash costs or non-cash charges to earnings if any of these matters is resolved unfavorably to us. To date, with respect to claims that have proceeded sufficiently through the judicial process, we have regularly achieved favorable resolution. Accordingly, we presently believe that these asbestos-related claims will not have a material adverse impact on our future financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to the vote of security holders during the fourth quarter of 2007. 28 ITEM 4.1. EXECUTIVE OFFICERS OF THE REGISTRANT. The following provides information concerning the persons who serve as our executive officers as of February 29, 2008.
NAME (AND AGE AT DECEMBER 31, 2007) OFFICES HELD ------------------ ------------------------------------------------- Gregg Sherrill (54)...... Chairman and Chief Executive Officer Hari N. Nair (47)........ Executive Vice President and President -- International Kenneth R. Trammell Executive Vice President and Chief Financial (47)................... Officer Brent J. Bauer (52)...... Senior Vice President and General Manager -- North American Original Equipment Emission Control Timothy E. Jackson (50).. Senior Vice President and Chief Technology Officer Alain Michaelis (41)..... Senior Vice President, Global Supply Chain Management and Manufacturing Richard P. Schneider Senior Vice President -- Global Administration (60)................... David A. Wardell (53).... Senior Vice President, General Counsel and Secretary Neal A. Yanos (45)....... Senior Vice President and General Manager -- North American Original Equipment Ride Control and North American Aftermarket Paul D. Novas (49)....... Vice President and Controller
GREGG SHERRILL -- Mr. Sherrill was named the Chairman and Chief Executive Officer of Tenneco in January 2007. Mr. Sherrill joined us from Johnson Controls Inc., where he served since 1998, most recently as President, Power Solutions. From 2002 to 2003, Mr. Sherrill served as the Vice President and Managing Director of Europe, South Africa and South America for Johnson Controls' Automotive Systems Group. Prior to joining Johnson Controls, Mr. Sherrill held various engineering and manufacturing assignments over a 22-year span at Ford Motor Company, including Plant Manager of Ford's Dearborn, Michigan engine plant and Director of Supplier Technical Assistance. Mr. Sherrill became a director of our company in January 2007. HARI N. NAIR -- Mr. Nair was named our Executive Vice President and President -- International effective March 2007. Previously, Mr. Nair served as Executive Vice President and Managing Director of our business in Europe, South America and India. Before that, he was Senior Vice President and Managing Director -- International. Prior to December 2000, Mr. Nair was the Vice President and Managing Director -- Emerging Markets. Previously, Mr. Nair was the Managing Director for Tenneco Automotive Asia, based in Singapore and responsible for all operations and development projects in Asia. He began his career with the former Tenneco Inc. in 1987, holding various positions in strategic planning, marketing, business development, quality and finance. From July 2006 until January 2007 during our search for our new Chief Executive Officer, he served as a member of our interim management committee known as the Office of the Chief Executive. Prior to joining Tenneco, Mr. Nair was a senior financial analyst at General Motors Corp. focusing on European operations. KENNETH R. TRAMMELL -- Mr. Trammell was promoted to Executive Vice President and Chief Financial Officer in January 2006. Mr. Trammell was named our Senior Vice President and Chief Financial Officer in September 2003, having served as our Vice President and Controller from September 1999. From April 1997 to November 1999 he served as Corporate Controller of Tenneco Inc. He joined Tenneco Inc. in May 1996 as Assistant Controller. From July 2006 until January 2007 during our search for our new Chief Executive Officer, he served as a member of our interim management committee known as the Office of the Chief Executive. Before joining Tenneco Inc., Mr. Trammell spent 12 years with the international public accounting firm of Arthur Andersen LLP, last serving as a senior manager. BRENT J. BAUER -- Mr. Bauer joined Tenneco Automotive in August 1996 as a Plant Manager and was named Vice President and General Manager -- European Original Equipment Emission Control in September 1999. Mr. Bauer was named Vice President and General Manager -- European and North American Original 29 Equipment Emission Control in July 2001. Currently, Mr. Bauer serves as the Senior Vice President and General Manager -- North American Original Equipment Emission Control. Prior to joining Tenneco, he was employed at AeroquipVickers Corporation for 20 years in positions of increasing responsibility serving most recently as Director of Operations. TIMOTHY E. JACKSON -- Mr. Jackson joined us as Senior Vice President and General Manager -- North American Original Equipment and Worldwide Program Management in June 1999. He served in this position until August 2000, at which time he was named Senior Vice President -- Global Technology. From 2002 to 2005, Mr. Jackson served as Senior Vice President -- Manufacturing, Engineering, and Global Technology. In July 2005, Mr. Jackson was named Senior Vice President -- Global Technology and General Manager, Asia Pacific. In March 2007, he was named our Chief Technology Officer. Mr. Jackson joined us from ITT Industries where he was President of that 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. ALAIN MICHAELIS -- Mr. Michaelis joined Tenneco in July 2007 as Senior Vice President, Global Supply Chain Management & Manufacturing. He is responsible for the company's worldwide purchasing, logistics and material management functions, as well as our global manufacturing programs. Mr. Michaelis returned to Tenneco after working for three years at Wolseley PLC, where he served as the Supply Chain Director for Europe. Before that, Mr. Michaelis worked for Tenneco since 1996, serving as the Executive Director for Exhaust Operations in Europe, as well as holding operations and logistics positions for South America & Asia and the United States. He began his career in London at Ove Arup Partnership as a design engineer. RICHARD P. SCHNEIDER -- Mr. Schneider was named as our Senior Vice President -- Global Administration in 1999 and is responsible for the development and implementation of human resources programs and policies and employee communications activities for our worldwide operations. Prior to 1999, Mr. Schneider served as our Vice President -- Human Resources. 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. DAVID A. WARDELL -- Mr. Wardell joined Tenneco in May 2007 as Senior Vice President, General Counsel and Corporate Secretary. He is responsible for managing the company's worldwide legal affairs including corporate governance. Prior to joining Tenneco, Mr. Wardell was associated with Abbott Laboratories where he held several positions of increasing responsibility, most recently being named Associate General Counsel, Pharmaceutical Products Group Legal Operations in 2005. Before joining Abbott Laboratories, Mr. Wardell spent over ten years in the legal department of Bristol-Myers Squibb Company, where he spent six years living and working in London, England providing legal support to various business units in Europe, Middle East and Africa. Mr. Wardell started his legal career as a New York County Assistant District Attorney. NEAL A. YANOS -- Mr. Yanos was named our Senior Vice President and General Manager -- North American Original Equipment Ride Control and North American Aftermarket in May 2003. He joined our Monroe ride control division as a process engineer in 1988 and since that time has served in a broad range of assignments including product engineering, strategic planning, business development, finance, program management and marketing, including Director of our North American original equipment GM/VW business unit and most recently as our Vice President and General Manager -- North American Original Equipment Ride Control from December 2000. From July 2006 until January 2007 during our search for our new Chief Executive Officer, he served as a member of our interim management committee known as the Office of the Chief Executive. Before joining our company, Mr. Yanos was employed in various engineering positions by Sheller Globe Inc. from 1985 to 1988. PAUL D. NOVAS -- Mr. Novas was named our Vice President and Controller in July 2006. Mr. Novas served as Vice President, Finance and Administration for Tenneco Europe from January 2004 until July 2006 and as Vice President and Treasurer of Tenneco from November 1999 until January 2004. Mr. Novas joined Tenneco in 1996 as assistant treasurer responsible for corporate finance and North American treasury 30 operations. Prior to joining Tenneco, Mr. Novas worked in the treasurer's office of General Motors Corporation for ten years. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER REPURCHASES OF EQUITY SECURITIES. Our outstanding shares of common stock, par value $.01 per share, are listed on the New York, Chicago and London Stock Exchanges. The following table sets forth, for the periods indicated, the high and low sales prices of our common stock on the New York Stock Exchange Composite Transactions Tape.
SALES PRICES --------------- QUARTER HIGH LOW - ------- ------ ------ 2007 1st........................................................... $27.34 $23.04 2nd........................................................... 35.81 25.49 3rd........................................................... 37.73 28.11 4th........................................................... 33.46 24.16 2006 1st........................................................... $23.33 $19.61 2nd........................................................... 27.55 20.64 3rd........................................................... 26.39 20.03 4th........................................................... 25.34 21.41
As of February 22, 2008, there were approximately 22,036 holders of record of our common stock, including brokers and other nominees. The declaration of dividends on our common stock is at the discretion of our 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. These considerations may include past and projected earnings, cash flows, economic, business and securities market conditions and anticipated developments concerning our business and operations. We are highly leveraged and restricted with respect to the payment of dividends under the terms of our financing arrangements. On January 10, 2001, we announced that our Board of Directors eliminated the regular quarterly dividend on the Company's common stock. The Board took this action in response to then- current industry conditions, primarily greater than anticipated production volume reductions by original equipment manufacturers in North America and continued softness in the global aftermarket. We have not paid dividends on our common stock since the fourth quarter of 2000. There are no current plans to reinstate a dividend on our common stock, as the Board of Directors intends to retain any earnings for use in our business for the foreseeable future. For additional information concerning our payment of dividends, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7. See "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" included in Item 12 for information regarding securities authorized for issuance under our equity compensation plans. 31 PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS The following table provides information relating to our purchase of shares of our common stock in the fourth quarter of 2007. All of these purchases reflect shares withheld upon vesting of restricted stock to satisfy minimum tax withholding obligations.
TOTAL NUMBER OF AVERAGE PRICE PERIOD SHARES PURCHASED PAID - ------ ---------------- ------------- October 2007...................................... 85 $30.69 November 2007..................................... -- -- December 2007..................................... -- -- -- ------ Total............................................. 85 $30.69
We presently have no publicly announced repurchase plan or program, but intend to continue to satisfy statutory minimum tax withholding obligations in connection with the vesting of outstanding restricted stock through the withholding of shares. RECENT SALES OF UNREGISTERED SECURITIES On November 20, 2007, we sold $250 million of 8 1/8 percent Senior Notes due 2015 through offerings to "qualified institutional buyers" (as defined in Rule 144A under the Securities Act of 1933, as amended), and, outside the United States, to non-U.S. persons in reliance on Regulation S under the Securities Act. We offered and sold the notes to the initial purchasers in reliance on the exemption from registration provided by Section 4(2) of the Securities Act. The initial purchasers then sold the Notes to qualified institutional buyers pursuant to the exemption from registration provided by Rule 144A under the Securities Act. Banc of America Securities LLC and Citigroup Global Markets Inc. were the principal initial purchasers of the Notes. In connection with the transaction, we paid offering fees and expenses, including fees to the initial purchasers, of approximately $5 million. We used the net proceeds of $245 million and cash on hand to repurchase $230 million of our outstanding 10 1/4 percent Senior Notes due 2013 pursuant to a tender offer that closed on November 14, 2007. For further discussion of the issuance, see "Liquidity and Capital Resources" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operation." 32 ITEM 6. SELECTED FINANCIAL DATA. TENNECO INC. AND CONSOLIDATED SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- 2007 2006(A) 2005(A) 2004(A)(B)(D) 2003(B)(C)(D) ----------- ----------- ----------- ------------- ------------- (MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS) STATEMENTS OF INCOME (LOSS) DATA: Net sales and operating revenues -- North America............... $ 2,910 $ 1,963 $ 2,033 $ 1,966 $ 1,889 Europe, South America and India..................... 3,135 2,387 2,110 1,940 1,611 Asia Pacific................ 560 436 371 380 322 Intergroup sales............ (421) (104) (74) (73) (54) ----------- ----------- ----------- ----------- ----------- $ 6,184 $ 4,682 $ 4,440 $ 4,213 $ 3,768 =========== =========== =========== =========== =========== Income before interest expense, income taxes, and minority interest -- North America............... $ 120 $ 103 $ 148 $ 131 $ 128 Europe, South America and India..................... 99 81 53 19 20 Asia Pacific................ 33 12 16 20 23 ----------- ----------- ----------- ----------- ----------- Total..................... 252 196 217 170 171 Interest expense (net of interest capitalized)................... 164 136 133 178 146 Income tax expense (benefit)..... 83 5 26 (21) (6) Minority interest................ 10 6 2 4 6 ----------- ----------- ----------- ----------- ----------- Net income (loss)................ $ (5) $ 49 $ 56 $ 9 $ 25 =========== =========== =========== =========== =========== Average number of shares of common stock outstanding Basic.......................... 45,809,730 44,625,220 43,088,558 41,534,810 40,426,136 Diluted........................ 45,809,730 46,755,573 45,321,225 44,180,460 41,767,959 Basic earnings (loss) per share of common stock................ $ (0.11) $ 1.11 $ 1.30 $ 0.22 $ 0.60 =========== =========== =========== =========== =========== Diluted earnings (loss) per share of common stock................ $ (0.11) $ 1.05 $ 1.24 $ 0.21 $ 0.58 =========== =========== =========== =========== ===========
33
YEARS ENDED DECEMBER 31, ---------------------------------------------------------- 2007 2006(A) 2005(A) 2004(A)(B)(D) 2003(B)(C)(D) ------ ------- ------- ------------- ------------- (MILLIONS EXCEPT RATIO AND PERCENT AMOUNTS) BALANCE SHEET DATA: Total assets.......................... $3,590 $3,274 $2,945 $3,134 $2,883 Short-term debt....................... 46 28 22 19 20 Long-term debt........................ 1,328 1,357 1,361 1,402 1,410 Minority interest..................... 31 28 24 24 23 Shareholders' equity.................. 400 226 137 170 81 STATEMENT OF CASH FLOWS DATA: Net cash provided by operating activities......................... $ 165 $ 203 $ 123 $ 218 $ 290 Net cash used by investing activities......................... (202) (172) (164) (131) (134) Net cash provided (used) by financing activities......................... (17) 12 (28) (15) (51) Cash Payments for plant, property and equipment.......................... (177) (177) (140) (132) (130) OTHER DATA: EBITDA(e)............................. $ 457 $ 380 $ 394 $ 347 $ 334 Ratio of EBITDA to interest expense... 2.79 2.79 2.96 1.95 2.29 Ratio of total debt to EBITDA......... 3.01 3.64 3.51 4.10 4.28 Ratio of earnings to fixed charges(f)......................... 1.46 1.35 1.55 0.95 1.15
- -------- NOTE: Our consolidated financial statements for the three years ended December 31, 2007, which are discussed in the following notes, are included in this Form 10-K under Item 8. (a) These amounts reflect the restatement discussed in Note 4 to the consolidated financial statements of Tenneco Inc. and Consolidated Subsidiaries included in Item 8 -- Financial Statements and Supplementary Data. For a discussion of the significant items affecting comparability of the financial information for the years ended 2007, 2006 and 2005, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." (b) Prior to the first quarter of 2005, inventories in the U.S. based operations (17 percent and 19 percent of our total consolidated inventories at December 31, 2004 and 2003, respectively) were valued using the last-in, first-out ("LIFO") method and all other inventories were valued using the first-in, first-out ("FIFO") or average cost methods at the lower of cost or market value. Effective January 1, 2005, we changed our accounting method for valuing inventory for our U.S. based operations from the LIFO method to the FIFO method. As a result, all U.S. inventories are now stated at the lower of cost, determined on a FIFO basis, or market. We elected to change to the FIFO method as we believe it is preferable for the following reasons: 1) the change will provide better matching of revenue and expenditures and 2) the change will achieve greater consistency in valuing our global inventory. Additionally, we initially adopted LIFO as it provided certain U.S. tax benefits which we no longer realize due to our U.S. net operating losses (when applied for tax purposes, tax laws require that LIFO be applied for accounting principles generally accepted in the United States of America ("GAAP") as well). As a result of the change, we also expect to realize administrative efficiencies. In accordance with GAAP, the change in inventory accounting has been applied by restating prior years' consolidated financial statements. The effect of the change on our financial position and results of operations are presented below. 34 (c) Similar correcting entries have been made to the 2003 amounts for the restatement discussed in Note 4 to the consolidated financial statements of Tenneco Inc. and Consolidated Subsidiaries included in Item 8 -- Financial Statements and Supplementary Data.
AS OF DECEMBER 31, ------------------- 2004 2003 ----- ------ (MILLIONS EXCEPT PER SHARE AMOUNTS) Inventories................................................ $ 14 $ 11 Deferred income tax assets (noncurrent).................... $ (5) $ (4) Shareholders' equity....................................... $ 9 $ 7 Income (loss) before interest expense, income taxes and minority interest........................................ $ 3 $ (2) Income tax expense (benefit)............................... 1 (1) ----- ------ Income (loss) before cumulative effect of change in accounting principle and net income (loss)............... $ 2 $ (1) ===== ====== Basic earnings (loss) per share of common stock............ $0.04 $(0.03) ===== ====== Diluted earnings (loss) per share of common stock.......... $0.04 $(0.03) ===== ======
(d) In October 2004 and July 2005, we announced a change in the structure of our organization which changed the components of our reportable segments. The European segment now includes our South American and Indian operations. While this has no impact on our consolidated results, it changes our segment results. (e) EBITDA represents income before extraordinary item, cumulative effect of change in accounting principle, 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 our operating performance, or as an alternative to operating cash flows as a measure of liquidity. We have reported EBITDA because we regularly review EBITDA as a measure of our company's performance. In addition, we believe our debt holders utilize and analyze our EBITDA for similar purposes. We also believe 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 many 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. EBITDA is derived from the statements of income (loss) as follows:
YEAR ENDED DECEMBER 31, -------------------------------------------------- 2007 2006(A) 2005(A) 2004(A)(B) 2003(B)(C) ---- ------- ------- ---------- ---------- (MILLIONS) Net income (loss)........................ $ (5) $ 49 $ 56 $ 9 $ 25 Minority interest........................ 10 6 2 4 6 Income tax expense (benefit)............. 83 5 26 (21) (6) Interest expense, net of interest capitalized............................ 164 136 133 178 146 Depreciation and amortization of other intangibles............................ 205 184 177 177 163 ---- ---- ---- ---- ---- Total EBITDA............................. $457 $380 $394 $347 $334 ==== ==== ==== ==== ====
(f) For purposes of computing this ratio, earnings generally consist of income 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 the year ended December 31, 2004, earnings were insufficient by $9 million to cover fixed charges. See Exhibit 12 to this Form 10-K for the calculation of this ratio. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. As you read the following review of our financial condition and results of operations, you should also read our consolidated financial statements and related notes beginning on page 66. As discussed in Note 4 to the consolidated financial statements of Tenneco Inc. and Consolidated Subsidiaries included in Item 8, we 35 restated our financial statements as of December 31, 2006 and 2005 and for the three year period ended December 31, 2006. This management's discussion and analysis reflects that restatement. EXECUTIVE SUMMARY We are one of the world's leading manufacturers of automotive emission control and ride control products and systems. We serve both original equipment (OE) vehicle designers and manufacturers and the repair and replacement markets, or aftermarket, globally through leading brands, including Monroe(R), Rancho(R), Clevite(R) Elastomers and Fric Rot(TM) ride control products and Walker(R), Fonos(TM), and Gillet(TM) emission control products. Worldwide we serve more than 39 different original equipment manufacturers, and our products or systems are included on eight of the top 10 passenger car models produced for sale in Europe and nine of the top 10 light truck and SUV models produced for sale in North America for 2007. Our aftermarket customers are comprised of full-line and specialty warehouse distributors, retailers, jobbers, installer chains and car dealers. We operate 80 manufacturing facilities worldwide and employ approximately 21,000 people to service our customers' demands. Factors that are critical to our success include winning new business awards, managing our overall global manufacturing footprint to ensure proper placement and workforce levels in line with business needs, maintaining competitive wages and benefits, maximizing efficiencies in manufacturing processes, fixing or eliminating unprofitable businesses and reducing overall costs. In addition, our ability to adapt to key industry trends, such as a shift in consumer preferences to other vehicles in response to higher fuel costs and other economic and social factors, increasing technologically sophisticated content, changing aftermarket distribution channels, increasing environmental standards and extended product life of automotive parts, also play a critical role in our success. Other factors that are critical to our success include adjusting to industry and economic challenges such as increases in the cost of raw materials and our ability to successfully reduce the impact of any such cost increases through material substitutions, cost reduction initiatives and other methods. We have a substantial amount of indebtedness. As such, our ability to generate cash -- both to fund operations and service our debt -- is also a significant area of focus for our company. See "Liquidity and Capital Resources" below for further discussion of cash flows. Total revenues for 2007 were $6.2 billion, a 32 percent increase compared to 2006. Excluding the impact of currency and substrate sales, revenue was up $552 million, or 15 percent, driven primarily by volume ramp-ups on platform launches in North America, and higher OE revenues in Europe and Asia, more than offsetting lower aftermarket sales. In addition to the benefit of the new launches, our geographic balance and diverse customer base helped offset the overall North American industry production decline. Gross margin for 2007 was 15.8 percent, down 2.3 percentage points from 18.1 percent in 2006. Higher substrate sales, which typically carry lower margins, driven by significant diesel platforms in North America and Europe, and a shift toward a lower percentage of revenue generated by higher margin aftermarket business negatively impacted overall gross margin. Also impacting gross margin were increased steel and other material costs, and reduced North American production volumes, all of which more than offset savings and improved efficiencies from Lean manufacturing, Six Sigma programs, cost recoveries and other cost reduction initiatives. We reported selling, general, administrative and engineering expenses for 2007 of 8.3 percent of revenues, as compared to 9.8 percent of revenues for 2006. The improvement in this ratio was due to leveraging our higher revenues by tightly controlling selling, general and administrative spending while still making investments in engineering for next generation ride and emission control technologies. Earnings before interest expense, taxes and minority interest ("EBIT") was $252 million for 2007, up $56 million from the $196 million reported in 2006. Global sales growth on OE platforms, benefits from the company's ongoing manufacturing efficiency programs, favorable currency and lower restructuring and aftermarket customer changeover costs more than offset higher material costs, reduced North American industry production volumes and softer global aftermarket conditions. 36 RESULTS FROM OPERATIONS NET SALES AND OPERATING REVENUES FOR YEARS 2007 AND 2006 The following tables reflect our revenues for the years of 2007 and 2006. We present these reconciliations of revenues in order to reflect the trend in our sales in various product lines and geographic regions separately from the effects of doing business in currencies other than the U.S. dollar. We have not reflected any currency impact in the 2006 table since this is the base period for measuring the effects of currency during 2007 on our operations. We believe investors find this information useful in understanding period-to-period comparisons in our revenues. Additionally, we show the component of our revenue represented by substrate sales in the following table. While we generally have primary design, engineering and manufacturing responsibility for OE emission control systems, we do not manufacture substrates. Substrates are porous ceramic filters coated with a catalyst -- precious metals such as platinum, palladium and rhodium. These are supplied to us by Tier 2 suppliers and directed by our OE customers. We generally earn a small margin on these components of the system. As the need for more sophisticated emission control solutions increases to meet more stringent environmental regulations, and as we capture more diesel aftertreatment business, these substrate components have been increasing as a percentage of our revenue. While these substrates dilute our gross margin percentage, they are a necessary component of an emission control system. We view the growth of substrates as a key indicator that our value-add content in an emission control system is moving toward the higher technology hot-end gas and diesel business. Our value-add content in an emission control system includes designing the system to meet environmental regulations through integration of the substrates into the system, maximizing use of thermal energy to heat up the catalyst quickly, efficiently managing airflow to reduce back pressure as the exhaust stream moves past the catalyst, managing the expansion and contraction of the emission control system components due to temperature extremes experienced by an emission control system, using advanced acoustic engineering tools to design the desired exhaust sound, minimizing the opportunity for the fragile components of the substrate to be damaged when we integrate it into the emission control system and reducing unwanted noise, vibration and harshness transmitted through the emission control system. 37 We present these substrate sales separately in the following table because we believe investors utilize this information to understand the impact of this portion of our revenues on our overall business and because it removes the impact of potentially volatile precious metals pricing from our revenues. While our original equipment customers generally assume the risk of precious metals pricing volatility, it impacts our reported revenues. Excluding "substrate" catalytic converter and diesel particulate filter sales removes this impact.
YEAR ENDED DECEMBER 31, 2007 ---------------------------------------------------------- REVENUES SUBSTRATE EXCLUDING REVENUES SALES CURRENCY AND CURRENCY EXCLUDING EXCLUDING SUBSTRATE REVENUES IMPACT CURRENCY CURRENCY SALES -------- -------- --------- --------- ------------ (MILLIONS) North America Original Equipment Ride Control........................ $ 514 $ -- $ 514 $ -- $ 514 Emission Control.................... 1,850 5 1,845 924 921 ------ ---- ------ ------ ------ Total North America Original Equipment...................... 2,364 5 2,359 924 1,435 North America Aftermarket Ride Control........................ 385 -- 385 -- 385 Emission Control.................... 152 -- 152 -- 152 ------ ---- ------ ------ ------ Total North America Aftermarket.. 537 -- 537 -- 537 Total North America............ 2,901 5 2,896 924 1,972 Europe Original Equipment Ride Control........................ 427 37 390 -- 390 Emission Control.................... 1,569 120 1,449 511 938 ------ ---- ------ ------ ------ Total Europe Original Equipment.. 1,996 157 1,839 511 1,328 Europe Aftermarket Ride Control........................ 201 15 186 -- 186 Emission Control.................... 207 16 191 -- 191 ------ ---- ------ ------ ------ Total Europe Aftermarket......... 408 31 377 -- 377 South America & India................. 333 24 309 39 270 Total Europe, South America & India....................... 2,737 212 2,525 550 1,975 Asia.................................. 352 15 337 123 214 Australia............................. 194 23 171 25 146 ------ ---- ------ ------ ------ Total Asia Pacific............. 546 38 508 148 360 ------ ---- ------ ------ ------ Total Tenneco......................... $6,184 $255 $5,929 $1,622 $4,307 ====== ==== ====== ====== ======
38
YEAR ENDED DECEMBER 31, 2006 ---------------------------------------------------------- REVENUES SUBSTRATE EXCLUDING REVENUES SALES CURRENCY AND CURRENCY EXCLUDING EXCLUDING SUBSTRATE REVENUES IMPACT CURRENCY CURRENCY SALES -------- -------- --------- --------- ------------ (MILLIONS) North America Original Equipment Ride Control........................ $ 483 $-- $ 483 $ -- $ 483 Emission Control.................... 928 -- 928 272 656 ------ --- ------ ---- ------ Total North America Original Equipment...................... 1,411 -- 1,411 272 1,139 North America Aftermarket Ride Control........................ 383 -- 383 -- 383 Emission Control.................... 162 -- 162 -- 162 ------ --- ------ ---- ------ Total North America Aftermarket.. 545 -- 545 -- 545 Total North America............ 1,956 -- 1,956 272 1,684 Europe Original Equipment Ride Control........................ 380 -- 380 -- 380 Emission Control.................... 1,264 -- 1,264 519 745 ------ --- ------ ---- ------ Total Europe Original Equipment.. 1,644 -- 1,644 519 1,125 Europe Aftermarket Ride Control........................ 178 -- 178 -- 178 Emission Control.................... 211 -- 211 -- 211 ------ --- ------ ---- ------ Total Europe Aftermarket......... 389 -- 389 -- 389 South America & India................. 272 -- 272 32 240 Total Europe, South America and India....................... 2,305 -- 2,305 551 1,754 Asia.................................. 246 -- 246 85 161 Australia............................. 175 -- 175 19 156 ------ --- ------ ---- ------ Total Asia Pacific............. 421 -- 421 104 317 ------ --- ------ ---- ------ Total Tenneco......................... $4,682 $-- $4,682 $927 $3,755 ====== === ====== ==== ======
Revenues from our North American operations increased $945 million in 2007 compared to the same period last year. Higher sales from new North American OE platform launches more than offset lower aftermarket revenues. Total North American OE revenues increased 68 percent to $2,364 million in 2007 from $1,411 million in 2006. North American OE emission control revenues were up 99 percent to $1,850 million, from $928 million in the prior year. Substrate emission control sales excluding currency increased 239 percent to $924 million, from $272 million in 2006. Excluding substrate sales and currency impact, OE emission control sales increased 41 percent from the prior year. This increase was primarily due to significant new OE platform launches which included GM's Lambda crossover, the Ford Super Duty gas and diesel pick-up trucks, GM's light duty pick-up trucks and vans with Duramax diesel engines, Toyota's Tundra gasoline pick-up truck, the International Truck and Engine medium duty diesel platform, GM's three-quarter ton gasoline powered pick-up trucks, and the Dodge Ram three- quarter ton diesel pick-up truck. North American OE ride control revenues for 2007 increased seven percent from the prior year. Expanded ride-control content on the GMT900 platform, the launch of the GMT360 platform, and strong sales of Chrysler's Jeep Wrangler, and Ford Ranger and Superduty, was partially offset by lower ride-control commercial vehicle sales. Total North American light vehicle production fell by two percent with a seven percent production decrease in passenger cars being partially offset by a three percent increase in light truck and SUV production. Aftermarket revenues for North America were $537 million in 2007, representing a decrease of $8 million compared to 2006. Volume decreases on our continuing business were partially offset by new customer wins and price increases to recover 39 steel costs. Aftermarket ride control revenues were $385 million in 2007, an increase of $2 million from the prior year. Aftermarket emission control revenues were $152 million in 2007, down $10 million from the prior year. Our European, South American and Indian segment's revenues increased $432 million or 19 percent in 2007 compared to last year. Total Europe OE revenues were $1,996 million, up 21 percent from last year. Excluding favorable currency and substrate sales, total European OE revenue was up 18 percent while total light vehicle production for Europe was up six percent. Europe OE emission control revenues increased 24 percent to $1,569 million from $1,264 million in the prior year. Excluding the impact of $120 million of favorable currency and $511 million in substrate sales, OE emission control revenues increased 26 percent from 2006 due to a growing position on the hot-end of exhaust platforms, new launches and higher OE volumes on the BMW 1 and 3-Series, Daimler's Sprinter, C-Class, and Smart, Volvo's V50 and V70, PSA's Picasso and Ford's Mondeo. Europe OE ride control revenues increased by $47 million in 2007, up 12 percent from $380 million a year ago. Excluding currency, revenues increased by three percent in 2007 due to improved volumes on the Ford Focus, Ford Galaxy and Mondeo with electronic shocks, Dacia Logan, VW Transporter, Mazda 2, and Mercedes C-Class with electronic shocks, partially offset with lower volumes on the Audi A4 and a shift in some production for the Audi A6 to our Chinese operations. European aftermarket sales were $408 million in 2007 compared to $389 million last year. Excluding $31 million of favorable currency, European aftermarket revenues declined three percent in 2007 compared to last year. Ride control aftermarket revenues, excluding the impact of currency, were up five percent from the prior year, reflecting strong volumes and improved pricing. Emission control aftermarket revenues were down nine percent, excluding $16 million in currency benefit, due to lower volumes which more than offset improved pricing. South American and Indian revenues were $333 million in 2007, compared to $272 million in the prior year. Stronger OE and aftermarket sales and currency appreciation drove this increase. Revenues from our Asia Pacific segment, which includes Asia and Australia, increased $125 million to $546 million in 2007, as compared to $421 million in the prior year. Excluding the impact of substrate sales and currency, Asian revenues increased $53 million in 2007 compared to last year driven by higher OE sales in China due to new launches and higher emission control volumes on existing platforms. In Australia, industry OE production declines negatively impacted revenues. Excluding substrate sales and favorable currency of $23 million, Australian revenue was down $10 million due to lower volumes. 40 NET SALES AND OPERATING REVENUES FOR YEARS 2006 AND 2005 The following tables reflect our revenues for the years of 2006 and 2005. See "Net Sales and Operating Revenues for Years 2007 and 2006" for a description of why we present these reconciliations of revenue.
YEAR ENDED DECEMBER 31, 2006 ---------------------------------------------------------- REVENUES SUBSTRATE EXCLUDING REVENUES SALES CURRENCY AND CURRENCY EXCLUDING EXCLUDING SUBSTRATE REVENUES IMPACT CURRENCY CURRENCY SALES -------- -------- --------- --------- ------------ (MILLIONS) North America Original Equipment Ride Control........................ $ 483 $-- $ 483 $ -- $ 483 Emission Control.................... 928 6 922 272 650 ------ --- ------ ---- ------ Total North America Original Equipment...................... 1,411 6 1,405 272 1,133 North America Aftermarket Ride Control........................ 383 -- 383 -- 383 Emission Control.................... 162 -- 162 -- 162 ------ --- ------ ---- ------ Total North America Aftermarket.. 545 -- 545 -- 545 Total North America............ 1,956 6 1,950 272 1,678 Europe Original Equipment Ride Control........................ 380 10 370 -- 370 Emission Control.................... 1,264 34 1,230 504 726 ------ --- ------ ---- ------ Total Europe Original Equipment.. 1,644 44 1,600 504 1,096 Europe Aftermarket Ride Control........................ 178 3 175 -- 175 Emission Control.................... 211 5 206 -- 206 ------ --- ------ ---- ------ Total Europe Aftermarket......... 389 8 381 -- 381 South America & India................. 272 14 258 32 226 Total Europe, South America & India....................... 2,305 66 2,239 536 1,703 Asia.................................. 246 -- 246 85 161 Australia............................. 175 (1) 176 19 157 ------ --- ------ ---- ------ Total Asia Pacific............. 421 (1) 422 104 318 ------ --- ------ ---- ------ Total Tenneco......................... $4,682 $71 $4,611 $912 $3,699 ====== === ====== ==== ======
41
YEAR ENDED DECEMBER 31, 2005 ---------------------------------------------------------- REVENUES SUBSTRATE EXCLUDING REVENUES SALES CURRENCY AND CURRENCY EXCLUDING EXCLUDING SUBSTRATE REVENUES IMPACT CURRENCY CURRENCY SALES -------- -------- --------- --------- ------------ (MILLIONS) North America Original Equipment Ride Control........................ $ 495 $-- $ 495 $ -- $ 495 Emission Control.................... 1,011 -- 1,011 272 739 ------ --- ------ ---- ------ Total North America Original Equipment...................... 1,506 -- 1,506 272 1,234 North America Aftermarket Ride Control........................ 361 -- 361 -- 361 Emission Control.................... 160 -- 160 -- 160 ------ --- ------ ---- ------ Total North America Aftermarket.. 521 -- 521 -- 521 Total North America............ 2,027 -- 2,027 272 1,755 Europe Original Equipment Ride Control........................ 378 -- 378 -- 378 Emission Control.................... 1,078 -- 1,078 327 751 ------ --- ------ ---- ------ Total Europe Original Equipment.. 1,456 -- 1,456 327 1,129 Europe Aftermarket Ride Control........................ 169 -- 169 -- 169 Emission Control.................... 195 -- 195 -- 195 ------ --- ------ ---- ------ Total Europe Aftermarket......... 364 -- 364 -- 364 South America & India................. 233 -- 233 20 213 Total Europe, South America and India....................... 2,053 -- 2,053 347 1,706 Asia.................................. 149 -- 149 43 106 Australia............................. 211 -- 211 19 192 ------ --- ------ ---- ------ Total Asia Pacific............. 360 -- 360 62 298 ------ --- ------ ---- ------ Total Tenneco......................... $4,440 $-- $4,440 $681 $3,759 ====== === ====== ==== ======
Revenues from our North American operations decreased $71 million in 2006 compared to the same period in 2005 reflecting lower sales in OE partially offset by increased aftermarket sales. Total North American OE revenues decreased six percent to $1,411 million in 2006. North American industry production of SUVs and light trucks was down year-over-year which had a significant impact on OE volumes, particularly on key exhaust platforms. OE emission control revenues were down eight percent to $928 million from $1,011 million in 2005. Substrate emission control sales remained the same as 2005 at $272 million. Adjusted for substrate sales and currency, OE emission control sales were down 12 percent from 2005. This decline was primarily driven by the impact from lower OE production of light trucks and SUVs on key exhaust platforms. In addition, the timing on the transition of one of GM's largest light truck platforms negatively impacted revenue. OE ride control revenues for 2006 decreased two percent from 2005. Increased heavy duty and commercial volumes were more than offset by lower OE production of light trucks and SUVs. Total OE revenues, excluding substrate sales and currency, decreased eight percent in 2006. Total North American light vehicle production fell by three percent with a nine percent decline in light truck and SUV production being partially offset by a five percent production increase in passenger cars. Aftermarket revenues for North America were $545 million in 2006, representing an increase of five percent compared to 2005. Aftermarket ride control revenues increased $22 million or six percent in 2006, primarily due to increased sales to new and existing customers and price increases to help offset higher material costs. Aftermarket emission control 42 revenues were $162 million in 2006, up $2 million from 2005. Price increases driven by higher steel costs more than offset lower volumes. Our European, South American and Indian segment's revenues increased $252 million or 12 percent in 2006 compared to 2005. Total Europe OE revenues were $1,644 million, up 13 percent from 2005. Excluding favorable currency and increased substrate sales, total European OE revenue was down three percent while total light vehicle production for Europe was up three percent. OE emission control revenues increased 17 percent to $1,264 million from $1,078 million in 2005. Excluding the impact of $34 million of favorable currency and $177 million in higher substrate sales, OE emission control revenues decreased three percent from 2005 primarily driven by OE price concessions. OE ride control revenues increased by $2 million in 2006, up one percent from $378 million in 2005. We changed our reporting in the second quarter of 2005 for an "assembly-only" contract with a European OE ride control customer and began accounting for those revenues as net of the related cost of sales. If we had reported our 2005 revenues in the same manner, they would have been lower by $15 million. Excluding a $10 million benefit from currency appreciation, OE ride control revenues decreased two percent. European aftermarket sales were $389 million in 2006 compared to $364 million in 2005. Excluding $8 million of favorable currency, European aftermarket revenues increased five percent in 2006 compared to 2005. Ride control aftermarket revenues, excluding the impact of currency, were up four percent from 2005, reflecting increased volumes. Aftermarket emission control revenues were up six percent from 2005 excluding the benefits of currency. Improved pricing, market share gains, and the introduction of new diesel particulate filter business drove the increase. South American and Indian revenues, excluding the benefits of currency appreciation and substrate sales, were up six percent compared to 2005. Higher volumes and improved pricing drove this increase. Revenues from our Asia Pacific segment, which includes Australia and Asia, increased $61 million to $421 million in 2006, as compared to $360 million in 2005. Excluding substrate sales, revenues increased $55 million at our Asian operations in 2006 compared to 2005 driven by higher OE volumes in China. In Australia, industry OE production declines and unfavorable currency negatively impacted revenues. Australian revenues were down 17 percent compared to 2005, or 18 percent when the impact of currency and substrate sales were excluded. EARNINGS BEFORE INTEREST EXPENSE, INCOME TAXES AND MINORITY INTEREST ("EBIT") FOR YEARS 2007 AND 2006
YEAR ENDED DECEMBER 31, ----------- 2007 2006 CHANGE ---- ---- ------ (MILLIONS) North America......................................... $120 $103 $17 Europe, South America and India....................... 99 81 18 Asia Pacific.......................................... 33 12 21 ---- ---- --- $252 $196 $56 ==== ==== ===
43 The EBIT results shown in the preceding table include the following items, discussed below under "Restructuring and Other Charges" and "Liquidity and Capital Resources -- Capitalization", which have an effect on the comparability of EBIT results between periods:
YEAR ENDED DECEMBER 31, ----------- 2007 2006 ---- ---- (MILLIONS) North America Restructuring and restructuring-related expenses........... $ 3 $13 New aftermarket customer changeover costs(1)............... 5 6 Pension replacement(2)..................................... -- (7) Reserve for receivable from former affiliate............... -- 3 Europe, South America and India Restructuring and restructuring-related expenses........... 22 8 Asia Pacific Restructuring and restructuring-related expenses........... -- 6
- -------- (1) Represents costs associated with changing new aftermarket customers from their prior suppliers to an inventory of our products. Although our aftermarket business regularly incurs changeover costs, we specifically identify in the table above those changeover costs that, based on the size or number of customers involved, we believe are of an unusual nature for the quarter in which they were incurred. (2) In August 2006, we announced that we were freezing future accruals under our U.S. defined benefit pension plans for substantially all our U.S. salaried and non-union hourly employees effective December 31, 2006. In lieu of those benefits, we are offering additional benefits under our defined contribution plan. EBIT for North American operations increased to $120 million from $103 million in the prior year. The improvement was primarily driven by the $22 million impact of higher OE volumes due to new platform launches, lower selling, general and administrative expenses, manufacturing efficiencies of $25 million driven by Lean and Six Sigma, lower changeover cost and lower restructuring costs of $10 million. These increases were partially offset by higher steel costs of $38 million, incremental launch costs of $2 million, increased spending on engineering and a softer aftermarket. Included in North America's 2007 EBIT is $3 million in restructuring and restructuring-related expenses and $5 million in customer changeover costs. Included in North America's 2006 EBIT were $13 million in restructuring and restructuring-related expenses, $6 million in customer changeover costs, $3 million of expense in connection with booking a reserve for a receivable from a former affiliate and a $7 million dollar benefit due to changes to our U.S. retirement plans for salaried and non-union hourly employees described above. Currency had a $1 million favorable impact on North American EBIT for 2007. Our European, South American and Indian segment's EBIT was $99 million for 2007, up $18 million from $81 million in 2006. Higher OE volumes on existing business and new platform launches had a combined $28 million impact, favorable currency of $10 million, manufacturing efficiencies of $43 million gained through Lean manufacturing and Six Sigma programs drove the improvement. These increases were partially offset by material cost increases which included $26 million of higher steel costs, higher SG&A of $8 million, net alloy surcharge of $10 million and increased spending on engineering of $5 million. Restructuring and restructuring-related expenses of $22 million were included in EBIT of 2007 compared to $8 million in 2006. EBIT for our Asia Pacific segment, which includes Asia and Australia, increased $21 million to $33 million in 2007 compared to $12 million in the prior year. Increased volume had an impact of $10 million driven primarily by OE production and new launches in China, reduced restructuring charges of $6 million and favorable currency of $4 million was partially offset by $5 million of increased steel costs and reduced light vehicle production in Australia. Included in Asia Pacific's 2006 EBIT were $6 million in restructuring and restructuring-related expenses. 44 Currency had a $15 million favorable impact on overall company EBIT for 2007, as compared to the prior year. EBIT FOR YEARS 2006 AND 2005
YEARS ENDED DECEMBER 31, ----------- 2006 2005 CHANGE ---- ---- ------ (MILLIONS) North America......................................... $103 $148 $(45) Europe, South America and India....................... 81 53 28 Asia Pacific.......................................... 12 16 (4) ---- ---- ---- $196 $217 $(21) ==== ==== ====
The EBIT results shown in the preceding table include the following items, discussed below under "Restructuring and Other Charges" and "Liquidity and Capital Resources -- Capitalization", which have an effect on the comparability of EBIT results between periods:
YEAR ENDED DECEMBER 31, ----------- 2006 2005 ---- ---- (MILLIONS) North America Restructuring and restructuring-related expenses........... $13 $ 4 New aftermarket customer changeover costs(1)............... 6 10 Pension replacement(2)..................................... (7) -- Stock-based compensation accounting change(3).............. 1 -- Reserve for receivable from former affiliate............... 3 -- Europe, South America and India Restructuring and restructuring-related expenses........... 8 8 Asia Pacific Restructuring and restructuring-related expenses........... 6 --
- -------- (1) Represents costs associated with changing new aftermarket customers from their prior suppliers to an inventory of our products. Although our aftermarket business regularly incurs changeover costs, we specifically identify in the table above those changeover costs that, based on the size or number of customers involved, we believe are of an unusual nature for the quarter in which they were incurred. (2) In August 2006, we announced that we were freezing future accruals under our U.S. defined benefit pension plans for substantially all our U.S. salaried and non-union hourly employees effective December 31, 2006. In lieu of those benefits, we are offering additional benefits under defined contribution plans. (3) Represents the expense associated with the change to the new stock-based accounting standard, Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment." EBIT for North American operations decreased to $103 million from $148 million in 2005. The decline was primarily driven by lower OE volumes of $27 million, OE price concessions of $17 million and higher material and restructuring costs. Partially offsetting these negative items were higher aftermarket sales, OE manufacturing efficiencies and lower selling, general and administrative costs of $16 million. Included in North America's 2006 EBIT were $13 million in restructuring and restructuring-related expenses, $6 million in customer changeover costs, $1 million of stock-based compensation expense due to an accounting change, $3 million of expense in connection with booking a reserve for a receivable from a former affiliate and a $7 million dollar benefit due to changes to our U.S. retirement plans for salaried and non-union hourly employees described above. Included in North America's 2005 EBIT were $4 million in restructuring and restructuring-related expenses and $10 million in customer changeover costs. 45 Our European, South American and Indian segment's EBIT was $81 million for 2006, up $28 million from $53 million in 2005. Increased European aftermarket sales benefited EBIT by $5 million. Higher European OE volumes from both emission and ride control product lines, improved European OE manufacturing efficiencies of $34 million, particularly in our exhaust operations, and favorable currency all contributed to the EBIT improvement. These improvements were partially offset by higher steel costs and price concessions of $11 million. South America and India EBIT benefited from higher revenues. Included in Europe, South America and India's EBIT were $8 million in restructuring and restructuring-related expenses in both 2006 and 2005. EBIT for our Asia Pacific segment, which includes Asia and Australia, decreased $4 million to $12 million in 2006 compared to $16 million in 2005. Lower Australian production volumes of $4 million and higher material and restructuring costs more than offset stronger volumes of $5 million in Asia. Included in Asia Pacific's 2006 EBIT were $6 million in restructuring and restructuring-related expenses. EBIT AS A PERCENTAGE OF REVENUE FOR YEARS 2007, 2006 AND 2005
YEAR ENDED DECEMBER 31, ------------------ 2007 2006 2005 ---- ---- ---- North America............................................ 4% 5% 7% Europe, South America and India.......................... 4% 4% 3% Asia Pacific............................................. 6% 3% 4% Total Tenneco.......................................... 4% 4% 5%
In North America, EBIT as a percentage of revenue for 2007 was down one percentage point from prior year levels. The benefits from our new platform launches, lower selling, general and administrative expenses and manufacturing efficiencies were more than offset by the margin impact from an increase in lower margin substrate sales, lower North American light vehicle production volumes, higher material costs, incremental launch costs, increased investments in engineering and soft aftermarket conditions. During 2007, North American results included lower restructuring and restructuring-related charges and lower aftermarket changeover costs. In Europe, South America and India, EBIT margin for 2007 was flat with prior year. Higher European OE volumes on existing business, new platform launches, favorable currency and manufacturing efficiencies were offset by higher material costs and restructuring charges. Restructuring and restructuring-related expenses were higher than prior year. EBIT as a percentage of revenue for our Asia Pacific segment increased three percentage points in 2007 versus the prior year. OE production increases in China, favorable currency and benefits from last year's restructuring activities drove the improvement. Lower restructuring and restructuring-related expenses also benefited EBIT margin. In North America, EBIT as a percentage of revenue for 2006 was down two percentage points from 2005 levels. Lower OE volumes, OE price concessions and higher material and restructuring costs, were partially offset by higher aftermarket sales, OE manufacturing efficiencies and lower selling, general and administrative costs. Our Europe, South America and India EBIT margin for 2006 increased one percentage point over 2005. Increased European aftermarket sales, as well as increased sales in South America and India, along with higher European OE volumes, improved European OE manufacturing efficiencies, particularly in our exhaust operations, and favorable currency drove the improvement to EBIT margin. These improvements were partially offset by higher steel costs, price concessions and a margin shift due to higher substrate sales. EBIT as a percentage of revenue for our Asia Pacific operations decreased one percentage point in 2006 compared to 2005. Higher revenues in Asia were more than offset by lower Australian production volumes and higher material and restructuring costs. INTEREST EXPENSE, NET OF INTEREST CAPITALIZED We reported interest expense of $164 million in 2007 compared to $136 million in 2006, net of interest capitalized of $6 million in each year. Of the increase, $5 million related to a charge to expense the unamortized portion of debt issuance costs related to our 2003 amended and restated senior credit facility in 46 connection with our debt refinancing in the first quarter of 2007 and $21 million related to a net charge to expense the costs associated with the tender premium and fees, the write-off of deferred debt issuance costs and the write- off of previously recognized debt issuance premium in connection with our November 2007 refinancing transaction. The requirement to mark the fixed-to- floating interest rate swaps to market reduced interest expense by $6 million in 2007 and increased expense by $1 million in 2006. The remainder of the change was due to higher borrowing during the year to fund growth. We reported interest expense of $136 million in 2006 compared to $133 million in 2005, net of interest capitalized of $6 million in 2006 and $3 million in 2005. The increase in expense was due to higher LIBOR rates on the variable portion of our debt and higher average borrowings, offset by lower expense associated with our swaps. See more detailed explanations on our debt structure, prepayments and the amendment and restatement of our senior credit facility in March 2007 and our November 2007 refinancing transaction, and their impact on our interest expense, in "Liquidity and Capital Resources -- Capitalization" later in this Management's Discussion and Analysis. We have three fixed-to-floating interest rate swaps that effectively convert $150 million of our 10.25 percent fixed interest rate senior secured notes into floating interest rate debt at an annual rate of LIBOR plus 5.68 percent. Based upon the current LIBOR rate of 4.08 percent (which is in effect until July 15, 2008) these swaps are expected to reduce our interest expense by $1 million in 2008 excluding any impact from marking the swaps to market. Since entering into these swaps, we have realized a net cumulative benefit of $2 million through December 31, 2007, in reduced cash interest payments. On December 31, 2007, we had $1,010 million in long-term debt obligations that have fixed interest rates. Of that amount, $245 million is fixed through July 2013, $500 million is fixed through November 2014, $250 million is fixed through November 2015 while the remaining $15 million is fixed over the 2008 through 2025 timeframe. Of the $245 million, $150 million has been swapped to floating rate debt and we also have $169 million in long-term debt obligations outstanding under our senior secured credit facility that are subject to variable interest rates. See Note 6 to the consolidated financial statements of Tenneco Inc. and Consolidated Subsidiaries included in Item 8. INCOME TAXES Income tax expense was $83 million in 2007, $5 million in 2006 and $26 million in 2005. The effective tax rate for 2007 was 94 percent as compared to 8 percent for 2006. The rate for 2007 included net tax expense of $56 million, including $66 million in non-cash tax expenses to realign the company's European ownership structure and net tax benefits of $10 million related to a reduction in foreign income tax rates and adjustments for prior year income tax returns. Included in 2006 were tax benefits of $15 million comprised of a FAS 109 adjustment, adjustments for prior year income tax returns, Czech Investment Credit and resolution of tax issues with former affiliates. Included in 2005 were benefits of $5 million, including settlements of prior year tax issues, prior year true-ups and resolution of some tax contingencies with our foreign operations. RESTRUCTURING AND OTHER CHARGES Over the past several years we have adopted plans to restructure portions of our operations. These plans were approved by Board of Directors and were designed to reduce operational and administrative overhead costs throughout the business. Prior to the change in accounting required for exit or disposal activities, we recorded charges to income related to these plans for costs that did not benefit future activities in the period in which the plans were finalized and approved, while actions necessary to affect these restructuring plans occurred over future periods in accordance with established plans. Our recent restructuring activities began in the fourth quarter of 2001, when our Board of Directors approved a restructuring plan, a project known as Project Genesis, which was designed to lower our fixed costs, relocate capacity, reduce our work force, improve efficiency and utilization, and better optimize our global footprint. We have subsequently engaged in various other restructuring projects related to Project Genesis. We incurred $27 million in restructuring and restructuring-related costs during 2006, of which $23 million was recorded in cost of sales and $4 million was recorded in selling, general and administrative expense. In 2007, we incurred $25 million in restructuring and restructuring-related costs of which $22 million 47 was recorded in cost of sales, $2 million of which related to a charge for asset impairments for the plant closure in France, and $3 million was recorded in selling, general and administrative expense. The majority of the 2007 charges were related to the planned closing of our emission control plant in Wissenbourg, France. Since Project Genesis was initiated, we have incurred costs of $155 million through December 31, 2007. We estimate that our current annual savings rate for completed projects is approximately $102 million. When all actions are complete, we expect an additional $6 million of annual savings. Under the terms of our amended and restated senior credit agreement that took effect on March 16, 2007, we are allowed to exclude $80 million of cash charges and expenses, before taxes, related to cost reduction initiatives excluding any charge for asset impairments incurred after March 16, 2007 from the calculation of the financial covenant ratios required under our senior credit facility. As of December 31, 2007, we have excluded $23 million in allowable charges relating to restructuring initiatives against the $80 million available under the terms of the March 2007 amendment and restatement of the senior credit facility. In addition to the announced actions, we will continue to evaluate additional opportunities and expect that we will initiate actions that will reduce our costs through implementing the most appropriate and efficient logistics, distribution and manufacturing footprint for the future. We expect to continue to undertake additional restructuring actions as deemed necessary, however, there can be no assurances we will undertake such actions. Actions that we take, if any, will require the approval of our Board of Directors, or its authorized committee. We plan to conduct any workforce reductions that result in compliance with all legal and contractual requirements including obligations to consult with workers' councils, union representatives and others. EARNINGS PER SHARE We reported a net loss of $5 million or $0.11 per diluted common share for 2007, as compared to net income of $49 million or $1.05 per diluted common share for 2006. Included in the results for 2007 were negative impacts from expenses related to our restructuring activities, new aftermarket customer changeover costs, charges relating to refinancing activities and tax adjustments. The net impact of these items decreased earnings per diluted share by $1.93. Included in the results for 2006 were negative impacts from expenses related to our restructuring activities, new aftermarket customer changeover costs and expense in connection with booking a reserve for a receivable from a former affiliate, partially offset by a positive impact from tax adjustments and a benefit from replacing the defined benefit pension plans in the U.S. The net impact of these items decreased earnings per diluted share by $0.10. We reported net income of $56 million or $1.24 per diluted share for 2005. Included in the results for 2005 were expenses related to our restructuring activities, customer changeover costs and favorable tax adjustments. The net impact of these items decreased earnings per diluted share by $0.23. Please read Note 8 to the consolidated financial statements of Tenneco Inc. and Consolidated Subsidiaries included in Item 8 for more detailed information on earnings per share. DIVIDENDS ON COMMON STOCK On January 10, 2001, we announced that our Board of Directors eliminated the quarterly dividend on our common stock. The Board took the action in response to industry conditions, primarily greater than anticipated production volume reductions by original equipment manufacturers and continued softness in the global light vehicle aftermarket. There are no current plans to reinstate a dividend on our common stock. OUTLOOK Total North American OE light vehicle production levels for 2007 were 15.0 million units, down two percent from 2006. Of this, production of passenger cars was down six percent while production of SUVs and light trucks was up two percent. Currently 2008 North American OE light vehicle production levels are expected to be down five percent, with passenger cars down four percent and SUVs and light trucks down six percent. We anticipate that 2008 will be another challenging year due to volatile oil prices, increasing demand for steel, and consumer caution due to recession concerns. We believe that new product launches, continued growth from existing platforms that launched in the first half of 2007, our position on top-selling platforms, 48 our position with Japanese OE customers, flexible cost structure and a strong new product and technology pipeline will help us offset pressures from North American production rates. European light vehicle production volumes were 22.1 million units during 2007 compared to 20.9 million units in 2006. Expectations for 2008 indicate production will increase three percent in Europe. North American heavy-duty truck production rates for 2007 decreased by 54 percent. North American heavy-duty production rates for 2008 are expected to increase two percent. In China, 2007 light vehicle production levels were 8.1 million units, up 22 percent from last year. Light vehicle production levels in China are anticipated to grow 15 percent in 2008. In the global aftermarket we anticipate soft market conditions. We also plan to continue our efforts to increase new and existing sales in the global aftermarket business. Tenneco estimates that its global original equipment revenues will be approximately $5.5 billion in 2008 and $6.0 billion in 2009. Adjusted for lower margin substrate sales, the company's global original equipment value-added revenues are estimated to be approximately $3.7 billion in 2008 and $4.1 billion in 2009. In addition, we project we will achieve an average compounded annual OE revenue growth rate of 11% to 13% between 2008 and 2012, primarily driven by tightening emission control regulations globally. These revenue estimates are based on original equipment manufacturers' programs that have been formally awarded to the company; programs where the company is highly confident that it will be awarded business based on informal customer indications consistent with past practices; Tenneco's status as supplier for the existing program and its relationship with the customer; and the actual original equipment revenues achieved by the company for each of the last several years compared to the amount of those revenues that the company estimated it would generate at the beginning of each year. Our revenue estimate is subject to increase or decrease due to changes in customer requirements, customer and consumer preferences, and the number of vehicles actually produced by our customers. We do not intend, however, to update the amounts shown above due to these changes. In addition, our revenue estimate is based on our anticipated pricing for each applicable program over its life. However, we are under continuing pricing pressures from our OE customers. We do not intend to update the amounts shown above for any price changes. Finally, for our foreign operations, our revenue estimate assumes a fixed foreign currency value. This value is used to translate foreign business to the US dollar. Currency in our foreign operations is subject to fluctuation based on the economic conditions in each of our foreign operations. We do not intend to update the amounts shown above due to these fluctuations. See "Cautionary Statement for Purposes of the 'Safe Harbor' Provisions of the Private Securities Litigation Reform Act of 1995" and Item 1A, "Risk Factors." We expect the pricing environment for steel will increase gross steel costs year-over-year up to $40 million in 2008, which we anticipate fully offsetting through cost reductions, manufacturing efficiencies, material substitutions, low-cost country sourcing and customer recovery. We are leveraging our position in 2008 as we prepare for our new product launches to negotiate the best possible pricing. We worked hard in 2007 and continue to work hard to address this issue by evaluating alternative materials and processes, reviewing material substitution opportunities, increasing component and assembly outsourcing to low cost countries and aggressively pursuing recovery of higher costs from our customers. In addition to these actions, we continue to pursue productivity initiatives and review opportunities to reduce costs through Six Sigma, Lean manufacturing and restructuring activities. We will continue to focus on controlling costs and leveraging global supply chain spending. CASH FLOWS FOR 2007 AND 2006
YEARS ENDED DECEMBER 31, ------------- 2007 2006 ----- ----- (MILLIONS) Cash provided (used) by: Operating activities..................................... $ 165 $ 203 Investing activities..................................... (202) (172) Financing activities..................................... (17) 12
49 Operating Activities For the year ended December 31, 2007, cash flow provided from operating activities was $165 million as compared to $203 million in the prior year. For 2007 cash used by working capital was $56 million compared to cash provided of $6 million for 2006. Receivables were a cash use of $117 million for 2007, a $93 million increase from last year. Inventory was a use of cash of $66 million compared to cash use of $57 million in the prior year. Inventory was up year over year due to the ramp-up of future platform launches. The year-over-year increase in the use of cash for both accounts receivable and inventory was primarily a result of working capital requirements for our new platform launches in North America. In addition to the higher level of receivables related to the revenue increase, we must carry higher inventory levels for these new platforms, a portion of which relates to higher value substrates sourced from South Africa. This inventory from South Africa increased our cash outflow from operating activities during 2007 by $33 million. Accounts payable provided cash of $123 million versus last year's cash inflow of $92 million. Cash interest payments of $177 million in 2007 were higher than prior year payments of $137 million as a result of higher interest rates on our variable portion of debt, increased average borrowings, and costs related to our refinancing activities of $26 million. Cash tax payments were $60 million in 2007 compared to $26 million in 2006. We made tax payments in 2007 to resolve audits related to prior years' operations and for separation from the old Tenneco packaging company. In addition, cash collected from former affiliaties in 2006 offset other cash tax payments. Negotiable Financial Instruments -- One of our European subsidiaries receives payment from one of its OE customers whereby the account receivables are satisfied through the delivery of negotiable financial instruments. These financial instruments are then sold at a discount to a European bank. The sales of these financial instruments are not included in the account receivables sold. Any of these financial instruments which were not sold as of December 31, 2007 and 2006 are classified as other current assets and are excluded from our definition of cash equivalents. We had sold approximately $15 million of these instruments at December 31, 2007 and $26 million at December 31, 2006. In certain instances several of our Chinese subsidiaries receive payment from OE customers and satisfy vendor payments through the receipt and delivery of negotiable financial instruments. Financial instruments used to satisfy vendor payables and not redeemed totaled $23 million and $12 million at December 31, 2007 and 2006, respectively, and were classified as notes payable. Financial instruments received from OE customers and not redeemed totaled $8 million and $9 million at December 31, 2007 and 2006, respectively and were classified as other current assets. One of our Chinese subsidiaries is required to maintain a cash balance at a financial institution issuing the financial instruments which are used to satisfy vendor payments. No financial instruments were outstanding at that Chinese subsidiary as of December 31, 2007. As of December 31, 2006 the required cash balance was less than $1 million and was classified as cash and cash equivalents. Investing Activities Cash used for investing activities was $202 million in 2007, $30 million greater than the same period a year ago. In 2007 we received $10 million in cash from the sale of assets. Cash payments for plant, property and equipment (PP&E) were $177 million in 2007, equal to 2006. In 2007, we spent $16 million to acquire Combustion Components Associates' ELIM-NOx(TM) technology. Cash payments for software-related intangible assets were $19 million in 2007 compared to $13 million in 2006. Financing Activities Cash flow from financing activities was a $17 million outflow in 2007 compared to an inflow of $12 million in 2006. The primary reason for the change is debt issuance costs due to our long-term debt refinancing activities in the year. 50 CASH FLOWS FOR 2006 AND 2005
YEARS ENDED DECEMBER 31, ------------- 2006 2005 ----- ----- (MILLIONS) Cash provided (used) by: Operating activities..................................... $ 203 $ 123 Investing activities..................................... (172) (164) Financing activities..................................... 12 (28)
Operating Activities For the year ended December 31, 2006, cash flow provided from operating activities was $203 million as compared to $123 million in 2005. For 2006 cash provided by working capital was $6 million compared to cash used of $95 million for 2005. Receivables were a cash outflow of $24 million, a $62 million improvement from 2005, which was impacted by the discontinuation of the advance payment programs with three major OE customers in North America in 2005. Inventory was a use of cash of $57 million compared to cash provided of $6 million in 2005. Inventory was up year over year due to the ramp-up of future platform launches. Accounts payable provided cash of $92 million versus last year's cash outflow of $9 million. Cash interest payments of $137 million in 2006 were higher than 2005 payments of $126 million as a result of higher interest rates on our variable portion of debt and increased average borrowings. Cash tax payments were $26 million in 2006 compared to $23 million in 2005. Other operating activity was a use of $5 million in cash for 2006, compared to a cash outflow of $22 million in 2005 which was primarily related to an increase in pension contributions during 2005. Negotiable Financial Instruments -- One of our European subsidiaries receives payment from one of its OE customers whereby the account receivables are satisfied through the delivery of negotiable financial instruments. These financial instruments are then sold at a discount to a European bank. The sales of these financial instruments are not included in the account receivables sold. Any of these financial instruments which were not sold as of December 31, 2006 and 2005 are classified as other current assets and are excluded from our definition of cash equivalents. We had sold approximately $26 million of these instruments at December 31, 2006 and $34 million at December 31, 2005. In certain instances several of our Chinese subsidiaries receive payment from OE customers and satisfy vendor payments through the receipt and delivery of negotiable financial instruments. Financial instruments used to satisfy vendor payables and not redeemed totaled $12 million and $8 million at December 31, 2006 and 2005, respectively, and were classified as notes payable. Financial instruments received from OE customers and not redeemed totaled $9 million at both December 31, 2006 and 2005 and were classified as other current assets. One of our Chinese subsidiaries is required to maintain a cash balance at a financial institution issuing the financial instruments which are used to satisfy vendor payments. The balance was less than $1 million at December 31, 2006 and $3 million at December 31, 2005 and was classified as cash and cash equivalents. Investing Activities Cash used for investing activities was $8 million higher in 2006 compared to 2005. In 2006 we received $17 million in cash from the sale of assets. Cash payments for plant, property and equipment (PP&E) were $177 million in 2006 versus $140 million in 2005. The increase of $37 million in cash payments for plant, property and equipment was primarily due to the timing of future OE customer platform launches. Without adjusting for changes in the balance of accounts payable relating to acquisitions of PP&E, the amount of PP&E acquired in 2006 and 2005 was $7 million lower and $3 million higher, respectively, than the cash payments reported. Acquisitions for PP&E were $170 million in 2006 and $143 million in 2005. Cash payments for software-related intangible assets were $13 million in 2006 compared to $14 million in 2005. 51 In 2005 we used $11 million in cash to acquire the exhaust operations of Gabilan Manufacturing and $3 million to acquire the remaining minority interest in India's Hydraulics joint venture operations, partially offset by net proceeds from the sale of assets of $4 million. Financing Activities Cash flow from financing activities was a $12 million inflow in 2006 compared to an outflow of $28 million in the same period of 2005. The primary reason for the change is attributable to $45 million in cash used to reduce our long-term debt during 2005. CRITICAL ACCOUNTING POLICIES We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. Preparing our consolidated financial statements in accordance with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The following paragraphs include a discussion of some critical areas where estimates are required. Revenue Recognition We recognize revenue for sales to our original equipment and aftermarket customers when title and risk of loss passes to the customers under the terms of our arrangements with those customers, which is usually at the time of shipment from our plants or distribution centers. In connection with the sale of exhaust systems to certain original equipment manufacturers, we purchase catalytic converters and diesel particulate filters or components thereof including precious metals ("substrates") on behalf of our customers which are used in the assembled system. These substrates are included in our inventory and "passed through" to the customer at our cost, plus a small margin, since we take title to the inventory and are responsible for both the delivery and quality of the finished product. Revenues recognized for substrate sales were $1,673 million, $927 million and $681 million in 2007, 2006 and 2005, respectively. For our aftermarket customers, we provide for promotional incentives and returns at the time of sale. Estimates are based upon the terms of the incentives and historical experience with returns. Certain taxes assessed by governmental authorities on revenue producing transactions, such as value added taxes, are excluded from revenue and recorded on a net basis. Shipping and handling costs billed to customers are included in revenues and the related costs are included in cost of sales in our Statements of Income (Loss). Warranty Reserves Where we have offered product warranty, we also provide for warranty costs. Those estimates are based upon historical experience and upon specific warranty issues as they arise. While we have not experienced any material differences between these estimates and our actual costs, it is reasonably possible that future warranty issues could arise that could have a significant impact on our consolidated financial statements. Pre-production Design and Development and Tooling Assets We expense pre-production design and development costs as incurred unless we have a contractual guarantee for reimbursement from the original equipment customer. We had long-term receivables of $20 million and $22 million on the balance sheet at December 31, 2007 and 2006, respectively, for guaranteed pre- production design and development reimbursement arrangements with our customers. In addition, plant, property and equipment includes $62 million and $63 million at December 31, 2007 and 2006, respectively, for original equipment tools and dies that we own, and prepayments and other includes $33 million and $38 million at December 31, 2007 and 2006, respectively, for in-process tools and dies that we are building for our original equipment customers. Income Taxes We have a U.S. Federal tax net operating loss carryforward ("NOL") at December 31, 2007, of $518 million, which will expire in varying amounts from 2020 to 2027. The federal tax effect of that NOL is 52 recorded as a deferred tax asset on our balance sheet for $181 million and $209 million at December 31, 2007 and 2006, respectively. We also have state NOL carryforwards at December 31, 2007 of $767 million, which will expire in various years through 2027. The tax effect of the state NOL, net of a valuation allowance, is recorded as a deferred tax asset on our balance sheet for $40 million and $29 million at December 31, 2007 and 2006, respectively. We estimate, based on available evidence both positive and negative, that it is more likely than not that we will utilize these NOLs within the prescribed carryforward period. That estimate is based upon our expectations regarding future taxable income of our U.S. operations and the implementation of available tax planning strategies that accelerate usage of the NOL. Circumstances that could change that estimate include future U.S. earnings at lower than expected levels or a majority ownership change as defined in the rules of the U.S. tax law. If that estimate changed, we would be required to cease recognizing an income tax benefit for any new NOL and could be required to record a reserve for some or all of the asset currently recorded on our balance sheet. Stock-Based Compensation Effective January 1, 2006, we began accounting for our stock-based compensation plans in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment," which requires a fair value method of accounting for compensation costs related to our stock-based compensation plans. Under the fair value method recognition provision of the statement, a share-based payment is measured at the grant date based upon the value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards requires judgment in estimating employee and market behavior. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted. As of December 31, 2007, there is approximately $4 million, net of tax, of total unrecognized compensation costs related to these stock-based awards that is expected to be recognized over a weighted average period of 0.8 years as compared to $4 million, net of tax, and a weighted average period of 1.0 years as of December 31, 2006. Goodwill and Other Intangible Assets We utilize an impairment-only approach to value our purchased goodwill in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." Each year in the fourth quarter, we perform an impairment analysis on the balance of goodwill. Inherent in this calculation is the use of estimates as the fair value of our designated reporting units is based upon the present value of our expected future cash flows. In addition, our calculation includes our best estimate of our weighted average cost of capital and growth rate. If the calculation results in a fair value of goodwill which is less than the book value of goodwill, an impairment charge would be recorded in the operating results of the impaired reporting unit. Pension and Other Postretirement Benefits We have various defined benefit pension plans that cover substantially all of our employees. We also have postretirement health care and life insurance plans that cover a majority of our domestic employees. Our pension and postretirement health care and life insurance expenses and valuations are dependent on assumptions used by our actuaries in calculating those amounts. These assumptions include discount rates, health care cost trend rates, long- term return on plan assets, retirement rates, mortality rates and other factors. Health care cost trend rate assumptions are developed based on historical cost data and an assessment of likely long-term trends. Retirement rates are based primarily on actual plan experience while mortality rates are based upon the general population experience which is not expected to differ materially from our experience. Our approach to establishing the discount rate assumption for both our domestic and foreign plans starts with high-quality investment-grade bonds adjusted for an incremental yield based on actual historical performance. This incremental yield adjustment is the result of selecting securities whose yields are higher than the "normal" bonds that comprise the index. Based on this approach, for 2007 we raised the weighted average discount rate for all of our pension plans to 5.9 percent, from 5.5 percent. The discount rate for postretirement benefits was raised from approximately 5.9 percent for 2006 to approximately 6.2 percent for 2007. 53 Our approach to determining expected return on plan asset assumptions evaluates both historical returns as well as estimates of future returns, and is adjusted for any expected changes in the long-term outlook for the equity and fixed income markets. As a result, our estimate of the weighted average long- term rate of return on plan assets for all of our pension plans was left unchanged at 8.2 percent for 2007. Except in the U.K., our pension plans generally do not require employee contributions. Our policy is to fund our pension plans in accordance with applicable U.S. and foreign government regulations and to make additional payments as funds are available to achieve full funding of the accumulated benefit obligation. At December 31, 2007 and 2006, all legal funding requirements had been met. Other postretirement benefit obligations, such as retiree medical, and certain foreign pension plans are not funded. Effective December 31, 2006, we froze future accruals under our defined benefit plans for substantially all U.S. salaried and non-union hourly employees and replaced these benefits with additional contributions under defined contribution plans. These changes reduced expense by approximately $11 million in 2007. These changes will continue to generate savings in future years but those savings will vary based on many factors, including the performance of our pension fund investments. Additionally, we realized a one-time benefit of $7 million in the fourth quarter 2006 related to curtailing the defined benefit pension plans. CHANGES IN ACCOUNTING PRONOUNCEMENTS In February 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) 140-3, "Accounting for Transfers of Financial Assets and Repurchase Financing Transactions". FSP 140-3 provides guidance on accounting for a transfer of a financial asset and a repurchase financing which is a repurchase agreement that relates to a previously transferred financial asset between the same counterparties that is entered into contemporaneously with, or in contemplation of, the initial transfer. FSP 140-3 is effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. We are evaluating FSP 140-3 to determine the effect on our financial statements and related disclosures. In February 2008, the FASB issued FSP 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement Under Statement 13". FSP 157-1 provides a scope exception to SFAS No. 157 which does not apply under Statement 13 and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under Statement 13. FSP 157-1 is effective upon the initial adoption of SFAS No. 157. We do not expect the adoption of FSP 157-1 to have a material impact to our consolidated financial statements. In December 2007, the FASB issued SFAS No. 141 (Revised 2007), "Business Combinations" (SFAS No. 141(R)). SFAS No. 141(R) requires an acquirer to recognize the assets acquired, the liabilities assumed, contractual contingencies and any noncontrolling interest in the acquiree at the acquisition date at their fair values as of that date. SFAS No. 141(R) provides guidance on the accounting for acquisition-related costs, restructuring costs related to the acquisition and the measurement of goodwill and a bargain purchase. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after December 15, 2008. We do not expect the adoption of this statement to have a material impact to our consolidated financial statements. In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 5." SFAS No. 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarified that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements, establishes a single method of accounting for changes in a parent's ownership interest in a subsidiary that does not result in deconsolidation and provides for expanded disclosure in the consolidated financial statements relating to the interests of the parent's owners and the interests of the noncontrolling owners of the subsidary. SFAS No. 160 applies prospectively (except for the presentation and disclosure requirements) for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008. The presentation and disclosure 54 requirements will be applied retrospectively for all periods presented. We are evaluating this statement to determine the effect on our financial statements and related disclosures. In December 2007, the Securities and Exchange Commission issued Staff Accounting Bulleting No. 110 (SAB 110). SAB 110 amends and replaces Question 6 of Section D.2 Topic 14, "Share-Based Payment." Question 6 of Topic 14:D.2 (as amended) expresses the views of the staff regarding the use of a "simplified" method in developing an estimate of the expected term of "plain vanilla" share options in accordance with SFAS No. 123 (revised 2004), "Share-Based Payment" (SFAS No. 123(R)). SAB 110 is effective January 1, 2008. The adoption of SAB 110 will have no impact to our consolidated financial statements. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurement." This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements. In February 2008, the FASB issued FSP 157-2, "Effective Date of FASB Statement No. 157," which delays the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. We do not expect the adoption of this statement to have a material impact to our consolidated financial statements. In June 2007, the Emerging Issues Task Force (EITF) issued EITF 06-11, "Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards." EITF 06-11 provides the final consensus on the application of paragraphs 62 and 63 of SFAS No. 123(R) on the accounting for income tax benefits relating to the payment of dividends on equity-classified employee share-based payment awards that are charged to retained earnings. EITF 06-11 affirms that the realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings for equity classified nonvested equity shares, nonvested equity share units, and outstanding equity share options should be recognized as an increase in additional paid-in-capital. Additionally, EITF 06-11 provides guidance on the amount of tax benefits from dividends that are reclassified from additional paid-in-capital to the income statement when an entity's estimate of forfeitures changes. EITF 06-11 is effective prospectively to the income tax benefits that result from dividends on equity-classified employee share-based payment awards that are declared in fiscal years beginning after December 15, 2007. We do not expect the adoption of EITF 06-11 to have a material impact on our consolidated financial statements. In June 2007, the EITF issued EITF 07-3, "Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities." EITF 07-3 requires the deferral and capitalization of nonrefundable advance payments for goods or services that an entity will use in research and development activities pursuant to an executory contractual agreement. Expenditures which are capitalized under EITF 07-3 should be expensed as the goods are delivered or the related services are performed. EITF 07-3 is effective prospectively for fiscal years beginning after December 15, 2007 and interim periods within those fiscal years. EITF 07-3 is applicable to new contracts entered into after the effective date of this Issue. We do not expect the adoption of EITF 07-3 to have a material impact on our consolidated financial statements. In May 2007, the FASB issued Interpretation No. 48-1, "Definition of Settlement in FASB Interpretation No. 48" (FIN 48-1). FIN 48-1 is effective for fiscal years beginning after December 15, 2006 and provides guidance on how a reporting entity should determine when a tax position is effectively settled. We began applying FIN 48-1 in the second quarter. The adoption of FIN 48-1 did not have a material impact to our consolidated financial statements and related disclosures. See Note 7 to the consolidated financial statements of Tenneco Inc. and Consolidated Subsidiaries included in Item 8. In April 2007, the FASB issued Interpretation No. 39-1, "Amendment of FASB Interpretation No. 39" (FIN 39-1). This amendment allows a reporting entity to offset fair value amounts recognized for derivative instruments with fair value amounts recognized for the right to reclaim or realize cash collateral. Additionally, this amendment requires disclosure of the accounting policy on the reporting entity's election to offset or not offset amounts for derivative instruments. FIN 39-1 is effective for fiscal years beginning after November 15, 2007. We do not expect the adoption of FIN 39-1 to have a material impact on our consolidated financial statements. 55 In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." This statement permits companies to choose to measure at fair value many financial instruments and certain other items that are not currently required to be measured at fair value. SFAS No. 159 is effective for financial statements issued for fiscal years beginning on or after November 15, 2007. We do not believe the statement will have a material effect on our consolidated financial statements and related disclosures. In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)." Part of this Statement was effective as of December 31, 2006, and requires companies that have defined benefit pension plans and other postretirement benefit plans to recognize the funded status of those plans on the balance sheet on a prospective basis from the effective date. The funded status of these plans is determined as of the plans' measurement dates and represents the difference between the amount of the obligations owed to participants under each plan (including the effects of future salary increases for defined benefit plans) and the fair value of each plan's assets dedicated to paying those obligations. To record the funded status of those plans, unrecognized prior service costs and net actuarial losses experienced by the plans will be recorded in the Accumulated Other Comprehensive Loss section of shareholders' equity on the balance sheet. The initial adoption as of December 31, 2006 resulted in a reduction of Accumulated Other Comprehensive Loss in shareholders' equity of $59 million. In addition, SFAS No. 158 requires that companies using a measurement date for their defined benefit pension plans and other postretirement benefit plans other than their fiscal year end, change the measurement date effective for fiscal years ending after December 15, 2008. Effective January 1, 2007, we elected to early adopt the measurement date provision of SFAS No. 158. Adoption of this part of the statement was not material to our financial position and results of operations. See Note 10 to the consolidated financial statements of Tenneco Inc. and Consolidated Subsidiaries included in Item 8. LIQUIDITY AND CAPITAL RESOURCES Capitalization
YEAR ENDED DECEMBER 31, --------------- 2007 2006 % CHANGE ------ ------ -------- (MILLIONS) Short-term debt and current maturities............ $ 46 $ 28 64% Long-term debt.................................... 1,328 1,357 (2) ------ ------ -- Total debt........................................ 1,374 1,385 (1) ------ ------ -- Total minority interest........................... 31 28 11 Shareholders' equity.............................. 400 226 77 ------ ------ -- Total capitalization.............................. $1,805 $1,639 10 ====== ====== ==
General. Short-term debt, which includes the current portion of long-term obligations and borrowings by foreign subsidiaries, was $46 million and $28 million as of December 31, 2007 and December 31, 2006, respectively. Borrowings under our revolving credit facilities, which are now classified as long-term debt, were approximately $169 million as of December 31, 2007. There were no borrowings outstanding on our revolving credit facilities as of December 31, 2006. The 2007 increase in shareholders' equity primarily resulted from $138 million of translation of foreign balances into U.S. dollars partially offset by a net loss of $5 million. In addition, the implementation of the measurement date provision of SFAS No. 158, additional liability for pension benefits and other transactions contributed $41 million to shareholders' equity. While our book equity balance was small at December 31, 2007, it had no effect on our business operations. We have no debt covenants that are based upon our book equity, and there are no other agreements that are adversely impacted by our relatively low book equity. You 56 should also read Note 5 to the consolidated financial statements Tenneco Inc. and Consolidated Subsidiaries included in Item 8. Overview and Recent Transactions. Our financing arrangements are primarily provided by a committed senior secured financing arrangement with a syndicate of banks and other financial institutions. The arrangement is secured by substantially all our domestic assets and pledges of 66 percent of the stock of certain first-tier foreign subsidiaries, as well as guarantees by our material domestic subsidiaries. On November 20, 2007, we issued $250 million of 8 1/8 percent Senior Notes due November 15, 2015 through a private placement offering. The offering and related transactions were designed to (1) reduce our interest expense and extend the maturity of a portion of our debt (by using the proceeds of the offering to tender for $230 million of our outstanding $475 million 10 1/4 percent senior secured notes due 2013), (2) facilitate the realignment of the ownership structure of some of our foreign subsidiaries and (3) otherwise amend certain of the covenants in the indenture for our 10 1/4 percent senior secured notes to be consistent with those contained in our 8 5/8 percent senior subordinated notes, including conforming the limitation on incurrence of indebtedness and the absence of a limitation on issuances or transfers of restricted subsidiary stock, and make other minor modifications. The ownership structure realignment is designed to more effectively align our domestic and foreign assets and revenues with expenses in the appropriate local currencies. Some of the desired results of the realignment will be to allow us to more rapidly use our U.S. net operating losses and reduce our cash tax payments. At present, the ownership structure realignment involves a new European holding company which will own some of our foreign entities. We may alter the components of the realignment from time to time. If market conditions permit in 2008, we may offer debt issued by the new European holding company. The proceeds of that debt would be used to repay any outstanding intercompany debt and, in turn, to fund the redemption of any remaining 10 1/4 percent senior secured notes. This realignment involves utilizing part of our U.S. net operating tax losses. Consequently, we recorded a non-cash charge of $66 million in the fourth quarter of 2007. The offering of new notes and related repurchase of our senior secured notes will reduce our annual interest expense by approximately $3 million for 2008 and increased our total debt outstanding to third-parties by approximately $20 million. In connection with the offering and the related repurchase of our senior secured notes, we also recorded non-recurring pre-tax charges related to the tender premium and fees, the write-off of deferred debt issuance costs, and the write-off of previously recognized issuance premium totaling $21 million in the fourth quarter of 2007. In March 2007, we refinanced our $831 million senior credit facility. This transaction reduced the interest rates we pay on all portions of the facility. While the total amount of the new senior credit facility is $830 million, approximately the same as the previous facility, we changed the components of the facility to enhance our financial flexibility. We increased the amount of commitments under our revolving loan facility from $320 million to $550 million, reduced the amount of commitments under our tranche B-1 letter of credit/revolving loan facility from $155 million to $130 million and replaced the $356 million term loan B with a $150 million term loan A. As of December 31, 2007, the senior credit facility consisted of a five-year, $150 million term loan A maturing in March 2012, a five-year, $550 million revolving credit facility maturing in March 2012, and a seven-year $130 million tranche B-1 letter of credit/revolving loan facility maturing in March 2014. The refinancing of the prior facility allowed us to: (i) amend the consolidated net debt to EBITDA ratio, (ii) eliminate the fixed charge coverage ratio, (iii) eliminate the restriction on capital expenditures, (iv) increase the amount of acquisitions permitted to $250 million, (v) improve the flexibility to repurchase and retire higher cost junior debt, (vi) increase our ability to enter into capital leases, (vii) increase the ability of our foreign subsidiaries to incur debt, (viii) increase our ability to pay dividends and repurchase common stock, (ix) increase our ability to invest in joint ventures, (x) allow for the increase in the existing tranche B-1 facility and/or the term loan A or the addition of a new term loan of up to $275 million in order to reduce our 10.25 percentage senior secured notes, and (xi) make other modifications. 57 Following the refinancing, the term loan A facility is payable in twelve consecutive quarterly installments, commencing June 30, 2009 as follows: $6 million due each of June 30, September 30, December 31, 2009 and March 31, 2010, $15 million due each of June 30, September 30, December 31, 2010 and March 31, 2011, and $17 million due each of June 30, September 30, December 31, 2011 and March 16, 2012. The revolving credit facility requires that any amounts drawn be repaid by March 2012. Prior to that date, funds may be borrowed, repaid and reborrowed under the revolving credit facility without premium or penalty. Letters of credit may be issued under the revolving credit facility. The tranche B-1 letter of credit/revolving loan facility requires that it be repaid by March 2014. We can borrow revolving loans and issue letters of credit under the $130 million tranche B-1 letter of credit/revolving loan facility. The tranche B-1 letter of credit/revolving loan facility lenders have deposited $130 million with the administrative agent, who has invested that amount in time deposits. We do not have an interest in any of the funds on deposit. When we draw revolving loans under this facility, the loans are funded from the $130 million on deposit with the administrative agent. When we make repayments, the repayments are redeposited with the administrative agent. The tranche B-1 letter of credit/revolving loan facility is reflected as debt on our balance sheet only if we borrow money under this facility or if we use the facility to make payments for letters of credit. We will not be liable for any losses to or misappropriation of any (i) return due to the administrative agent's failure to achieve the return described above or to pay all or any portion of such return to any lender under such facility or (ii) funds on deposit in such account by such lender (other than the obligation to repay funds released from such accounts and provided to us as revolving loans under such facility). Senior Credit Facility -- Interest Rates and Fees. Prior to the March 2007 refinancing, borrowings under the term loan B facility and the tranche B-1 letter of credit/revolving loan facility bore interest at an annual rate equal to, at our option, either (i) the London Interbank Offering Rate plus a margin of 200 basis points; or (ii) a rate consisting of the greater of the JP Morgan Chase prime rate or the Federal Funds rate plus 50 basis points, plus a margin of 100 basis points. As of December 31, 2007 borrowings under the term loan A facility and the tranche B-1 letter of credit/revolving loan facility bore interest at an annual rate equal to, at our option, either (i) the London Interbank Offering Rate plus a margin of 150 basis points; or (ii) a rate consisting of the greater of the JP Morgan Chase prime rate or the Federal Funds rate plus 50 basis points, plus a margin of 50 basis points. The interest margin for borrowings under the facilities are subject to adjustment based on the consolidated net leverage ratio (consolidated indebtedness net of cash divided by consolidated EBITDA as defined in the senior credit facility agreement). The margin we pay on the term loan A and the tranche B-1 facility is reduced by 25 basis points following each fiscal quarter for which the consolidated net leverage ratio is less than 2.5 beginning in March 2007, and would increase by 25 basis points following each fiscal quarter for which the consolidated net leverage ratio exceeds 3.5. There is no cost to us for issuing letters of credit under the tranche B-1 letter of credit/revolving loan facility, however outstanding letters of credit reduce our availability to borrow revolving loans under this portion of the facility. If a letter of credit issued under this facility is subsequently paid and we do not reimburse the amount paid in full, then a ratable portion of each lender's deposit would be used to fund the letter of credit. We pay the tranche B-1 lenders a fee which is equal to LIBOR plus 150 basis points. This fee is offset by the return on the funds deposited with the administrative agent which earn interest at a per annum rate approximately equal to LIBOR. Outstanding revolving loans reduce the funds on deposit with the administrative agent which in turn reduce the earnings of those deposits and effectively increases our interest expense at a per annum rate equal to LIBOR. Prior to the March 2007 refinancing, borrowings under the revolving credit facility bore interest at an annual rate equal to, at our option, either (i) the London Interbank Offering Rate plus a margin of 275 basis points; or (ii) a rate consisting of the greater of the JP Morgan Chase prime rate or the Federal Funds rate plus 37.5 basis points, plus a margin of 175 basis points. As of December 31, 2007 borrowings under the revolving credit facility bore interest at an annual rate equal to, at our option, either (i) the London Interbank Offering Rate plus a margin of 150 basis points; or (ii) a rate consisting of the greater of the JP Morgan Chase prime rate or the Federal Funds rate plus 50 basis points, plus a margin of 50 basis points. Letters of credit issued under the revolving credit facility accrue a letter of credit fee at a per annum rate of 150 basis points for the pro rata account of the lenders under such facility and a fronting fee for the ratable account of the issuers 58 thereof at a per annum rate in an amount to be agreed upon payable quarterly in arrears. We also pay a commitment fee of 35 basis points on the unused portion of the revolving credit facility. The interest margins for borrowings and letters of credit issued under the revolving credit facility are subject to adjustment based on the consolidated net leverage ratio (consolidated indebtedness net of cash divided by consolidated EBITDA as defined in the senior credit facility agreement) measured at the end of each quarter. The margin we pay on the revolving credit facility is reduced by 25 basis points and the commitment fee we pay on the revolving credit facility is reduced by 5 basis points following each fiscal quarter for which the consolidated net leverage ratio is less than 2.5 beginning in March 2007. The margin and the commitment fee would increase by 25 basis points and 2.5 basis points, respectively, following each fiscal quarter for which the consolidated net leverage ratio exceeds 3.5. Senior Credit Facility -- Other Terms and Conditions. As described above, we are highly leveraged. Our refinanced senior credit facility requires that we maintain financial ratios equal to or better than the following consolidated net leverage ratio (consolidated indebtedness net of cash divided by consolidated EBITDA, as defined in the senior credit facility agreement), and consolidated interest coverage ratio (consolidated EBITDA divided by consolidated interest expense, as defined under the senior credit facility agreement) at the end of each period indicated. Failure to maintain these ratios will result in a default under our senior credit facility, which could result in all amounts due immediately, as well as most of our other debt, being declared immediately due and payable. The financial ratios required under the amended and restated senior credit facility and, the actual ratios we achieved for the four quarters of 2007, are shown in the following tables:
QUARTER ENDED ----------------------------------------------------- SEPTEMBER DECEMBER MARCH 31, JUNE 30, 30, 31, 2007 2007 2007 2007 ----------- ----------- ----------- ----------- REQ. ACT. REQ. ACT. REQ. ACT. REQ. ACT. ---- ---- ---- ---- ---- ---- ---- ---- Leverage Ratio (maximum).............. 4.25 3.27 4.25 2.99 4.25 2.97 4.25 2.53 Interest Coverage Ratio (minimum)..... 2.10 3.09 2.10 3.21 2.10 3.35 2.10 3.61
2008 2009 2010 2011 2012 REQ. REQ. REQ. REQ. REQ. ---- ---- ---- ---- ---- Leverage Ratio (maximum)............................ 4.00 3.75 3.50 3.50 3.50 Interest Coverage Ratio (minimum)................... 2.10 2.25 2.40 2.55 2.75
The senior credit facility agreement provides the ability to refinance our senior subordinated notes and/or our senior secured notes in an amount equal to the sum of (i) the net cash proceeds of equity issued after the closing date plus (ii) the portion of annual excess cash flow (as defined in the senior credit facility agreement) that is not required to be applied to the payment of the credit facilities and which is not used for other purposes, provided that the amount of the subordinated notes and the aggregate amount of the senior secured notes and the subordinated notes that may be refinanced is capped based upon the pro forma consolidated leverage ratio after giving effect to such refinancing as shown in the following table:
AGGREGATE SENIOR AND SUBORDINATED NOTES SUBORDINATE NOTE PROFORMA CONSOLIDATED LEVERAGE RATIO MAXIMUM AMOUNT MAXIMUM AMOUNT - ------------------------------------ ------------------ -------------------- Greater than or equal to 3.0x................ $ 50 million $150 million Greater than or equal to 2.5x................ $100 million $300 million Less than 2.5x............................. $125 million $375 million
In addition, the senior secured notes may be refinanced with (i) the net cash proceeds of incremental facilities and permitted refinancing indebtedness (as defined in the senior credit facility agreement), (ii) the net cash proceeds of any new senior or subordinated unsecured indebtedness, (iii) proceeds of revolving credit loans (as defined in the senior credit facility agreement), (iv) up to E200 million of unsecured indebtedness of the company's foreign subsidiaries and (v) cash generated by the company's operations. The refinanced senior credit facility agreement also contains restrictions on our operations that are customary for similar facilities, including limitations on: (i) incurring additional liens; (ii) sale and leaseback transactions (except for the permitted transactions as described in the amended and restated agreement); 59 (iii) liquidations and dissolutions; (iv) incurring additional indebtedness or guarantees; (v) investments and acquisitions; (vi) dividends and share repurchases; (vii) mergers and consolidations; and (viii) refinancing of subordinated and 10.25 percent senior secured notes. 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. As of December 31, 2007, we were in compliance with all the financial covenants and operational restrictions of the facility. Our senior credit facility does not contain any terms that could accelerate the payment of the facility as a result of a credit rating agency downgrade. Senior Secured, Senior and Subordinated Notes. Our outstanding debt also includes $245 million of 10 1/4 percent senior secured notes due July 15, 2013, $250 million of 8 1/8 percent senior notes due November 15, 2015, and $500 million of 8 5/8 percent senior subordinated notes due November 15, 2014. We can redeem some or all of the notes at any time after July 15, 2008 in the case of the senior secured notes, November 15, 2009 in the case of the senior subordinated notes and November 15, 2011 in the case of the senior notes. If we sell certain of our assets or experience specified kinds of changes in control, we must offer to repurchase the notes. We are permitted to redeem up to 35 percent of the senior notes with the proceeds of certain equity offerings completed before November 15, 2010. Our senior secured, senior and subordinated notes require that, as a condition precedent to incurring certain types of indebtedness not otherwise permitted, our consolidated fixed charge coverage ratio, as calculated on a proforma basis, be greater than 2.00. We have not incurred any of the types of indebtedness not otherwise permitted by the indentures. The indentures also contain restrictions on our operations, including limitations on: (i) incurring additional indebtedness or liens; (ii) dividends; (iii) distributions and stock repurchases; (iv) investments; (v) asset sales and (vi) mergers and consolidations. Subject to limited exceptions, all of our existing and future material domestic wholly owned subsidiaries fully and unconditionally guarantee these notes on a joint and several basis. In addition, the senior secured notes and related guarantees are secured by second priority liens, subject to specified exceptions, on all of our and our subsidiary guarantors' assets that secure obligations under our senior credit facility, except that only a portion of the capital stock of our subsidiary guarantor's domestic subsidiaries is provided as collateral and no assets or capital stock of our direct or indirect foreign subsidiaries secure the notes or guarantees. There are no significant restrictions on the ability of the subsidiaries that have guaranteed these notes to make distributions to us. The senior subordinated notes rank junior in right of payment to our senior credit facility and any future senior debt incurred. As of December 31, 2007, we were in compliance with the covenants and restrictions of these indentures. Accounts Receivable Securitization. In addition to our senior credit facility, senior secured notes, senior notes and senior subordinated notes, we also sell some of our accounts receivable on a nonrecourse basis in North America and Europe. In North America, we have an accounts receivable securitization program with two commercial banks. We sell original equipment and aftermarket receivables on a daily basis under this program. We sold accounts receivable under this program of $100 million and $85 million as of December 31, 2007 and 2006, respectively. This program is subject to cancellation prior to its maturity date if we (i) fail to pay interest or principal payments on an amount of indebtedness exceeding $50 million, (ii) default on the financial covenant ratios under the senior credit facility, or (iii) fail to maintain certain financial ratios in connection with the accounts receivable securitization program. In January 2008, this program was renewed for 364 days to January 26, 2009 at a facility size of $120 million. We also sell some receivables in our European operations to regional banks in Europe. As of December 31, 2007, we sold $57 million of accounts receivable in Europe up from $48 million at December 31, 2006. The arrangements to sell receivables in Europe are not committed and can be cancelled at any time. If we were not able to sell receivables under either the North American or European securitization programs, our borrowings under our revolving credit agreements may increase. These accounts receivable securitization programs provide us with access to cash at costs that are generally favorable to alternative sources of financing, and allow us to reduce borrowings under our revolving credit agreements. 60 Capital Requirements. We believe that cash flows from operations, combined with available borrowing capacity described above, assuming that we maintain compliance with the financial covenants and other requirements of our loan agreement, will be sufficient to meet our future capital requirements for the following year. Our ability to meet the financial covenants depends upon a number of operational and economic factors, many of which are beyond our control. Factors that could impact our ability to comply with the financial covenants include the rate at which consumers continue to buy new vehicles and the rate at which they continue to repair vehicles already in service, as well as our ability to successfully implement our restructuring plans and offset higher raw material prices. Lower North American vehicle production levels, weakening in the global aftermarket, or a reduction in vehicle production levels in Europe, beyond our expectations, could impact our ability to meet our financial covenant ratios. In the event that we are unable to meet these financial covenants, we would consider several options to meet our cash flow needs. These options could include renegotiations with our senior credit lenders, additional cost reduction or restructuring initiatives, sales of assets or common stock, or other alternatives to enhance our financial and operating position. Should we be required to implement any of these actions to meet our cash flow needs, we believe we can do so in a reasonable time frame. Contractual Obligations. Our remaining required debt principal amortization and payment obligations under lease and certain other financial commitments as of December 31, 2007, are shown in the following table:
PAYMENTS DUE IN: -------------------------------------------------- BEYOND 2008 2009 2010 2011 2012 2012 TOTAL ---- ---- ---- ---- ---- ------ ------ (MILLIONS) Obligations: Revolver borrowings................... $ -- $ -- $ -- $ -- $ -- $ 169 $ 169 Senior term loans..................... -- 17 50 66 17 -- 150 Senior secured notes.................. 2 -- -- -- -- 246 248 Senior subordinated notes............. -- -- -- -- -- 500 500 Senior notes.......................... -- -- -- -- -- 250 250 Capital leases........................ 3 3 3 -- -- -- 9 Other subsidiary debt................. 1 -- -- -- -- 2 3 Short-term debt....................... 40 -- -- -- -- -- 40 ---- ---- ---- ---- ---- ------ ------ Debt and capital lease obligations.. 46 20 53 66 17 1,167 1,369 Operating leases...................... 17 14 11 9 5 2 58 Interest payments..................... 110 110 108 104 99 165 696 Capital commitments................... 48 -- -- -- -- -- 48 ---- ---- ---- ---- ---- ------ ------ Total Payments........................ $221 $144 $172 $179 $121 $1,334 $2,171 ==== ==== ==== ==== ==== ====== ======
If we do not maintain compliance with the terms of our senior credit facility, senior secured notes indenture, senior notes indenture and senior subordinated debt indenture described above, all amounts under those arrangements could, automatically or at the option of the lenders or other debt holders, become due. Additionally, each of those facilities contains provisions that certain events of default under one facility will constitute a default under the other facility, allowing the acceleration of all amounts due. We currently expect to maintain compliance with terms of all of our various credit agreements for the foreseeable future. Included in our contractual obligations is the amount of interest to be paid on our long-term debt. As our debt structure contains both fixed and variable rate interest debt, we have made assumptions in calculating the amount of the future interest payments. Interest on our senior secured notes, senior subordinated notes, and senior notes is calculated using the fixed rates of 10 1/4 percent, 8 5/8 percent, and 8 1/8 percent respectively. Interest on our variable rate debt is calculated as 150 basis points plus LIBOR of 4.60 percent which was the rate at December 31, 2007. We have assumed that LIBOR will remain unchanged for the outlying years. See 61 "-- Capitalization." In addition we have included the impact of our interest rate swaps entered into in April 2004, excluding any impact marking the swaps to market may have. See "Interest Rate Risk" below. We have also included an estimate of expenditures required after December 31, 2007 to complete the projects authorized at December 31, 2007, in which we have made substantial commitments in connection with purchasing plant, property and equipment for our operations. For 2008, we expect our capital expenditure budget to be $200 million to $220 million. We have not included purchase obligations as part of our contractual obligations as we generally do not enter into long-term agreements with our suppliers. In addition, the agreements we currently have do not specify the volumes we are required to purchase. If any commitment is provided, in many cases the agreements state only the minimum percentage of our purchase requirements we must buy from the supplier. As a result, these purchase obligations fluctuate from year to year and we are not able to quantify the amount of our future obligation. We have not included material cash requirements for taxes as we are a taxpayer in certain foreign jurisdictions but not domestically. Additionally, it is difficult to estimate taxes to be paid as changes in where we generate income can have a significant impact on future tax payments. We have also not included cash requirements for funding pension and postretirement benefit costs. Based upon current estimates we believe we will be required to make contributions of approximately $39 million to those plans in 2008. Pension and postretirement contributions beyond 2008 will be required but those amounts will vary based upon many factors, including the performance of our pension fund investments during 2008. In addition, we have not included cash requirements for environmental remediation. Based upon current estimates we believe we will be required to spend approximately $11 million over the next 20 to 30 years. However, due to possible modifications in remediation processes and other factors, it is difficult to determine the actual timing of the payments. See "-- Environmental and Other Matters". We occasionally provide guarantees that could require us to make future payments in the event that the third party primary obligor does not make its required payments. We have not recorded a liability for any of these guarantees. Additionally, we have from time to time issued guarantees for the performance of obligations by some of our subsidiaries, and some of our subsidiaries have guaranteed our debt. All of our existing and future material domestic wholly-owned subsidiaries fully and unconditionally guarantee our senior credit facility, our senior secured notes, our senior notes and our senior subordinated notes on a joint and several basis. The arrangement for the senior credit facility is also secured by first-priority liens on substantially all our domestic assets and pledges of 66 percent of the stock of certain first- tier foreign subsidiaries. The arrangement for the $245 million senior secured notes is also secured by second-priority liens on substantially all our domestic assets, excluding some of the stock of our domestic subsidiaries. No assets or capital stock of our direct or indirect foreign subsidiaries secure these notes. You should also read Note 13 of the consolidated financial statements of Tenneco Inc. and Consolidated Subsidiaries included in Item 8, where we present the Supplemental Guarantor Condensed Consolidating Financial Statements. We have issued guarantees through letters of credit in connection with some obligations of our affiliates. As of December 31, 2007, we have guaranteed $18 million in letters of credit to support some of our subsidiaries' insurance arrangements. In addition, we have issued $13 million in guarantees through letters of credit to guarantee other obligations of subsidiaries primarily related to foreign employee benefit programs, environmental remediation activities, and cash management requirements. DERIVATIVE FINANCIAL INSTRUMENTS Foreign Currency Exchange Rate Risk We use derivative financial instruments, principally foreign currency forward purchase and sale contracts with terms of less than one year, to hedge our exposure to changes in foreign currency exchange rates. Our primary exposure to changes in foreign currency rates results from intercompany loans made between affiliates to minimize the need for borrowings from third parties. Additionally, we enter into foreign currency forward 62 purchase and sale contracts to mitigate our exposure to changes in exchange rates on certain intercompany and third-party trade receivables and payables. We manage counter-party credit risk by entering into derivative financial instruments with major financial institutions that can be expected to fully perform under the terms of such agreements. We do not enter into derivative financial instruments for speculative purposes. In managing our foreign currency exposures, we identify and aggregate existing offsetting positions and then hedge residual exposures through third- party derivative contracts. The following table summarizes by major currency the notional amounts, weighted average settlement rates, and fair value for foreign currency forward purchase and sale contracts as of December 31, 2007. All contracts in the following table mature in 2008.
DECEMBER 31, 2007 ------------------------------------------------------ NOTIONAL AMOUNT WEIGHTED AVERAGE FAIR VALUE IN IN FOREIGN CURRENCY SETTLEMENT RATES U.S. DOLLARS ------------------- ---------------- ------------- (MILLIONS EXCEPT SETTLEMENT RATES) Australian dollars................ --Purchase 13 .876 $ 11 --Sell (2) .876 (2) British pounds.................... --Purchase 4 1.987 8 --Sell (1) 1.987 (2) European euro..................... --Purchase 1 1.464 1 --Sell (98) 1.461 (143) South Africa rand................. --Purchase 409 .146 60 --Sell (92) .146 (13) U.S. dollars...................... --Purchase 136 1.000 136 --Sell (62) 1.003 (62) Other............................. --Purchase 414 .009 4 --Sell -- -- -- ----- $ (2) =====
Interest Rate Risk Our financial instruments that are sensitive to market risk for changes in interest rates are primarily our debt securities and our interest rate swaps. We use our revolving credit facilities to finance our short-term and long-term capital requirements. We pay a current market rate of interest on these borrowings. Our long-term capital requirements have been financed with long-term debt with original maturity dates ranging from five to ten years. On December 31, 2007, we had $1,010 million in long-term debt obligations that have fixed interest rates. Of that amount, $245 million is fixed through July 2013, $500 million is fixed through November 2014, $250 million is fixed through November 2015, and the remainder is fixed from 2008 through 2025. Of the $245 million, $150 million has been swapped to floating and we also have $169 million in long- term debt obligations outstanding under our senior secured credit facility that are subject to variable interest rates. See Note 5 to the consolidated financial statements of Tenneco Inc. and Consolidated Subsidiaries included in Item 8. We estimate that the fair value of our long-term debt at December 31, 2007 was about 99 percent of its book value. A one percentage point increase or decrease in interest rates would increase or decrease the annual interest expense we recognize in the income statement and the cash we pay for interest expense by about $2 million after tax, excluding the effect of the interest rate swaps we completed in April 2004. A one percentage point increase or decrease in interest rates on the swaps we completed in April 2004 would increase or decrease the annual interest expense we recognize in the income statement and the cash we pay for interest expense by approximately $1 million after tax, excluding the effect on interest expense of marking the swaps to market. 63 ENVIRONMENTAL AND OTHER MATTERS We are subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which we operate. We expense or capitalize, as appropriate, expenditures for ongoing compliance with environmental regulations that relate to current operations. We expense costs related to an existing environmental condition caused by past operations that do not contribute to current or future revenue generation. We record liabilities 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. We consider all available evidence including prior experience in remediation of contaminated sites, other companies' cleanup experiences 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. Where future cash flows are fixed or reliably determinable, we have discounted the liabilities. All other environmental liabilities are recorded at their undiscounted amounts. We evaluate recoveries separately from the liability and, when they are assured, recoveries are recorded and reported separately from the associated liability in our consolidated financial statements. As of December 31, 2007, we are designated as a potentially responsible party in one Superfund site. Including the Superfund site, we may have the obligation to remediate current or former facilities, and we estimate our share of environmental remediation costs at these facilities to be approximately $11 million. For the Superfund site and the current and former facilities, we have established reserves that we believe are adequate for these costs. Although we believe our estimates of remediation costs are reasonable and are based on the latest available information, the cleanup costs are estimates and are subject to revision as more information becomes available about the extent of remediation required. At some sites, we expect that other parties will contribute to the remediation costs. In addition, at the Superfund site, the Comprehensive Environmental Response, Compensation and Liability Act provides that our liability could be joint and several, meaning that we could be required to pay in excess of our share of remediation costs. Our understanding of the financial strength of other potentially responsible parties at the Superfund site, and of other liable parties at our current and former facilities, has been considered, where appropriate, in our determination of our estimated liability. We believe that any potential costs associated with our current status as a potentially responsible party in the Superfund site, or as a liable party at our current or former facilities, will not be material to our results of operations or consolidated financial position. We also from time to time are involved in legal proceedings, claims or investigations that are incidental to the conduct of our business. Some of these proceedings allege damages against us relating to environmental liabilities (including toxic tort, property damage and remediation), intellectual property matters (including patent, trademark and copyright infringement, and licensing disputes), personal injury claims (including injuries due to product failure, design or warnings issues, and other product liability related matters), taxes, employment matters, and commercial or contractual disputes, sometimes related to acquisitions or divestitures. We vigorously defend ourselves against all of these claims. In future periods, we could be subjected to cash costs or non-cash charges to earnings if any of these matters is resolved on unfavorable terms. However, although the ultimate outcome of any legal matter cannot be predicted with certainty, based on current information, including our assessment of the merits of the particular claim, we do not expect that these legal proceedings or claims will have any material adverse impact on our future consolidated financial position or results of operations. In addition, we are subject to a number of lawsuits initiated by a significant number of claimants alleging health problems as a result of exposure to asbestos. A small percentage of claims have been asserted by railroad workers alleging exposure to asbestos products in railroad cars manufactured by the Pullman Company, one of our subsidiaries. Nearly all of the claims are related to alleged exposure to asbestos in our automotive emission control products. Only a small percentage of these claimants allege that they were automobile mechanics and a significant number appear to involve workers in other industries or otherwise do not include sufficient information to determine whether there is any basis for a claim against us. We believe, based on scientific and other evidence, it is unlikely that mechanics were exposed to asbestos by our former muffler products and that, in any event, they would not be at increased risk of asbestos-related disease based 64 on their work with these products. Further, many of these cases involve numerous defendants, with the number of each in some cases exceeding 200 defendants from a variety of industries. Additionally, the plaintiffs either do not specify any, or specify the jurisdictional minimum, dollar amount for damages. As major asbestos manufacturers continue to go out of business or file for bankruptcy, we may experience an increased number of these claims. We vigorously defend ourselves against these claims as part of our ordinary course of business. In future periods, we could be subject to cash costs or non-cash charges to earnings if any of these matters is resolved unfavorably to us. To date, with respect to claims that have proceeded sufficiently through the judicial process, we have regularly achieved favorable resolution. Accordingly, we presently believe that these asbestos-related claims will not have a material adverse impact on our future financial condition or results of operations. EMPLOYEE STOCK OWNERSHIP PLANS We have established Employee Stock Ownership Plans for the benefit of our employees. Under the plans, subject to limitations in the Internal Revenue Code, participants may elect to defer up to 75 percent of their salary through contributions to the plan, which are invested in selected mutual funds or used to buy our common stock. We currently match in cash 50 percent of each employee's contribution up to eight percent of the employee's salary. In connection with freezing the defined benefit pension plans for nearly all U.S. based salaried and hourly employees effective December 31, 2006, and the related replacement of those defined benefit plans with defined contribution plans, we are making additional contributions to the Employee Stock Ownership Plans. We recorded expense for these matching and defined benefit replacement contributions of approximately $17 million for December 31, 2007 and $7 million for each of the years ended December 31, 2006 and 2005. Matching contributions vest immediately. Defined benefit replacement contributions fully vest on the employee's third anniversary of employment. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The section entitled "Derivative Financial Instruments" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" is incorporated herein by reference. 65 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO FINANCIAL STATEMENTS OF TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
PAGE ---- Management's Report on Internal Control Over Financial Reporting........ 67 Reports of Independent Registered Public Accounting Firm................ 69 Statements of income (loss) for each of the three years in the period ended December 31, 2007............................................... 72 Balance sheets -- December 31, 2007 and 2006............................ 73 Statements of cash flows for each of the three years in the period ended December 31, 2007..................................................... 74 Statements of changes in shareholders' equity for each of the three years in the period ended December 31, 2007........................... 75 Statements of comprehensive income (loss) for each of the three years in the period ended December 31, 2007.................................... 76 Notes to financial statements........................................... 77 Schedule II -- Valuation and Qualifying Accounts........................ 128
66 MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management of Tenneco Inc. is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934). Management's internal control system is designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error or circumvention or overriding of controls. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation and may not prevent or detect misstatements in financial reporting. Further, due to changing conditions and adherence to established policies and controls, internal control effectiveness may vary over time. Management assessed the company's effectiveness of internal controls over financial reporting. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated Framework. Based on our assessment we believe that the company's internal control over financial reporting was not effective as a result of the material weakness related to accounting for income taxes as of December 31, 2007. A material weakness is a deficiency, or combination of control deficiencies, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. Accounting for income taxes was identified as a material weakness as of December 31, 2006. In response to this material weakness, we took substantial actions to strengthen our controls and processes. Despite our efforts, as of December 31, 2007, we believe additional controls are needed related to the oversight and review of tax coordination, documentation and reporting. We did not maintain effective controls over the monitoring of specific balance sheet accounts relating to obligations under a tax sharing agreement with a former subsidiary, the foreign currency valuation of foreign affiliate transactions which are subject to changes in exchange rates, and the accuracy and completeness of the tax components of a foreign affiliate. This control deficiency resulted in audit adjustments to the tax accounts for our financial statements as of December 31, 2007, as our internal controls did not operate effectively to detect errors that were or could have been, individually or in the aggregate, material. Our internal control over financial reporting as of December 31, 2007 has been audited by Deloitte & Touche LLP, our independent registered public accounting firm, as stated in their report, which is included herein. February 29, 2008 67 REMEDIATION PLANS FOR A MATERIAL WEAKNESS IN INTERNAL CONTROL OVER FINANCIAL REPORTING To address the 2006 material weakness related to accounting for income taxes, we took the following actions to strengthen our internal controls over accounting for income taxes including: - With the assistance of an outside professional service provider, during the fourth quarter of 2006 we implemented procedures to more effectively and accurately accumulate detailed support for approximately 70 foreign tax basis balance sheets and related processes to quantify deferred tax balances. - We changed the tax provision reporting processes (including U.S. federal and state tax provision processes) to improve visibility, timeliness and accuracy, as well as technical support and documentation standards. - We reorganized functional responsibilities in the tax department to better control and manage the income tax data that is collected and enhance our current process for completing the provision and performing analysis. Despite our efforts, as of December 31, 2007, we encountered errors relating to obligations under a tax sharing agreement with a former subsidiary, the foreign currency valuation of foreign affiliate transactions which are subject to changes in exchange rates, and the accuracy and completeness of the tax components of a foreign affiliate. In addition, we believe additional controls are needed related to the oversight and review of tax coordination, documentation and reporting. As a result of these internal control deficiencies, there is a reasonable possibility that a material misstatement of the our annual and interim income tax provision and tax account balances will not be prevented or detected on a timely basis. Consequently, we concluded that we did not maintain effective controls over the monitoring of income tax accounts. To address the current material weakness in accounting for income taxes, we will undertake the following actions: 1. We will require that all income tax entries approved for recording at the consolidated level include supporting documentation which will be provided to the local finance personnel with instructions for recording the transactions on the local ledgers. 2. We will formalize a process for documenting decisions and journal entries made based upon the review of tax packages or any other supporting information provided. 3. Based on review of each entity's quarterly balance sheet and income tax provision reconciliation, we will identify variances requiring additional balance sheet and income tax provision reconciliations. The tax department will institute a process whereby a member of the tax department will work with the location to review the tax accounting if an analysis of the balance sheet and income tax provision reconciliation identifies multiple and/or significant tax reporting variances requiring further analysis and training. 4. We will accelerate year end tax analysis and reporting activities to periods earlier in the year in order to provide additional analysis and reconciliation time. We are in the process of developing additional remediation plans which will be implemented to address the material weakness in internal controls in accounting for income taxes. Although the remediation plans include accelerating the occurrence of many of the controls to earlier in the year, many of the controls and procedures will only be executed annually during the year-end closing process. Our assessment of the remediation will remain open until that time. 68 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Tenneco Inc. We have audited the internal control over financial reporting of Tenneco Inc. and subsidiaries (the "Company") as of December 31, 2007, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Controls Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management's assessment: accounting for income taxes. Specifically, the Company did not maintain effective controls over the monitoring of specific balance sheet accounts relating to obligations under a tax sharing agreement with a former subsidiary, the foreign currency valuation of foreign affiliate transactions which are subject to changes in exchange rates, and the accuracy and completeness of the tax components of a foreign affiliate. In addition, additional controls are needed related to the oversight and review of tax coordination, documentation and reporting. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated balance sheet of the Company as of December 31, 2007 and the related consolidated statements of income (loss), cash flows, changes in shareholders' equity and comprehensive income (loss) and financial statement schedule for the year ended December 31, 2007, of the Company and this report does not affect our report on such financial statements and financial statement schedule. 69 In our opinion, because of the effect of the material weakness identified above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2007 and the related consolidated statements of income (loss), cash flows, changes in shareholders' equity and comprehensive income (loss) and financial statement schedule for the year ended December 31, 2007, and our report dated February 29, 2008 expressed an unqualified opinion on those financial statements and financial statement schedule and included an explanatory paragraph regarding the Company's adoption of the measurement date provisions of Statement of Financial Accounting Standards ("SFAS") No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans -- an amendment of FASB Statements No. 87, 88, 106, and 132(R)" as of January 1, 2007. DELOITTE & TOUCHE LLP Chicago, Illinois February 29, 2008 70 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Tenneco Inc. We have audited the accompanying consolidated balance sheets of Tenneco Inc and subsidiaries (the "Company") as of December 31, 2007 and 2006, and the related consolidated statements of income (loss), cash flows, changes in shareholders' equity, and comprehensive income (loss) for each of the three years in the period ended December 31, 2007. Our audits also included the financial statement schedule listed in the Index at Item 8. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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. As discussed in Note 10, effective January 1, 2007, the Company adopted the measurement date provisions of Statement of Financial Accounting Standards ("SFAS") No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans -- an amendment of FASB Statements No. 87, 88, 106, and 132(R)." As described in Note 8 to the consolidated financial statements, on January 1, 2006 , the Company adopted Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment" and as discussed in Note 1 to the consolidated financial statements, on December 31, 2006, the Company adopted the recognition and disclosure provisions of Statement of Financial Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans -- an amendment of FASB Statements No. 87, 88, 106 and 132(R)." In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 29, 2008 expressed an adverse opinion on the effectiveness of the Company's internal control over financial reporting because of a material weakness. DELOITTE & TOUCHE LLP Chicago, Illinois February 29, 2008 71 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF INCOME (LOSS)
YEAR ENDED DECEMBER 31, --------------------------------------- 2007 2006 2005 ----------- ----------- ----------- (MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS) REVENUES Net sales and operating revenues.............. $ 6,184 $ 4,682 $ 4,440 ----------- ----------- ----------- COSTS AND EXPENSES Cost of sales (exclusive of depreciation and amortization shown below).................. 5,210 3,836 3,578 Engineering, research, and development........ 114 88 83 Selling, general, and administrative.......... 399 373 384 Depreciation and amortization of intangibles.. 205 184 177 ----------- ----------- ----------- 5,928 4,481 4,222 ----------- ----------- ----------- OTHER INCOME (EXPENSE) Loss on sale of receivables................... (10) (9) (6) Other income.................................. 6 4 5 ----------- ----------- ----------- (4) (5) (1) ----------- ----------- ----------- INCOME BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST......................... 252 196 217 Interest expense (net of interest capitalized of $6 million, $6 million and $3 million, respectively).............................. 164 136 133 Income tax expense............................ 83 5 26 Minority interest............................. 10 6 2 ----------- ----------- ----------- NET INCOME (LOSS)............................... $ (5) $ 49 $ 56 =========== =========== =========== EARNINGS (LOSS) PER SHARE Average shares of common stock outstanding -- Basic...................................... 45,809,730 44,625,220 43,088,558 Diluted.................................... 45,809,730 46,755,573 45,321,225 Basic earnings (loss) per share of common stock -- ..................................... $ (0.11) $ 1.11 $ 1.30 Diluted earnings (loss) per share of common stock -- ..................................... $ (0.11) $ 1.05 $ 1.24
The accompanying notes to consolidated financial statements are an integral part of these statements of income (loss). 72 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES BALANCE SHEETS
DECEMBER 31, ----------------- 2007 2006 ------- ------- (MILLIONS) ASSETS Current assets: Cash and cash equivalents.................................... $ 188 $ 202 Receivables -- Customer notes and accounts, net.......................... 732 578 Other..................................................... 25 17 Inventories.................................................. 539 441 Deferred income taxes........................................ 36 51 Prepayments and other........................................ 121 126 ------- ------- 1,641 1,415 ------- ------- Other assets: Long-term notes receivable, net.............................. 19 26 Goodwill..................................................... 208 203 Intangibles, net............................................. 26 8 Deferred income taxes........................................ 370 397 Other........................................................ 141 132 ------- ------- 764 766 ------- ------- Plant, property, and equipment, at cost........................ 2,978 2,643 Less -- Accumulated depreciation and amortization............ (1,793) (1,550) ------- ------- 1,185 1,093 ------- ------- $ 3,590 $ 3,274 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt (including current maturities of long-term debt)..................................................... $ 46 $ 28 Trade payables............................................... 987 781 Accrued taxes................................................ 41 49 Accrued interest............................................. 22 33 Accrued liabilities.......................................... 213 194 Other........................................................ 49 34 ------- ------- 1,358 1,119 ------- ------- Long-term debt................................................. 1,328 1,357 ------- ------- Deferred income taxes.......................................... 114 107 ------- ------- Postretirement benefits........................................ 288 350 ------- ------- Deferred credits and other liabilities......................... 71 87 ------- ------- Commitments and contingencies Minority interest................ 31 28 ------- ------- Shareholders' equity: Common stock................................................. -- -- Premium on common stock and other capital surplus............ 2,800 2,790 Accumulated other comprehensive loss......................... (73) (252) Retained earnings (accumulated deficit)...................... (2,087) (2,072) ------- ------- 640 466 Less -- Shares held as treasury stock, at cost............... 240 240 ------- ------- 400 226 ------- ------- $ 3,590 $ 3,274 ======= =======
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. 73 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------- 2007 2006 2005 ----- ----- ----- (MILLIONS) OPERATING ACTIVITIES Net income (loss).......................................... $ (5) $ 49 $ 56 Adjustments to reconcile net income (loss) to cash provided by operating activities -- Depreciation and amortization of other intangibles....... 205 184 177 Stock-based compensation................................. 9 7 3 Deferred income taxes.................................... 25 (41) 1 Loss on sale of assets................................... 8 3 3 Changes in components of working capital (net of acquisition) -- (Increase) decrease in receivables.................... (117) (24) (86) (Increase) decrease in inventories.................... (66) (57) 6 (Increase) decrease in prepayments and other current assets.............................................. 15 (25) 4 Increase (decrease) in payables....................... 123 92 (9) Increase (decrease) in accrued taxes.................. (25) 15 13 Increase (decrease) in accrued interest............... (10) 2 4 Increase (decrease) in other current liabilities...... 24 3 (27) Other.................................................... (21) (5) (22) ----- ----- ----- Net cash provided by operating activities.................. 165 203 123 ----- ----- ----- INVESTING ACTIVITIES Proceeds from sale of assets............................... 10 17 4 Cash payments for plant, property, and equipment........... (177) (177) (140) Cash payments for software related intangible assets....... (19) (13) (14) Cash payment for net assets purchased...................... (16) -- -- Acquisition of businesses (net of cash acquired)........... -- -- (14) Investments and other...................................... -- 1 -- ----- ----- ----- Net cash used by investing activities...................... (202) (172) (164) ----- ----- ----- FINANCING ACTIVITIES Issuance of common shares.................................. 8 17 7 Issuance of long-term debt................................. 400 -- 1 Debt issuance costs on long-term debt...................... (11) -- -- Retirement of long-term debt............................... (591) (4) (45) Net increase (decrease) in revolver borrowings and short- term debt excluding current maturities of long-term debt..................................................... 183 3 9 Distribution to minority interest partners................. (6) (4) -- ----- ----- ----- Net cash provided (used) by financing activities........... (17) 12 (28) ----- ----- ----- Effect of foreign exchange rate changes on cash and cash equivalents.............................................. 40 18 (4) ----- ----- ----- Increase (decrease) in cash and cash equivalents........... (14) 61 (73) Cash and cash equivalents, January 1....................... 202 141 214 ----- ----- ----- Cash and cash equivalents, December 31 (Note).............. $ 188 $ 202 $ 141 ===== ===== ===== SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the year for interest..................... $ 177 $ 137 $ 126 Cash paid during the year for income taxes (net of refunds)................................................. $ 60 $ 26 $ 23 NON-CASH INVESTING AND FINANCING ACTIVITIES Retirement of obligation and exchange of property.......... $ -- $ -- $ (2) Period ended balance of payables for plant, property, and equipment................................................ $ 40 $ 18 $ 25
- ---------- Note: Cash and cash equivalents include highly liquid investments with a maturity of three months or less at the date of purchase. The accompanying notes to consolidated financial statements are an integral part of these statements of cash flows. 74 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, ------------------------------------------------------------- 2007 2006 2005 ------------------- ------------------- ------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ---------- ------- ---------- ------- ---------- ------- (MILLIONS EXCEPT SHARE AMOUNTS) COMMON STOCK Balance January 1.................. 47,085,274 $ -- 45,544,668 $ -- 44,275,594 $ -- Issued (Reacquired) pursuant to benefit plans................. 209,558 -- (104,240) -- 283,797 -- Stock options exercised.......... 597,700 -- 1,644,846 -- 985,277 -- ---------- ------- ---------- ------- ---------- ------- Balance December 31................ 47,892,532 -- 47,085,274 -- 45,544,668 -- ========== ======= ========== ======= ========== ======= PREMIUM ON COMMON STOCK AND OTHER CAPITAL SURPLUS Balance January 1.................. 2,790 2,776 2,765 Premium on common stock issued pursuant to benefit plans..... 10 14 11 ------- ------- ------- Balance December 31................ 2,800 2,790 2,776 ------- ------- ------- ACCUMULATED OTHER COMPREHENSIVE LOSS Balance January 1.................. (252) (281) (184) Adoption of Statement of Financial Accounting Standard (SFAS) No. 158, net of tax.... -- (59) -- Other comprehensive income (loss)........................ 179 88 (97) ------- ------- ------- Balance December 31................ (73) (252) (281) ------- ------- ------- RETAINED EARNINGS (ACCUMULATED DEFICIT) Balance January 1.................. (2,072) (2,118) (2,171) Net income (loss)................ (5) 49 56 Measurement date implementation of SFAS No. 158, net of tax... (8) -- -- Other............................ (2) (3) (3) ------- ------- ------- Balance December 31................ (2,087) (2,072) (2,118) ------- ------- ------- LESS -- COMMON STOCK HELD AS TREASURY STOCK, AT COST Balance January 1 and December 31.. 1,294,692 240 1,294,692 240 1,294,692 240 ========== ------- ========== ------- ========== ------- Total............................ $ 400 $ 226 $ 137 ======= ======= =======
The accompanying notes to consolidated financial statements are an integral part of these statements of changes in shareholders' equity. 75 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------------ 2007 2006 2005 ------------------------------ ---------------------------- ---------------------------- ACCUMULATED ACCUMULATED ACCUMULATED OTHER OTHER OTHER COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE INCOME INCOME INCOME INCOME INCOME INCOME (LOSS) (LOSS) (LOSS) (LOSS) (LOSS) (LOSS) ------------- ------------- ------------- ------------- ------------- ------------- (MILLIONS) NET INCOME (LOSS)........... $ (5) $ 49 $ 56 ---- ---- ---- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) CUMULATIVE TRANSLATION ADJUSTMENT Balance January 1......... $ (53) $(149) $ (62) Translation of foreign currency statements.. 138 138 96 96 (87) (87) ----- ----- ----- Balance December 31....... 85 (53) (149) ----- ----- ----- ADDITIONAL LIABILITY FOR PENSION BENEFITS Balance January 1......... (199) (132) (122) Additional liability for pension benefits............. 27 27 (5) (5) (16) (16) Measurement date implementation of SFAS No. 158, net of tax.................. 14 14 -- -- -- -- Income tax benefit..... -- -- -- -- 6 6 Deferred tax valuation allowance adjustment........... -- -- (3) (3) -- -- ----- ----- ----- Balance December 31....... (158) (140) (132) ----- ----- ----- ADOPTION OF SFAS NO. 158, NET OF TAX............. -- -- (59) -- -- -- ----- ----- ----- Balance December 31......... $ (73) $(252) $(281) ===== ---- ===== ---- ===== ---- Other comprehensive income (loss).................... 179 88 (97) ---- ---- ---- COMPREHENSIVE INCOME (LOSS).................... $174 $137 $(41) ==== ==== ====
The accompanying notes to consolidated financial statements are an integral part of these statements of comprehensive income (loss). 76 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF ACCOUNTING POLICIES Consolidation and Presentation Our consolidated financial statements include all majority-owned subsidiaries. We carry investments in 20 percent to 50 percent owned companies as an equity method investment, at cost plus equity in undistributed earnings since the date of acquisition and cumulative translation adjustments. We have eliminated all significant intercompany transactions. Sales of Accounts Receivable We entered into an agreement to sell an interest in some of our U.S. trade accounts receivable to a third party. Receivables become eligible for the program on a daily basis, at which time the receivables are sold to the third party, net of a factoring discount, through a wholly-owned subsidiary. Under this agreement, as well as individual agreements with third parties in Europe, we sell accounts receivable throughout the year. As of December 31, 2007, 2006, and 2005, we have sold accounts receivables of $157 million, $133 million and $129 million, respectively. We recognized losses of approximately $10 million, $9 million and $6 million during 2007, 2006, and 2005, respectively, on these sales of trade accounts receivable, representing the discount from book values at which these receivables were sold to the third party. The discount rate varies based on funding cost incurred by the third party, and it averaged six percent during 2007. We retained ownership of the remaining interest in the pool of receivables not sold to the third party. The retained interest represents a credit enhancement for the program. We value the retained interest based upon the amount we expect to collect from our customers, which approximates book value. Inventories At December 31, 2007 and 2006, inventory by major classification was as follows:
2007 2006 ---- ---- (MILLIONS) Finished goods.............................................. $212 $193 Work in process............................................. 175 90 Raw materials............................................... 111 122 Materials and supplies...................................... 41 36 ---- ---- $539 $441 ==== ====
Our inventories are stated at the lower of cost or market value using the first-in, first-out ("FIFO") or average cost methods. Goodwill and Intangibles, net As required by Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," each year in the fourth quarter, or more frequently if events indicate it is warranted, we compare the estimated fair value of our reporting units with goodwill to the carrying value of the unit's assets and liabilities to determine if impairment exists within the recorded balance of goodwill. Inherent in this calculation is the use of estimates as the fair value of our designated reporting units is based upon the present value of our expected future cash flows. In addition, our calculation includes our best estimate of our weighted average cost of capital and growth rate. If the calculation results in a fair value of the reporting unit which is less than its book value, a goodwill impairment charge would be recorded in the operating results of the impaired reporting unit. We also evaluate the carrying value of our intangible assets with indefinite lives by comparing it to their estimated fair value. If the carrying value exceeds the estimated fair value, we would record an impairment charge. 77 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The changes in the net carrying amount of goodwill for the twelve months ended December 31, 2007, are as follows:
EUROPE, NORTH SOUTH AMERICA ASIA AMERICA AND INDIA PACIFIC TOTAL ------- ------------- ------- ----- (MILLIONS) Balance at December 31, 2006............... $138 $56 $ 9 $203 Translation adjustments.................... -- 4 1 5 ---- --- --- ---- Balance at December 31, 2007............... $138 $60 $10 $208 ==== === === ====
We have capitalized certain intangible assets, primarily trademarks and patents, based on their estimated fair value at the date we acquired them. We amortize these intangible assets on a straight-line basis over periods ranging from five to 30 years. Amortization of intangibles amounted to $1 million in 2007, and less than $1 million in 2006 and 2005, and is included in the statements of income caption "Depreciation and amortization of other intangibles." The carrying amount and accumulated amortization are as follows:
DECEMBER 31, 2007 DECEMBER 31, 2006 ----------------------------- ----------------------------- GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED VALUE AMORTIZATION VALUE AMORTIZATION -------------- ------------ -------------- ------------ (MILLIONS) (MILLIONS) Amortized Intangible Assets Customer contract............. $ 8 $(1) $ 6 $-- Patents....................... 3 (2) 3 (2) Noncompete covenants.......... -- -- -- -- Trademarks.................... -- -- 1 (1) Technology rights & capital subsidies.................. 20 (2) 2 (1) --- --- --- --- Total......................... $31 $(5) $12 $(4) === === === ===
Estimated amortization of intangible assets over the next five years is expected to be $2 million each year. During 2007, we spent $16 million to acquire Combustion Components Associates' ELIM-NOx(TM) technology which we will begin to amortize in 2008. Plant, Property, and Equipment, at Cost At December 31, 2007 and 2006, plant, property, and equipment, at cost, by major category were as follows:
2007 2006 ------ ------ (MILLIONS) Land, buildings, and improvements......................... $ 496 $ 432 Machinery and equipment................................... 2,288 2,027 Other, including construction in progress................. 194 184 ------ ------ $2,978 $2,643 ====== ======
We depreciate these properties excluding land on a straight-line basis over the estimated useful lives of the assets. Useful lives range from 10 to 50 years for buildings and improvements and from three to 25 years for machinery and equipment. 78 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Notes and Accounts Receivable and Allowance for Doubtful Accounts Short and long-term notes receivable outstanding were $23 million and $29 million at December 31, 2007 and 2006, respectively. The allowance for doubtful accounts on short-term and long-term notes receivable was $3 million at December 31, 2007, and $3 million at December 31, 2006. At December 31, 2007 and 2006, the allowance for doubtful accounts on short-term and long-term accounts receivable was $22 million and $20 million, respectively. Pre-production Design and Development and Tooling Assets We expense pre-production design and development costs as incurred unless we have a contractual guarantee for reimbursement from the original equipment customer. We had long-term receivables of $20 million and $22 million on the balance sheet at December 31, 2007 and 2006, respectively, for guaranteed pre- production design and development reimbursement arrangements with our customers. In addition, plant, property and equipment includes $62 million and $63 million at December 31, 2007 and 2006, respectively, for original equipment tools and dies that we own, and prepayments and other includes $33 million and $38 million at December 31, 2007 and 2006, respectively, for in-process tools and dies that we are building for our original equipment customers. Internal Use Software Assets We capitalize certain costs related to the purchase and development of software that we use in our business operations. We amortize the costs attributable to these software systems over their estimated useful lives, ranging from three 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, were $86 million and $81 million at December 31, 2007 and 2006, respectively, and are recorded in other long-term assets. Amortization of software development costs was approximately $21 million, $17 million and $16 million for the years ended December 31, 2007, 2006 and 2005, respectively, and is included in the statements of income caption "Depreciation and Amortization of other intangibles." Additions to capitalized software development costs, including payroll and payroll-related costs for those employees directly associated with developing and obtaining the internal use software, are classified as investing activities in the statements of cash flows. Income Taxes We have a U.S. Federal tax net operating loss carryforward ("NOL") at December 31, 2007, of $518 million, which will expire in varying amounts from 2020 to 2027. The federal tax effect of that NOL is recorded as a deferred tax asset on our balance sheet for $181 million and $209 million at December 31, 2007 and 2006, respectively. We also have state NOL carryforwards at December 31, 2007 of $767 million, which will expire in various years through 2027. The tax effect of the state NOL, net of a valuation allowance, is recorded as a deferred tax asset on our balance sheet for $40 million and $29 million at December 31, 2007 and 2006, respectively. We estimate, based on available evidence both positive and negative, that it is more likely than not that we will utilize these NOLs within the prescribed carryforward period. That estimate is based upon our expectations regarding future taxable income of our U.S. operations and the implementation of available tax planning strategies that accelerate usage of the NOL. Circumstances that could change that estimate include future U.S. earnings at lower than expected levels or a majority ownership change as defined in the rules of the U.S. tax law. If that estimate changed, we would be required to cease recognizing an income tax benefit for any new NOL and could be required to record a reserve for some or all of the asset currently recorded on our balance sheet. 79 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Revenue Recognition We recognize revenue for sales to our original equipment and aftermarket customers when title and risk of loss passes to the customers under the terms of our arrangements with those customers, which is usually at the time of shipment from our plants or distribution centers. In connection with the sale of exhaust systems to certain original equipment manufacturers, we purchase catalytic converters and diesel particulate filters or components thereof including precious metals ("substrates") on behalf of our customers which are used in the assembled system. These substrates are included in our inventory and "passed through" to the customer at our cost, plus a small margin, since we take title to the inventory and are responsible for both the delivery and quality of the finished product. Revenues recognized for substrate sales were $1,673 million, $927 million and $681 million in 2007, 2006 and 2005, respectively. For our aftermarket customers, we provide for promotional incentives and returns at the time of sale. Estimates are based upon the terms of the incentives and historical experience with returns. Certain taxes assessed by governmental authorities on revenue producing transactions, such as value added taxes, are excluded from revenue and recorded on a net basis. Shipping and handling costs billed to customers are included in revenues and the related costs are included in cost of sales in our Statements of Income (Loss). Warranty Reserves Where we have offered product warranty, we also provide for warranty costs. Those estimates are based upon historical experience and upon specific warranty issues as they arise. While we have not experienced any material differences between these estimates and our actual costs, it is reasonably possible that future warranty issues could arise that could have a significant impact on our consolidated financial statements. Earnings Per Share We compute basic earnings per share by dividing income available to common shareholders 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 we adjust the weighted-average number of shares outstanding to include estimates of additional shares that would be issued if potentially dilutive common shares had been issued. In addition, we adjust income available to common shareholders to include any changes in income or loss that would result from the assumed issuance of the dilutive common shares. Due to the net loss for the year ended December 31, 2007, the calculation of diluted earnings per share does not include the dilutive effect from shares of restricted stock and stock options. See Note 8 to the consolidated financial statements of Tenneco Inc. and Consolidated Subsidiaries. Engineering, Research and Development We expense engineering, research, and development costs as they are incurred. Engineering, research and development expenses were $114 million for 2007, $88 million for 2006 and $83 million for 2005, net of reimbursements from our customers. Of these amounts, $18 million in 2007, $13 million in 2006 and $11 million in 2005 relate to research and development, which includes the research, design, and development of a new unproven product or process. Additionally, $59 million, $45 million and $47 million of engineering, research, and development expense for 2007, 2006, and 2005, respectively, relates to improvements and enhancements to existing products and processes. The remainder of the expenses in each year relate to engineering costs we incurred for application of existing products and processes to vehicle platforms. Further, our customers reimburse us for engineering, research, and development costs on some platforms when we prepare prototypes and incur costs before platform awards. Our engineering research and development expense for 2007, 2006, and 2005 has been reduced by $72 million, $61 million and $51 million, respectively, for these reimbursements. 80 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Foreign Currency Translation We translate the consolidated financial statements of foreign subsidiaries into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and a weighted-average exchange rate for revenues and expenses in each period. We record translation adjustments for those subsidiaries whose local currency is their functional currency as a component of accumulated other comprehensive loss in shareholders' equity. We recognize transaction gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency in earnings as incurred, except for those transactions which hedge purchase commitments and for those intercompany balances which are designated as long-term investments. Net income included foreign currency transaction gains of $15 million in 2007 and losses of $8 million and $5 million in 2006 and 2005, respectively. Risk Management Activities We use derivative financial instruments, principally foreign currency forward purchase and sale contracts with terms of less than one year, to hedge our exposure to changes in foreign currency exchange rates, and interest rate swaps to manage our exposure to changes in interest rates. Our primary exposure to changes in foreign currency rates results from intercompany loans made between affiliates to minimize the need for borrowings from third parties. Net gains or 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. From time to time we may enter into foreign currency forward purchase and sale contracts to mitigate our exposure to changes in exchange rates on some intercompany and third party trade receivables and payables. Since these anticipated transactions are not firm commitments, we mark these forward contracts to market each period and record any gain or loss in the income statement. We recognize the after-tax net gains or losses on these contracts on the accrual basis in the balance sheet caption "Accumulated other comprehensive 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. We do not enter into derivative financial instruments for speculative purposes. Changes in Accounting Pronouncements In February 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) 140-3, "Accounting for Transfers of Financial Assets and Repurchase Financing Transactions". FSP 140-3 provides guidance on accounting for a transfer of a financial asset and a repurchase financing which is a repurchase agreement that relates to a previously transferred financial asset between the same counterparties that is entered into contemporaneously with, or in contemplation of, the initial transfer. FSP 140-3 is effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. We are evaluating FSP 140-3 to determine the effect on our financial statements and related disclosures. In February 2008, the FASB issued FSP 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement Under Statement 13". FSP 157-1 provides a scope exception to SFAS No. 157 which does not apply under Statement 13 and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under Statement 13. FSP 157-1 is effective upon the initial adoption of SFAS No. 157. We do not expect the adoption of FSP 157-1 to have a material impact to our consolidated financial statements. In December 2007, the FASB issued SFAS No. 141 (Revised 2007), "Business Combinations" (SFAS No. 141(R)). SFAS No. 141(R) requires an acquirer to recognize the assets acquired, the liabilities assumed, contractual contingencies and any noncontrolling interest in the acquiree at the acquisition date at their fair 81 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) values as of that date. SFAS No. 141(R) provides guidance on the accounting for acquisition-related costs, restructuring costs related to the acquisition and the measurement of goodwill and a bargain purchase. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after December 15, 2008. We do not expect the adoption of this statement to have a material impact to our consolidated financial statements. In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51." SFAS No. 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarified that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements, establishes a single method of accounting for changes in a parent's ownership interest in a subsidiary that does not result in deconsolidation and provides for expanded disclosure in the consolidated financial statements relating to the interests of the parent's owners and the interests of the noncontrolling owners of the subsidary. SFAS No. 160 applies prospectively (except for the presentation and disclosure requirements) for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008. The presentation and disclosure requirements will be applied retrospectively for all periods presented. We are evaluating this statement to determine the effect on our financial statements and related disclosures. In December 2007, the Securities and Exchange Commission issued Staff Accounting Bulleting No. 110 (SAB 110). SAB 110 amends and replaces Question 6 of Section D.2 Topic 14, "Share-Based Payment." Question 6 of Topic 14:D.2 (as amended) expresses the views of the staff regarding the use of a "simplified" method in developing an estimate of the expected term of "plain vanilla" share options in accordance with SFAS No. 123 (revised 2004), "Share-Based Payment" (SFAS No. 123(R)). SAB 110 is effective January 1, 2008. The adoption of SAB 110 will have no impact to our consolidated financial statements. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurement." This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements. In February 2008, the FASB issued FSP 157-2, "Effective Date of FASB Statement No. 157," which delays the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. We do not expect the adoption of this statement to have a material impact to our consolidated financial statements. In June 2007, the Emerging Issues Task Force (EITF) issued EITF 06-11, "Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards." EITF 06-11 provides the final consensus on the application of paragraphs 62 and 63 of SFAS No. 123(R) on the accounting for income tax benefits relating to the payment of dividends on equity-classified employee share-based payment awards that are charged to retained earnings. EITF 06-11 affirms that the realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings for equity classified nonvested equity shares, nonvested equity share units, and outstanding equity share options should be recognized as an increase in additional paid-in-capital. Additionally, EITF 06-11 provides guidance on the amount of tax benefits from dividends that are reclassified from additional paid-in-capital to the income statement when an entity's estimate of forfeitures changes. EITF 06-11 is effective prospectively to the income tax benefits that result from dividends on equity-classified employee share-based payment awards that are declared in fiscal years beginning after December 15, 2007. We do not expect the adoption of EITF 06-11 to have a material impact on our consolidated financial statements. In June 2007, the EITF issued EITF 07-3, "Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities." EITF 07-3 requires the deferral and capitalization of nonrefundable advance payments for goods or services that an entity will use in research and development activities pursuant to an executory contractual agreement. Expenditures which are capitalized 82 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) under EITF 07-3 should be expensed as the goods are delivered or the related services are performed. EITF 07-3 is effective prospectively for fiscal years beginning after December 15, 2007 and interim periods within those fiscal years. EITF 07-3 is applicable to new contracts entered into after the effective date of this Issue. We do not expect the adoption of EITF 07-3 to have a material impact on our consolidated financial statements. In May 2007, the FASB issued Interpretation No. 48-1, "Definition of Settlement in FASB Interpretation No. 48" (FIN 48-1). FIN 48-1 is effective for fiscal years beginning after December 15, 2006 and provides guidance on how a reporting entity should determine when a tax position is effectively settled. We began applying FIN 48-1 in the second quarter. The adoption of FIN 48-1 did not have a material impact to our consolidated financial statements and related disclosures. See Note 7 to the consolidated financial statements of Tenneco Inc. and Consolidated Subsidiaries included in Item 8. In April 2007, the FASB issued Interpretation No. 39-1, "Amendment of FASB Interpretation No. 39" (FIN 39-1). This amendment allows a reporting entity to offset fair value amounts recognized for derivative instruments with fair value amounts recognized for the right to reclaim or realize cash collateral. Additionally, this amendment requires disclosure of the accounting policy on the reporting entity's election to offset or not offset amounts for derivative instruments. FIN 39-1 is effective for fiscal years beginning after November 15, 2007. We do not expect the adoption of FIN 39-1 to have a material impact on our consolidated financial statements. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." This statement permits companies to choose to measure at fair value many financial instruments and certain other items that are not currently required to be measured at fair value. SFAS No. 159 is effective for financial statements issued for fiscal years beginning on or after November 15, 2007. We do not believe the statement will have a material effect on our consolidated financial statements and related disclosures. In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)." Part of this Statement was effective as of December 31, 2006, and requires companies that have defined benefit pension plans and other postretirement benefit plans to recognize the funded status of those plans on the balance sheet on a prospective basis from the effective date. The funded status of these plans is determined as of the plans' measurement dates and represents the difference between the amount of the obligations owed to participants under each plan (including the effects of future salary increases for defined benefit plans) and the fair value of each plan's assets dedicated to paying those obligations. To record the funded status of those plans, unrecognized prior service costs and net actuarial losses experienced by the plans will be recorded in the Accumulated Other Comprehensive Loss section of shareholders' equity on the balance sheet. The initial adoption as of December 31, 2006 resulted in a reduction of Accumulated Other Comprehensive Loss in shareholders' equity of $59 million. In addition, SFAS No. 158 requires that companies using a measurement date for their defined benefit pension plans and other postretirement benefit plans other than their fiscal year end, change the measurement date effective for fiscal years ending after December 15, 2008. Effective January 1, 2007, we elected to early adopt the measurement date provision of SFAS No. 158. Adoption of this part of the statement was not material to our financial position and results of operations. See Note 10 to the consolidated financial statements of Tenneco Inc. and Consolidated Subsidiaries included in Item 8. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of 83 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates include, among others allowances for doubtful receivables, promotional and product returns, pension and post-retirement benefit plans, income taxes, and contingencies. These items are covered in more detail elsewhere in Note 1, Note 7, Note 10, and Note 12 of the consolidated financial statements of Tenneco Inc. and Consolidated Subsidiaries. Actual results could differ from those estimates. 2. RESTRUCTURING AND OTHER CHARGES Over the past several years we have adopted plans to restructure portions of our operations. These plans were approved by the Board of Directors and were designed to reduce operational and administrative overhead costs throughout the business. Prior to the change in accounting required for exit or disposal activities, we recorded charges to income related to these plans for costs that did not benefit future activities in the period in which the plans were finalized and approved, while actions necessary to affect these restructuring plans occurred over future periods in accordance with established plans. Our recent restructuring activities began in the fourth quarter of 2001, when our Board of Directors approved a restructuring plan, a project known as Project Genesis, which was designed to lower our fixed costs, relocate capacity, reduce our work force, improve efficiency and utilization, and better optimize our global footprint. We have subsequently engaged in various other restructuring projects related to Project Genesis. We incurred $27 million in restructuring and restructuring-related costs during 2006, of which $23 million was recorded in cost of sales and $4 million was recorded in selling, general and administrative expense. In 2007, we incurred $25 million in restructuring and restructuring-related costs of which $22 million was recorded in cost of sales, $2 million of which related to a charge for asset impairments for the plant closure in France and $3 million was recorded in selling, general and administrative expense. At December 31, 2007, our restructuring reserve balance was $18 million, of which, $15 million relates to our remaining obligations for the Wissembourg, France plant closure. Since Project Genesis was initiated, we have incurred costs of $155 million through December 31, 2007. Under the terms of our amended and restated senior credit agreement that took effect on March 16, 2007, we are allowed to exclude $80 million of cash charges and expenses, before taxes, related to cost reduction initiatives excluding any charge for asset impairments incurred after March 16, 2007 from the calculation of the financial covenant ratios required under our senior credit facility. As of December 31, 2007, we have excluded $23 million in allowable charges relating to restructuring initiatives against the $80 million available under the terms of the March 2007 amended and restated senior credit facility. In addition to the announced actions, we will continue to evaluate additional opportunities and expect that we will initiate actions that will reduce our costs through implementing the most appropriate and efficient logistics, distribution and manufacturing footprint for the future. We expect to continue to undertake additional restructuring actions as deemed necessary, however, there can be no assurance we will undertake such actions. Actions that we take, if any, will require the approval of our Board of Directors, or its authorized committee. We plan to conduct any workforce reductions that result in compliance with all legal and contractual requirements including obligations to consult with workers' councils, union representatives and others. 3. ACQUISITIONS In September 2007, we completed the acquisition of Combustion Components Associates' ELIM-NOx(TM) technology for $16 million. The acquisition included a complete reactant dosing system design and associated intellectual property including granted patents and patent applications yet to be granted for selective catalytic reduction emission control systems that reduce emissions of oxides of nitrogen from diesel powered vehicles. The technology can be used for both urea and hydrocarbon injection. We have recorded the acquisition as part 84 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of intangible assets on our balance sheet. The final allocation of the purchase price for the assets will be completed in the first quarter of 2008. In December 2005, we completed the acquisition of the minority interest of the joint venture partner for our Indian ride control operations. We purchased the minority owned interest for approximately $5 million in cash and property. In February 2005, we acquired substantially all the exhaust assets, and assumed certain related liabilities of, Gabilan Manufacturing, Inc., a privately held company that had developed and manufactured motorcycle exhaust systems for Harley-Davidson motorcycles since 1978. The company also produced aftermarket muffler kits for Harley-Davidson. We purchased Gabilan's assets, including working capital adjustments, for $11 million in cash. 4. RESTATEMENT Subsequent to the issuance of our consolidated financial statements for the year ended December 31, 2006, we determined that an error existed in our consolidated financial statements relating to our accounting for three interest rate swaps. The error did not change the underlying economics of the transaction and had no effect on our cash flow or liquidity. In April 2004, we entered into three separate fixed-to-floating interest rate swaps with two financial institutions. These agreements swapped a total of $150 million of our fixed 10.25% senior secured notes to floating interest rate debt at LIBOR plus an average spread of 5.68 percentage points. From the inception of the interest rate swaps, we applied the so-called "short-cut" method of fair value hedge accounting under Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." To qualify for the short-cut method of hedge accounting, the terms of an interest rate swap must be an exact match, or "mirror image," of the terms of the debt it is hedging. When these conditions are met, a company can assume the changes in the value of the hedges and the underlying debt offset each other. Any unrealized gains and losses in fair value of the swap agreements are recorded as an offset to long-term debt thereby having no effect on earnings. While we believed we had appropriately matched the terms of the swaps and the underlying debt, differences have subsequently been identified. One difference is between the 30-day notice period to terminate the swaps and the 30 to 60 day notice period to redeem the notes. Another difference relates to the fact that while the debt and swaps can both be redeemed before their maturity dates, the notes allow us to make redemptions in increments of $1,000 while the interest rate swap agreements imply that they can only be redeemed in their full amounts. As a result, we determined that these transactions do not meet the requirements for hedge accounting treatment under SFAS No. 133 and we corrected our past accounting for the swaps as hedges. Therefore, we recorded the changes in the fair value of the interest rate swaps as increases or decreases to interest expense in each period since we entered into them, instead of recording the changes in fair value as an offset to the underlying debt. In connection with the restatement, we requested and received from the lenders under the senior credit facility a waiver of any default or event of default that would otherwise have arisen because our prior consolidated financial statements could no longer be relied upon. 85 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Other restatement adjustments We also corrected other errors as part of this restatement that we originally determined to be immaterial, individually and in the aggregate, to our consolidated financial statements. In addition, we have conducted a detailed reconciliation of our deferred income tax balances. The corrections include the following: Stock option expense -- We moved the fourth quarter 2006 expense related to past administration of stock options to the periods to which the charges relate. In certain years our administrative procedures for determining the final allocation of the options granted to middle management were not finalized until after the Board approved the grants and set the exercise price. During certain years, at the time the administrative procedures were completed, the market value of the option was greater than the grant price. As a result, we are required to recognize expense for the difference in price. Approximately $1 million of expense was recorded in periods prior to 2006. Currency gains and losses -- In the second quarter of 2005, we recorded an expense to correct a system error in calculating realized and unrealized currency gains and losses. We have moved this expense from the second quarter of 2005 and recorded the expense in the periods to which it relates. Approximately $2 million was recorded in the fourth quarter of 2004 and $1 million was recorded in the first quarter of 2005. Deferred income taxes -- As part of our efforts to improve our internal control environment surrounding accounting for income taxes, we undertook a detailed reconciliation of deferred tax balances. As a result, we recorded a net increase of approximately $16 million in our net deferred tax assets. This tax adjustment recognized historical book to tax basis differences identified in the reconciliation including depreciation, property transfers and disposals, and state income taxes. A substantial portion of the adjustment also relates to the 1999 spin-off of our former packaging subsidiary now known as Pactiv, Inc., a 1996 acquisition and a 1994 U.K. business restructuring. Fees on Receivables Sold -- We corrected the classification of costs associated with our European receivables sale program. These costs were recorded in interest expense and selling, general and administrative expenses and should have been recorded in other income and expense. This change reduced interest expense by $1 million in each of the years ended December 31, 2006 and 2005 and selling, general and administrative expense by $2 million in each of the years ended December 31, 2006 and 2005, with a corresponding increase in other expense. This represents the discount from book values at which these receivables were sold to the third party. This adjustment did not impact net income. As a result, we filed restated financial statements for the year ended December 31, 2006 on Form 10-K/A on August 14, 2007. 86 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. LONG-TERM DEBT, SHORT-TERM DEBT, AND FINANCING ARRANGEMENTS Long-Term Debt A summary of our long-term debt obligations at December 31, 2007 and 2006, is set forth in the following table:
2007 2006 ------ ------ (MILLIONS) Tenneco Inc. -- Revolver borrowings due 2012, average effective interest rate 5.8% in 2007....................................... $ 169 $ -- Senior Term Loans due 2012, average effective interest rate 7.2% in 2007 and 7.1% in 2006...................... 150 356 10 1/4% Senior Secured Notes due 2013, including unamortized premium.................................. 250 488 8 5/8% Senior Subordinated Notes due 2014............... 500 500 8 1/8% Senior Notes due 2015............................ 250 -- Debentures due 2008 through 2025, average effective interest rate 9.3% in both 2007 and 2006............. 3 3 Notes due 2007, average effective interest rate 7.5% in both 2007 and 2006................................... -- 2 Other subsidiaries -- Notes due 2008 through 2016, average effective interest rate 4.6% in 2007 and 4.0% in 2006... 12 14 ------ ------ 1,334 1,363 Less -- current maturities................................ 6 6 ------ ------ Total long-term debt...................................... $1,328 $1,357 ====== ======
The aggregate maturities and sinking fund requirements applicable to the issues outstanding at December 31, 2007, are $6 million, $21 million, $54 million, $67 million, and $18 million for 2008, 2009, 2010, 2011, and 2012, respectively. Short-Term Debt Our short-term debt includes the current portion of long-term obligations and borrowing by foreign subsidiaries. Information regarding our short-term debt as of and for the years ended December 31, 2007 and 2006 is as follows:
2007 2006 ---- ---- (MILLIONS) Current maturities on long-term debt......................... $ 6 $ 6 Notes payable................................................ 40 22 --- --- Total short-term debt........................................ $46 $28 === ===
87 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2007 2006 ---------------- ---------------- NOTES PAYABLE(A) NOTES PAYABLE(A) ---------------- ---------------- (DOLLARS IN MILLIONS) Outstanding borrowings at end of year............ $ 40 $ 22 Weighted average interest rate on outstanding borrowings at end of year(b)................... 4.0% 3.7% Approximate maximum month-end outstanding borrowings during year......................... $ 40 $175 Approximate average month-end outstanding borrowings during year......................... $ 28 $ 97 Weighted average interest rate on approximate average month-end outstanding borrowings during year(b)........................................ 4.5% 6.6%
- -------- (a) Includes borrowings under both committed credit facilities and uncommitted lines of credit and similar arrangements. (b) This calculation does not include the commitment fees to be paid on the unused revolving credit facilities balances which are recorded as interest expense for accounting purposes. Financing Arrangements
COMMITTED CREDIT FACILITIES(A) AS OF DECEMBER 31, 2007 ----------------------------------------------------------- LETTERS OF TERM COMMITMENTS BORROWINGS CREDIT(B) AVAILABLE ------- ----------- ---------- ---------- --------- (MILLIONS) Tenneco Inc. revolving credit agreement..................... 2012 $550 $100 $31 $419 Tenneco Inc. tranche B letter of credit/revolving loan agreement..................... 2014 130 69 -- 61 Subsidiaries' credit agreements.................... Various 40 40 -- -- ---- ---- --- ---- $720 $209 $31 $480 ==== ==== === ====
- -------- (a) We generally are required to pay commitment fees on the unused portion of the total commitment. (b) Letters of credit reduce the available borrowings under the tranche B letter of credit/revolving loan agreement. Overview and Recent Transactions. Our financing arrangements are primarily provided by a committed senior secured financing arrangement with a syndicate of banks and other financial institutions. The arrangement is secured by substantially all our domestic assets and pledges of 66 percent of the stock of certain first-tier foreign subsidiaries, as well as guarantees by our material domestic subsidiaries. On November 20, 2007, we issued $250 million of 8 1/8 percent Senior Notes due November 15, 2015 through a private placement offering. The offering and related transactions were designed to (1) reduce our interest expense and extend the maturity of a portion of our debt (by using the proceeds of the offering to tender for $230 million of our outstanding $475 million 10 1/4 percent senior secured notes due 2013), (2) facilitate the realignment of the ownership structure of some of our foreign subsidiaries and (3) otherwise amend certain of the covenants in the indenture for the senior secured notes to be consistent with those contained in our 8 5/8 percent senior subordinated notes, including conforming the limitation on incurrence of indebtedness and the absence of a limitation on issuances or transfers of restricted subsidiary stock, and make other minor modifications. 88 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The ownership structure realignment is designed to more effectively align our domestic and foreign assets and revenues with expenses in the appropriate local currencies. Some of the desired results of the realignment will be to allow us to more rapidly use our U.S. net operating losses and reduce our cash tax payments. At present, the ownership structure realignment involves a new European holding company which will own some of our foreign entities. We may alter the components of the realignment from time to time. If market conditions permit in 2008, we may offer debt issued by the new European holding company. The proceeds of that debt would be used to repay any outstanding intercompany debt and, in turn, to fund the redemption of any remaining senior secured notes. This realignment involves utilizing part of our U.S. net operating tax losses. Consequently, we recorded a non-cash charge of $66 million in the fourth quarter of 2007. The offering of new notes and related repurchase of our senior secured notes will reduce our annual interest expense by approximately $3 million for 2008 and increased our total debt outstanding to third-parties by approximately $20 million. In connection with the offering and the related repurchase of our senior secured notes, we also recorded non-recurring pre-tax charges related to the tender premium and fees, the write-off of deferred debt issuance costs, and the write-off of previously recognized issuance premium totaling $21 million in the fourth quarter of 2007. In March 2007, we refinanced our $831 million senior credit facility. This transaction reduced the interest rates we pay on all portions of the facility. While the total amount of the new senior credit facility is $830 million, approximately the same as the previous facility, we changed the components of the facility to enhance our financial flexibility. We increased the amount of commitments under our revolving loan facility from $320 million to $550 million, reduced the amount of commitments under our tranche B-1 letter of credit/revolving loan facility from $155 million to $130 million and replaced the $356 million term loan B with a $150 million term loan A. As of December 31, 2007, the senior credit facility consisted of a five-year, $150 million term loan A maturing in March 2012, a five-year, $550 million revolving credit facility maturing in March 2012, and a seven-year $130 million tranche B-1 letter of credit/revolving loan facility maturing in March 2014. The refinancing of the prior facility allowed us to: (i) amend the consolidated net debt to EBITDA ratio, (ii) eliminate the fixed charge coverage ratio, (iii) eliminate the restriction on capital expenditures, (iv) increase the amount of acquisitions permitted to $250 million, (v) improve the flexibility to repurchase and retire higher cost junior debt, (vi) increase our ability to enter into capital leases, (vii) increase the ability of our foreign subsidiaries to incur debt, (viii) increase our ability to pay dividends and repurchase common stock, (ix) increase our ability to invest in joint ventures, (x) allow for the increase in the existing tranche B-1 facility and/or the term loan A or the addition of a new term loan of up to $275 million in order to reduce our 10.25 percentage senior secured notes, and (xi) make other modifications. Following the refinancing, the term loan A facility is payable in twelve consecutive quarterly installments, commencing June 30, 2009 as follows: $6 million due each of June 30, September 30, December 31, 2009 and March 31, 2010, $15 million due each of June 30, September 30, December 31, 2010 and March 31, 2011, and $17 million due each of June 30, September 30, December 31, 2011 and March 16, 2012. The revolving credit facility requires that any amounts drawn, be repaid by March 2012. Prior to that date, funds may be borrowed, repaid and reborrowed under the revolving credit facility without premium or penalty. Letters of credit may be issued under the revolving credit facility. The tranche B-1 letter of credit/revolving loan facility requires that it be repaid by March 2014. We can borrow revolving loans and issue letters of credit under the $130 million tranche B-1 letter of credit/revolving loan facility. The tranche B-1 letter of credit/revolving loan facility lenders have deposited $130 million with the administrative agent, who has invested that amount in time deposits. We do not have an interest in any of the funds on deposit. When we draw revolving loans under this facility, the loans are funded from the $130 million on deposit with the administrative agent. When we make repayments, the repayments are redeposited with the administrative agent. 89 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The tranche B-1 letter of credit/revolving loan facility is reflected as debt on our balance sheet only if we borrow money under this facility or if we use the facility to make payments for letters of credit. We will not be liable for any losses to or misappropriation of any (i) return due to the administrative agent's failure to achieve the return described above or to pay all or any portion of such return to any lender under such facility or (ii) funds on deposit in such account by such lender (other than the obligation to repay funds released from such accounts and provided to us as revolving loans under such facility). Senior Credit Facility -- Interest Rates and Fees. Prior to the March 2007 refinancing, borrowings under the term loan B facility and the tranche B-1 letter of credit/revolving loan facility bore interest at an annual rate equal to, at our option, either (i) the London Interbank Offering Rate plus a margin of 200 basis points; or (ii) a rate consisting of the greater of the JP Morgan Chase prime rate or the Federal Funds rate plus 50 basis points, plus a margin of 100 basis points. As of December 31, 2007 borrowings under the term loan A facility and the tranche B-1 letter of credit/revolving loan facility bore interest at an annual rate equal to, at our option, either (i) the London Interbank Offering Rate plus a margin of 150 basis points; or (ii) a rate consisting of the greater of the JP Morgan Chase prime rate or the Federal Funds rate plus 50 basis points, plus a margin of 50 basis points. The interest margin for borrowings under the term loan A are subject to adjustment based on the consolidated net leverage ratio (consolidated indebtedness net of cash divided by consolidated EBITDA as defined in the senior credit facility agreement). The margin we pay on the term loan A and the tranche B-1 facility is reduced by 25 basis points following each fiscal quarter for which the consolidated net leverage ratio is less than 2.5 beginning in March 2007, and would increase by 25 basis points following each fiscal quarter for which the consolidated net leverage ratio exceeds 3.5. There is no cost to us for issuing letters of credit under the tranche B-1 letter of credit/revolving loan facility, however outstanding letters of credit reduce our availability to borrow revolving loans under this portion of the facility. If a letter of credit issued under this facility is subsequently paid and we do not reimburse the amount paid in full, then a ratable portion of each lender's deposit would be used to fund the letter of credit. We pay the tranche B-1 lenders a fee which is equal to LIBOR plus 150 basis points. This fee is offset by the return on the funds deposited with the administrative agent which earn interest at a per annum rate approximately equal to LIBOR. Outstanding revolving loans reduce the funds on deposit with the administrative agent which in turn reduce the earnings of those deposits and effectively increases our interest expense at a per annum rate equal to LIBOR. Prior to the March 2007 refinancing, borrowings under the revolving credit facility bore interest at an annual rate equal to, at our option, either (i) the London Interbank Offering Rate plus a margin of 275 basis points; or (ii) a rate consisting of the greater of the JP Morgan Chase prime rate or the Federal Funds rate plus 37.5 basis points, plus a margin of 175 basis points. As of December 31, 2007 borrowings under the revolving credit facility bore interest at an annual rate equal to, at our option, either (i) the London Interbank Offering Rate plus a margin of 150 basis points; or (ii) a rate consisting of the greater of the JP Morgan Chase prime rate or the Federal Funds rate plus 50 basis points, plus a margin of 50 basis points. Letters of credit issued under the revolving credit facility accrue a letter of credit fee at a per annum rate of 150 basis points for the pro rata account of the lenders under such facility and a fronting fee for the ratable account of the issuers thereof at a per annum rate in an amount to be agreed upon payable quarterly in arrears. We also pay a commitment fee of 35 basis points on the unused portion of the revolving credit facility. The interest margins for borrowings and letters of credit issued under the revolving credit facility are subject to adjustment based on the consolidated net leverage ratio (consolidated indebtedness net of cash divided by consolidated EBITDA as defined in the senior credit facility agreement) measured at the end of each quarter. The margin we pay on the revolving credit facility is reduced by 25 basis points and the commitment fee we pay on the revolving credit facility is reduced by 5 basis points following each fiscal quarter for which the consolidated net leverage ratio is less than 2.5 beginning in March 2007. The margin and the commitment fee would increase by 25 basis points and 2.5 basis points, respectively, following each fiscal quarter for which the consolidated net leverage ratio exceeds 3.5. 90 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Senior Credit Facility -- Other Terms and Conditions. As described above, we are highly leveraged. Our refinanced senior credit facility requires that we maintain financial ratios equal to or better than the following consolidated net leverage ratio (consolidated indebtedness net of cash divided by consolidated EBITDA, as defined in the senior credit facility agreement), and consolidated interest coverage ratio (consolidated EBITDA divided by consolidated interest expense, as defined under the senior credit facility agreement) at the end of each period indicated. Failure to maintain these ratios will result in a default under our senior credit facility which could result in all amounts due immediately, as well as most of our other debt, being declared immediately due and payable. The financial ratios required under the amended and restated senior credit facility and, the actual ratios we achieved for the four quarters of 2007, are shown in the following tables:
QUARTER ENDED ------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 2007 2007 2007 2007 ----------- ----------- ------------- ------------- REQ. ACT. REQ. ACT. REQ. ACT. REQ. ACT. ---- ---- ---- ---- ---- ---- ---- ---- Leverage Ratio (maximum).............. 4.25 3.27 4.25 2.99 4.25 2.97 4.25 2.53 Interest Coverage Ratio (minimum)..... 2.10 3.09 2.10 3.21 2.10 3.35 2.10 3.61
2008 2009 2010 2011 2012 REQ. REQ. REQ. REQ. REQ. ---- ---- ---- ---- ---- Leverage Ratio (maximum)............................ 4.00 3.75 3.50 3.50 3.50 Interest Coverage Ratio (minimum)................... 2.10 2.25 2.40 2.55 2.75
The senior credit facility agreement provides the ability to refinance our senior subordinated notes and/or our senior secured notes in an amount equal to the sum of (i) the net cash proceeds of equity issued after the closing date plus (ii) the portion of annual excess cash flow (as defined in the senior credit facility agreement) that is not required to be applied to the payment of the credit facilities and which is not used for other purposes, provided that the amount of the subordinated notes and the aggregate amount of the senior secured notes and the subordinated notes that may be refinanced is capped based upon the pro forma consolidated leverage ratio after giving effect to such refinancing as shown in the following table:
AGGREGATE SENIOR AND PROFORMA CONSOLIDATED SUBORDINATED NOTES SUBORDINATE NOTES LEVERAGE RATIO MAXIMUM AMOUNT MAXIMUM AMOUNT - --------------------- ------------------ -------------------- Greater than or equal to 3.0x...................... $ 50 million $150 million Greater than or equal to 2.5x...................... $100 million $300 million Less than 2.5x..................................... $125 million $375 million
In addition, the senior secured notes may be refinanced with (i) the net cash proceeds of incremental facilities and permitted refinancing indebtedness (as defined in the senior credit facility agreement), (ii) the net cash proceeds of any new senior or subordinated unsecured indebtedness, (iii) proceeds of revolving credit loans (as defined in the senior credit facility agreement), (iv) up to E200 million of unsecured indebtedness of the company's foreign subsidiaries and (v) cash generated by the company's operations. The refinanced senior credit facility agreement also contains restrictions on our operations that are customary for similar facilities, including limitations on: (i) incurring additional liens; (ii) sale and leaseback transactions (except for the permitted transactions as described in the amended and restated agreement); (iii) liquidations and dissolutions; (iv) incurring additional indebtedness or guarantees; (v) investments and acquisitions; (vi) dividends and share repurchases; (vii) mergers and consolidations; and (viii) refinancing of subordinated and 10.25 percent senior secured notes. Compliance with these requirements and restrictions is a condition for any incremental borrowings under the senior credit facility agreement and failure to meet these 91 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) requirements enables the lenders to require repayment of any outstanding loans. As of December 31, 2007, we were in compliance with all the financial covenants and operational restrictions of the facility. Our senior credit facility does not contain any terms that could accelerate the payment of the facility as a result of a credit rating agency downgrade. Senior Secured, Senior and Subordinated Notes. Our outstanding debt also includes $245 million of 10.25 percent senior secured notes due July 15, 2013, $250 million of 8 1/8 percent senior notes due November 15, 2015, and $500 million of 8 5/8 percent senior subordinated notes due November 15, 2014. We can redeem some or all of the notes at any time after July 15, 2008 in the case of the senior secured notes, November 15, 2009 in the case of the senior subordinated notes and November 15, 2011 in the case of the senior notes. If we sell certain of our assets or experience specified kinds of changes in control, we must offer to repurchase the notes. We are permitted to redeem up to 35 percent of the senior notes with the proceeds of certain equity offerings completed before November 15, 2010. Our senior secured, senior and subordinated notes require that, as a condition precedent to incurring certain types of indebtedness not otherwise permitted, our consolidated fixed charge coverage ratio, as calculated on a proforma basis, be greater than 2.00. We have not incurred any of the types of indebtedness not otherwise permitted by the indentures. The indentures also contain restrictions on our operations, including limitations on: (i) incurring additional indebtedness or liens; (ii) dividends; (iii) distributions and stock repurchases; (iv) investments; (v) asset sales and (vi) mergers and consolidations. Subject to limited exceptions, all of our existing and future material domestic wholly owned subsidiaries fully and unconditionally guarantee these notes on a joint and several basis. In addition, the senior secured notes and related guarantees are secured by second priority liens, subject to specified exceptions, on all of our and our subsidiary guarantors' assets that secure obligations under our senior credit facility, except that only a portion of the capital stock of our subsidiary guarantor's domestic subsidiaries is provided as collateral and no assets or capital stock of our direct or indirect foreign subsidiaries secure the notes or guarantees. There are no significant restrictions on the ability of the subsidiaries that have guaranteed these notes to make distributions to us. The senior subordinated notes rank junior in right of payment to our senior credit facility and any future senior debt incurred. As of December 31, 2007, we were in compliance with the covenants and restrictions of these indentures. Accounts Receivable Securitization. In addition to our senior credit facility, senior secured notes, senior notes and senior subordinated notes, we also sell some of our accounts receivable on a nonrecourse basis in North America and Europe. In North America, we have an accounts receivable securitization program with two commercial banks. We sell original equipment and aftermarket receivables on a daily basis under this program. We sold accounts receivable under this program of $100 million and $85 million as of December 31, 2007 and 2006, respectively. This program is subject to cancellation prior to its maturity date if we (i) fail to pay interest or principal payments on an amount of indebtedness exceeding $50 million, (ii) default on the financial covenant ratios under the senior credit facility, or (iii) fail to maintain certain financial ratios in connection with the accounts receivable securitization program. In January 2008, this program was renewed for 364 days to January 26, 2009 at a facility size of $120 million. We also sell some receivables in our European operations to regional banks in Europe. As of December 31, 2007, we sold $57 million of accounts receivable in Europe up from $48 million at December 31, 2006. The arrangements to sell receivables in Europe are not committed and can be cancelled at any time. If we were not able to sell receivables under either the North American or European securitization programs, our borrowings under our revolving credit agreements may increase. These accounts receivable securitization programs provide us with access to cash at costs that are generally favorable to alternative sources of financing, and allow us to reduce borrowings under our revolving credit agreements. 92 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. FINANCIAL INSTRUMENTS The carrying and estimated fair values of our financial instruments by class at December 31, 2007 and 2006 were as follows:
2007 2006 ----------------- ----------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ------ -------- ------ (MILLIONS) ASSETS (LIABILITIES) Long-term debt (including current maturities)............................... $1,334 $1,324 $1,363 $1,420 Instruments with off-balance sheet risk: Foreign currency contracts................ -- (2) -- 1 Financial guarantees...................... -- -- -- --
Asset and Liability Instruments -- The fair value of cash and cash equivalents, short and long-term receivables, accounts payable, and short-term debt was considered to be the same as or was not determined to be materially different from the carrying amount. Long-term Debt -- The fair value of fixed rate long-term debt was based on the market value of debt with similar maturities and interest rates. Instruments With Off-Balance Sheet Risk Foreign Currency Contracts -- Note 1 of the consolidated financial statements of Tenneco Inc. and Consolidated Subsidiaries, "Summary of Accounting Policies -- Risk Management Activities" describes our use of and accounting for foreign currency exchange contracts. The following table summarizes by major currency the contractual amounts of foreign currency contracts we utilize:
NOTIONAL AMOUNT --------------------------------- DECEMBER 31, DECEMBER 31, 2007 2006 --------------- --------------- PURCHASE SELL PURCHASE SELL -------- ---- -------- ---- (MILLIONS) Foreign currency contracts (in U.S.$): Australian dollars.......................... $ 11 $ 2 $ 2 $ 7 British pounds.............................. 8 2 158 119 Canadian dollars............................ -- -- 13 -- Czech Republic koruna....................... -- -- 7 9 Danish kroner............................... -- -- 29 4 European euro............................... 1 143 162 3 Polish zloty................................ -- -- 25 17 South Africa rand........................... 60 13 -- -- Swedish krona............................... -- -- 44 -- U.S. dollars................................ 136 62 -- 282 Other....................................... 4 -- 3 1 ---- ---- ---- ---- $220 $222 $443 $442 ==== ==== ==== ====
We manage our foreign currency risk by entering into derivative financial instruments with major financial institutions that can be expected to fully perform under the terms of such agreements. Based on exchange rates at December 31, 2007 and 2006, the cost of replacing these contracts in the event of 93 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) non-performance by the counterparties would not have been material. The face value of these instruments is recorded in other current liabilities. Financial Guarantees -- We occasionally provide guarantees that could require us to make future payments in the event that the third party primary obligor does not make its required payments. We have not recorded a liability for any of these guarantees. Additionally, we have from time to time issued guarantees for the performance of obligations by some of our subsidiaries, and some of our subsidiaries have guaranteed our debt. All of our existing and future material domestic wholly-owned subsidiaries fully and unconditionally guarantee our senior credit facility, our senior secured notes, our senior notes and our senior subordinated notes on a joint and several basis. The arrangement for the senior credit facility is also secured by first-priority liens on substantially all our domestic assets and pledges of 66 percent of the stock of certain first- tier foreign subsidiaries. The arrangement for the $245 million senior secured notes is also secured by second-priority liens on substantially all our domestic assets, excluding some of the stock of our domestic subsidiaries. No assets or capital stock of our direct or indirect foreign subsidiaries secure these notes. You should also read Note 13 of the consolidated financial statements of Tenneco Inc. and Consolidated Subsidiaries, where we present the Supplemental Guarantor Condensed Consolidating Financial Statements. We have issued guarantees through letters of credit in connection with some obligations of our affiliates. As of December 31, 2007, we have guaranteed $18 million in letters of credit to support some of our subsidiaries' insurance arrangements. In addition, we have issued $13 million in guarantees through letters of credit to guarantee other obligations of subsidiaries primarily related to foreign employee benefit program, environmental remediation activities, and cash management requirements. Interest Rate Swaps -- In April 2004, we entered into fixed-to-floating interest rate swaps covering $150 million of our fixed interest rate debt. The change in market value of these swaps is recorded as part of interest expense and other long-term liabilities. The cost of replacing these contracts in the event of non-performance by the counterparties would not be material. You should also see Notes 4 and 5 of the consolidated financial statements of Tenneco Inc. and Consolidated Subsidiaries. Negotiable Financial Instruments -- One of our European subsidiaries receives payment from one of its OE customers whereby the account receivables are satisfied through the delivery of negotiable financial instruments. These financial instruments are then sold at a discount to a European bank. The sales of these financial instruments are not included in the account receivables sold. Any of these financial instruments which were not sold as of December 31, 2007 and 2006 are classified as other current assets and are excluded from our definition of cash equivalents. We had sold approximately $15 million of these instruments at December 31, 2007 and $26 million at December 31, 2006. In certain instances several of our Chinese subsidiaries receive payment from OE customers and satisfy vendor payments through the receipt and delivery of negotiable financial instruments. Financial instruments used to satisfy vendor payables and not redeemed totaled $23 million and $12 million at December 31, 2007 and 2006, respectively, and were classified as notes payable. Financial instruments received from OE customers and not redeemed totaled $8 million and $9 million at December 31, 2007 and 2006, respectively and were classified as other current assets. One of our Chinese subsidiaries is required to maintain a cash balance at a financial institution issuing the financial instruments which are used to satisfy vendor payments. No financial instruments were outstanding at that Chinese subsidiary as of December 31, 2007. As of December 31, 2006 the required cash balance was less than $1 million and was classified as cash and cash equivalents. 94 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. INCOME TAXES The domestic and foreign components of our income before income taxes and minority interest are as follows:
YEAR ENDED DECEMBER 31, ------------------ 2007 2006 2005 ---- ---- ---- (MILLIONS) U.S. loss before income taxes........................... $(99) $(66) $(5) Foreign income before income taxes...................... 187 126 89 ---- ---- --- Income before income taxes and minority interest........ $ 88 $ 60 $84 ==== ==== ===
Following is a comparative analysis of the components of income tax expense:
YEAR ENDED DECEMBER 31, ------------------ 2007 2006 2005 ---- ---- ---- (MILLIONS) Current -- U.S......................................................... $ -- $ -- $ -- State and local............................................. -- -- 2 Foreign..................................................... 58 46 23 ---- ---- ---- 58 46 25 ---- ---- ---- Deferred -- U.S......................................................... 38 (28) (15) State and local............................................. 5 (1) 4 Foreign..................................................... (18) (12) 12 ---- ---- ---- 25 (41) 1 ---- ---- ---- Income tax expense............................................ $ 83 $ 5 $ 26 ==== ==== ====
95 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Following is a reconciliation of income taxes computed at the statutory U.S. federal income tax rate (35 percent for all years presented) to the income tax expense reflected in the statements of income (loss):
YEAR ENDED DECEMBER 31, ---------------------- 2007 2006 2005 ---- ---- ---- (MILLIONS) Income tax expense computed at the statutory U.S. federal income tax rate............................................ $31 $ 21 $29 Increases (reductions) in income tax expense resulting from: Foreign income taxed at different rates and foreign losses with no tax benefit..................................... (3) (4) 1 Taxes on repatriation of dividends......................... 1 2 1 State and local taxes on income, net of U.S. federal income tax benefit............................................. (1) (1) 1 Changes in valuation allowance for tax loss carryforwards and credits............................................. 6 3 2 Amortization of tax goodwill............................... (2) (2) (2) Income exempt from tax due to tax holidays................. (5) (3) (2) Investment tax credit earned............................... (1) (8) -- European ownership structure realignment................... 66 -- -- Foreign earnings subject to U.S. federal income tax........ 4 3 1 Adjustment of prior years taxes............................ (9) 3 2 Impact of foreign rate reduction........................... (7) (1) (1) Tax contingencies.......................................... 6 (10) (9) Other...................................................... (3) 2 3 --- ---- --- Income tax expense........................................... $83 $ 5 $26 === ==== ===
96 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of our net deferred tax asset were as follows:
DECEMBER 31, ----------- 2007 2006 ---- ---- (MILLIONS) Deferred tax assets -- Tax loss carryforwards: U.S.......................................................... $181 $209 State........................................................ 57 35 Foreign...................................................... 61 59 Investment tax credit benefits.................................. 54 52 Postretirement benefits other than pensions..................... 56 58 Pensions........................................................ 45 55 Bad debts....................................................... 1 1 Sales allowances................................................ 5 7 Other........................................................... 87 115 Valuation allowance............................................. (89) (81) ---- ---- Net deferred tax asset.................................. 458 510 ---- ---- Deferred tax liabilities -- Tax over book depreciation...................................... 101 129 Other........................................................... 70 57 ---- ---- Total deferred tax liability............................... 171 186 ---- ---- Net deferred tax asset............................................ $287 $324 ==== ====
Following is a reconciliation of deferred taxes to the deferred taxes shown in the balance sheet:
DECEMBER 31, ------------- 2007 2006 ----- ----- (MILLIONS) Balance Sheet: Current portion -- deferred tax asset.......................... $ 36 $ 51 Non-current portion -- deferred tax asset...................... 370 397 Current portion -- deferred tax liability shown in other current liabilities......................................... (5) (17) Non-current portion -- deferred tax liability.................. (114) (107) ----- ----- Net Deferred Tax Assets.......................................... $ 287 $ 324 ===== =====
As shown by the valuation allowance in the table above, we had potential tax benefits of $89 million and $81 million at December 31, 2007 and 2006, respectively, that we did not recognize in the statements of income when they were generated. These unrecognized tax benefits resulted primarily from foreign tax loss carryforwards, foreign investment tax credits and U.S. state net operating losses that are available to reduce future U.S. state and foreign tax liabilities. We have a U.S. Federal tax net operating loss carryforward ("NOL") at December 31, 2007, of $518 million, which will expire in varying amounts from 2020 to 2027. The federal tax effect of that NOL is recorded as a deferred tax asset on our balance sheet for $181 million and $209 million at December 31, 2007 and 2006, respectively. We also have state NOL carryforwards at December 31, 2007 of $767 million, which will expire in various years through 2027. The tax effect of the state NOL, net of a valuation allowance, is 97 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) recorded as a deferred tax asset on our balance sheet for $40 million and $29 million at December 31, 2007 and 2006, respectively. We estimate, based on available evidence both positive and negative, that it is more likely than not that we will utilize these NOLs within the prescribed carryforward period. That estimate is based upon our expectations regarding future taxable income of our U.S. operations and the implementation of available tax planning strategies that accelerate usage of the NOL. Circumstances that could change that estimate include future U.S. earnings at lower than expected levels or a majority ownership change as defined in the rules of the U.S. tax law. If that estimate changed, we would be required to cease recognizing an income tax benefit for any new NOL and could be required to record a reserve for some or all of the asset currently recorded on our balance sheet. As of December 31, 2007, for foreign income tax purposes, we have $61 million of foreign tax NOLs. Of the $61 million of foreign tax NOLs, $54 million does not expire and the remainder will expire in varying amounts from 2008 to 2022. We do not provide for U.S. income taxes on unremitted earnings of foreign subsidiaries, except for the earnings of certain of our China operations, as our present intention is to reinvest the unremitted earnings in our foreign operations. Unremitted earnings of foreign subsidiaries are approximately $594 million at December 31, 2007. We estimated that the amount of U.S. and foreign income taxes that would be accrued or paid upon remittance of the assets that represent those unremitted earnings is $215 million. We have tax sharing agreements with our former affiliates that allocate tax liabilities for prior periods and establish indemnity rights on certain tax issues. In July 2006, the FASB issued Financial Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes," which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes." FIN 48 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. This interprepation also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation, the Company recognized approximately a $1 million decrease in the liability for unrecognized tax benefits, which was accounted for as an increase to the January 1, 2007, balance of retained earnings.
2007 ---- Uncertain tax positions -- Balance upon adoption (January 1, 2007).......................... $42 Gross increases in tax positions in current period............... 3 Gross increases in tax positions in prior period................. 6 Gross decreases in tax positions in prior period................. (5) Gross decreases -- settlements................................... (1) Gross decreases -- statute of limitations expired................ (1) --- Ending balance................................................... $44 ===
Included in the balance of unrecognized tax benefits at December 31, 2007 are $41 million of tax benefits that, if recognized, would affect the effective tax rate. We recognize accrued interest and penalties related to unrecognized tax benefits as income tax expense. Related to the uncertain tax benefits noted above, we 98 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) accrued penalties of $1 million and interest of $3 million during 2007 and in total, as of December 31, 2007, we have recognized a liability for penalties of $2 million and interest of $5 million. Our unrecognized tax benefits include foreign exposures relating to the disallowance of deductions, global transfer pricing and various other issues. We believe it is reasonably possible that a decrease of up to $7 million in unrecognized tax benefits related to the expiration of foreign statute of limitations and the conclusion of foreign income tax examinations may occur within the coming year. We are subject to taxation in the U.S. and various state and foreign jurisdictions. Our tax years open to examination in primary jurisdictions are as follows:
OPEN TO TAX YEAR ------------ United States -- due to NOL.................................. 1998 Germany...................................................... 2002 Belgium...................................................... 2005 Canada....................................................... 2002 UK........................................................... 2005 Spain........................................................ 2003
8. COMMON STOCK We have authorized 135 million shares ($0.01 par value) of common stock, of which 47,892,532 shares and 47,085,274 shares were issued at December 31, 2007 and 2006, respectively. We held 1,294,692 shares of treasury stock at both December 31, 2007 and 2006. Equity Plans -- In December 1996, we adopted the 1996 Stock Ownership Plan, which permitted the granting of a variety of awards, including common stock, restricted stock, performance units, stock equivalent units, stock appreciation rights ("SARs"), and stock options to our directors, officers, employees and consultants. The 1996 plan, which terminated as to new awards on December 31, 2001, was renamed the "Stock Ownership Plan." In December 1999, we adopted the Supplemental Stock Ownership Plan, which permitted the granting of a variety of similar awards to our directors, officers, employees and consultants. We were authorized to deliver up to about 1.1 million treasury shares of common stock under the Supplemental Stock Ownership Plan, which also terminated as to new awards on December 31, 2001. In March 2002, we adopted the 2002 Long-Term Incentive Plan which permitted the granting of a variety of similar awards to our officers, directors, employees and consultants. Up to 4 million shares of our common stock were authorized for delivery under the 2002 Long-Term Incentive Plan. In March 2006, we adopted the 2006 Long-Term Incentive Plan which replaced the 2002 Long-Term Incentive Plan and permits the granting of a variety of similar awards to directors, officers, employees and consultants. As of December 31, 2007, up to 1,884,216 shares of our common stock remain authorized for delivery under the 2006 Long-Term Incentive Plan. Our nonqualified stock options have 7 to 20 year terms and vest equally over a three year service period from the date of the grant. We have granted restricted common stock to our directors and certain key employees. These awards generally require, among other things, that the award holder remains in service to our company during the restriction period. We have also granted stock equivalent units and long-term performance units to certain key employees that have been payable in cash. For 2007, the awards contain an annual stub-year grant payable in the first quarter of 2008 and a three year grant payable in the first quarter of 2010. Payment is based on the attainment of specified performance goals. The grant value is indexed to the stock price. In addition, we have granted SARs to certain key employees in our Asian operations that are payable in cash after a three year service period. The grant value is indexed to the stock price. 99 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Accounting Methods -- Prior to January 1, 2006, we utilized the intrinsic value method to account for our stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Therefore, no compensation cost was reflected in net income related to stock options as all options granted under the plans had an exercise price equal to the market price of the underlying common stock on the date of the grant. Compensation cost was previously recognized for restricted stock, stock equivalent units and SARs under this accounting principle. Effective January 1, 2006, we adopted Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment," using the modified prospective application method. Under this transition method, compensation cost recognized for the twelve months ended December 31, 2007, includes the applicable amounts of: (1) compensation cost of all unvested stock-based awards granted prior to January 1, 2006, based upon the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and previously presented in pro-forma footnote disclosures, and (2) compensation cost for all stock-based awards granted on or after January 1, 2006, based upon the grant date fair value estimated in accordance with the new provisions of SFAS No. 123(R). The table below illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123 prior to January 1, 2006:
YEAR ENDED DECEMBER 31, 2005 ----------------- (MILLIONS EXCEPT PER SHARE AMOUNTS) Net income................................................ $ 56 Add: Stock-based employee compensation expense included in net income, net of income tax........................... 6 Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of income tax....................................... (8) ----- Pro forma net income...................................... $ 54 ===== Earnings per share: Basic..................................................... $1.30 Basic -- pro forma for stock-based compensation expense... $1.25 Diluted................................................... $1.24 Diluted -- pro forma for stock-based compensation expense................................................. $1.19
The impact of recognizing compensation expense related to nonqualified stock options under the fair value recognition provisions of SFAS No. 123(R) is contained in the table below.
YEAR ENDED DECEMBER 31, --------------- 2007 2006 ------ ------ (MILLIONS) Selling, general and administrative....................... $ 4 $ 4 ------ ------ Loss before interest expense, income taxes and minority interest................................................ (4) (4) Income tax benefit........................................ (1) (1) ------ ------ Net loss.................................................. $ (3) (3) ====== ====== Decrease in basic earnings per share...................... $(0.06) $(0.06) Decrease in diluted earnings per share.................... $(0.06) $(0.06)
100 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) For stock options awarded to retirement eligible employees prior to the adoption of SFAS No. 123(R) we immediately accelerate the recognition of any outstanding compensation cost when employees become retiree eligible before the end of the explicit vesting period. As of December 31, 2007, there was approximately $4 million, net of tax, of total unrecognized compensation costs related to these stock-based awards that we expect to recognize over a weighted average period of 0.8 years. SFAS No. 109, "Accounting for Income Taxes," discusses the deductibility of transactions. We are allowed a tax deduction for compensation cost which is calculated as the difference between the value of the stock at the date of grant and the price upon exercise of a stock option. Under SFAS No. 123(R), excess tax benefits, which are tax benefits we may realize upon the exercise of stock options that are greater than the tax benefit recognized on the compensation cost recorded in our income statement, are recognized as an addition to paid-in capital. We would present cash retained as a result of excess tax benefits as financing cash flows. Any write-offs of deferred tax assets related to unrealized tax benefits associated with the recognized compensation cost would be reported as income tax expense. Compensation expense for restricted stock, stock equivalent units, long- term performance units and SARs net of tax, was $5 million for the year ended December 31, 2007 and $9 million for the year ended December 31, 2006 and was recorded in selling, general, and administrative expense on the statement of income. Cash received from option exercises for the year ended December 31, 2007, was approximately $4 million. Stock option exercises during the year ended December 31, 2007 generated an excess tax benefit of approximately $5 million. Pursuant to footnote 82 of SFAS No. 123(R), this benefit was not recorded as we have federal and state net operating losses which are not currently being utilized. As a result, the excess tax benefit had no impact on our financial position or statement of cash flows. Assumptions -- We calculated the fair values of the awards using the Black- Scholes option pricing model with the weighted average assumptions listed below. Determining the fair value of share-based awards requires judgment in estimating employee and market behavior. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.
YEAR ENDED DECEMBER 31, ----------------------- 2007 2006 2005 ----- ----- ----- Stock Options Weighted average grant date fair value, per share..... $9.93 $9.27 $8.14 Weighted average assumptions used: Expected volatility................................... 38.4% 42.6% 43.0% Expected lives........................................ 4.1 5.1 7.0 Risk-free interest rates.............................. 4.7% 4.2% 4.0% Dividend yields....................................... 0.0% 0.0% 0.0%
Effective January 1, 2006, we changed our method of determining volatility on all new options granted after that date to implied volatility rather than an analysis of historical volatility. We believe the market-based measures of implied volatility are currently the best available indicators of the expected volatility used in these estimates. The effect of this change did not have a material impact to our results of operations. Expected lives of options are based upon the historical and expected time to post-vesting forfeiture and exercise. We believe this method is the best estimate of the future exercise patterns currently available. The risk-free interest rates are based upon the Constant Maturity Rates provided by the U.S. Treasury. For our valuations, we used the continuous rate with a term equal to the expected life of the options. 101 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On January 10, 2001, we announced that our Board of Directors eliminated the quarterly dividend on our common stock. As a result, there is no dividend yield. Stock Options -- The following table reflects the status and activity for all options to purchase common stock for the period indicated:
YEAR ENDED DECEMBER 31, 2007 ------------------------------------------------ WEIGHTED WEIGHTED AVG. SHARES AVG. REMAINING AGGREGATE UNDER EXERCISE LIFE IN INTRINSIC OPTION PRICES YEARS VALUE --------- -------- ------------- --------- (MILLIONS) Outstanding Stock Options Outstanding, January 1, 2007................ 3,074,173 $10.13 5.5 $40 Granted................................... 589,681 26.68 Canceled.................................. -- -- Forfeited................................. (54,730) 23.67 Exercised................................. (192,563) 7.31 $ 3 --------- Outstanding, March 31, 2007................. 3,416,561 12.93 5.2 42 Granted................................... 33,039 13.86 Canceled.................................. (159,800) 24.07 Forfeited................................. (31,317) 23.27 Exercised................................. (191,097) 6.58 5 --------- Outstanding, June 30, 2007.................. 3,067,386 12.65 5.2 55 Granted................................... 5,884 32.08 Canceled.................................. -- -- Forfeited................................. (6,419) 20.30 Exercised................................. (108,310) 8.72 3 --------- Outstanding, September 30, 2007............. 2,958,541 12.82 4.9 61 Granted................................... -- -- Canceled.................................. (10,000) 13.17 Forfeited................................. (21,922) 23.65 Exercised................................. (105,730) 6.02 2 --------- Outstanding, December 31, 2007.............. 2,820,889 $13.10 4.6 $46 ========= Vested or Expected to Vest, December 31, 2007...................................... 2,761,658 $12.83 4.6 $46 ========= Exercisable, December 31, 2007.............. 1,919,624 $ 8.14 4.1 $41 =========
As previously disclosed, in certain years our administrative procedures for determining the final allocation of the options granted to middle management under our 2002 Long-Term Incentive Plan (the predecessor to our current equity incentive Plan) were not finalized until after the Board approved the grants and set the exercise price. At the time the administrative procedures were completed, the market values of some of the options were greater than the grant prices. While these option-grant practices were not intended to avoid regulations or gain unfair financial advantage, they did result in monetary gains that current law (recently enacted Section 409A of the Internal Revenue Code) would subject to additional taxes and penalties. To mitigate this financial impact of the new tax rules for affected employees, we offered to amend the affected outstanding stock options so the exercise prices match the higher prices on the date they were actually 102 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) granted (we also offered to make up the difference between the revised exercise prices and the lower, original exercise prices with a special cash payment during the first pay period of 2008). Amended options are not liable for additional Section 409A tax liabilities. We also offered to "make whole" employees who were already subject to the additional Section 409A liabilities because of prior exercises or vesting of affected options. We completed the offer in November 2007 and accepted for amendment options to purchase 98,375 shares of our common stock. Restricted Stock -- The following table reflects the status for all nonvested restricted shares for the period indicated:
YEAR ENDED DECEMBER 31, 2007 ------------------------ WEIGHTED AVG. GRANT DATE SHARES FAIR VALUE -------- ------------- Nonvested Restricted Shares Nonvested balance at January 1, 2007....................... 386,507 $17.10 Granted.................................................. 364,018 26.73 Vested................................................... (222,040) 15.39 Forfeited................................................ (35,972) 22.49 -------- Nonvested balance at March 31, 2007........................ 492,513 $24.60 Granted.................................................. 6,527 30.22 Vested................................................... (833) 13.28 Forfeited................................................ (17,199) 22.35 -------- Nonvested balance at June 30, 2007......................... 481,008 $24.77 Granted.................................................. 3,054 32.46 Vested................................................... (612) 16.59 Forfeited................................................ -- -- -------- Nonvested balance at September 30, 2007.................... 483,450 $24.83 Granted.................................................. 747 31.23 Vested................................................... (90) 13.97 Forfeited................................................ (14,713) 22.81 -------- Nonvested balance at December 31, 2007..................... 469,394 $24.91 ========
The fair value of restricted stock grants is equal to the average market price of our stock at the date of grant. As of December 31, 2007, $7 million of total unrecognized compensation costs related to compensation for restricted stock awards is expected to be recognized over a weighted-average period of 1.8 years. Long-term Performance Units and SARs -- Long-term performance units and SARs are paid in cash and recognized as a liability based upon their fair value. As of December 31, 2007, $2 million of total unrecognized compensation cost is expected to be recognized over a weighted average period of approximately 2 years. Rights Plan On September 9, 1998, we adopted a Rights Plan and established an independent Board committee to review it every three years. The Rights Plan was adopted to deter coercive takeover tactics and to prevent a 103 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) potential acquirer from gaining control of us in a transaction that is not in the best interests of our shareholders. Generally, under the Rights Plan, as it has been amended to date, if a person becomes the beneficial owner of 15 percent or more of our outstanding common stock, each right will entitle its holder to purchase, at the right's exercise price, a number of shares of our common stock or, under certain circumstances, of the acquiring person's common stock, having a market value of twice the right's exercise price. Rights held by the 15 percent or more holders will become void and will not be exercisable. In March 2000, we amended the Rights Plan to (i) reduce from 20 percent to 15 percent the level of beneficial ownership at which the rights became exercisable, as described above, and (ii) eliminate the "qualified offer" terms of the plan. These terms provided that the rights would not become exercisable in connection with a "qualified offer," which was defined as an all-cash tender offer for all outstanding common stock that was fully financed, remained open for a period of at least 60 business days, resulted in the offeror owning at least 85 percent of our common stock after consummation of the offer, assured a prompt second-step acquisition of shares not purchased in the initial offer, at the same price as the initial offer, and met certain other requirements. In connection with the adoption of the Rights Plan, our Board of Directors also adopted a three-year independent director evaluation ("TIDE") mechanism. Under the TIDE mechanism, an independent Board committee (the "Tide Committee") will review, on an ongoing basis, the Rights Plan and developments in rights plans generally, and, if it deems appropriate, recommend modification or termination of the Rights Plan. The independent committee will report to our Board at least every three years as to whether the Rights Plan continues to be in the best interests of our shareholders. In 2005, the Tide Committee met and reviewed, among other things, developments in rights plans and academic studies of rights plans and contests for corporate control since the last meeting of the Tide Committee. Based upon this review, the Tide Committee determined that the Rights Agreement continues to be in the best interests of our shareholders. The Tide Committee recommended to our Board of Directors that the Board should not take any action with respect to the Rights Plan. 104 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Earnings (Loss) Per Share Earnings (loss) per share of common stock outstanding were computed as follows:
YEAR ENDED DECEMBER 31, --------------------------------------- 2007 2006 2005 ----------- ----------- ----------- (MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS) Basic earnings (loss) per share -- Net income (loss)............................. $ (5) $ 49 $ 56 =========== =========== =========== Average shares of common stock outstanding.... 45,809,730 44,625,220 43,088,588 =========== =========== =========== Earnings (loss) per average share of common stock...................................... $ (0.11) $ 1.11 $ 1.30 =========== =========== =========== Diluted earnings (loss) per share -- Net income (loss)............................. $ (5) $ 49 $ 56 =========== =========== =========== Average shares of common stock outstanding.... 45,809,730 44,625,220 43,088,588 Effect of dilutive securities: Restricted stock.............................. -- 400,954 380,656 Stock options................................. -- 1,729,399 1,852,011 ----------- ----------- ----------- Average shares of common stock outstanding including dilutive securities................. 45,809,730 46,755,573 45,321,225 =========== =========== =========== Earnings (loss) per average share of common stock......................................... $ (0.11) $ 1.05 $ 1.24 =========== =========== ===========
As a result of the net loss in 2007, the calculation of diluted earnings per share does not include the dilutive effect of 206,960 shares of restricted stock and 1,509,462 stock options. In addition, options to purchase 517,012, 564,749 and 716,441, shares of common stock were outstanding at December 31, 2007, 2006 and 2005, respectively, but were not included in the computation of diluted EPS because the options were anti-dilutive for the years ended December 31, 2007, 2006 and 2005, respectively. 9. PREFERRED STOCK We had 50 million shares of preferred stock ($0.01 par value) authorized at December 31, 2007 and 2006. No shares of preferred stock were outstanding at those dates. We have designated and reserved 2 million shares of the preferred stock as junior preferred stock for the Rights Plan. 10. PENSION PLANS, POSTRETIREMENT AND OTHER EMPLOYEE BENEFITS We have various defined benefit pension plans that cover substantially all of our employees. For 2007 we have adopted the measurement date provisions of SFAS No. 158, "Accounting for Defined Benefit Pension and Other Postretirement Plans." Therefore, the measurement date used to determine measurement of our pension plan assets and benefit obligations is December 31st for both our domestic and foreign plans. Benefits are based on years of service and, for most salaried employees, on final average compensation. Our funding policy is to contribute to the plans amounts necessary to satisfy the funding requirement of applicable federal or foreign laws and regulations. Of our $678 million benefit obligation at December 31, 2007, approximately $612 million required funding under applicable federal and foreign laws. At December 31, 2007, we had approximately $531 million in assets to fund that obligation. The balance of our benefit obligation, $66 million, 105 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) did not require funding under applicable federal or foreign laws and regulations. Pension plan assets were invested in the following classes of securities:
PERCENTAGE OF FAIR MARKET VALUE ----------------------------- DECEMBER 31, SEPTEMBER 30, 2007 2006 ------------- ------------- US FOREIGN US FOREIGN --- ------- --- ------- Equity Securities.................................. 69% 61% 70% 60% Debt Securities.................................... 31% 34% 28% 36% Real Estate........................................ -- 1% -- -- Other.............................................. -- 4% 2% 4%
Our investment policy for both our domestic and foreign plans is to invest more heavily in equity securities than debt securities. Targeted pension plan allocations are 70 percent in equity securities and 30 percent in debt securities, with acceptable tolerance levels of plus or minus five percent within each category for our domestic plans. Our foreign plans are individually managed to different target levels depending on the investing environment in each country. Our approach to determining expected return on plan asset assumptions evaluates both historical returns as well as estimates of future returns, and adjusts for any expected changes in the long-term outlook for the equity and fixed income markets for both our domestic and foreign plans. 106 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 balance sheets for the pension plans and postretirement benefit plans follows:
POSTRETIRE- PENSION MENT ------------------------------- ------------- 2007 2006 2007 2006 -------------- -------------- ----- ----- US FOREIGN US FOREIGN US US ---- ------- ---- ------- ----- ----- (MILLIONS) Change in benefit obligation: Benefit obligation at December 31 and September 30 of the previous year, respectively........................... $325 $348 $332 $ 304 $ 158 $ 146 Currency rate conversion.................. -- 23 -- 29 -- -- Settlement................................ -- -- -- (2) -- -- Curtailment............................... -- -- (30) -- -- -- Service cost.............................. 1 5 15 6 2 2 Interest cost............................. 19 19 19 16 9 8 Plan amendments........................... -- 1 -- 6 -- -- Actuarial loss............................ (15) (25) 1 (4) (3) 11 Benefits paid............................. (18) (14) (12) (9) (9) (9) Participants' contributions............... -- 4 -- 2 -- -- Impact of change in measurement data...... 1 3 -- -- (5) -- ---- ---- ---- ----- ----- ----- Benefit obligation at December 31 and September 30, respectively............. $313 $364 $325 $ 348 $ 152 $ 158 ==== ==== ==== ===== ===== ===== Change in plan assets: Fair value at December 31 and September 30, of the previous year, respectively........................... $229 $231 $196 $ 194 $ -- $ -- Currency rate conversion.................. -- 17 -- 18 -- -- Settlement................................ -- -- -- (2) -- -- Actual return on plan assets.............. 13 9 18 16 -- -- Employer contributions.................... 16 20 27 12 10 9 Participants' contributions............... -- 4 -- 2 -- -- Benefits paid............................. (18) (14) (12) (9) (10) (9) Impact of change in measurement date...... 9 15 -- -- -- -- ---- ---- ---- ----- ----- ----- Fair value at December 31 and September 30, respectively....................... $249 $282 $229 $ 231 $ -- $ -- ==== ==== ==== ===== ===== ===== Development of net amount recognized: Funded status at December 31 and September 30 of the previous year, respectively.. $(64) $(82) $(97) $(117) $(152) $(158) Post measurement date contributions....... -- -- 1 5 -- 3 Unrecognized cost: Actuarial loss......................... 81 101 102 123 87 102 Prior service cost..................... 3 14 4 14 (42) (48) ---- ---- ---- ----- ----- ----- Net amount recognized at December 31... $ 20 $ 33 $ 10 $ 25 $(107) $(101) ==== ==== ==== ===== ===== ===== Amounts recognized in the balance sheets as of December 31 Noncurrent assets......................... $ -- $ 3 $ -- $ 1 $ -- $ -- Current liabilities....................... (5) (2) (5) (1) (10) (9) Noncurrent liabilities.................... (59) (83) (92) (111) (142) (147) ---- ---- ---- ----- ----- ----- Net amount recognized..................... $(64) $(82) $(97) $(111) $(152) $(156) ==== ==== ==== ===== ===== =====
107 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Assets of one plan may not be utilized to pay benefits of other plans. Additionally, the prepaid (accrued) pension 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. As a result of our adoption of the measurement date provisions of SFAS No. 158, the measurement date for our plans changed from September 30 in 2006 to December 31 in 2007. Net periodic pension costs (income) for the years 2007, 2006, and 2005, consist of the following components:
2007 2006 2005 -------------- -------------- -------------- US FOREIGN US FOREIGN US FOREIGN ---- ------- ---- ------- ---- ------- (MILLIONS) Service cost -- benefits earned during the year............................. $ 1 $ 5 $ 15 $ 6 $ 15 $ 6 Interest on prior year's projected benefit obligation................... 19 19 19 16 18 14 Expected return on plan assets......... (21) (20) (19) (16) (16) (15) Curtailment gain....................... -- -- (25) -- -- -- Recognition of: Actuarial loss....................... 2 6 21 1 4 4 Prior service cost................... 1 2 6 6 3 1 ---- ---- ---- ---- ---- ---- Net pension costs...................... $ 2 $ 12 $ 17 $ 13 $ 24 $ 10 ==== ==== ==== ==== ==== ==== Other comprehensive loss............... $ -- $ -- $ -- $ -- $ 10 $ 5 ==== ==== ==== ==== ==== ====
As a result of the adoption of the recognition provisions of SFAS No. 158, "Employers Accounting for Defined Benefit Pension and Other Postretirement Plans," other changes in plan assets and benefit obligations recognized in other comprehensive income consisted of the following components:
2007 -------------- US FOREIGN ---- ------- Net actuarial gain......................................... $(18) $(23) Recognized actuarial loss.................................. (2) (6) Currency translation adjustment............................ -- 9 Recognition of prior service cost.......................... (1) (2) ---- ---- Total recognized in other comprehensive income before tax effects.................................................. $(21) $(22) ==== ====
Amounts recognized in accumulated other comprehensive income consist of:
2007 ------------- US FOREIGN --- ------- Net actuarial loss.......................................... $81 $101 Prior service cost.......................................... 3 14 --- ---- $84 $115 === ====
108 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In 2008, we expect to recognize the following amounts, which are currently reflected in accumulated other comprehensive income, as components of net periodic benefit cost:
2008 ------------- US FOREIGN --- ------- Net actuarial loss........................................... $2 $4 Prior service cost........................................... 1 2 -- -- $3 $6 == ==
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 at December 31, 2007 and September 30, 2006 were as follows:
DECEMBER 31, SEPTEMBER 30, 2007 2006 -------------- -------------- US FOREIGN US FOREIGN ---- ------- ---- ------- (MILLIONS) Projected Benefit Obligation.................... $314 $273 $325 $335 Accumulated Benefit Obligation.................. 314 260 325 321 Fair Value of Plan Assets....................... 249 188 229 217
The following estimated benefit payments are payable from the pension plans to participants:
PENSION YEAR BENEFITS - ---- ---------- (MILLIONS) 2008........................................................... $ 34 2009........................................................... 35 2010........................................................... 38 2011........................................................... 49 2012........................................................... 47 2013-2017...................................................... 253
The following assumptions were used in the accounting for the pension plans for the years of 2007, 2006, and 2005:
2007 2006 ------------- ------------- US FOREIGN US FOREIGN --- ------- --- ------- WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE BENEFIT OBLIGATIONS Discount rate..................................... 6.2% 5.6% 5.9% 5.0% Rate of compensation increase..................... 3.0% 4.4% 3.0% 4.1%
2007 2006 2005 ------------- ------------- ------------- US FOREIGN US FOREIGN US FOREIGN --- ------- --- ------- --- ------- WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE NET PERIODIC BENEFIT COST Discount rate.......................... 6.0% 5.0% 5.8% 5.0% 6.3% 5.7% Expected long-term return on plan assets............................... 8.8% 7.6% 8.8% 7.6% 8.8% 7.7% Rate of compensation increase.......... N/A 4.3% 3.2% 4.3% 4.5% 4.4%
109 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Effective January 1, 2007, we froze our defined benefit plans and replaced them with additional contributions under defined contribution plans for nearly all U.S.-based salaried and non-union hourly employees. Effective January 1, 2007, Tenneco elected to early-adopt the measurement date provisions of SFAS No. 158. As a result, during the first quarter of 2007, the following adjustments were made to retained earnings (accumulated deficit) and other comprehensive income (both net of tax effects) for our defined benefit pension plans:
US FOREIGN --- ------- Retained earnings (accumulated deficit), net of tax......... $(3) $(2) Accumulated other comprehensive income, net of tax.......... 8 6
We made contributions of $36 million to these pension plans during 2007. Based on current actuarial estimates, we believe we will be required to make contributions of $29 million to those plans during 2008. Pension contributions beyond 2008 will be required, but those amounts will vary based upon many factors, including the performance of our pension fund investments during 2008. Effective December 31, 2006, we froze future accruals under our defined benefit plans for substantially all U.S. salaried and non-union hourly employees and replaced these benefits with additional contributions under defined contribution plans. These changes saved approximately $11 million in earnings before taxes in 2007. Additionally, we realized a one-time benefit of $7 million in the fourth quarter 2006 related to curtailing the defined benefit pension plans. We have life insurance plans which cover a majority of our domestic employees. We also have postretirement plans for our domestic employees hired before January 1, 2001. The plans cover salaried employees retiring on or after attaining age 55 who have at least 10 years of service with us after attaining age 45. For hourly employees, the postretirement benefit plans generally cover employees who retire according to one of our hourly employee retirement plans. All of these benefits may be subject to deductibles, co-payment provisions and other limitations, and we have reserved the right to change these benefits. For those employees hired after January 1, 2001, we do not provide any postretirement benefits. Our postretirement healthcare and life insurance plans are not funded. The measurement date used to determine postretirement benefit obligations is December 31st. On September 1, 2003, we changed our retiree medical benefits program to provide participating retirees with continued access to group health coverage while reducing our subsidization of the program. This negative plan amendment is being amortized over the average remaining service life to retirement eligibility of active plan participants as a reduction of service cost beginning September 1, 2003. In July 2004, we entered into a settlement with a group of the retirees which were a part of the September 2003 change mentioned above. This settlement provided the group with increased coverage, and as a result, a portion of the negative plan amendment was reversed and a positive plan amendment put in place. The effect of the settlement increased our 2004 postretirement benefit expense by approximately $1 million and increased our accumulated postretirement benefit obligation by approximately $13 million. 110 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Net periodic postretirement benefit cost for the years 2007, 2006, and 2005, consists of the following components:
2007 2006 2005 ---- ---- ---- (MILLIONS) Service cost -- benefits earned during the year.......... $ 2 $ 2 $ 3 Interest on accumulated postretirement benefit obligation............................................. 9 9 8 Recognition of: Actuarial loss......................................... 6 6 6 Prior service cost..................................... (5) (6) (6) --- --- --- Net periodic pension cost................................ $12 $11 $11 === === ===
In 2008, we expect to recognize the following amounts, which are currently reflected in accumulated other comprehensive income, as components of net periodic benefit cost:
2008 ---- Net actuarial loss................................................ $ 5 Prior service cost................................................ (5) --- $-- ===
Effective January 1, 2007, Tenneco elected to early-adopt the measurement date provisions of SFAS No. 158. As a result, during the first quarter of 2007, the following adjustments were made to retained earnings (accumulated deficit) and other comprehensive income (both net of tax effects) for our postretirement plans:
US -- Retained earnings (accumulated deficit), net of tax................ $3 Accumulated other comprehensive income, net of tax................. --
The following estimated postretirement benefit payments are payable from the plans to participants:
POSTRETIREMENT YEAR BENEFITS - ---- -------------- (MILLIONS) 2008......................................................... $10 2009......................................................... 10 2010......................................................... 10 2011......................................................... 11 2012......................................................... 11 2013-2017.................................................... 53
The weighted average assumed health care cost trend rate used in determining the 2007 accumulated postretirement benefit obligation was 10 percent, declining to 5 percent by 2012. The healthcare cost trend rate was 10 percent and 9 percent for 2006 and 2005, respectively, in each case trading down to 5 percent over succeeding periods. 111 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following assumptions were used in the accounting for postretirement cost for the years of 2007, 2006 and 2005:
2007 2006 ---- ---- WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE BENEFIT OBLIGATIONS Discount rate................................................ 6.2% 5.9% Rate of compensation increase................................ 4.0% 4.0%
2007 2006 2005 ---- ---- ---- WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE NET PERIODIC BENEFIT COST Discount rate............................................ 6.0% 5.8% 6.3% Rate of compensation increase............................ 4.0% 4.5% 4.5%
The effect of a one-percentage-point increase or decrease in the 2007 assumed health care cost trend rates on total service cost and interest and the postretirement benefit obligation are as follows:
ONE-PERCENTAGE ONE-PERCENTAGE POINT INCREASE POINT DECREASE -------------- -------------- (MILLIONS) Effect on total of service cost and interest cost............................................ $ 1 $ 1 Effect on postretirement benefit obligation....... 14 12
Based on current actuarial estimates, we believe we will be required to make postretirement contributions of approximately $10 million during 2008. In September 2006, the FASB issued Statement of Accounting Standards No. 158, "Accounting for Defined Benefit Pension and Other Postretirement Plans" which amended certain provisions of FASB Statements 87, 88, 106 and 132(R). As a result of implementing the recognition provisions of this Statement on our pension and postretirement plans, the incremental effect on individual line items in the consolidated financial statements as of December 31, 2006, is as follows:
BEFORE APPLICATION AFTER APPLICATION OF STATEMENT 158 ADJUSTMENTS OF STATEMENT 158 ------------------ ----------- ----------------- Deferred Income Tax Assets............. $ 417 $ 31 $ 448 Total Assets........................... 3,243 31 3,274 Liability for Pension Benefits......... 274 90 364 Total Liabilities...................... 2,958 90 3,048 Accumulated Other Comprehensive loss... (193) (59) (252) Total Stockholders' Equity............. 285 (59) 226
Employee Stock Ownership Plans (401(k) Plans) -- We have established Employee Stock Ownership Plans for the benefit of our employees. Under the plans, subject to limitations in the Internal Revenue Code, participants may elect to defer up to 75 percent of their salary through contributions to the plan, which are invested in selected mutual funds or used to buy our common stock. We currently match in cash 50 percent of each employee's contribution up to eight percent of the employee's salary. In connection with freezing the defined benefit pension plans for nearly all U.S. based salaried and hourly employees effective December 31, 2006, and the related replacement of those defined benefit plans with defined contribution plans, we are making additional contributions to the Employee Stock Ownership Plans. We recorded expense for these matching contributions of approximately $17 million for December 31, 2007 and $7 million for each of the years ended December 31, 2006 and 2005. All contributions vest immediately. 112 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. SEGMENT AND GEOGRAPHIC AREA INFORMATION In October 2004 and July 2005, we announced changes in the structure of our organization which changed the components of our reportable segments. The European segment now includes South American and Indian operations. The Asia Pacific segment includes our other Asian and Australian operations. While this had no impact on our consolidated results, it changed our segment results. We are a global manufacturer with three geographic reportable segments: (1) North America, (2) Europe, South America and India ("Europe"), and (3) Asia Pacific. Each segment manufactures and distributes ride control and emission control products primarily for the automotive industry. We have not aggregated individual operating segments within these reportable segments. We evaluate segment performance based primarily on income before interest expense, income taxes, and minority interest. Products are 113 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) transferred between segments and geographic areas on a basis intended to reflect as nearly as possible the "market value" of the products. Segment results for 2007, 2006, and 2005 are as follows:
SEGMENT ----------------------------------------------------- NORTH ASIA RECLASS & AMERICA EUROPE PACIFIC ELIMS CONSOLIDATED ------- ------ ------- --------- ------------ (MILLIONS) AT DECEMBER 31, 2007, AND FOR THE YEAR THEN ENDED Revenues from external customers.......... $2,901 $2,737 $546 $ -- $6,184 Intersegment revenues..................... 9 398 14 (421) -- Interest income........................... -- 12 -- -- 12 Depreciation and amortization of other intangibles............................. 103 86 16 -- 205 Income before interest expense, income taxes, and minority interest............ 120 99 33 -- 252 Total assets.............................. 1,555 1,605 368 62 3,590 Investment in affiliated companies........ -- 10 -- -- 10 Expenditures for plant, property and equipment............................... 106 74 18 -- 198 Noncash items other than depreciation and amortization............................ (18) (1) 1 -- (18) AT DECEMBER 31, 2006, AND FOR THE YEAR THEN ENDED Revenues from external customers.......... $1,956 $2,305 $421 $ -- $4,682 Intersegment revenues..................... 7 82 15 (104) -- Interest income........................... -- 7 -- -- 7 Depreciation and amortization of other intangibles............................. 92 79 13 -- 184 Income before interest expense, income taxes, and minority interest............ 103 81 12 -- 196 Total assets.............................. 1,460 1,422 301 91 3,274 Investment in affiliated companies........ -- 9 -- -- 9 Expenditures for plant, property and equipment............................... 100 51 19 -- 170 Noncash items other than depreciation and amortization............................ (14) 4 (1) -- (11) AT DECEMBER 31, 2005, AND FOR THE YEAR THEN ENDED Revenues from external customers.......... $2,027 $2,053 $360 $ -- $4,440 Intersegment revenues..................... 6 57 11 (74) -- Interest income........................... 1 3 -- -- 4 Depreciation and amortization of other intangibles............................. 90 76 11 -- 177 Income before interest expense, income taxes, and minority interest............ 148 53 16 -- 217 Total assets.............................. 1,352 1,288 251 54 2,945 Investment in affiliated companies........ -- 6 -- -- 6 Expenditures for plant, property and equipment............................... 74 54 16 -- 144 Noncash items other than depreciation and amortization............................ (8) 8 -- -- --
114 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table shows information relating to our external customer revenues for each product or each group of similar products:
NET SALES YEAR ENDED DECEMBER 31, ------------------------ 2007 2006 2005 ------ ------ ------ (MILLIONS) EMISSION CONTROL SYSTEMS & PRODUCTS Aftermarket....................................... $ 370 $ 384 $ 368 Original Equipment market OE Value-add................................... 2,288 1,665 1,709 OE Substrate................................... 1,673 927 681 ------ ------ ------ 3,961 2,592 2,390 ------ ------ ------ 4,331 2,976 2,758 ------ ------ ------ RIDE CONTROL SYSTEMS & PRODUCTS Aftermarket....................................... 734 690 653 OE market......................................... 1,119 1,016 1,029 ------ ------ ------ 1,853 1,706 1,682 ------ ------ ------ Total Revenues................................. $6,184 $4,682 $4,440 ====== ====== ======
During 2007, sales to four major customers comprised approximately 20 percent, 14 percent, 9 percent and 8 percent of consolidated net sales and operating revenues. During 2006, sales to four major customers comprised approximately 14 percent, 11 percent, 11 percent and 11 percent of consolidated net sales and operating revenues. During 2005, sales to the same four major customers comprised approximately 17 percent, 12 percent, 9 percent and 9 percent of consolidated net sales and operating revenues.
GEOGRAPHIC AREA ----------------------------------------------------------------- UNITED OTHER RECLASS & STATES GERMANY CANADA FOREIGN(A) ELIMS CONSOLIDATED ------ ------- ------ ---------- --------- ------------ (MILLIONS) AT DECEMBER 31, 2007, AND FOR THE YEAR THEN ENDED Revenues from external customers(b)................... $2,121 $1,036 $590 $2,437 $ -- $6,184 Long-lived assets(c)............. 410 151 89 695 -- 1,345 Total assets..................... 1,476 477 150 1,621 (134) 3,590 AT DECEMBER 31, 2006, AND FOR THE YEAR THEN ENDED Revenues from external customers(b)................... $1,538 $ 842 $248 $2,054 $ -- $4,682 Long-lived assets(c)............. 402 139 73 637 -- 1,251 Total assets..................... 1,365 329 122 1,553 (95) 3,274 AT DECEMBER 31, 2005, AND FOR THE YEAR THEN ENDED Revenues from external customers(b)................... $1,625 $ 633 $260 $1,922 $ -- $4,440 Long-lived assets(c)............. 406 136 77 586 -- 1,205 Total assets..................... 1,265 296 116 1,371 (103) 2,945
115 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - -------- Notes: (a) Revenues from external customers and long-lived assets for individual foreign countries other than Germany and Canada are not material. (b) Revenues are attributed to countries based on location of the shipper. (c) Long-lived assets include all long-term assets except goodwill, intangibles and deferred tax assets. 12. COMMITMENTS AND CONTINGENCIES Capital Commitments We estimate that expenditures aggregating approximately $48 million will be required after December 31, 2007 to complete facilities and projects authorized at such date, and we have made substantial commitments in connection with these facilities and projects. Lease Commitments We have long-term leases for certain facilities, equipment and other assets. The minimum lease payments under non-cancelable leases with lease terms in excess of one year are:
SUBSEQUENT 2008 2009 2010 2011 2012 YEARS ---- ---- ---- ---- ---- ---------- (MILLIONS) Operating Leases........................ $17 $14 $11 $ 9 $ 5 $ 2 Capital Leases.......................... $ 3 $ 3 $ 3 $-- $-- $--
Total rental expense for the year 2007, 2006, and 2005 was $40 million, $37 million and $35 million respectively. Litigation We also from time to time are involved in legal proceedings, claims or investigations that are incidental to the conduct of our business. Some of these proceedings allege damages against us relating to environmental liabilities (including toxic tort, property damage and remediation), intellectual property matters (including patent, trademark and copyright infringement, and licensing disputes), personal injury claims (including injuries due to product failure, design or warnings issues, and other product liability related matters), taxes, employment matters, and commercial or contractual disputes, sometimes related to acquisitions or divestitures. We vigorously defend ourselves against all of these claims. In future periods, we could be subjected to cash costs or non-cash charges to earnings if any of these matters are resolved on unfavorable terms. However, although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including our assessment of the merits of the particular claim, we do not expect that these legal proceedings or claims will have any material adverse impact on our future consolidated financial position or results of operations. In addition, we are subject to a number of lawsuits initiated by a significant number of claimants alleging health problems as a result of exposure to asbestos. A small percentage of claims have been asserted by railroad workers alleging exposure to asbestos products in railroad cars manufactured by The Pullman Company, one of our subsidiaries. Nearly all of the claims are related to alleged exposure to asbestos in our automotive emission control products. Only a small percentage of these claimants allege that they were automobile mechanics and a significant number appear to involve workers in other industries or otherwise do not include sufficient information to determine whether there is any basis for a claim against us. We believe, based on scientific and other evidence, it is unlikely that mechanics were exposed to asbestos by our former muffler products and that, in any event, they would not be at increased risk of asbestos-related disease based on their work with these products. Further, many of these cases involve numerous defendants, with the number 116 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of each in some cases exceeding 200 defendants from a variety of industries. Additionally, the plaintiffs either do not specify any, or specify the jurisdictional minimum, dollar amount for damages. As major asbestos manufacturers continue to go out of business or file for bankruptcy, we may experience an increased number of these claims. We vigorously defend ourselves against these claims as part of our ordinary course of business. In future periods, we could be subject to cash costs or non-cash charges to earnings if any of these matters are resolved unfavorably to us. To date, with respect to claims that have proceeded sufficiently through the judicial process, we have regularly achieved favorable resolution. Accordingly, we presently believe that these asbestos-related claims will not have a material adverse impact on our future financial condition or results of operations. Product Warranties We provide warranties on some of our products. The warranty terms vary but range from one year up to limited lifetime warranties on some of our premium aftermarket products. Provisions for estimated expenses related to product warranty are made at the time products are sold or when specific warranty issues are identified on OE products. These estimates are established using historical information about the nature, frequency and average cost of warranty claims. We actively study trends of warranty claims and take action to improve product quality and minimize warranty claims. We believe that the warranty reserve is appropriate; however, actual claims incurred could differ from the original estimates, requiring adjustments to the reserve. The reserve is included in both current and long-term liabilities on the balance sheet. Below is a table that shows the activity in the warranty accrual accounts:
YEAR ENDED DECEMBER 31, ----------- 2007 2006 ---- ---- (MILLIONS) Beginning Balance............................................ $ 25 $ 22 Accruals related to product warranties....................... 12 17 Reductions for payments made................................. (12) (14) ---- ---- Ending Balance............................................... $ 25 $ 25 ==== ====
Environmental Matters We are subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which we operate. We expense or capitalize, as appropriate, expenditures for ongoing compliance with environmental regulations that relate to current operations. We expense costs related to an existing condition caused by past operations and that do not contribute to current or future revenue generation. We record liabilities 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. We consider all available evidence including prior experience in remediation of contaminated sites, other companies' cleanup experiences 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. Where future cash flows are fixed or reliably determinable, we have discounted the liabilities. All other environmental liabilities are recorded at their undiscounted amounts. We evaluate recoveries separately from the liability and, when they are assured, recoveries are recorded and reported separately from the associated liability in our consolidated financial statements. As of December 31, 2007, we are designated as a potentially responsible party in one Superfund site. Including the Superfund site, we may have the obligation to remediate current or former facilities, and we 117 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) estimate our share of environmental remediation costs at these facilities to be approximately $11 million. For the Superfund site and the current and former facilities, we have established reserves that we believe are adequate for these costs. Although we believe our estimates of remediation costs are reasonable and are based on the latest available information, the cleanup costs are estimates and are subject to revision as more information becomes available about the extent of remediation required. At some sites, we expect that other parties will contribute to the remediation costs. In addition, at the Superfund site, the Comprehensive Environmental Response, Compensation and Liability Act provides that our liability could be joint and several, meaning that we could be required to pay in excess of our share of remediation costs. Our understanding of the financial strength of other potentially responsible parties at the Superfund site, and of other liable parties at our current and former facilities, has been considered, where appropriate, in our determination of our estimated liability. We believe that any potential costs associated with our current status as a potentially responsible party in the Superfund site, or as a liable party at our current or former facilities, will not be material to our results of operations or consolidated financial position. 13. SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Basis of Presentation Subject to limited exceptions, all of our existing and future material domestic 100% owned subsidiaries (which are referred to as the Guarantor Subsidiaries) fully and unconditionally guarantee our senior subordinated notes due in 2014, our senior notes due in 2015 and our senior secured notes due 2013 on a joint and several basis. You should also read Note 6 of the consolidated financial statements of Tenneco Inc. and Consolidated Subsidiaries, "Financial Instruments" for further discussion of the notes and related guarantee. We have not presented separate financial statements and other disclosures concerning each of the Guarantor Subsidiaries because management has determined that such information is not material to the holders of the notes. Therefore, the Guarantor Subsidiaries are combined in the presentation below. These condensed consolidating financial statements are presented on the equity method. Under this method, our investments are recorded at cost and adjusted for our ownership share of a subsidiary's cumulative results of operations, capital contributions and distributions, and other equity changes. You should read the condensed consolidating financial information of the Guarantor Subsidiaries in connection with our consolidated financial statements and related notes 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 us. 118 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STATEMENT OF INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 2007 ------------------------------------------------------------------- TENNECO INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ ------------ ------- ------------ (MILLIONS) REVENUES Net sales and operating revenues -- External...................... $2,827 $3,357 $ -- $ -- $6,184 Affiliated companies.......... 95 895 -- (990) -- ------ ------ ----- ----- ------ 2,922 4,252 -- (990) 6,184 ------ ------ ----- ----- ------ COSTS AND EXPENSES Cost of sales (exclusive of depreciation shown below)..... 2,619 3,582 (1) (990) 5,210 Engineering, research, and development................... 55 59 -- -- 114 Selling, general, and administrative................ 145 249 4 1 399 Depreciation and amortization of other intangibles............. 80 125 -- -- 205 ------ ------ ----- ----- ------ 2,899 4,015 3 (989) 5,928 ------ ------ ----- ----- ------ OTHER INCOME (EXPENSE) Loss on sale of receivables...... -- (10) -- -- (10) Other income (expense)........... 13 3 -- (10) 6 ------ ------ ----- ----- ------ 13 (7) -- (10) (4) ------ ------ ----- ----- ------ INCOME (LOSS) BEFORE INTEREST EXPENSE, INCOME TAXES, MINORITY INTEREST, AND EQUITY IN NET INCOME FROM AFFILIATED COMPANIES........................ 36 230 (3) (11) 252 Interest expense -- External (net of interest capitalized)............. (2) 2 164 -- 164 Affiliated companies (net of interest income)......... 185 (16) (169) -- -- Income tax expense (benefit).. (42) 78 57 (10) 83 Minority interest............. -- 10 -- -- 10 ------ ------ ----- ----- ------ (105) 156 (55) (1) (5) Equity in net income (loss) from affiliated companies... 135 -- 50 (185) -- ------ ------ ----- ----- ------ NET INCOME (LOSS).................. $ 30 $ 156 $ (5) $(186) $ (5) ====== ====== ===== ===== ======
119 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STATEMENT OF INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 2006 ------------------------------------------------------------------- TENNECO INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ ------------ ------- ------------ (MILLIONS) REVENUES Net sales and operating revenues -- External...................... $1,892 $2,790 $ -- $ -- $4,682 Affiliated companies.......... 88 483 -- (571) -- ------ ------ ----- ----- ------ 1,980 3,273 -- (571) 4,682 ------ ------ ----- ----- ------ COSTS AND EXPENSES Cost of sales (exclusive of depreciation shown below)..... 1,614 2,793 -- (571) 3,836 Engineering, research, and development................... 45 43 -- -- 88 Selling, general, and administrative................ 131 238 4 -- 373 Depreciation and amortization of other intangibles............. 71 113 -- -- 184 ------ ------ ----- ----- ------ 1,861 3,187 4 (571) 4,481 ------ ------ ----- ----- ------ OTHER INCOME (EXPENSE) Loss on sale of receivables...... -- (9) -- -- (9) Other income (expense)........... -- 6 (3) 1 4 ------ ------ ----- ----- ------ -- (3) (3) 1 (5) ------ ------ ----- ----- ------ INCOME (LOSS) BEFORE INTEREST EXPENSE, INCOME TAXES, MINORITY INTEREST, AND EQUITY IN NET INCOME FROM AFFILIATED COMPANIES........................ 119 83 (7) 1 196 Interest expense -- External (net of interest capitalized)............. (4) 3 137 -- 136 Affiliated companies (net of interest income)......... 165 (11) (154) -- -- Income tax expense (benefit).. (33) 41 (4) 1 5 Minority interest............. -- 6 -- -- 6 ------ ------ ----- ----- ------ (9) 44 14 -- 49 Equity in net income (loss) from affiliated companies... 24 3 35 (62) -- ------ ------ ----- ----- ------ NET INCOME (LOSS).................. $ 15 $ 47 $ 49 $ (62) $ 49 ====== ====== ===== ===== ======
120 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STATEMENT OF INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 2005 ------------------------------------------------------------------- TENNECO INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ ------------ ------- ------------ (MILLIONS) REVENUES Net sales and operating revenues -- External...................... $2,026 $2,414 $ -- $ -- $4,440 Affiliated companies.......... 73 508 -- (581) -- ------ ------ ----- ----- ------ 2,099 2,922 -- (581) 4,440 ------ ------ ----- ----- ------ COSTS AND EXPENSES Cost of sales (exclusive of depreciation shown below)..... 1,697 2,462 -- (581) 3,578 Engineering, research, and development................... 41 42 -- -- 83 Selling, general, and administrative................ 165 219 -- -- 384 Depreciation and amortization of other intangibles............. 71 106 -- -- 177 ------ ------ ----- ----- ------ 1,974 2,829 -- (581) 4,222 ------ ------ ----- ----- ------ OTHER INCOME (EXPENSE) Loss on sale of receivables...... -- (6) -- -- (6) Other income (expense)........... 43 (30) 2 (10) 5 ------ ------ ----- ----- ------ 43 (36) 2 (10) (1) ------ ------ ----- ----- ------ INCOME (LOSS) BEFORE INTEREST EXPENSE, INCOME TAXES, MINORITY INTEREST, AND EQUITY IN NET INCOME FROM AFFILIATED COMPANIES........................ 168 57 2 (10) 217 Interest expense -- External (net of interest capitalized)............. (2) 3 132 -- 133 Affiliated companies (net of interest income)......... 122 (8) (114) -- -- Income tax expense (benefit).. (76) 26 69 7 26 Minority interest............. -- 2 -- -- 2 ------ ------ ----- ----- ------ 124 34 (85) (17) 56 Equity in net income (loss) from affiliated companies... 57 -- 141 (198) -- ------ ------ ----- ----- ------ NET INCOME (LOSS).................. $ 181 $ 34 $ 56 $(215) $ 56 ====== ====== ===== ===== ======
121 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) BALANCE SHEET
DECEMBER 31, 2007 -------------------------------------------------------------------- TENNECO INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ ------------ -------- ------------ (MILLIONS) ASSETS Current assets: Cash and cash equivalents.......... $ 6 $ 182 $ -- $ -- $ 188 Receivables, net................... 385 1,090 148 (866) 757 Inventories........................ 198 341 -- -- 539 Deferred income taxes.............. 53 0 3 (20) 36 Prepayments and other.............. 18 103 -- -- 121 ------ ------- ------ -------- ------- 660 1,716 151 (886) 1,641 ------ ------- ------ -------- ------- Other assets: Investment in affiliated companies....................... 628 -- 1,083 (1,711) -- Notes and advances receivable from affiliates...................... 3,607 232 5,383 (9,222) -- Long-term notes receivable, net.... -- 19 -- -- 19 Goodwill........................... 136 72 -- -- 208 Intangibles, net................... 17 9 -- -- 26 Deferred income taxes.............. 310 60 180 (180) 370 Other.............................. 40 76 25 -- 141 ------ ------- ------ -------- ------- 4,738 468 6,671 (11,113) 764 ------ ------- ------ -------- ------- Plant, property, and equipment, at cost............................... 994 1,984 -- -- 2,978 Less -- Accumulated depreciation and amortization................ (658) (1,135) -- -- (1,793) ------ ------- ------ -------- ------- 336 849 -- -- 1,185 ------ ------- ------ -------- ------- $5,734 $ 3,033 $6,822 $(11,999) $ 3,590 ====== ======= ====== ======== ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt (including current maturities of long-term debt) Short-term debt -- non- affiliated.................... $ -- $ 44 $ 2 $ -- $ 46 Short-term debt -- affiliated... 274 439 10 (723) -- Trade payables..................... 350 774 -- (137) 987 Accrued taxes...................... 27 16 -- (2) 41 Other.............................. 118 169 21 (24) 284 ------ ------- ------ -------- ------- 769 1,442 33 (886) 1,358 Long-term debt-non-affiliated........ -- 7 1,321 -- 1,328 Long-term debt-affiliated............ 4,100 54 5,068 (9,222) -- Deferred income taxes................ 213 81 -- (180) 114 Postretirement benefits and other liabilities........................ 264 89 -- 6 359 Commitments and contingencies Minority interest.................... -- 31 -- -- 31 Shareholders' equity................. 388 1,329 400 (1,717) 400 ------ ------- ------ -------- ------- $5,734 $ 3,033 $6,822 $(11,999) $ 3,590 ====== ======= ====== ======== =======
122 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) BALANCE SHEET
DECEMBER 31, 2006 -------------------------------------------------------------------- TENNECO INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ ------------ -------- ------------ (MILLIONS) ASSETS Current assets: Cash and cash equivalents.......... $ 57 $ 146 $ (1) $ -- $ 202 Receivables, net................... 333 828 23 (589) 595 Inventories........................ 138 303 -- -- 441 Deferred income taxes.............. 34 12 7 (2) 51 Prepayments and other.............. 24 102 -- -- 126 ------ ------ ------ -------- ------- 586 1,391 29 (591) 1,415 ------ ------ ------ -------- ------- Other assets: Investment in affiliated companies....................... 587 -- 1,108 (1,695) -- Notes and advances receivable from affiliates...................... 3,442 215 5,012 (8,669) -- Long-term notes receivable, net.... 2 27 (3) -- 26 Goodwill........................... 135 68 -- -- 203 Intangibles, net................... -- 9 (1) -- 8 Deferred income taxes.............. 327 67 200 (197) 397 Other.............................. 34 70 28 -- 132 ------ ------ ------ -------- ------- 4,527 456 6,344 (10,561) 766 ------ ------ ------ -------- ------- Plant, property, and equipment, at cost............................... 949 1,694 -- -- 2,643 Less -- Accumulated depreciation and amortization................ (621) (929) -- -- (1,550) ------ ------ ------ -------- ------- 328 765 -- -- 1,093 ------ ------ ------ -------- ------- $5,441 $2,612 $6,373 $(11,152) $ 3,274 ====== ====== ====== ======== ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt (including current maturities of long-term debt) Short-term debt -- non- affiliated.................... $ -- $ 26 $ 2 $ -- $ 28 Short-term debt -- affiliated... 211 281 10 (502) -- Trade payables.................. 248 618 (1) (84) 781 Accrued taxes...................... 16 33 1 (1) 49 Other.............................. 119 114 32 (4) 261 ------ ------ ------ -------- ------- 594 1,072 44 (591) 1,119 Long-term debt-non-affiliated........ -- 10 1,347 -- 1,357 Long-term debt-affiliated............ 3,872 49 4,748 (8,669) -- Deferred income taxes................ 212 92 -- (197) 107 Postretirement benefits and other liabilities........................ 311 111 8 7 437 Commitments and contingencies Minority interest.................... -- 28 -- -- 28 Shareholders' equity................. 452 1,250 226 (1,702) 226 ------ ------ ------ -------- ------- $5,441 $2,612 $6,373 $(11,152) $ 3,274 ====== ====== ====== ======== =======
123 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2007 --------------------------------------------------------------- TENNECO INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ ------------ ------- ------------ (MILLIONS) OPERATING ACTIVITIES Net cash provided (used) by operating activities........................... $ 380 $ 309 $(524) $ $ 165 INVESTING ACTIVITIES Net proceeds from the sale of assets... 1 9 -- -- 10 Cash payments for plant, property, and equipment............................ (59) (118) -- -- (177) Cash payments for software related intangible assets.................... (13) (6) -- -- (19) Cash payment for net assets purchased.. (16) -- -- -- (16) Investments and other.................. -- (250) 250 -- -- ----- ----- ----- --- ----- Net cash used by investing activities.. (87) (365) 250 -- (202) ----- ----- ----- --- ----- FINANCING ACTIVITIES Issuance of common shares.............. -- -- 8 -- 8 Issuance of Subsidiary Equity.......... 41 (41) -- -- -- Issuance of long-term debt............. -- -- 400 -- 400 Retirement of long-term debt........... -- (3) (588) -- (591) Debt issuance cost of long-term debt... -- -- (11) -- (11) Net increase (decrease) in revolver borrowings and short-term debt excluding current maturities of long- term debt............................ -- 16 167 -- 183 Intercompany dividends and net increase (decrease) in intercompany obligations.......................... (384) 86 298 -- -- Distribution to minority interest partners............................. -- (6) -- -- (6) ----- ----- ----- --- ----- Net cash provided (used) by financing activities........................... (343) 52 274 -- (17) ----- ----- ----- --- ----- Effect of foreign exchange rate changes on cash and cash equivalents......... -- 40 -- -- 40 ----- ----- ----- --- ----- Increase (decrease) in cash and cash equivalents.......................... (50) 36 -- -- (14) Cash and cash equivalents, January 1... 56 146 -- -- 202 ----- ----- ----- --- ----- Cash and cash equivalents, December 31 (Note)............................... $ 6 $ 182 $ -- $-- $ 188 ===== ===== ===== === =====
- -------- Note: Cash and cash equivalents include highly liquid investments with a maturity of three months or less at the date of purchase. 124 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2006 ------------------------------------------------------------------- TENNECO INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ ------------ ------- ------------ (MILLIONS) OPERATING ACTIVITIES Net cash provided (used) by operating activities............. $ 242 $ 249 $(288) $-- $ 203 INVESTING ACTIVITIES Net proceeds from the sale of assets........................... 10 7 -- -- 17 Cash payment for plant, property, and equipment.................... (78) (99) -- -- (177) Cash payment for software related intangible assets................ (6) (7) -- -- (13) Investments and other.............. -- 1 -- -- 1 ----- ----- ----- --- ----- Net cash used by investing activities....................... (74) (98) -- -- (172) ----- ----- ----- --- ----- FINANCING ACTIVITIES Issuance of common shares.......... -- -- 17 -- 17 Retirement of long-term debt....... -- (3) (1) -- (4) Net increase (decrease) in revolver borrowings and short-term debt excluding current maturities of long-term debt................... -- 3 -- -- 3 Intercompany dividends and net increase (decrease) in intercompany obligations......... (142) (129) 271 -- -- Distribution to minority interest partners......................... -- (4) -- -- (4) ----- ----- ----- --- ----- Net cash provided (used) by financing activities............. (142) (133) 287 -- 12 ----- ----- ----- --- ----- Effect of foreign exchange rate changes on cash and cash equivalents...................... -- 18 -- -- 18 ----- ----- ----- --- ----- Increase (decrease) in cash and cash equivalents................. 26 36 (1) -- 61 Cash and cash equivalents, January 1................................ 31 110 -- -- 141 ----- ----- ----- --- ----- Cash and cash equivalents, December 31 (Note)........................ $ 57 $ 146 $ (1) $-- $ 202 ===== ===== ===== === =====
- -------- Note: Cash and cash equivalents include highly liquid investments with a maturity of three months or less at the date of purchase. 125 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2005 ------------------------------------------------------------------- TENNECO INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ ------------ ------- ------------ (MILLIONS) OPERATING ACTIVITIES Net cash provided (used) by operating activities............. $ 202 $ 159 $(238) $-- $ 123 INVESTING ACTIVITIES Net proceeds from the sale of assets........................... 3 1 -- -- 4 Cash payments for plant, property, and equipment.................... (47) (93) -- -- (140) Cash payments for software related intangible assets................ (6) (8) -- -- (14) Acquisition of business............ -- (14) -- -- (14) Investments and other.............. 2 (2) -- -- -- ----- ----- ----- --- ----- Net cash used by investing activities....................... (48) (116) -- -- (164) ----- ----- ----- --- ----- FINANCING ACTIVITIES Issuance of common shares.......... -- -- 7 -- 7 Issuance of long-term debt......... -- 1 -- -- 1 Retirement of long-term debt....... -- (3) (42) -- (45) Net increase (decrease) in revolver borrowings and short-term debt excluding current maturities of long-term debt................... -- 9 -- -- 9 Intercompany dividends and net increase (decrease) in intercompany obligations......... (264) (9) 273 -- -- Distribution to minority interest partners......................... -- -- -- -- -- ----- ----- ----- --- ----- Net cash provided (used) by financing activities............. (264) (2) 238 -- (28) ----- ----- ----- --- ----- Effect of foreign exchange rate changes on cash and cash equivalents...................... -- (4) -- -- (4) ----- ----- ----- --- ----- Increase (decrease) in cash and cash equivalents................. (110) 37 -- -- (73) Cash and cash equivalents, January 1................................ 140 74 -- -- 214 ----- ----- ----- --- ----- Cash and cash equivalents, December 31 (Note)........................ $ 30 $ 111 $ -- $-- $ 141 ===== ===== ===== === =====
- -------- Note: Cash and cash equivalents include highly liquid investments with a maturity of three months or less at the date of purchase. 126 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
INCOME BEFORE NET SALES COST OF SALES INTEREST EXPENSE, AND (EXCLUDING INCOME TAXES OPERATING DEPRECIATION AND AND MINORITY NET QUARTER REVENUES AMORTIZATION) INTEREST INCOME (LOSS) - ------- --------- ---------------- ----------------- ------------- (MILLIONS) 2007 1st................................. $1,400 $1,179 $ 49 $ 5 2nd................................. 1,663 1,377 103 41 3rd................................. 1,556 1,313 57 21 4th................................. 1,565 1,341 43 (72) ------ ------ ---- ---- $6,184 $5,210 $252 $ (5) ====== ====== ==== ==== The net loss of $72 million in the fourth quarter of 2007 was primarily driven by $66 million in non- cash tax expense to realign the European ownership structure, a net tax benefit of $4 million for prior year income tax returns, a charge of $14 million, after tax, for refinancing a portion of the company's debt and after tax restructuring and restructuring related expenses of $11 million. 2006 1st................................. $1,131 $ 921 $ 41 $ 3 2nd................................. 1,221 971 73 24 3rd................................. 1,121 925 43 7 4th................................. 1,209 1,019 39 15 ------ ------ ---- ---- $4,682 $3,836 $196 $ 49 ====== ====== ==== ====
BASIC DILUTED EARNINGS EARNINGS PER SHARE OF PER SHARE OF QUARTER COMMON STOCK COMMON STOCK - ------- ------------ ------------ 2007 1st................................................... $ 0.11 $ 0.11 2nd................................................... 0.89 0.85 3rd................................................... 0.47 0.45 4th................................................... (1.57) (1.57) Full Year............................................. (0.11) (0.11) 2006 1st................................................... $ 0.07 $ 0.07 2nd................................................... 0.55 0.51 3rd................................................... 0.16 0.16 4th................................................... 0.32 0.31 Full Year............................................. 1.11 1.05
- -------- Note: 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 consolidated financial statements.) 127 SCHEDULE II TENNECO INC. AND CONSOLIDATED SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Column C -------------------- Column B ADDITIONS --------- -------------------- Column E BALANCE CHARGED CHARGED -------- Column A AT TO TO Column D BALANCE -------- BEGINNING COSTS AND OTHER ---------- AT END DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR - ----------- --------- --------- -------- ---------- -------- (Millions) Allowance for Doubtful Accounts and Notes Deducted from Assets to Which it Applies: Year Ended December 31, 2007.......... $23 $3 $2 $3 $25 === == == == === Year Ended December 31, 2006.......... $26 $4 $1 $8 $23 === == == == === Year Ended December 31, 2005.......... $26 $5 $1 $6 $26 === == == == ===
128 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A. CONTROLS AND PROCEDURES. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the year covered by this report. As described below under Management's Report on Internal Control Over Financial Reporting, we have identified a material weakness in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Our Chief Executive Officer and Chief Financial Officer have concluded that as a result of this material weakness in accounting for income taxes, as of the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures were not effective. See Item 8, "Financial Statements and Supplementary Data" for management's report on internal control over financial reporting and the report of our independent registered public accounting firm thereon. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING Except as described in management's report on internal control over financial reporting under Item 8, "Financial Statements and Supplementary Data", there have been no changes in our internal control over financial reporting during the quarter ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION. None. 129 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. The sections entitled "Election of Directors" and "Corporate Governance" in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held May 6, 2008 are incorporated herein by reference. In addition, Item 4.1 of this Annual Report on Form 10-K, which appears at the end of Part I, is incorporated herein by reference. A copy of our Code of Ethical Conduct for Financial Managers, which applies to our Chief Executive Officer, Chief Financial Officer, Controller and other key financial managers, is filed as Exhibit 14 to this Form 10-K. We have posted a copy of the Code of Ethical Conduct for Financial Managers on our Internet website at www.tenneco.com. We will make a copy of this code available to any person, without charge, upon written request to Tenneco Inc., 500 North Field Drive, Lake Forest, Illinois 60045, Attn: General Counsel. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K and applicable NYSE rules regarding amendments to or waivers of our Code of Ethical Conduct by posting this information on our Internet website at www.tenneco.com. ITEM 11. EXECUTIVE COMPENSATION. The section entitled "Executive Compensation" in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held May 6, 2008 is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The section entitled "Ownership of Common Stock" in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held May 6, 2008 is incorporated herein by reference. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS The following table shows, as of December 31, 2007, information regarding outstanding awards available under our compensation plans (including individual compensation arrangements) under which our equity securities may be delivered:
(A) (C) NUMBER OF (B) NUMBER OF SECURITIES TO BE WEIGHTED- SECURITIES ISSUED UPON AVERAGE EXERCISE AVAILABLE FOR EXERCISE OF PRICE OF FUTURE OUTSTANDING OUTSTANDING ISSUANCE OPTIONS, OPTIONS, (EXCLUDING WARRANTS AND WARRANTS AND SHARES IN PLAN CATEGORY RIGHTS(1) RIGHTS COLUMN (A))(1) - ----------------------------------------------- ---------------- ---------------- -------------- EQUITY COMPENSATION PLANS APPROVED BY SECURITY HOLDERS: Stock Ownership Plan(2)...................... 774,114 $ 6.01 -- 2002 Long-Term Incentive Plan (as amended)(3)(4)............................ 1,259,730 $12.44 -- 2006 Long-Term Incentive Plan(5)............. 541,814 $26.82 1,884,216 EQUITY COMPENSATION PLANS NOT APPROVED BY SECURITY HOLDERS: Supplemental Stock Ownership Plan(6)......... 245,231 $ 8.56 --
- -------- (1) Reflects the number of shares of the Company's common stock. Does not include 203,001 shares that may be issued in settlement of common stock equivalent units that were credited to outside directors as payment for their retainer and other fees. In general, these units are settled in cash. At the option of the Company, however, the units may be settled in shares of the Company's common stock. (2) This plan terminated as to new awards on December 31, 2001 (except awards pursuant to commitments outstanding at that date). 130 (3) This plan terminated as to new awards upon adoption of our 2006 Long-term Incentive Plan (except awards pursuant to commitments outstanding on that date). (4) Does not include 145,797 shares subject to outstanding restricted stock (vest over time) as of December 31, 2007 that were issued at a weighted- average issue price of $19.24 per share. (5) Under this plan, as of December 31, 2007, a maximum of 463,236 shares remained available for delivery under full value awards (i.e., bonus stock, stock equivalent units, performance units, restricted stock and restricted stock units). (6) The plan described in the table above as not having been approved by security holders is the Tenneco Inc. Supplemental Stock Ownership Plan. This plan, which terminated on December 31, 2001 as to new awards (except awards pursuant to commitments outstanding at that date), originally covered the delivery of up to 1.5 million shares of common stock held in the Company's treasury. This plan was and continues to be administered by the Compensation/Nominating/Governance Committee. The Company's directors, officers and other employees were eligible to receive awards under this plan, although awards under the plan were limited to the Company's non-executive employees. Awards under the plan could take the form of non-statutory stock options, stock appreciation rights, restricted stock, stock equivalent units or performance units. All awards made under this plan were discretionary. The committee determined which eligible persons received awards and determined all terms and conditions (including form, amount and timing) of each award. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. The subsections entitled "The Board of Directors and its Committees -- General" and "Transactions with Related Persons" under the section entitled "Corporate Governance" in our definitive Proxy Statement for the annual meeting of Stockholders to be held on May 6, 2008 are incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The sections entitled "Ratify Appointment of Independent Public Accountants -- Audit, Audit-Related, Tax and Other Fees" and "Ratify Appointment of Independent Public Accountants -- Pre-Approval Policy" in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held May 6, 2008 are incorporated herein by reference. 131 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN ITEM 8 See "Index to Financial Statements of Tenneco Inc. and Consolidated Subsidiaries" set forth in Item 8, "Financial Statements and Supplementary Data" for a list of financial statements filed as part of this Report. INDEX TO SCHEDULE INCLUDED IN ITEM 8
PAGE ---- Schedule of Tenneco Inc. and Consolidated Subsidiaries -- Schedule II -- Valuation and qualifying accounts -- three years ended December 31, 2007.................................................................. 128
SCHEDULES OMITTED AS NOT REQUIRED OR INAPPLICABLE Schedule I -- Condensed financial information of registrant Schedule III -- Real estate and accumulated depreciation Schedule IV -- Mortgage loans on real estate Schedule V -- Supplemental information concerning property -- casualty insurance operations 132 EXHIBITS The following exhibits are filed with this Annual Report on Form 10-K for the fiscal year ended December 31, 2007, or incorporated herein by reference (exhibits designated by an asterisk are filed with the report; all other exhibits are incorporated by reference): INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2 -- None 3.1(a) Restated Certificate of Incorporation of the registrant dated December 11, 1996 (incorporated herein by reference from Exhibit 3.1(a) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-12387). 3.1(b) -- Certificate of Amendment, dated December 11, 1996 (incorporated herein by reference from Exhibit 3.1(c) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-12387). 3.1(c) -- Certificate of Ownership and Merger, dated July 8, 1997 (incorporated herein by reference from Exhibit 3.1(d) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-12387). 3.1(d) -- Certificate of Designation of Series B Junior Participating Preferred Stock dated September 9, 1998 (incorporated herein by reference from Exhibit 3.1(d) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 1- 12387). 3.1(e) -- Certificate of Elimination of the Series A Participating Junior Preferred Stock of the registrant dated September 11, 1998 (incorporated herein by reference from Exhibit 3.1(e) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 1-12387). 3.1(f) -- Certificate of Amendment to Restated Certificate of Incorporation of the registrant dated November 5, 1999 (incorporated herein by reference from Exhibit 3.1(f) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1- 12387). 3.1(g) -- Certificate of Amendment to Restated Certificate of Incorporation of the registrant dated November 5, 1999 (incorporated herein by reference from Exhibit 3.1(g) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1- 12387). 3.1(h) -- Certificate of Ownership and Merger merging Tenneco Automotive Merger Sub Inc. with and into the registrant, dated November 5, 1999 (incorporated herein by reference from Exhibit 3.1(h) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 3.1(i) -- Certificate of Amendment to Restated Certificate of Incorporation of the registrant dated May 9, 2000 (incorporated herein by reference from Exhibit 3.1(i) of the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, File No. 1- 12387). 3.1(j) -- Certificate of Ownership and Merger merging Tenneco Inc. with and into the registrant, dated October 27, 2005 (incorporated herein by reference from Exhibit 99.1 of the registrant's Current Report on Form 8-K dated October 28, 2005, File No. 1-12387). 3.2 -- By-laws of the registrant, as amended July 10, 2006 (incorporated herein by reference from Exhibit 99.1 of the registrant's Current Report on Form 8-K dated July 10, 2006, File No. 1-12387). 3.3 -- Certificate of Incorporation of Tenneco Global Holdings Inc. ("Global"), as amended (incorporated herein by reference to Exhibit 3.3 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.4 -- By-laws of Global (incorporated herein by reference to Exhibit 3.4 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.5 -- Certificate of Incorporation of TMC Texas Inc. ("TMC") (incorporated herein by reference to Exhibit 3.5 to the registrant's Registration Statement on Form S-4, Reg. No. 333- 93757). 3.6 -- By-laws of TMC (incorporated herein by reference to Exhibit 3.6 to the registrant's Registration Statement on Form S-4, Reg. No. 333- 93757).
133
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.7 -- Amended and Restated Certificate of Incorporation of Tenneco International Holding Corp. ("TIHC") (incorporated herein by reference to Exhibit 3.7 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.8 -- Amended and Restated By-laws of TIHC (incorporated herein by reference to Exhibit 3.8 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.9 -- Certificate of Incorporation of Clevite Industries Inc. ("Clevite"), as amended (incorporated herein by reference to Exhibit 3.9 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.10 -- By-laws of Clevite (incorporated herein by reference to Exhibit 3.10 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.11 -- Amended and Restated Certificate of Incorporation of the Pullman Company ("Pullman") (incorporated herein by reference to Exhibit 3.11 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.12 -- By-laws of Pullman (incorporated herein by reference to Exhibit 3.12 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.13 -- Certificate of Incorporation of Tenneco Automotive Operating Company Inc. ("Operating") (incorporated herein by reference to Exhibit 3.13 to the registrant's Registration Statement on Form S- 4, Reg. No. 333-93757). 3.14 -- By-laws of Operating (incorporated herein by reference to Exhibit 3.14 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 4.1(a) -- Rights Agreement dated as of September 8, 1998, by and between the registrant and First Chicago Trust Company of New York, as Rights Agent (incorporated herein by reference from Exhibit 4.1 of the registrant's Current Report on Form 8-K dated September 24, 1998, File No. 1-12387). 4.1(b) -- Amendment No. 1 to Rights Agreement, dated March 14, 2000, by and between the registrant and First Chicago Trust Company of New York, as Rights Agent (incorporated herein by reference from Exhibit 4.4(b) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1999, File No. 1-12387). 4.1(c) -- Amendment No. 2 to Rights Agreement, dated February 5, 2001, by and between the registrant and First Union National Bank, as Rights Agent (incorporated herein by reference from Exhibit 4.4(b) of the registrant's Post-Effective Amendment No. 3, dated February 26, 2001, to its Registration Statement on Form 8-A dated September 17, 1998). 4.1(d) -- Amendment No. 3 to Rights Agreement, dated November 13, 2006, by and between the registrant and Wells Fargo Bank, N.A., as Rights Agent (incorporated herein by reference from Exhibit 99.2 of the registrant's Current Report on Form 8-K dated November 13, 2006, File No. 1-12387. 4.2(a) -- Indenture, dated as of November 1, 1996, between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.1 of the registrant's Registration Statement on Form S-4, Registration No. 333-14003). 4.2(b) -- First Supplemental Indenture dated as of December 11, 1996 to Indenture dated as of November 1, 1996 between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.3(b) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 4.2(c) -- Third Supplemental Indenture dated as of December 11, 1996 to Indenture dated as of November 1, 1996 between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.3(d) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 4.2(d) -- Fourth Supplemental Indenture dated as of December 11, 1996 to Indenture dated as of November 1, 1996 between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.3(e) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 4.2(e) -- Eleventh Supplemental Indenture, dated October 21, 1999, to Indenture dated November 1, 1996 between The Chase Manhattan Bank, as Trustee, and the registrant (incorporated herein by reference from Exhibit 4.2(l) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387).
134
EXHIBIT NUMBER DESCRIPTION ------- ----------- 4.3 -- Specimen stock certificate for Tenneco Inc. common stock (incorporated herein by reference from Exhibit 4.3 of the registrant's Annual Report on Form 10-K for the year ended December 31, 2006, File No. 1-12387). 4.4(a) -- Indenture dated October 14, 1999 by and between the registrant and The Bank of New York, as trustee (incorporated herein by reference from Exhibit 4.4(a) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 4.4(b) -- Supplemental Indenture dated November 4, 1999 among Tenneco Automotive Operating Company Inc., Tenneco International Holding Corp., Tenneco Global Holdings Inc., the Pullman Company, Clevite Industries Inc. and TMC Texas Inc. in favor of The Bank of New York, as trustee (incorporated herein by reference from Exhibit 4.4(b) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 4.4(c) -- Subsidiary Guarantee dated as of October 14, 1999 from Tenneco Automotive Operating Company Inc., Tenneco International Holding Corp., Tenneco Global Holdings Inc., the Pullman Company, Clevite Industries Inc. and TMC Texas Inc. in favor of The Bank of New York, as trustee (incorporated herein by reference to Exhibit 4.4(c) to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 4.5(a) -- Second Amended and Restated Credit Agreement, dated as of March 16, 2007, among Tenneco Inc., JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto (incorporated herein by reference from Exhibit 99.1 of the registrant's Current Report on Form 8-K dated March 16, 2007). 4.5(b) -- Guarantee and Collateral Agreement, dated as of March 16, 2007 (amending and restating the Guarantee and Collateral Agreement dated as of November 4, 1999, as previously amended and amended and restated), among Tenneco Inc., various of its subsidiaries and JPMorgan Chase Bank, N.A., as administrative agent (incorporated herein by reference from Exhibit 99.2 of the registrant's Current Report on Form 8-K dated March 16, 2007). *4.5(c) -- Waiver, dated July 23, 2007, to Second Amended and Restated Credit Agreement, dated as March 16, 2007, by and among the registrant, JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto. *4.5(d) -- Second Amendment, dated November 26, 2007, to Second Amended and Restated Credit Agreement, dated as March 16, 2007, by and among the registrant, JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto. 4.6(a) -- Indenture, dated as of June 19, 2003, among the registrant, the subsidiary guarantors named therein and Wachovia Bank, National Association (incorporated herein by reference from Exhibit 4.6(a) to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, File No. 1-12387). 4.6(b) -- Collateral Agreement, dated as of June 19, 2003, by the registrant and the subsidiary guarantors named therein in favor of Wachovia Bank, National Association (incorporated herein by reference from Exhibit 4.6(b) to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, File No. 1-12387). 4.6(c) -- Registration Rights Agreement, dated as of June 19, 2003, among the registrant, the subsidiary guarantors named therein, and the initial purchasers named therein, for whom JPMorgan Securities Inc. acted as representative (incorporated herein by reference from Exhibit 4.6(c) to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, File No. 1-12387). 4.6(d) -- Supplemental Indenture, dated as of December 12, 2003, among the registrant, the subsidiary guarantors named therein and Wachovia Bank, National Association (incorporated herein by reference to Exhibit 4.6(d) to the registrant's Annual Report on Form 10-K for the year ended December 31, 2003, File No. 1-12387). 4.6(e) -- Registration Rights Agreement, dated as of December 12, 2003, among the registrant, the subsidiary guarantors named therein, and the initial purchasers named therein, for whom Banc of America Securities LLC acted as representative agent (incorporated herein by reference to Exhibit 4.5(a) to the registrant's Annual Report on Form 10-K for the year ended December 31, 2003, File No. 1-12387). 4.6(f) -- Second Supplemental Indenture, dated as of October 28, 2005, among the registrant, the subsidiary guarantors named therein and Wachovia Bank, National Association (incorporated herein by reference from Exhibit 4.6(f) to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, File No. 1- 12387).
135
EXHIBIT NUMBER DESCRIPTION ------- ----------- 4.6(g) -- Third Supplemental Indenture, dated as of November 14, 2007, by and among the registrant, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee (incorporated herein by reference from Exhibit 4.1 to the Company's Current Report on Form 8-K, dated November 14, 2007). 4.7 -- Intercreditor Agreement, dated as of June 19, 2003, among JPMorgan Chase Bank, as Credit Agent, Wachovia Bank, National Association, as Trustee and Collateral Agent, and the registrant (incorporated herein by reference from Exhibit 4.7 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, File No. 1-12387). 4.8(a) -- Indenture, dated as of November 19, 2004, among the registrant, the subsidiary guarantors named therein and The Bank of New York Trust Company (incorporated herein by reference from Exhibit 99.1 of the registrant's Current Report on Form 8-K dated November 19, 2004, File No. 1-12387). 4.8(b) -- Supplemental Indenture, dated as of March 28, 2005, among the registrant, the guarantors party thereto and the Bank of New York Trust Company, N.A., as trustee (incorporated herein by reference from Exhibit 4.3 to the registrant's Registration Statement on Form S-4, Reg. No. 333-123752). 4.8(c) -- Registration Rights Agreement, dated as of November 19, 2004, among the registrant, the guarantors party thereto and the initial purchasers party thereto (incorporated herein by reference from Exhibit 4.2 to the registrant's Registration Statement on Form S-4, Reg. No. 333-123752). 4.8(d) -- Second Supplemental Indenture, dated as of October 27, 2005, among the registrant, the guarantors party thereto and the Bank of New York Trust Company, N.A., as trustee (incorporated herein by reference from Exhibit 4.8(d) to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, File No. 1- 12387). *4.9(a) -- Indenture, dated as of November 19, 2007, by and among the registrant, the subsidiary guarantors party thereto and Wells Fargo Bank, N.A., as trustee. *4.9(b) -- Registration Rights Agreement, dated November 19, 2007, by and among the registrant, the subsidiary guarantors party thereto and the initial purchasers party thereto. 9 -- None. 10.1 Distribution Agreement, dated November 1, 1996, by and among El Paso Tennessee Pipeline Co., the registrant, and Newport News Shipbuilding Inc. (incorporated herein by reference from Exhibit 2 of the registrant's Form 10, File No. 1-12387). 10.2 -- Amendment No. 1 to Distribution Agreement, dated as of December 11, 1996, by and among El Paso Tennessee Pipeline Co., the registrant, and Newport News Shipbuilding Inc. (incorporated herein by reference from Exhibit 10.2 of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 10.3 -- Debt and Cash Allocation Agreement, dated December 11, 1996, by and among El Paso Tennessee Pipeline Co. , the registrant, and Newport News Shipbuilding Inc. (incorporated herein by reference from Exhibit 10.3 of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 10.4 -- Benefits Agreement, dated December 11, 1996, by and among El Paso Tennessee Pipeline Co., the registrant, and Newport News Shipbuilding Inc. (incorporated herein by reference from Exhibit 10.4 of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 10.5 -- Insurance Agreement, dated December 11, 1996, by and among El Paso Tennessee Pipeline Co., the registrant, and Newport News Shipbuilding Inc. (incorporated herein by reference from Exhibit 10.5 of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 10.6 -- Tax Sharing Agreement, dated December 11, 1996, by and among El Paso Tennessee Pipeline Co., Newport News Shipbuilding Inc., the registrant, and El Paso Natural Gas Company (incorporated herein by reference from Exhibit 10.6 of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 10.7 -- First Amendment to Tax Sharing Agreement, dated as of December 11, 1996, among El Paso Tennessee Pipeline Co., the registrant, El Paso Natural Gas Company and Newport News Shipbuilding Inc. (incorporated herein by reference from Exhibit 10.7 of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). +10.8 -- Value Added 'TAVA' Incentive Compensation Plan, as in effect for periods through December 31, 2005 (incorporated herein by reference from Exhibit 10.8 of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, File No. 1-12387).
136
EXHIBIT NUMBER DESCRIPTION ------- ----------- +10.9 -- Change of Control Severance Benefits Plan for Key Executives (incorporated herein by reference from Exhibit 10.13 of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). +10.10 -- Stock Ownership Plan (incorporated herein by reference from Exhibit 10.10 of the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). +10.11 -- Key Executive Pension Plan (incorporated herein by reference from Exhibit 10.11 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387). +10.12 -- Deferred Compensation Plan (incorporated herein by reference from Exhibit 10.12 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387). +10.13 -- Supplemental Executive Retirement Plan (incorporated herein by reference from Exhibit 10.13 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1- 12387). 10.14 -- Human Resources Agreement by and between the registrant and Tenneco Packaging Inc. dated November 4, 1999 (incorporated herein by reference to Exhibit 99.1 to the registrant's Current Report on Form 8-K dated November 4, 1999, File No. 1-12387). 10.15 -- Tax Sharing Agreement by and between the registrant and Tenneco Packaging Inc. dated November 3, 1999 (incorporated herein by reference to Exhibit 99.2 to the registrant's Current Report on Form 8-K dated November 4, 1999, File No. 1-12387). 10.16 -- Amended and Restated Transition Services Agreement by and between the registrant and Tenneco Packaging Inc. dated as of November 4, 1999 (incorporated herein by reference from Exhibit 10.21 of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 10.17 -- Assumption Agreement among Tenneco Automotive Operating Company Inc., Tenneco International Holding Corp., Tenneco Global Holdings Inc., The Pullman Company, Clevite Industries Inc., TMC Texas Inc., Salomon Smith Barney Inc. and the other Initial Purchasers listed in the Purchase Agreement dated as of November 4, 1999 (incorporated herein by reference from Exhibit 10.24 of the registrant's Registration Statement on Form S-4, Reg. No. 333- 93757). +10.18 -- Amendment No. 1 to Change in Control Severance Benefits Plan for Key Executives (incorporated herein by reference from Exhibit 10.23 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387). +10.19 -- Letter Agreement dated July 27, 2000 between the registrant and Mark P. Frissora (incorporated herein by reference from Exhibit 10.24 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387). +10.20 -- Omitted. +10.21 -- Letter Agreement dated July 27, 2000 between the registrant and Timothy R. Donovan (incorporated herein by reference from Exhibit 10.28 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2000, File No. 1-12387). +10.22 -- Form of Indemnity Agreement entered into between the registrant and the following directors of the registrant: Paul Stecko, M. Kathryn Eickhoff and Dennis Severance (incorporated herein by reference from Exhibit 10.29 to the registrant's Quarterly Report on Form 10- Q for the quarter ended September 30, 2000, File No. 1-12387). +10.23 -- Letter Agreement dated July 27, 2000 between the registrant and Timothy E. Jackson (incorporated herein by reference from Exhibit 10.27 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387) +10.24 -- Letter Agreement dated as of June 1, 2001 between the registrant and Hari Nair (incorporated herein by reference from Exhibit 10.28 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2001. File No. 1-12387). +10.25 -- 2002 Long-Term Incentive Plan (As Amended and Restated Effective March 11, 2003) (incorporated herein by reference from Exhibit 10.26 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003. File No. 1-12387). +10.26 -- Amendment No. 1 to Deferred Compensation Plan (incorporated herein by reference from Exhibit 10.27 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1- 12387). +10.27 -- Supplemental Stock Ownership Plan (incorporated herein by reference from Exhibit 10.28 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-12387).
137
EXHIBIT NUMBER DESCRIPTION ------- ----------- +10.28 -- Form of Stock Equivalent Unit Award Agreement under the 2002 Long- Term Incentive Plan, as amended (incorporated herein by reference from Exhibit 99.1 of the registrant's Current Report on Form 8-K dated January 13, 2005, File No. 1-12387). +10.29 -- Form of Stock Option Agreement for employees under the 2002 Long- Term Incentive Plan, as amended (providing for a ten year option term) (incorporated herein by reference from Exhibit 99.2 of the registrant's Current Report on Form 8-K dated January 13, 2005, File No. 1-12387). +10.30 -- Form of Stock Option Agreement for non-employee directors under the 2002 Long-Term Incentive Plan, as amended (providing for a ten year option term) (incorporated herein by reference from Exhibit 99.3 of the registrant's Current Report on Form 8-K dated January 13, 2005, File No. 1-12387). +10.31 -- Form of Restricted Stock Award Agreement for employees under the 2002 Long-Term Incentive Plan, as amended (three year cliff vesting) (incorporated herein by reference from Exhibit 99.4 of the registrant's Current Report on Form 8-K dated January 13, 2005, File No. 1-12387). +10.32 -- Form of Restricted Stock Award Agreement for non-employee directors under the 2002 Long-Term Incentive Plan, as amended (incorporated herein by reference from Exhibit 99.5 of the registrant's Current Report on Form 8-K dated January 13, 2005, File No. 1-12387). +10.33 -- Form of Restricted Stock Award Agreement for employees under the 2002 Long-Term Incentive Plan, as amended (vesting 1/3 annually) (incorporated herein by reference from Exhibit 99.1 of the registrant's Current Report on Form 8-K dated January 17, 2005, File No. 1-12387). +10.34 -- Form of Stock Option Agreement for employees under the 2002 Long- Term Incentive Plan, as amended (providing for a seven year option term) (incorporated herein by reference from Exhibit 99.2 of the registrant's Current Report on Form 8-K dated January 17, 2005, File No. 1-12387). +10.35 -- Form of Stock Option Agreement for non-employee directors under the 2002 Long-Term Incentive Plan, as amended (providing for a seven year option term) (incorporated herein by reference from Exhibit 99.3 of the registrant's Current Report on Form 8-K dated January 17, 2005, File No. 1-12387). +10.36 -- Form of Performance Share Agreement for non-employee directors under the 2002 Long-Term Incentive Plan, as amended (incorporated herein by reference from Exhibit 10.37 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2004, file No. 1-12387). *+10.37 -- Summary of 2008 Outside Directors' Compensation. *+10.38 -- Summary of 2008 Named Executive Officer Compensation. +10.39 -- Amendment No. 1 to the Key Executive Pension Plan (incorporated herein by reference from Exhibit 10.39 to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, File No. 1-12387). +10.40 -- Amendment No. 1 to the Supplemental Executive Retirement Plan (incorporated herein by reference from Exhibit 10.40 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, File No. 1-12387). +10.41 -- Second Amendment to the Key Executive Pension Plan (incorporated herein by reference from Exhibit 10.41 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, File No. 1-12387). +10.42 -- Amendment No. 2 to the Deferred Compensation Plan (incorporated herein by reference from Exhibit 10.42 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, File No. 1-12387). +10.43 -- Supplemental Retirement Plan (incorporated herein by reference from Exhibit 10.43 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, File No. 1-12387). +10.44 -- Mark P. Frissora Special Appendix under Supplemental Retirement Plan (incorporated herein by reference from Exhibit 10.44 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, File No. 1-12387). +10.45 -- Supplemental Pension Plan for Management (incorporated herein by reference from Exhibit 10.45 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, File No. 1- 12387). +10.46 -- Incentive Deferral Plan (incorporated herein by reference from Exhibit 10.46 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, File No. 1- 12387). +10.47 -- Amended and Restated Value Added ("TAVA") Incentive Compensation Plan, effective January 1, 2006 (incorporated herein by reference from Exhibit 10.47 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2005, file No. 1-12387).
138
EXHIBIT NUMBER DESCRIPTION ------- ----------- +10.48 -- Form of Restricted Stock Award Agreement for non-employee directors under the 2002 Long-Term Incentive Plan, as amended (providing for one year cliff vesting) (incorporated herein by reference from Exhibit 10.48 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2005, file No. 1-12387). +10.49 -- Form of Stock Equivalent Unit Award Agreement, as amended, under the 2002 Long-Term Incentive Plan, as amended (incorporated herein by reference from Exhibit 10.49 to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, File No. 1-12387). +10.50 -- Summary of Amendments to Deferred Compensation Plan and Incentive Deferral Plan (incorporated herein by reference from Exhibit 10.50 to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, File No. 1-12387). +10.51 -- Tenneco Inc. 2006 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.1 to the registrant's Current Report on Form 8-K, dated May 9, 2006). +10.52 -- Form of Restricted Stock Award Agreement for non-employee directors under the Tenneco Inc. 2006 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.2 to the registrant's Current Report on Form 8-K, dated May 9, 2006). +10.53 -- Form of Stock Option Agreement for employees under the Tenneco Inc. 2006 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.3 to the registrant's Current Report on Form 8-K, dated May 9, 2006). +10.54 -- Form of Restricted Stock Award Agreement for employees under the Tenneco Inc. 2006 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.4 to the registrant's Current Report on Form 8-K, dated May 9, 2006). +10.55 -- Summary of Amendments to the Company's excess defined benefit plans, the terms of a new excess defined contribution plan and Amendments to certain executives' employment agreements (incorporated herein by reference from Exhibit 10.55 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, File No. 1-12387). +10.56 -- Form of First Amendment to the Tenneco Inc. Supplemental Pension Plan for Management (incorporated herein by reference from Exhibit 10.56 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2006. File No. 1-12387). +10.57 -- Form of First Amendment to the Tenneco Inc. Supplemental Retirement Plan (incorporated herein by reference from Exhibit 10.57 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2006. File No. 1-12387). +10.58 -- Form of Stock Equivalent Unit Award Agreement, as amended, under the 2002 Long-Term Incentive Plan, as amended (incorporated herein by reference from Exhibit 99.1 of the registrant's Current Report on Form 8-K dated as of December 6, 2006, File No. 1-12387). +10.59 -- Letter Agreement dated December 4, 2006 between the registrant and Timothy R. Donovan (incorporated herein by reference from Exhibit 10.59 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2006. File No. 1-12387). +10.60 -- Letter Agreement dated January 5, 2007 between the registrant and Hari N. Nair (incorporated herein by reference from Exhibit 10.60 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2006. File No. 1-12387). +10.61 -- Letter Agreement between Tenneco Inc. and Gregg Sherrill (incorporated herein by reference from Exhibit 99.2 of the registrant's Current Report on Form 8-K dated as of January 5, 2007, File No. 1-12387). +10.62 -- Letter Agreement between Tenneco Inc. and Gregg Sherrill, dated as of January 15, 2007 (incorporated herein by reference from Exhibit 99.1 of the registrant's Current Report on Form 8-K dated as of January 15, 2007, File No. 1-12387). +10.63 -- Form of Restricted Stock Agreement between Tenneco Inc. and Gregg Sherrill (incorporated by reference to Exhibit 10.63 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2006, File No. 1-12387). +10.64 -- Form of Long Term Performance Unit Award Under the 2006 Long-Term Incentive Plan (stub period award for 2007) (incorporated herein by reference from Exhibit 10.64 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, File No. 1- 12387).
139
EXHIBIT NUMBER DESCRIPTION ------- ----------- +10.65 -- Form of Long Term Performance Unit Award Under the 2006 Long-Term Incentive Plan (three year award for 2007-2009 period) (incorporated herein by reference from Exhibit 10.65 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, File No. 1-12387). +10.66 -- Tenneco Inc. Change in Control Severance Benefit Plan for Key Executives, as Amended and Restated effective December 12, 2007 (incorporated herein by reference from Exhibit 10.1 to the Company's Current Report on Form 8-K, dated December 18, 2007). +*10.67 -- Form of Long Term Performance Unit Award Under the 2006 Long-Term Incentive Plan (stub period award for 2008). +*10.68 -- Form of Long Term Performance Unit Award Under the 2006 Long-Term Incentive Plan (three-year award for periods commencing with 2008). +*10.69 -- Letter Agreement dated January 5, 2007 between the registrant and Timothy E. Jackson. 11 -- None. *12 -- Computation of Ratio of Earnings to Fixed Charges. 13 -- None. 14 -- Tenneco Inc. Code of Ethical Conduct for Financial Managers (incorporated herein by reference from Exhibit 99.3 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-12387). 16 -- None. 18 -- None. *21 -- List of Subsidiaries of Tenneco Inc. 22 -- None. *23 -- Consent of Independent Registered Public Accounting Firm. *24 -- Powers of Attorney. *31.1 -- Certification of Gregg Sherrill under Section 302 of the Sarbanes- Oxley Act of 2002. *31.2 -- Certification of Kenneth R. Trammell under Section 302 of the Sarbanes-Oxley Act of 2002. *32.1 -- Certification of Gregg Sherrill and Kenneth R. Trammell under Section 906 of the Sarbanes-Oxley Act of 2002. 33 -- None. 34 -- None. 35 -- None. 99 -- None. 100 -- None.
- -------- * Filed herewith. + Indicates a management contract or compensatory plan or arrangement. 140 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TENNECO INC. By * ------------------------------------- Gregg Sherrill Chairman and Chief Executive Officer Date: February 29, 2008 Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed by the following persons in the capacities indicated on February 29, 2008.
SIGNATURE TITLE --------- ----- * Chairman, President and Chief Executive Officer and Director - ------------------------------------- (principal executive officer) Gregg Sherrill /s/ KENNETH R. TRAMMELL Executive Vice President and Chief Financial Officer (principal financial - ------------------------------------- officer) Kenneth R. Trammell * Vice President and Controller (principal accounting officer) - ------------------------------------- Paul D. Novas * Director - ------------------------------------- Charles W. Cramb * Director - ------------------------------------- Dennis J. Letham * Director - ------------------------------------- Frank E. Macher * Director - ------------------------------------- Roger B. Porter * Director - ------------------------------------- David B. Price, Jr. * Director - ------------------------------------- Paul T. Stecko * Director - ------------------------------------- Mitsunobi Takeuchi * Director - ------------------------------------- Jane L. Warner By: /s/ KENNETH R. TRAMMELL ------------------------------- Kenneth R. Trammell Attorney in fact
141 EX-4.5(C) 2 c23259exv4w5xcy.htm WAIVER exv4w5xcy
 

Exhibit 4.5(c)
WAIVER
          WAIVER, dated as of July 23, 2007 (this “Waiver”), under the Second Amended and Restated Credit Agreement, dated as of March 16, 2007 (amending and restating the Amended and Restated Credit Agreement dated as of December 12, 2003 (amending and restating the Credit Agreement dated as of September 30, 1999)) (as amended, supplemented, or otherwise modified from time to time, the “Credit Agreement”), among TENNECO INC., a Delaware corporation (the “Borrower”), the several lenders from time to time parties thereto (the “Lenders”), JPMORGAN CHASE BANK, N.A., a national banking association, as administrative agent for the Lenders (in such capacity, the “Administrative Agent”), and the other financial institutions named therein as agents for the Lenders (in such capacity, collectively, the “Other Agents”).
W I T N E S S E T H:
          WHEREAS, the Borrower, the Lenders and the Administrative Agent and the Other Agents are parties to the Credit Agreement;
          WHEREAS, the Borrower will restate its financial statements for the fiscal years ended December 31, 2004, December 31, 2005 and December 31, 2006 and for the fiscal quarter ended March 31, 2007, as more fully described in the Borrower’s report on Form 8-K filed with the SEC on July 23, 2007 (the “Restatement”);
          WHEREAS, the Borrower has requested certain waivers under the Credit Agreement in connection with the Restatement; and
          WHEREAS, the Lenders, the Administrative Agent and the Other Agents are willing to agree to such waivers under the Credit Agreement, subject to the terms and conditions set forth herein;
          NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, the Borrower, the Lenders, the Administrative Agent and the Other Agents hereby agree as follows:
          1. Defined Terms. Unless otherwise defined herein, capitalized terms which are defined in the Credit Agreement, as amended hereby, are used herein as therein defined.
          2. Waiver, etc. The Required Lenders hereby waive (a) any Default or Event of Default (a) under Section 4.1 of the Credit Agreement, Section 6.1 of the Credit Agreement or any other provision of the Credit Agreement or any other Loan Document requiring an item or calculation to be determined in accordance with GAAP or resulting from the bring-down of representations and warranties by the Borrower or satisfaction of conditions in connection with any prior extension of credit under the Credit Agreement, in each case resulting from the Restatement; provided that the foregoing shall not be deemed to waive any Default or Event of Default with respect to a Financial Covenant, and (b) through September 30, 2007, delivery of the financial statements and certificates described in Sections 6.1 and 6.2 of the Credit

 

 

 2 
Agreement with respect to the fiscal quarters ended March 31, 2007 and June 30, 3007. From and after the date on which restated consolidated balance sheets of the Borrower as at December 31, 2006 and December 31, 2005 and the related restated consolidated statements of income and cash flows for the fiscal years ended on such dates have been issued pursuant to the Restatement, Section 4.1 shall be deemed to refer to such restated audited financial statements.
          3. Representations and Warranties. The Borrower hereby confirms that the representations and warranties set forth in Section 4 of the Credit Agreement (excluding Section 4.1 to the extent described herein), as amended by this Waiver, are true and correct in all material respects as if made as of the Waiver Effective Date (except such representations and warranties as are made as of a particular date, which such representations and warranties shall be true and correct in all material respects as if made as of such date). The Borrower represents and warrants that, after giving effect to this Waiver, no Default or Event of Default has occurred and is continuing.
          4. Effectiveness. This Waiver shall become effective as of the date (the “Waiver Effective Date”) on which the Administrative Agent shall have received this Waiver executed and delivered by the Administrative Agent, the Borrower and the Required Lenders (or, in the case of any Lender, a lender addendum or joinder agreement in a form specified by the Administrative Agent).
          5. Continuing Effect of the Credit Agreement. This Waiver shall not constitute an amendment or waiver of any provision of the Credit Agreement not expressly referred to herein and shall not be construed as a waiver or consent to any further or future action on the part of the Borrower that would require a waiver or consent of the Lenders, the Administrative Agent or the Other Agents. Except as expressly amended hereby, the provisions of the Credit Agreement are and shall remain in full force and effect.
          6. Counterparts. This Waiver may be executed by the parties hereto in any number of separate counterparts (including telecopied counterparts), each of which shall be deemed to be an original, and all of which taken together shall be deemed to constitute one and the same instrument.
          7. GOVERNING LAW. THIS WAIVER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

 

 

          IN WITNESS WHEREOF, the parties hereto have caused this Waiver to be duly executed and delivered by their respective proper and duly authorized officers as of the day and year first above written.
             
    TENNECO INC.    
 
            
 
  By:        
 
           
 
      Name:    
 
      Title:    
 
            
    JPMORGAN CHASE BANK, N.A., as
Administrative Agent and as a Lender		    
 
            
 
  By:        
 
           
 
      Name:    
 
      Title:    

 

 

             
    WAIVER dated as of July 23, 2007 to the Tenneco Inc.   Second Amended and Restated Credit Agreement, dated as of March 16, 2007 (amended and restating the Amended and Restated Credit Agreement dated as of December 12, 2003 (amending and restating the Credit Agreement dated as of September 30, 1999))
 
            
         
 
      [LENDER]    
 
            
 
  By:        
 
           
 
      Name:    
 
      Title:    

 

EX-4.5(D) 3 c23259exv4w5xdy.htm SECOND AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT exv4w5xdy
 

Exhibit 4.5(d)
EXECUTION COPY
SECOND AMENDMENT
          SECOND AMENDMENT, dated as of November 26, 2007 (this “Amendment”), under the Second Amended and Restated Credit Agreement, dated as of March 16, 2007 (amending and restating the Amended and Restated Credit Agreement dated as of December 12, 2003 (amending and restating the Credit Agreement dated as of September 30, 1999)) (as amended and waived by the Amendment and Waiver dated as of July 23, 2007 and as further amended, supplemented, or otherwise modified from time to time, the “Credit Agreement”), among TENNECO INC., a Delaware corporation (the “Borrower”), the several lenders from time to time parties thereto (the “Lenders”), JPMORGAN CHASE BANK, N.A., a national banking association, as administrative agent for the Lenders (in such capacity, the “Administrative Agent”), and the other financial institutions named therein as agents for the Lenders (in such capacity, collectively, the “Other Agents”).
W I T N E S S E T H:
          WHEREAS, the Borrower, the Lenders and the Administrative Agent and the Other Agents are parties to the Credit Agreement;
          WHEREAS, the Borrower has informed the Lenders that it intends to engage in certain corporate restructuring transactions;
          WHEREAS, the Borrower has requested certain amendments under the Credit Agreement in connection with such corporate restructuring transactions and in connection with certain other matters; and
          WHEREAS, the Required Lenders, the Administrative Agent and the Other Agents are willing to agree to such amendments of the Credit Agreement, subject to the terms and conditions set forth herein;
          NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, the Borrower, the Required Lenders, the Administrative Agent and the Other Agents hereby agree as follows:
          1. Defined Terms. Unless otherwise defined herein, capitalized terms which are defined in the Credit Agreement, as amended hereby, are used herein as therein defined.
          2. Amendments to Credit Agreement.
               (a) Section 1.1 of the Credit Agreement is hereby amended by adding the following definitions in proper alphabetical order:
     “Offshore Restructuring”: the collective reference to the European, Chinese and Brazilian restructuring transactions described in the document entitled Ownership Structure Alignment Step Plan posted on Intralinks by the Administrative Agent on

 

 

November 26, 2007 substantially as described therein, and transactions reasonably related thereto.
               (b) Section 1.1 of the Credit Agreement is hereby amended by deleting from the definition of “Cash Management Obligations” the amount “$15,000,000” and substituting therefor the amount “$30,000,000”.
               (c) Section 6.9 of the Credit Agreement is hereby amended by (i) deleting from paragraph (i) references to Tenneco Automotive Polska Sp z.o.o. and (ii) adding the following paragraph at the end thereof:
        (j) Notwithstanding the preceding provisions of this Section 6.9 (i) with respect to the pledge of Capital Stock of any Subsidiary or the delivery of instruments evidencing pledged intercompany Indebtedness owing to any Loan Party otherwise required by Section 6.9 resulting from the Offshore Restructuring, the Borrower and its Subsidiaries will not be required to comply with Section 6.9 until the date which is 60 days from the later of the consummation or abandonment (in each case as reasonably determined by the Administrative Agent after consultation with the Company) of the Offshore Restructuring (which period may be extended from time to time by the Administrative Agent in its sole discretion) and (ii) the domestic Subsidiary formed in connection with the Brazilian component of the Offshore Restructuring will only be required to execute and deliver a counterpart of the Guarantee and Collateral Agreement to the extent both (A) such execution and delivery would not result in adverse tax consequences to the Borrower or any other Subsidiary and (B) such domestic Subsidiary does not guarantee or otherwise provide direct credit support for obligations of any Loan Party.
               (d) Section 7.2 of the Credit Agreement is hereby amended by deleting paragraph (n) and substituting therefor the following:
     (n) additional unsecured Indebtedness of Foreign Subsidiaries in an aggregate principal amount not to exceed the local currency equivalent of €200,000,000 at any time to the extent the proceeds are used directly or indirectly to prepay, repurchase or redeem the Second Lien Notes and to pay any fees and premiums arising in connection with such refinancing; and
               (e) Paragraph (o) of Section 7.2 of the Credit Agreement is hereby amended by adding the phrase “and the other Loan Parties” immediately after the word “Borrower”.
               (f) Section 7.4 of the Credit Agreement is hereby amended by (i) deleting the word “and” from the end of paragraph (b), (ii) deleting the period from the end of paragraph (c) and substituting therefor the phrase “; and” and (iii) adding the following paragraph at the end thereof:
     (d) the Borrower and its Subsidiaries may implement and consummate the Offshore Restructuring.

 

3

               (g) Section 7.5 of the Credit Agreement is hereby amended by (i) deleting the word “and” from the end of paragraph (m), (ii) deleting the period from the end of paragraph (n) and substituting therefor the phrase “; and” and (iii) adding the following paragraph at the end thereof:
     (o) the Borrower and its Subsidiaries may implement and consummate the Offshore Restructuring.
               (h) Section 10.14 of the Credit Agreement is hereby amended by adding the following paragraph at the end thereof:
     (c) The Administrative Agent and the Lenders agree that Liens on assets of the Loan Parties created by the Loan Documents will be terminated and released upon the transfer of such assets to a Foreign Subsidiary pursuant to the Offshore Restructuring. The Administrative Agent is hereby irrevocably authorized by each Lender (without requirement of notice to or consent of any Lender) to take any action requested by the Borrower to effect any termination or release described in this paragraph (c).
          3. Representations and Warranties. The Borrower hereby confirms that the representations and warranties set forth in Section 4 of the Credit Agreement, as amended by this Amendment, are true and correct in all material respects as if made as of the Amendment Effective Date (except such representations and warranties as are made as of a particular date, which such representations and warranties shall be true and correct in all material respects as if made as of such date). The Borrower represents and warrants that, after giving effect to this Amendment, no Default or Event of Default has occurred and is continuing.
          4. Effectiveness. This Amendment shall become effective as of the date set forth above (the “Amendment Effective Date”) on the date on which the Administrative Agent shall have received this Amendment executed and delivered by the Administrative Agent, the Borrower and the Required Lenders (or, in the case of any Lender, a lender addendum or joinder agreement in a form specified by the Administrative Agent) and acknowledged by the Loan Parties.
          5. Continuing Effect of the Credit Agreement. This Amendment shall not constitute an amendment or waiver of any provision of the Credit Agreement not expressly referred to herein and shall not be construed as a waiver or consent to any further or future action on the part of the Borrower that would require a waiver or consent of the Lenders, the Administrative Agent or the Other Agents. Except as expressly amended hereby, the provisions of the Credit Agreement are and shall remain in full force and effect.
          6. Counterparts. This Amendment may be executed by the parties hereto in any number of separate counterparts (including telecopied counterparts), each of which shall be deemed to be an original, and all of which taken together shall be deemed to constitute one and the same instrument.

 

4

          7. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

 

 

          IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective proper and duly authorized officers as of the day and year first above written.
         
  TENNECO INC.
 		  
  By:      
    Name:      
    Title:      
 
         
  JPMORGAN CHASE BANK, N.A., as
Administrative Agent and as a Lender
 		  
  By:      
    Name:      
    Title:      

 

 
         

         
 
  SECOND AMENDMENT dated as of November 26, 2007 to the    
 
  Tenneco Inc. Second Amended and Restated Credit    
 
  Agreement, dated as of March 16, 2007 (amended and    
 
  restating the Amended and Restated Credit Agreement    
 
  dated as of December 12, 2003 (amending and restating    
 
  the Credit Agreement dated as of September 30, 1999))    
 
        
 
       
 
  [LENDER]    
         
     
  By:      
    Name:      
    Title:      

 

 
         

     
 
  The undersigned Loan Parties acknowledge and
 
  agree to the Second Amendment and confirm that
 
  all of their obligations under the Loan Documents
 
  remain in full force and effect after giving
 
  effect thereto and the transactions contemplated
 
  thereby:
 
    
 
  TENNECO INC.
 
  TENNECO AUTOMOTIVE OPERATING
 
       COMPANY INC.
 
  TENNECO INTERNATIONAL HOLDING
 
       CORP.
 
  TENNECO GLOBAL HOLDINGS INC.
 
  THE PULLMAN COMPANY
 
  TMC TEXAS INC.
 
  CLEVITE INDUSTRIES INC.
         
     
  By:      
    Title:   
       
 

 

EX-4.9(A) 4 c23259exv4w9xay.htm INDENTURE exv4w9xay
 

Exhibit 4.9(a)
 
 
INDENTURE
Dated as of November 20, 2007
among
TENNECO INC.,
as Issuer,
TENNECO AUTOMOTIVE OPERATING COMPANY INC.,
THE PULLMAN COMPANY
CLEVITE INDUSTRIES INC.
TENNECO GLOBAL HOLDINGS INC.
TMC TEXAS INC.
TENNECO INTERNATIONAL HOLDING CORP.
as Guarantors,
and
WELLS FARGO BANK, N.A.
as Trustee
 
81/8% Senior Notes due 2015, Series A
881/8% Senior Notes due 2015, Series B
 
 

 

 

CROSS-REFERENCE TABLE
     
   TIA   Indenture
Section    Section 
310(a)(1)
  7.10
(a)(2)
  7.10
(a)(3)
  N.A.
(a)(4)
  N.A.
(a)(5)
  7.10
(b)
   7.08; 7.10
(c)
   N.A.
311(a)
   7.11
(b)
   7.11
312(a)
   2.05
(b)
   11.03
(c)
   11.03
313(a)
  7.06
(b)(1)
  7.06
(b)(2)
  7.06; 7.07
(c)
   7.05; 7.06; 11.02
(d)
   7.06
314(a)
   4.08; 4.10; 11.02
(b)
   N.A.
(c)(1)
  4.08; 11.04
(c)(2)
  11.04
(c)(3
  4.08; 11.04
(d)
   N.A.
(e)
   11.05
(f)
   N.A.
315(a)
   7.01(b)
(b)
   7.05; 11.02
(c)
   7.01(a)
(d)
   7.01(c)
(e)
   6.11
316(a)(last sentence)
  2.09
(a)(1)(A)
  6.05
(a)(1)(B)
  6.04
(a)(2)
  N.A.
(b)
   6.07; 9.04
(c)
   9.04
317(a)(1)
  6.08
(a)(2)
  6.09
(b)
   2.04
318(a)
   11.01
(c)
   11.01
 
“N.A.” means Not Applicable.
 
NOTE:   This Cross-Reference Table shall not, for any purpose, be deemed to be a part of the Indenture.

-i-

 

 

TABLE OF CONTENTS
         
    Page
ARTICLE I

DEFINITIONS AND INCORPORATION BY REFERENCE
        
 
        
SECTION 1.01. Definitions
     1  
SECTION 1.02. Incorporation by Reference of TIA
     33  
SECTION 1.03. Rules of Construction
     34  
 
        
ARTICLE II

THE SECURITIES
        
 
        
SECTION 2.01. Form and Dating
     34  
SECTION 2.02. Execution and Authentication
     35  
SECTION 2.03. Registrar and Paying Agent
     36  
SECTION 2.04. Paying Agent To Hold Assets in Trust
     37  
SECTION 2.05. Securityholder Lists
     37  
SECTION 2.06. Transfer and Exchange
     37  
SECTION 2.07. Replacement Securities
     38  
SECTION 2.08. Outstanding Securities
     38  
SECTION 2.09. Treasury Securities
     39  
SECTION 2.10. Temporary Securities
     39  
SECTION 2.11. Cancellation
     39  
SECTION 2.12. Defaulted Interest
     40  
SECTION 2.13. CUSIP Number
     40  
SECTION 2.14. Deposit of Moneys
     40  
SECTION 2.15. Book-Entry Provisions for Global Securities
     40  
SECTION 2.16. Registration of Transfers and Exchanges
     41  
 
        
ARTICLE III

REDEMPTION
        
 
        
SECTION 3.01. Notices to Trustee
     45  
SECTION 3.02. Selection of Securities To Be Redeemed
     46  
SECTION 3.03. Notice of Redemption
     46  
SECTION 3.04. Effect of Notice of Redemption
     47  
SECTION 3.05. Deposit of Redemption Price
     47  
SECTION 3.06. Securities Redeemed in Part
     48  

-ii-

 

 

         
    Page
ARTICLE IV

COVENANTS
        
 
        
SECTION 4.01. Payment of Securities
     48  
SECTION 4.02. Maintenance of Office or Agency
     48  
SECTION 4.03. Limitation on Incurrence of Additional Indebtedness
     48  
SECTION 4.04. Limitation on Restricted Payments
     49  
SECTION 4.05. Corporate Existence
     52  
SECTION 4.06. Payment of Taxes and Other Claims
     53  
SECTION 4.07. Maintenance of Properties and Insurance
     53  
SECTION 4.08. Compliance Certificate; Notice of Default
     54  
SECTION 4.09. Compliance with Laws
     54  
SECTION 4.10. Reports to Holders
     55  
SECTION 4.11. Waiver of Stay, Extension or Usury Laws
     56  
SECTION 4.12. Limitation on Asset Sales
     56  
SECTION 4.13. Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
     59  
SECTION 4.14. Limitation on Issuances of Capital Stock of Restricted Subsidiaries
     61  
SECTION 4.15. Limitation on Liens
     61  
SECTION 4.16. [Intentionally Omitted]
     62  
SECTION 4.17. Limitation on Transactions with Affiliates
     62  
SECTION 4.18. Issuance of Subsidiary Guarantees
     63  
SECTION 4.19. Payments for Consent
     65  
SECTION 4.20. Limitation on Designations of Unrestricted Subsidiaries
     65  
SECTION 4.21. Change of Control
     66  
 
        
ARTICLE V

SUCCESSOR CORPORATION
        
 
        
SECTION 5.01. Merger, Consolidation and Sale of Assets
     68  
SECTION 5.02. Successor Corporation Substituted
     70  
 
        
ARTICLE VI

DEFAULT AND REMEDIES
        
 
        
SECTION 6.01. Events of Default
     71  
SECTION 6.02. Acceleration
     72  
SECTION 6.03. Other Remedies
     73  
SECTION 6.04. Waiver of Past Defaults
     74  
SECTION 6.05. Control by Majority
     74  
SECTION 6.06. Limitation on Suits
     74  
SECTION 6.07. Rights of Holders To Receive Payment
     75  
SECTION 6.08. Collection Suit by Trustee
     75  

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    Page
SECTION 6.09. Trustee May File Proofs of Claim
     75  
SECTION 6.10. Priorities
     76  
SECTION 6.11. Payment of Interest; Interest Rights Preserved
     76  
SECTION 6.12. Undertaking for Costs
     77  
 
        
ARTICLE VII

TRUSTEE
        
 
        
SECTION 7.01. Duties of Trustee
     78  
SECTION 7.02. Rights of Trustee
     79  
SECTION 7.03. Individual Rights of Trustee
     80  
SECTION 7.04. Trustee’s Disclaimer
     81  
SECTION 7.05. Notice of Default
     81  
SECTION 7.06. Reports by Trustee to Holders
     81  
SECTION 7.07. Compensation and Indemnity
     82  
SECTION 7.08. Replacement of Trustee
     83  
SECTION 7.09. Successor Trustee by Merger, Etc
     84  
SECTION 7.10. Eligibility; Disqualification
     84  
SECTION 7.11. Preferential Collection of Claims Against Company
     84  
 
        
ARTICLE VIII

SATISFACTION AND DISCHARGE OF INDENTURE
        
 
        
SECTION 8.01. Legal Defeasance and Covenant Defeasance
     85  
SECTION 8.02. Satisfaction and Discharge
     88  
SECTION 8.03. Survival of Certain Obligations
     89  
SECTION 8.04. Acknowledgment of Discharge by Trustee
     89  
SECTION 8.05. Application of Trust Assets
     89  
SECTION 8.06. Repayment to the Company or Guarantors; Unclaimed Money
     90  
SECTION 8.07. Reinstatement
     90  
 
        
ARTICLE IX

AMENDMENTS, SUPPLEMENTS AND WAIVERS
        
 
        
SECTION 9.01. Without Consent of Holders
     91  
SECTION 9.02. With Consent of Holders
     92  
SECTION 9.03. Compliance with TIA
     93  
SECTION 9.04. Revocation and Effect of Consents
     93  
SECTION 9.05. Notation on or Exchange of Securities
     94  
SECTION 9.06. Trustee To Sign Amendments, Etc
     94  

-iv-

 

 

         
    Page
ARTICLE X

GUARANTEE
        
 
        
SECTION 10.01. Unconditional Guarantee
     94  
SECTION 10.02. Severability
     95  
SECTION 10.03. Release of a Guarantor
     96  
SECTION 10.04. Limitation of a Guarantor’s Liability
     96  
SECTION 10.05. Contribution
     96  
SECTION 10.06. Waiver of Subrogation
     97  
SECTION 10.07. Execution of Subsidiary Guarantees
     97  
SECTION 10.08. Waiver of Stay, Extension or Usury Laws
     98  
 
        
ARTICLE XI

MISCELLANEOUS
        
 
        
SECTION 11.01. TIA Controls
     98  
SECTION 11.02. Notices
     98  
SECTION 11.03. Communications by Holders with Other Holders
     100  
SECTION 11.04. Certificate and Opinion as to Conditions Precedent
     100  
SECTION 11.05. Statements Required in Certificate or Opinion
     100  
SECTION 11.06. Rules by Trustee, Paying Agent, Registrar
     101  
SECTION 11.07. Legal Holidays
     101  
SECTION 11.08. Governing Law
     101  
SECTION 11.09. No Adverse Interpretation of Other Agreements
     102  
SECTION 11.10. No Recourse Against Others
     102  
SECTION 11.11. Successors
     102  
SECTION 11.12. Duplicate Originals
     102  
SECTION 11.13. Severability
     102  
SECTION 11.14. Table of Contents, Headings, Etc
     102  
Exhibit A – Form of Series A Security
Exhibit B – Form of Series B Security
Exhibit C – Form of Legend for Global Securities
Exhibit D – Transfer Certificate
Exhibit E – Transferee Certificate for Institutional Accredited Investors
Exhibit F – Transferee Certificate for Regulation S Transfers
Exhibit G – Form of Subsidiary Guarantee
Note:   This Table of Contents shall not, for any purpose, be deemed to be a part of the Indenture.

-v-

 

 

          INDENTURE dated as of November 20, 2007, among TENNECO INC., a Delaware corporation (the “Company”), as issuer, TENNECO AUTOMOTIVE OPERATING COMPANY INC., THE PULLMAN COMPANY, CLEVITE INDUSTRIES INC., TENNECO GLOBAL HOLDINGS INC., TMC TEXAS INC., TENNECO INTERNATIONAL HOLDING CORP. and such other subsidiaries of the Company, as shall from time to time execute a Subsidiary Guarantee (as defined), and WELLS FARGO BANK, N.A., a national banking association, as Trustee (the “Trustee”).
          The Company has duly authorized the issue of 81/8% Senior Notes due 2015, Series A, and 81/8% Senior Notes due 2015, Series B, and to provide therefor, the Company has duly authorized the execution and delivery of this Indenture. All things necessary to make the Securities, when duly issued and executed by the Company and authenticated and delivered hereunder, the valid and binding obligations of the Company, and to make this Indenture a valid and binding agreement of the Company, have been done.
          Each party hereto agrees as follows for the benefit of each other party and for the equal and ratable benefit of the Holders of the Securities:
ARTICLE I
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. Definitions.
          “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 Issue 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.

 

 

-2-
          “Additional Securities” means Series A Securities issued from time to time after the Issue Date under the terms of this Indenture (other than pursuant to Sections 2.06, 2.07, 2.10 or 3.06 of this Indenture).
          “Adjusted Net Assets” has the meaning set forth in Section 10.05.
          “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 in Section 4.17.
          “Agent” means any Registrar, Paying Agent or co-Registrar.
          “Applicable Premium” means, at any Redemption Date, the greater of (i) 1.0% of the principal amount of such Security and (ii) the excess of (A) the present value at such Redemption Date of (1) the redemption price of such Security on November 15, 2011 (such redemption price being that described in the Security under Paragraph 5 “Optional Redemption”) plus (2) all required remaining scheduled interest payments due on such Security through such date, computed using a discount rate equal to the Treasury Rate plus 50 basis points, over (B) the principal amount of such Security on such Redemption Date; and, as calculated by the Company or on behalf of the Company by such Person as the Company shall designate; provided that such calculation shall not be a duty or obligation of the Trustee.
          “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 or substantially all of the assets of such Person or comprise 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 this 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

 

-3-

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 $15 million;
     (2) the sale, lease, conveyance, disposition or other transfer of all or substantially all of the assets of the Company as permitted by Section 5.01;
     (3) any Restricted Payment made in accordance with Section 4.04; or
     (4) sales of accounts receivable and related assets pursuant to a Permitted Receivables Financing made in accordance with Section 4.03.
          “Bankruptcy Law” means Title 11, U.S. Code or any similar Federal, state or foreign law for the relief of debtors.
          “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.
          “Business Day” means any day other than a Saturday, Sunday or any other day on which banking institutions in The City of New York or in the city in which the principal corporate trust office of the Trustee is located, are required or authorized by law or other governmental action to be closed.
          “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.
          “Capitalized Lease Obligations” 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.

 

-4-

          “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”);
     (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-2 from S&P or at least P-2 from Moody’s;
     (4) demand and time deposit accounts, 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;
     (6) investments in money market funds which invest substantially all their assets in securities of the types described in clauses (1) through (5) above; and
     (7) solely in respect of the ordinary course cash management activities of the Foreign Subsidiaries, equivalents of the investments described in clause (1) above to the extent guaranteed by any member state of the European Union or the country in which the Foreign Subsidiary operates and equivalents of the investments described in clause (4) above issued, accepted or offered by any commercial bank organized under the laws of a member state of the European Union or the jurisdiction of organization of the applicable Foreign Subsidiary having at the acquisition thereof combined capital and surplus of not less than $250 million.
          “Cash Management Obligations” means, with respect to any Person, all obligations of such Person in respect of overdrafts and related liabilities owed to any other Person that arise from treasury, depositary or cash management services, including in connection with any automated clearing house transfers of funds, or any similar transactions.

 

-5-

          “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 this 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 this 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 in Section 4.21.
          “Change of Control Payment Date” has the meaning set forth in Section 4.21.
          “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) (the “Combined Subsidiaries”), 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 Combined Subsidiaries, paid or accrued in accordance with GAAP for such period;
     (B) Combined Interest Expense; and
     (C) Combined Non-cash Charges;

 

-6-

less any non-cash items increasing Combined Net Income for such period, all as determined on a combined basis for the Combined Subsidiaries in accordance with GAAP.
          “Combined Fixed Charge Coverage Ratio” means, with respect to the Combined Subsidiaries 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 dispositions 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

 

-7-

or indirectly guarantees 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.
          “Combined Fixed Charges” 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 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 multiplied by (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

 

-8-

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 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 Receivables 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) any non-cash compensation expense incurred for grants and issuances of stock appreciation or similar rights, stock options, restricted shares or other rights to officers, directors and employees of the Company and its Subsidiaries (including any such grant or issuance to a 401(k) or other retirement benefit plan);

 

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     (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 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 provision for such reserve was made out of Combined Net Income accrued at any time following March 31, 2003;
     (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) from and after the date that such operation is classified as discontinued;
     (7) write-downs resulting from the impairment of intangible assets;
     (8) the amount of amortization or write-off deferred financing costs and debt issuance costs of the Company and its Restricted Subsidiaries during such period and any premium or penalty paid in connection with redeeming or retiring Indebtedness of the Company and its Restricted Subsidiaries prior to the stated maturity thereof pursuant to the agreements governing such Indebtedness; and
     (9) any restructuring charges incurred pursuant to any Genesis Project or any related project disclosed as such in the Company’s audited financial statements prepared in accordance with GAAP, together with any related provision for taxes, in an aggregate amount since March 16, 2007 not to exceed $80.0 million.
          “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 this 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.
          “Commodity Agreement” means any commodity futures contract, commodity option or other similar agreement or arrangement entered into by the Company or any Restricted

 

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Subsidiary of the Company designed to protect the Company or any of its Restricted Subsidiaries against fluctuations in the price of the commodities at the time used in the ordinary course of business of the Company or any of its Restricted Subsidiaries and not for speculative purposes.
          “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 Issue Date or issued after the Issue Date, and includes, without limitation, all series and classes of such common stock.
          “Company” means the party named as such in this Indenture until a successor replaces it pursuant to this Indenture and thereafter means such successor.
          “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:
     (1) all income taxes of the Company and the Restricted Subsidiaries paid or accrued in accordance with GAAP for such period;
     (2) Consolidated Interest Expense; and
     (3) 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 proceeds thereof), other than the incurrence or repayment of Indebtedness in the ordinary course of business for working capital purposes

 

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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 dispositions 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.

 

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          “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.
     “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 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 Receivables 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;

 

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     (2) extraordinary or non-recurring gains or losses (determined on an after-tax basis);
     (3) any non-cash compensation expense incurred for grants and issuances of stock appreciation or similar rights, stock options, restricted shares or other rights to officers, directors and employees of the Company and its Subsidiaries (including any such grant or issuance to a 401(k) plan or other retirement benefit plan);
     (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 provision for such reserve was made out of Consolidated Net Income accrued at any time following March 31, 2003;
     (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) from and after the date that such operation is 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) write-downs resulting from the impairment of intangible assets;
     (10) the amount of amortization or write-off of deferred financing costs and debt issuance costs of the Company and its Restricted Subsidiaries during such period and any premium or penalty paid in connection with redeeming or retiring Indebtedness of the Company and its Restricted Subsidiaries prior to the stated maturity thereof pursuant to the agreements governing such Indebtedness; and
     (11) any restructuring charges incurred pursuant to any Genesis Project or any similar or related project disclosed as such in the Company’s audited financial statements prepared in accordance with GAAP, together with any related provision for taxes, in an aggregate amount since March 16, 2007 not to exceed $80.0 million.

 

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          “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 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 payments for any future period).
          “Consolidated Secured Debt Ratio” means, as of any date of determination, the ratio of (a) Consolidated Total Indebtedness of the Company and the Restricted Subsidiaries that is secured by Liens as of the end of the Four Quarter Period ending on or prior to the Transaction Date to (b) the aggregate amount of Consolidated EBITDA of the Company during the Four Quarter Period ending on or prior to the Transaction Date, in each case with such pro forma adjustments to Consolidated Total Indebtedness and Consolidated EBITDA as are appropriate and consistent with the pro forma adjustment provisions set forth in the definition of Consolidated Fixed Charge Coverage Ratio.
          “Consolidated Total Indebtedness” means, as at any date of determination, an amount equal to the sum of (1) the aggregate amount of all outstanding Indebtedness of the Company and the Restricted Subsidiaries on a consolidated basis consisting of Indebtedness for borrowed money, Obligations in respect of Capitalized Lease Obligations and debt obligations evidenced by bonds, notes, debentures or similar instruments or letters of credit or bankers’ acceptances (and excluding (x) any undrawn letters of credit and (y) all obligations relating to Permitted Receivables Financings) and (2) the aggregate amount of all outstanding Disqualified Capital Stock of the Company and all Disqualified Capital Stock and Preferred Stock of the Restricted Subsidiaries (excluding items eliminated in consolidation), with the amount of such Disqualified Capital Stock and Preferred Stock equal to the greater of their respective voluntary or involuntary liquidation preferences and Maximum Fixed Repurchase Prices, in each case determined on a consolidated basis in accordance with GAAP.
          For purposes hereof, the “Maximum Fixed Repurchase Price” of any Disqualified Capital Stock or Preferred Stock that 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 the applicable date on which Consolidated Total 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

 

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Capital Stock or Preferred Stock, such fair market value shall be determined reasonably and in good faith by the Company.
          “Corporate Trust Department” means the principal corporate trust office of the Trustee at which at any particular time its corporate trust business shall be principally administered, which office at the date of this Indenture is located at 230 W. Monroe Street, Suite 2900 Chicago, IL 60606.
          “Covenant Defeasance” has the meaning set forth in Section 8.01.
          “Credit Agreement” means the Second Amended and Restated Credit Agreement, dated as of March 16, 2007, among the Company, the Guarantors, the lenders party thereto in their capacities as lenders thereunder and JPMorgan Chase Bank, N.A., as administrative agent, together with the documents related 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 in accordance with their terms (the “Existing Credit Agreement”), including any agreement (a “Replacement 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 Section 4.03 (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.
          “Credit Facilities” means one or more debt facilities (including the Credit Agreement) or commercial paper facilities providing for revolving credit loans, term loans, receivables financing (including through the sale of receivables to lenders or to special purpose entities formed to borrow from lenders against such receivables) or letters of credit, or any debt securities or other form of debt financing (including convertible or exchangeable debt instruments), in each case, as amended, supplemented, modified, extended, renewed, restated or refunded in whole or in part from time to time.
          “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.
          “Custodian” means any receiver, trustee, assignee, liquidator, sequestrator or similar official under any Bankruptcy Law.
          “Default” means an event or condition the occurrence of which is, or with the lapse of time or the giving of notice or both would be, an Event of Default.

 

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          “Default Notice” has the meaning set forth in Section 12.02.
          “Defaulted Interest” has the meaning set forth in Section 6.11.
          “Depository” means, with respect to the Securities issued in the form of one or more Global Securities, The Depository Trust Company or another Person designated as Depository by the Company, which must be a clearing agency registered under the Exchange Act.
          “Designation” has the meaning set forth in Section 4.20.
          “Designation Amount” has the meaning set forth in Section 4.20.
          “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 Securities.
          “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.
          “DTC” means The Depository Trust Company or any successor thereto.
          “Equity Offering” has the meaning set forth in Paragraph 6 of the Securities.
          “Event of Default” has the meaning provided in Section 6.01.
          “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.
          “Final Maturity Date” means November 15, 2015.

 

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          “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.
          “Foreign Subsidiary” means any 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.
          “Four Quarter Period” has the meaning provided in the definition of “Combined Fixed Charge Coverage Ratio” above.
          “Funding Guarantor” has the meaning provided in Section 10.05.
          “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 Accountants 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.
          “Global Security” means a security evidencing all or a part of the Securities issued to the Depository in accordance with Section 2.01 and bearing the legend prescribed in Exhibit C.
          “Guarantee” has the meaning set forth in Section 4.18.
          “Guaranteed Indebtedness” has the meaning set forth in Section 4.18.
          “Guarantor” means (1) each Wholly Owned Domestic Restricted Subsidiary of the Company (other than any Immaterial Domestic Subsidiaries, Accounts Receivable Entities and Finance Subsidiaries) as of the Issue Date and (2) each other Restricted Subsidiary that in the future is required to or executes a Subsidiary Guarantee pursuant to Section 4.18 or otherwise; provided that any Person constituting a Guarantor as described above shall cease to constitute a Guarantor when its Subsidiary Guarantee is released in accordance with the terms of this Indenture.
          “Hedging Obligations” means, with respect to any Person, the obligations of such Person in respect of (a) interest rate or currency swap agreements, interest rate or currency

 

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cap agreements, interest rate or currency collar agreements or (b) other agreements or arrangements designed to protect such Person against fluctuations in interest rates and/or currency exchange rates.
          “Holder” or “Securityholder” means a Person in whose name a Security is registered on the Registrar’s books.
          “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 Restricted Subsidiaries (as so determined). In the event that the total assets of all Immaterial Domestic Subsidiaries exceed 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 or any Credit Agreement Obligation shall be deemed an Immaterial Domestic Subsidiary.
          “incur” has the meaning provided in Section 4.03.
          “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 this 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.
          “Indenture” means this Indenture, as amended or supplemented from time to time in accordance with the terms hereof.
          “Independent” when used with respect to any specified Person means such a Person who (a) is in fact independent; (b) does not have any direct financial interest or any material indirect financial interest in the Company or any of its Subsidiaries, or in any Affiliate of the Company or any of its Subsidiaries; and (c) is not an officer, employee, promoter, underwriter, trustee, partner, director or Person performing similar functions for the Company or any of its Subsidiaries. Whenever it is provided in this Indenture that any Independent Person’s opinion or certificate shall be furnished to the Trustee, such Person shall be appointed by the Company, and such opinion or certificate shall state that the signer has read this definition and that the signer is Independent within the meaning hereof.

 

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          “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 (i) with respect to the Securities issued on the Issue Date, Banc of America Securities LLC, Citigroup Global Markets Inc., Deutsche Bank Securities Inc., Greenwich Capital Markets, Inc., J.P. Morgan Securities Inc., BNP Paribas Securities Corp., BNY Capital Markets, Inc., Commerzbank Capital Markets Corp., Fifth Third Securities, Inc., HVB Capital Markets, KeyBanc Capital Markets, Morgan Stanley, NatCity Investments, Inc., Scotia Capital and Wells Fargo Securities, LLC and (ii) with respect to each issuance of additional notes, if any, the Persons purchasing securities from the Company pursuant to the related Purchase Agreement.
          “Insolvency or Liquidation Proceeding” means, with respect to any Person, (a) any voluntary or involuntary case or proceeding under any Bankruptcy Law, (b) any other voluntary or involuntary insolvency, reorganization or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding with respect to such Person or with respect to any of its assets, (c) any liquidation, dissolution, reorganization or winding up of such Person whether voluntary or involuntary and whether or not involving insolvency or bankruptcy or (d) any assignment for the benefit of creditors or any other marshaling of assets and liabilities of such Person.
          “Institutional Accredited Investor” means an institution that is an “accredited investor” as that term is defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act.
          “Interest Payment Date” means the stated maturity of an installment of interest on the Securities.
          “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 lock obligations, 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

 

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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 other 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 November 20, 2007, the date of original issuance of the Securities.
          “Legal Defeasance” has the meaning set forth in Section 8.01.
          “Lien” means any lien, mortgage, deed of trust, deed to secure debt, 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

 

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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 in Section 4.12.
          “Net Proceeds Offer Amount” has the meaning set forth in Section 4.12.
          “Net Proceeds Offer Payment Date” has the meaning set forth in Section 4.12.
          “Net Proceeds Offer Trigger Date” has the meaning set forth in Section 4.12.
          “Obligations” means any and all obligations with respect to the payment of (a) any principal of or interest (including interest accruing on or after the commencement of any Insolvency or Liquidation Proceedings, whether or not a claim for post-filing interest is allowed in such proceeding) or premium on any Indebtedness, including any reimbursement obligation in respect of any letter of credit, (b) any fees, indemnification obligations, damages, expense reimbursement obligations or other liabilities payable under the documentation governing any Indebtedness, (c) any obligation to post cash collateral in respect of letters of credit and any other obligations and (d) any Cash Management Obligations or Hedging Obligations.
          “Offering Memorandum” means the offering memorandum of the Company dated November 1, 2007 related to the Securities.
          “Officer” means, with respect to any Person, the Chairman of the Board, the Chief Executive Officer, the President, any Vice President and the Chief Financial Officer of such Person.
          “Officers’ Certificate” means a certificate signed by an Officer of the Company and another Officer or the secretary, treasurer or controller of the Company.
          “Offshore Physical Securities” has the meaning provided in Section 2.01.
          “Opinion of Counsel” means a written opinion from legal counsel which is and who are acceptable to the Trustee.
          “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.
          “Participants” has the meaning provided in Section 2.15.
          “Paying Agent” has the meaning provided in Section 2.03.

 

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          “Payment Default” has the meaning provided in Section 6.01.
          “Permitted Indebtedness” means, without duplication, each of the following:
     (1) Indebtedness under the Securities, this Indenture and any Subsidiary Guarantees outstanding on the Issue Date;
     (2) Indebtedness incurred pursuant to the Credit Agreement (or, in the case of clause (2)(x) below, pursuant to a Credit Facility) in an aggregate principal amount at any time outstanding not to exceed the greater of:
     (x) the sum of (i) $1,000 million (reduced by any required permanent repayments with the proceeds of Asset Sales (which are accompanied by a corresponding permanent commitment reduction) thereunder) and (ii) the aggregate dollar amount permitted to be but not then outstanding under the Outstanding Permitted Receivables Financings referred to in clause (14) below; 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 Issue Date reduced by the amount of any scheduled amortization payments or mandatory prepayments when actually paid or permanent reductions are made 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 this 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 relate;
     (5) Indebtedness under Currency Agreements and Commodity 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;

 

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     (6) Indebtedness of a Restricted Subsidiary of the Company to the Company or to a Restricted Subsidiary of the Company for so long as such Indebtedness is held by the Company, a Restricted Subsidiary of the Company or the lenders or collateral agent under any agreement governing secured Indebtedness permitted to be incurred under Sections 4.03 and 4.15, in each case subject to no Lien held by a Person other than the Company, a Restricted Subsidiary of the Company or the lenders or collateral agent under any agreement governing secured Indebtedness permitted to be incurred under Sections 4.03 and 4.15; provided that if as of any date any Person other than the Company, a Restricted Subsidiary of the Company or the lenders or collateral agent under any agreement governing secured Indebtedness permitted to be incurred under Sections 4.03 and 4.15, 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 under this clause (6) by the issuer of such Indebtedness;
     (7) Indebtedness of the Company to a Restricted Subsidiary of the Company for so long as such Indebtedness is held by a Restricted Subsidiary of the Company or the lenders or the collateral agent under any agreement governing secured Indebtedness permitted to be incurred under Sections 4.03 and 4.15, and is subject to no Lien other than a Lien in favor of the lenders or collateral agent under any agreement governing secured Indebtedness permitted to be incurred under Sections 4.03 and 4.15; provided that (a) any Indebtedness of the Company to any Restricted Subsidiary of the Company is unsecured and, except in the case of Indebtedness owed to Foreign Subsidiaries, subordinated, pursuant to a written agreement to the Company’s obligations under this Indenture and the Securities and (b) if as of any date any Person other than a Restricted Subsidiary of the Company owns or holds any such Indebtedness or any Person holds a Lien other than a Lien in favor of the lenders or collateral agent under any agreement governing secured Indebtedness permitted to be incurred under Sections 4.03 and 4.15, such date shall be deemed the incurrence of Indebtedness not constituting Permitted Indebtedness under this clause (7) 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;

 

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     (10) Refinancing Indebtedness;
     (11) additional Indebtedness of the Company and the Restricted Subsidiaries in an aggregate principal amount not to exceed $100.0 million at any one time outstanding;
     (12) additional Indebtedness of Foreign Subsidiaries of the Company under working capital facilities in an aggregate principal amount not to exceed 100.0 million Euros at any one time outstanding;
     (13) Purchase Money Indebtedness and Capitalized Lease Obligations (and any Indebtedness incurred to Refinance such Purchase Money Indebtedness or Capitalized Lease Obligations) not to exceed 7.5% of Consolidated Net Tangible Assets at any one time outstanding; and
     (14) Outstanding Permitted Receivables Financings not to exceed $250.0 million at any one time outstanding less any amount of Indebtedness then outstanding and incurred pursuant to clause (2)(x)(ii) above.
          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 (14) 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 $25.0 million at any one time outstanding;
     (5) Commodity Agreements, 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 this Indenture;

 

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     (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 in settlement of delinquent accounts;
     (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 Section 4.12;
     (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 Issue Date, not to exceed 5% of Consolidated Net Tangible Assets at any one time outstanding; and
     (9) 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;
     (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;

 

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     (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 asset 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 this Indenture;
     (12) Liens securing Indebtedness and other Obligations under Commodity Agreements, Currency Agreements and Cash Management Obligations, in each case permitted under this Indenture;
     (13) Liens securing Acquired Indebtedness (and any Indebtedness which Refinances such Acquired Indebtedness) incurred in accordance with Section 4.03; 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

 

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(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;
     (14) Liens securing Indebtedness of Foreign Restricted Subsidiaries incurred in accordance with this Indenture; provided that such Liens do not extend to any property or assets other than property or assets of Foreign Restricted Subsidiaries;
     (15) Liens incurred in connection with a Permitted Receivables Financing; and
     (16) Liens incurred to secure Obligations in respect of any Indebtedness permitted to be incurred pursuant to Section 4.03; provided that, at the time of incurrence and after giving pro forma effect thereto, the Consolidated Secured Debt Ratio would be no greater than 2.50:1.00.
          “Permitted Receivables Financing” means any sale by the Company or a Restricted Subsidiary of accounts receivable and related assets intended to be (and which shall be treated for purposes of this 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.
          “Physical Securities” has the meaning provided in Section 2.01.
          “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.
          “Presenting Agent” has the meaning set forth in Section 2.03.
          “Private Placement Legend” means the legend initially set forth on the Securities in the form set forth on Exhibit A.
          “pro forma” means, with respect to any calculation made or required to be made pursuant to the terms of this Indenture, a calculation in accordance with Article 11 of Regulation S-X under the Securities Act as interpreted by the Company’s Board of Directors in consultation with its Independent certified public accountants.

 

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          “Purchase Agreement” means (1) with respect to the Securities issued on the Issue Date, the Purchase Agreement, dated as of November 1, 2007, by and among the Company, the Guarantors and the Initial Purchasers, and (2) with respect to each issuance of Additional Securities, if any, the purchase agreement or underwriting agreement among the Company, the Guarantors and the Initial Purchasers.
          “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.
          “Qualified Institutional Buyer” or “QIB” shall have the meaning specified in Rule 144A under the Securities Act.
          “Record Date” means the Record Dates specified in the Securities; provided that if any such date is not a Business Day, the Record Date shall be the first day immediately preceding such specified day that is a Business Day.
          “Redemption Date,” when used with respect to any Security to be redeemed, means the date fixed for such redemption pursuant to this Indenture and the Securities.
          “Redemption Price,” when used with respect to any Security to be redeemed, means the price fixed for such redemption, payable in immediately available funds, pursuant to this Indenture and the Securities.
          “Reference Date” has the meaning set forth in Section 4.04.
          “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 Section 4.03 (other than pursuant to clause (2), (4), (5), (6), (7), (8), (9), (11), (12), (13) or (14) 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 the completion of all components of such proposed

 

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Refinancing (provided such completion occurs within 60 days of the initial incurrence of Indebtedness in connection with such 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.
          “Registrar” has the meaning provided in Section 2.03.
          “Registration Rights Agreement” means (1) with respect to the Securities issued on the Issue Date, the Registration Rights Agreement, dated November 20, 2007, among the Company, the Guarantors and the Initial Purchasers, and (2) with respect to any issuance of Additional Securities issued in a transaction exempt from the registration requirements of the Securities Act, the registration rights agreement, if any, among the Company, the Guarantors and the Initial Purchasers under the related Purchase Agreement.
          “Regulation S” means Regulation S under the Securities Act.
          “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 Issue Date or in a business the same, similar or reasonably related thereto (including Capital Stock of a Person which becomes a Restricted Subsidiary).
          “Responsible Officer” shall mean, when used with respect to the Trustee (in all capacities appointed hereunder), any officer in the Corporate Trust Department of the Trustee including any vice president, assistant vice president or any other officer of the Trustee who customarily performs functions similar to those performed by the Persons who at the time shall be such officers, respectively, and to whom any corporate trust matter is referred because of such officer’s knowledge of and familiarity with the particular subject.
          “Restricted Payment” has the meaning set forth in Section 4.04.
          “Restricted Security” has the meaning set forth in Rule 144(a)(3) under the Securities Act; provided that the Trustee shall be entitled to request and conclusively rely upon an Opinion of Counsel with respect to whether any Security is a Restricted Security.

 

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          “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 Section 4.20. 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 in Section 4.20.
          “Rule 144A” means Rule 144A under the Securities Act.
          “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 Issue Date 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” means the Series A Securities and the Series B Securities treated as a single class of securities, as amended or supplemented from time to time in accordance with the terms hereof, that are issued pursuant to this Indenture.
          “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 Secured Notes” means the Company’s 10-1/4% Senior Secured Notes due 2013 issued from time to time under that certain indenture dated as of June 19, 2003 with Wachovia Bank, National Association as trustee.
          “Senior Subordinated Notes” means the Company’s 8-5/8% Senior Subordinated Notes due 2014 issued under that certain indenture dated as of October 19, 2004 with The Bank of New York, as trustee.
          “Series A Securities” means the 81/8% Senior Notes due 2015, Series A, of the Company issued pursuant to this Indenture and sold pursuant to the Purchase Agreement.
          “Series B Securities” means the 81/8% Senior Notes due 2015, Series B, of the Company to be issued in exchange for the Series A Securities pursuant to this Indenture and the Registration Rights Agreement.
          “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.

 

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          “Special Record Date” has the meaning set forth in Section 6.11.
          “Subordinated Indebtedness” means Indebtedness as to which the payment of principal (and premium, if any) and interest and other payment obligations is subordinate or junior in right of payment by its terms to the Securities or the Subsidiary Guarantees, as applicable, including, without limitation, the Senior Subordinated Notes.
          “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.
          “Subsidiary Guarantee” has the meaning set forth in Section 4.18 and also includes any Guarantee of an initial Guarantor under Article Ten of this Indenture.
          “Surviving Entity” has the meaning set forth in Section 5.01.
          “TIA” means the Trust Indenture Act of 1939 (15 U.S.C. §§ 77aaa-77bbbb), as amended, as in effect on the date of the execution of this Indenture until such time as this Indenture is qualified under the TIA, and thereafter as in effect on the date on which this Indenture is qualified under the TIA, except as otherwise provided in Section 9.03.
          “Transaction Date” has the meaning set forth in the definition of Combined Fixed Charge Coverage Ratio.
          “Treasury Rate” means, with respect to a Redemption Date, the yield to maturity at the time of computation of United States Treasury securities with a constant maturity (as compiled and published in the most recent Federal Reserve Statistical Release H.15(519) that has become publicly available at least two Business Days prior to such Redemption Date (or, if such Statistical Release is no longer published, any publicly available source of similar market data)) most nearly equal to the period from such Redemption Date to November 15, 2011; provided, however, that if the period from the Redemption Date to such date is not equal to the constant maturity of a United States Treasury security for which a weekly average yield is given, the Treasury Rate shall be obtained by linear interpolation (calculated to the nearest one-twelfth of a year) from the weekly average yields of United States Treasury securities for which such yields are given, except that if the period from the Redemption Date to such date is less than one year, the weekly average yield on actually traded United States Treasury securities adjusted to a constant maturity of one year shall be used.
          “Trustee” means the party named as such in this Indenture until a successor replaces it in accordance with the provisions of this Indenture and thereafter means such successor.

 

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          “Unrestricted Subsidiary” means any Subsidiary of the Company designated as such pursuant to and in compliance with Section 4.20. Any such designation may be revoked by a Board Resolution of the Company delivered to the Trustee, subject to the provisions of such covenant.
          “U.S. Government Obligations” shall have the meaning provided in Section 8.01.
          “U.S. Legal Tender” means such coin or currency in immediately available funds of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts.
          “U.S. Physical Securities” shall have the meaning set forth in Section 2.01.
          “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’ 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.
          SECTION 1.02. Incorporation by Reference of TIA.
          Whenever this Indenture refers to a provision of the TIA, such provision is incorporated by reference in, and made a part of, this Indenture. The following TIA terms used in this Indenture have the following meanings:
          “indenture securities” means the Securities.
          “indenture security holder” means a Holder or a Securityholder.
          “indenture to be qualified” means this Indenture.
          “indenture trustee” or “institutional trustee” means the Trustee.

 

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          “obligor” on the indenture securities means the Company, any Guarantor and any other obligor on the Securities.
          All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by Commission rule and not otherwise defined herein have the meanings assigned to them therein.
          SECTION 1.03. Rules of Construction.
          Unless the context otherwise requires
     (1) a term has the meaning assigned to it;
     (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP;
     (3) “or” is not exclusive;
     (4) words in the singular include the plural, and words in the plural include the singular;
     (5) provisions apply to successive events and transactions; and
     (6) “herein,” “hereof” and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision.
ARTICLE II
THE SECURITIES
SECTION 2.01. Form and Dating.
          The Series A Securities and the Trustee’s certificate of authentication thereof shall be substantially in the form of Exhibit A annexed hereto, which is hereby incorporated in and expressly made a part of this Indenture. The Series B Securities and the Trustee’s certificate of authentication thereof shall be substantially in the form of Exhibit B annexed hereto, which is hereby incorporated in and expressly made a part of this Indenture. The Securities may have notations, legends or endorsements (including notations relating to any Subsidiary Guarantees, stock exchange rule or usage). The Company and the Trustee shall approve the form of the Securities and any notation, legend or endorsement (including notations relating to any Subsidiary Guarantees) on them any such approval to be evidenced by the execution or authentication thereof. Each Security shall be dated the date of its issuance and shall be authenticated by the Trustee.

 

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          Securities offered and sold in reliance on Rule 144A or Regulation S shall be issued initially in the form of one or more permanent Global Securities in registered form, substantially in the form set forth in Exhibit A, deposited with the Trustee, as custodian for the Depository, and shall bear the legend set forth in Exhibit C. The aggregate principal amount of any Global Security may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depository, as hereinafter provided. Securities transferred to Institutional Accredited Investors in transactions exempt from registration under the Securities Act may be registered in the form of one or more permanent Global Securities in registered form, substantially in the form set forth in Exhibit A, deposited with the Trustee, as custodian for the Depository.
          Securities offered and sold in offshore transactions in reliance on Regulation S may be issued in the form of certificated Securities in registered form in substantially the form set forth in Exhibit A (the “Offshore Physical Securities”). Securities offered and sold in reliance on any other exemption from registration under the Securities Act other than as described in the preceding paragraph shall be issued, and Securities offered and sold in reliance on Rule 144A may be issued, in the form of certificated Securities in registered form in substantially the form set forth in Exhibit A (the “U.S. Physical Securities”). The Offshore Physical Securities and the U.S. Physical Securities are sometimes collectively herein referred to as the “Physical Securities.”
SECTION 2.02. Execution and Authentication.
     (a) Two Officers, or an Officer and a secretary, treasurer, controller or an assistant secretary of the Company, shall sign, or one Officer shall sign and one Officer or a Secretary or an Assistant Secretary of the Company (each of whom shall, in each case, have been duly authorized by all requisite corporate actions) shall attest to, the Securities for the Company by manual or facsimile signature.
     If an Officer or a secretary, treasurer, controller or an assistant secretary of the Company whose signature is on a Security was an Officer or a Secretary or an Assistant Secretary of the Company at the time of such execution but no longer holds that office at the time the Trustee authenticates the Security, the Security shall be valid nevertheless. Each Guarantor shall execute its Subsidiary Guarantee in the manner set forth in Section 10.07.
     A Security shall not be valid until an authorized signatory of the Trustee manually signs the certificate of authentication on the Security. The signature shall be conclusive evidence that the Security has been authenticated under this Indenture.
     (b) The Trustee shall authenticate (i) Securities for original issue on the Issue Date in the aggregate principal amount of $250,000,000, (ii) subject to compliance by the Company with clause (c) below, Additional Securities for original issue in an

 

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aggregate principal amount specified in a written order of the Company and (iii) Series B Securities for issue only in exchange, pursuant to the terms of a Registration Rights Agreement, for a like principal amount of Series A Securities, in each case upon a written order of the Company in the form of an Officers’ Certificate. Each such Officers’ Certificate shall specify the amount of Securities to be authenticated, the series of Securities and the date on which the Securities are to be authenticated.
     (c) Except as provided in Section 2.07, Additional Securities may be issued only in compliance with Section 4.03 and, in the case of any such Additional Securities, the Officers’ Certificate specified in clause (b) above shall certify that such issuance is not prohibited under Section 4.03 of this Indenture. Any Additional Securities shall be part of the same issue as the Securities being issued on the Issue Date and will vote on all matters as one class with the Securities being issued on the Issue Date, including, without limitation, waivers, amendments, redemptions, Change of Control Offers and Net Proceeds Offers.
     (d) Upon receipt of a written order of the Company in the form of an Officers’ Certificate, the Trustee shall authenticate Securities in substitution for Securities originally issued to reflect any name change of the Company.
     (e) The Trustee may appoint an authenticating agent reasonably acceptable to the Company to authenticate Securities. Unless otherwise provided in the appointment, an authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company and Affiliates of the Company.
     (f) The Securities shall be issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof.
SECTION 2.03. Registrar and Paying Agent.
          The Company shall maintain an office or agency (the “Presenting Agent”), where (a) Securities may be presented or surrendered for registration of transfer or for exchange, (b) Securities may be presented or surrendered for payment and (c) notices and demands upon the Company in respect of the Securities and this Indenture may be served. The Trustee shall initially act as Registrar (“Registrar”) and Paying Agent (“Paying Agent”) for the Securities. The Registrar shall keep a register of the Securities and of their transfer and exchange. The Company, upon written notice to the Trustee, may have one or more co-Registrars and one or more additional Paying Agents reasonably acceptable to the Trustee. The term “Paying Agent” includes any additional Paying Agent. The Company initially appoints the Trustee as Registrar, Paying Agent and Presenting Agent until such time as the Trustee has resigned or a successor has been appointed. Notices and demands upon the Company

 

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in respect of the Securities and this Indenture may be served at the Trustee’s office located as of the date hereof c/o Wells Fargo Bank, N.A. 230 W. Monroe Street, Suite 2900, Chicago, IL 60606. Neither the Company nor any Affiliate of the Company may act as Paying Agent except as otherwise expressly provided in the form of the Security.
SECTION 2.04. Paying Agent To Hold Assets in Trust.
          The Company shall require each Paying Agent other than the Trustee to agree in writing that each Paying Agent shall hold in trust for the benefit of Holders or the Trustee all assets held by the Paying Agent for the payment of principal of, premium, if any, or interest on the Securities, and shall notify the Trustee in writing of any Default by the Company in making any such payment. The Company at any time may require a Paying Agent to distribute all assets held by it to the Trustee and account for any assets disbursed and the Trustee may at any time, but shall be under no obligation to, during the continuance of any payment Default, upon written request to a Paying Agent, require such Paying Agent to distribute all assets held by it to the Trustee and to account for any assets distributed. Upon distribution to the Trustee of all assets that shall have been delivered by the Company to the Paying Agent, the Paying Agent shall have no further liability for such assets.
SECTION 2.05. Securityholder Lists.
          The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders. If the Trustee is not the Registrar, the Company shall furnish to the Trustee before each Record Date and at such other times as the Trustee may request in writing a list as of such date and in such form as the Trustee may reasonably require of the names and addresses of Holders, which list may be conclusively relied upon by the Trustee.
SECTION 2.06. Transfer and Exchange.
          Subject to the provisions of Sections 2.15 and 2.16, when Securities are presented to the Registrar or a co-Registrar (through the Presenting Agent or otherwise) with a request to register the transfer of such Securities or to exchange such Securities for an equal principal amount of Securities of other authorized denominations of the same series, the Registrar or co-Registrar shall register the transfer or make the exchange as requested if its requirements for such transaction are met; provided, however, that the Securities surrendered for transfer or exchange shall be duly endorsed or accompanied by a written instrument of transfer in form satisfactory to the Company and the Registrar or co-Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing. To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Securities at the Registrar’s or co-Registrar’s written request. No service charge shall be made for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection

 

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therewith (other than any such transfer taxes or other governmental charge payable upon exchanges or transfers pursuant to Section 2.02, 2.10, 3.06, 3.07, 4.12, 4.21 or 9.05). The Registrar or co-Registrar shall not be required to register the transfer of or exchange of any Security (i) during a period beginning at the opening of business 15 days before the mailing of a notice of redemption of Securities and ending at the close of business on the day of such mailing and (ii) selected for redemption in whole or in part pursuant to Article Three, except the unredeemed portion of any Security being redeemed in part.
          Any Holder of a Global Security shall, by acceptance of such Global Security, agree that transfers of beneficial interests in such Global Security may be effected only through a book-entry system maintained by the Depository (or its agent), and that ownership of a beneficial interest in a Global Security shall be required to be reflected in a book entry system.
SECTION 2.07. Replacement Securities.
          If a mutilated Security is surrendered to the Registrar or if the Holder of a Security claims that the Security has been lost, destroyed or wrongfully taken, the Company shall issue and the Trustee shall authenticate upon written notice from the Company a replacement Security if the Trustee’s requirements are met. If required by the Trustee or the Company, such Holder must provide an indemnity bond or other indemnity, sufficient in the judgment of both the Company and the Trustee, to protect the Company, the Trustee and any Agent from any loss which any of them may suffer if a Security is replaced. The Company and the Trustee may charge such Holder for their respective reasonable out-of-pocket expenses in replacing a Security, including reasonable fees and expenses of counsel. Every replacement Security is an additional obligation of the Company.
SECTION 2.08. Outstanding Securities.
          Securities outstanding at any time are all the Securities that have been authenticated by the Trustee except those canceled by it, those delivered to it for cancellation and those described in this Section as not outstanding. Subject to Section 2.09, a Security does not cease to be outstanding because the Company or any of its Affiliates holds the Security.
          If a Security is replaced pursuant to Section 2.07 (other than a mutilated Security surrendered for replacement), it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Security is held by a bona fide purchaser. A mutilated Security ceases to be outstanding upon surrender of such Security and replacement thereof pursuant to Section 2.07.
          If on a Redemption Date or the Final Maturity Date the Paying Agent holds U.S. Legal Tender or U.S. Government Obligations sufficient to pay all of the principal and

 

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interest due on the Securities payable on that date, then on and after that date such Securities cease to be outstanding and interest on them ceases to accrue.
SECTION 2.09. Treasury Securities.
          In determining whether the Holders of the required principal amount of Securities have concurred in any direction, waiver or consent, Securities owned by the Company, any Guarantor or any of their respective Affiliates shall be disregarded, except that, for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities that a Responsible Officer of the Trustee actually knows are so owned shall be disregarded.
          The Trustee may require an Officers’ Certificate listing Securities owned by the Company, any Guarantor or any of their respective Affiliates.
SECTION 2.10. Temporary Securities.
          Until definitive Securities are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Securities upon receipt of a written order of the Company in the form of an Officers’ Certificate. The Officers’ Certificate shall specify the amount of temporary Securities to be authenticated and the date on which the temporary Securities are to be authenticated. Temporary Securities shall be substantially in the form of definitive Securities but may have variations that the Company considers appropriate for temporary Securities. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate upon receipt of a written order of the Company pursuant to Section 2.02 definitive Securities in exchange for temporary Securities.
SECTION 2.11. Cancellation.
          The Company at any time may deliver Securities to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Securities surrendered to them for transfer, exchange or payment. The Trustee, or at the direction of the Trustee, the Registrar or the Paying Agent, and no one else, shall cancel all Securities surrendered for transfer, exchange, payment or cancellation, and the Trustee shall destroy any cancelled Securities. Subject to Section 2.07, the Company may not issue new Securities to replace Securities that it has paid or delivered to the Trustee for cancellation. If the Company or any Guarantor shall acquire any of the Securities, such acquisition shall not operate as a redemption or satisfaction of the Indebtedness represented by such Securities unless and until the same are surrendered to the Trustee for cancellation pursuant to this Section 2.11.

 

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SECTION 2.12. Defaulted Interest.
          If the Company defaults in a payment of interest on the Securities, it shall pay interest on overdue principal and on overdue installments of interest (without grace periods) from time to time on demand at the rate of 2% per annum in excess of the rate shown on the Security.
SECTION 2.13. CUSIP Number.
          The Company in issuing the Securities will use a “CUSIP” number, and if so, the Trustee shall use the CUSIP number in notices of redemption or exchange as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness or accuracy of the CUSIP number printed in the notice or on the Securities, and that reliance may be placed only on the other identification numbers printed on the Securities.
SECTION 2.14. Deposit of Moneys.
          Not later than 11:00 a.m. (New York City time) on each due date of the principal, premium, if any, and interest on any Notes, the Company shall deposit with the Paying Agent money in immediately available funds sufficient to pay such principal, premium, if any, and interest so becoming due.
SECTION 2.15. Book-Entry Provisions for Global Securities.
          (a) The Global Securities initially shall (i) be registered in the name of the Depository or the nominee of such Depository, (ii) be delivered to the Trustee as custodian for such Depository and (iii) bear legends as set forth in Exhibit C.
          Members of, or participants in, the Depository (“Participants”) shall have no rights under this Indenture with respect to any Global Security held on their behalf by the Depository, or the Trustee as its custodian, or under the Global Security, and the Depository may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of the Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depository or impair, as between the Depository and Participants, the operation of customary practices governing the exercise of the rights of a Holder of any Security.
          (b) Transfers of Global Securities shall be limited to transfers in whole, but not in part, to the Depository, its successors or their respective nominees. Interests of beneficial owners in the Global Securities may be transferred or exchanged for Physical Securities in accordance with the rules and procedures of the Depository and the provisions of Section

 

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2.16. In addition, Physical Securities shall be transferred to all beneficial owners in exchange for their beneficial interests in Global Securities if (i) the Depository notifies the Company that it is unwilling or unable to continue as Depository for any Global Security and a successor depositary is not appointed by the Company within 90 days of such notice or (ii) an Event of Default has occurred and is continuing and the Registrar has received a request from the Depository to issue Physical Securities.
          (c) In connection with the transfer of Global Securities as an entirety to beneficial owners pursuant to paragraph (b) of this Section 2.15, the Global Securities shall be deemed to be surrendered to the Trustee for cancellation, and the Company shall execute, and the Trustee shall upon written instructions from the Company authenticate and deliver, to each beneficial owner identified by the Depository in exchange for its beneficial interest in the Global Securities, an equal aggregate principal amount of Physical Securities of authorized denominations.
          (d) Any Physical Security constituting a Restricted Security delivered in exchange for an interest in a Global Security pursuant to paragraph (b) or (c) of this Section 2.15 shall, except as otherwise provided by Section 2.16, bear the Private Placement Legend.
          (e) The Holder of any Global Security may grant proxies and otherwise authorize any Person, including Participants and Persons that may hold interests through Participants, to take any action which a Holder is entitled to take under this Indenture or the Securities.
SECTION 2.16. Registration of Transfers and Exchanges.
          (a) Transfer and Exchange of Physical Securities. When Physical Securities are presented to the Registrar with a request
     (i) to register the transfer of the Physical Securities; or
     (ii) to exchange such Physical Securities for an equal number of Physical Securities of other authorized denominations,
the Registrar shall register the transfer or make the exchange as requested if the requirements under this Indenture as set forth in this Section 2.16 for such transactions are met; provided, however, that the Physical Securities presented or surrendered for registration of transfer or exchange
     (I) shall be duly endorsed or accompanied by a written instrument of transfer in form satisfactory to the Registrar or co-Registrar, duly executed by the Holder

 

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thereof or his attorney duly authorized in writing and accompanied by reasonable assurance that each necessary endorsement or instrument is genuine and authorized; and
     (II) in the case of Physical Securities the offer and sale of which have not been registered under the Securities Act, such Physical Securities shall be accompanied by an Opinion of Counsel addressed to the Registrar to the effect that such transfer and exchange is in compliance with applicable securities law and, in the sole discretion of the Company, by the following additional information and documents, as applicable:
     (A) if such Physical Security is being delivered to the Registrar by a holder for registration in the name of such holder, without transfer, a certification from such holder to that effect (in substantially the form of Exhibit D hereto); or
     (B) if such Physical Security is being transferred to a Qualified Institutional Buyer in accordance with Rule 144A under the Securities Act, a certification to that effect (in substantially the form of Exhibit D hereto); or
     (C) if such Physical Security is being transferred to an Institutional Accredited Investor, delivery of a certification to that effect (in substantially the form of Exhibit D hereto) and a Transferee Certificate for Institutional Accredited Investors in substantially the form of Exhibit E hereto; or
     (D) if such Physical Security is being transferred in reliance on Regulation S, delivery of a certification to that effect (in substantially the form of Exhibit D hereto) and a Transferee Certificate for Regulation S Transfers in substantially the form of Exhibit F hereto and an Opinion of Counsel reasonably satisfactory to the Company to the effect that such transfer is in compliance with the Securities Act; or
     (E) if such Physical Security is being transferred in reliance on Rule 144 under the Securities Act, delivery of a certification to that effect (in substantially the form of Exhibit D hereto) and an Opinion of Counsel reasonably satisfactory to the Company to the effect that such transfer is in compliance with the Securities Act; or
     (F) if such Physical Security is being transferred in reliance on another exemption from the registration requirements of the Securities Act, a certification to that effect (in substantially the form of Exhibit D hereto) and an Opinion of Counsel reasonably satisfactory to the Company to the effect that such transfer is in compliance with the Securities Act.

 

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          (b) Restrictions on Transfer of a Physical Security for a Beneficial Interest in a Global Security. A Physical Security may not be exchanged for a beneficial interest in a Global Security except upon satisfaction of the requirements set forth below. Upon receipt by the Registrar of a Physical Security, duly endorsed or accompanied by appropriate instruments of transfer, in form satisfactory to the Registrar, together with
     (A) a certification, in substantially the form of Exhibit D hereto, that such Physical Security is being transferred to a Qualified Institutional Buyer; and
     (B) written instructions directing the Registrar to make, or to direct the Depository to make, an endorsement on the Global Security to reflect an increase in the aggregate amount of the Securities represented by the Global Security,
then the Registrar shall cancel such Physical Security and cause, or direct the Depository to cause, in accordance with the standing instructions and procedures existing between the Depository and the Registrar, the number of Securities represented by the Global Security to be increased accordingly. If no Global Security is then outstanding, the Company shall issue and the Trustee shall upon written instructions from the Company authenticate a new Global Security in the appropriate amount.
          (c) Transfer and Exchange of Global Securities. The transfer and exchange of Global Securities or beneficial interests therein shall be effected through the Depository, in accordance with this Indenture (including the restrictions on transfer set forth herein) and the procedures of the Depository therefor.
          (d) Transfer of a Beneficial Interest in a Global Security for a Physical Security. (i)  Any Person having a beneficial interest in a Global Security may upon request exchange such beneficial interest for a Physical Security. Upon receipt by the Registrar of written instructions or such other form of instructions as is customary for the Depository from the Depository or its nominee on behalf of any Person having a beneficial interest in a Global Security and upon receipt by the Trustee of a written order or such other form of instructions as is customary for the Depository or the Person designated by the Depository as having such a beneficial interest containing registration instructions and, in the case of any such transfer or exchange of a beneficial interest in Securities the offer and sale of which have not been registered under the Securities Act, an Opinion of Counsel addressed to the Registrar to the effect that such transfer and exchange is in compliance with applicable securities laws and the following additional information and documents:
     (A) if such beneficial interest is being transferred to the Person designated by the Depository as being the beneficial owner, a certification from such Person to that effect (in substantially the form of Exhibit D hereto); or

 

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     (B) if such beneficial interest is being transferred to a Qualified Institutional Buyer in accordance with Rule 144A under the Securities Act, a certification to that effect (in substantially the form of Exhibit D hereto); or
     (C) if such beneficial interest is being transferred to an Institutional Accredited Investor, delivery of a certification to that effect (in substantially the form of Exhibit D hereto) and a Certificate for Institutional Accredited Investors in substantially the form of Exhibit E hereto; or
     (D) if such beneficial interest is being transferred in reliance on Regulation S, delivery of a certification to that effect (in substantially the form of Exhibit D hereto) and a Transferee Certificate for Regulation S Transfers in substantially the form of Exhibit F hereto and an Opinion of Counsel reasonably satisfactory to the Company to the effect that such transfer is in compliance with the Securities Act; or
     (E) if such beneficial interest is being transferred in reliance on Rule 144 under the Securities Act, delivery of a certification to that effect (in substantially the form of Exhibit D hereto) and an Opinion of Counsel reasonably satisfactory to the Company to the effect that such transfer is in compliance with the Securities Act; or
     (F) if such beneficial interest is being transferred in reliance on another exemption from the registration requirements of the Securities Act, a certification to that effect (in substantially the form of Exhibit D hereto) and an Opinion of Counsel reasonably satisfactory to the Company to the effect that such transfer is in compliance with the Securities Act,
then the Registrar will cause, in accordance with the standing instructions and procedures existing between the Depository and the Registrar, the aggregate amount of the Global Security to be reduced and, following such reduction, the Company will execute and, upon receipt of an authentication order in the form of an Officers’ Certificate, the Trustee will authenticate and deliver to the transferee a Physical Security.
          (ii) Securities issued in exchange for a beneficial interest in a Global Security pursuant to this Section 2.16(d) shall be registered in such names and in such authorized denominations as the Depository, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Registrar in writing. The Registrar shall make such Physical Securities available for delivery to the Persons in whose names such Physical Securities are so registered.
          (e) Restrictions on Transfer and Exchange of Global Securities. Notwithstanding any other provisions of this Indenture, a Global Security may not be transferred as a whole except by the Depository to a nominee of the Depository or by a nominee of the Depository

 

 

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to the Depository or another nominee of the Depository or by the Depository or any such nominee to a successor Depository or a nominee of such successor Depository.
          (f) Private Placement Legend. Upon the transfer, exchange or replacement of Securities not bearing the Private Placement Legend, the Registrar shall deliver Securities that do not bear the Private Placement Legend. Upon the transfer, exchange or replacement of Securities bearing the Private Placement Legend, the Registrar shall deliver only Securities that bear the Private Placement Legend unless, and the Trustee is hereby authorized to deliver Securities without the Private Placement Legend if (i) there is delivered to the Trustee an Opinion of Counsel reasonably satisfactory to the Company and the Trustee to the effect that neither such legend nor the related restrictions on transfer are required in order to maintain compliance with the provisions of the Securities Act or (ii) such Security has been sold pursuant to an effective registration statement under the Securities Act.
          (g) General. By its acceptance of any Security bearing the Private Placement Legend, each Holder of such a Security acknowledges the restrictions on transfer of such Security set forth in this Indenture and in the Private Placement Legend and agrees that it will transfer such Security only as provided in this Indenture.
          The Registrar shall retain copies of all letters, notices and other written communications received pursuant to Section 2.15 or this Section 2.16 in accordance with its customary procedures. The Company shall have the right to inspect and make copies of all such letters, notices or other written communications at any reasonable time upon the giving of reasonable written notice to the Registrar.
          The Registrar and the Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Security (including any transfers between or among Participants or beneficial owners of interests in any Global Security) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by the terms of, this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof.
ARTICLE III
REDEMPTION
SECTION 3.01. Notices to Trustee.
          If the Company elects to redeem Securities pursuant to Paragraph 5 or Paragraph 6 of the Securities, it shall notify the Trustee in writing of the Redemption Date, the Redemption Price and the principal amount of Securities to be redeemed. The Company shall

 

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give notice of redemption to the Trustee at least 45 days but not more than 60 days before the Redemption Date (unless a shorter notice shall be agreed to by the Trustee in writing), together with an Officers’ Certificate stating that such redemption will comply with the conditions contained herein.
SECTION 3.02. Selection of Securities To Be Redeemed.
If fewer than all of the Securities are to be redeemed at any time, the Trustee shall select the Securities to be redeemed in compliance with the requirements of the principal national securities exchange, if any, on which the Securities are listed or, if the Securities 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 if the Securities are redeemed pursuant to Paragraph 6 of the Securities, the Securities shall be redeemed solely on a pro rata basis or on as nearly a pro rata basis as is practicable (subject to the procedures of the Depository) unless the securities exchange, if any, on which the Securities are listed requires a different method. If the Securities are listed on any national securities exchange, the Company shall notify the Trustee in writing of the requirements of such exchange in respect of any redemption. The Trustee shall make the selection from the Securities outstanding and not previously called for redemption and shall promptly notify the Company in writing of the Securities selected for redemption and, in the case of any Security selected for partial redemption, the principal amount thereof to be redeemed. The Trustee may select for redemption portions (equal to $1,000 or any integral multiple thereof) of the principal of Securities that have denominations larger than $1,000. Provisions of this Indenture that apply to Securities called for redemption also apply to portions of Securities called for redemption.
SECTION 3.03. Notice of Redemption.
          At least 30 days but not more than 60 days before a Redemption Date, the Company shall mail or cause to be mailed a notice of redemption by first-class mail, postage prepaid, to each Holder whose Securities are to be redeemed. At the Company’s written request delivered at least 15 days prior to the proposed date of such mailing (unless a shorter notice shall be acceptable to the Trustee), the Trustee shall give the notice of redemption in the Company’s name and at the Company’s expense. Each notice for redemption shall identify the Securities to be redeemed (including CUSIP numbers, if any) and shall state
     (1) the Redemption Date;
     (2) the Redemption Price and the amount of accrued interest, if any, to be paid;
     (3) the name and address of the Paying Agent;

 

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     (4) that Securities called for redemption must be surrendered to the Paying Agent to collect the Redemption Price plus accrued interest, if any;
     (5) that, unless the Company defaults in making the redemption payment, interest on Securities called for redemption ceases to accrue on and after the Redemption Date, and the only remaining right of the Holders of such Securities is to receive payment of the Redemption Price and accrued interest, if any, to the Redemption Date upon surrender to the Paying Agent of the Securities redeemed;
     (6) if any Security is being redeemed in part, the portion of the principal amount of such Security to be redeemed and that, after the Redemption Date, and upon surrender of such Security, a new Security or Securities in aggregate principal amount equal to the unredeemed portion thereof will be issued;
     (7) if fewer than all the Securities are to be redeemed, the identification of the particular Securities (or portion thereof) to be redeemed, as well as the aggregate principal amount of Securities to be redeemed and the aggregate principal amount of Securities to be outstanding after such partial redemption; and
     (8) the paragraph of the Securities pursuant to which the Securities are to be redeemed.
SECTION 3.04. Effect of Notice of Redemption.
          Once notice of redemption is mailed in accordance with Section 3.03, Securities called for redemption become due and payable on the Redemption Date and at the Redemption Price plus accrued interest, if any. Upon surrender to the Paying Agent, such Securities called for redemption shall be paid at the Redemption Price (which shall include accrued interest thereon to the Redemption Date), but installments of interest, the maturity of which is on or prior to the Redemption Date, shall be payable to Holders of record at the close of business on the relevant Record Dates.
SECTION 3.05. Deposit of Redemption Price.
          Prior to 11:00 a.m. New York City time on the Redemption Date, the Company shall deposit with the Paying Agent U.S. Legal Tender sufficient to pay the Redemption Price plus accrued interest, if any, of all Securities to be redeemed on that date.
          If the Company complies with the preceding paragraph, then, unless the Company defaults in the payment of such Redemption Price plus accrued interest, if any, interest on the Securities to be redeemed will cease to accrue on and after the applicable Redemption Date, whether or not such Securities are presented for payment.

 

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SECTION 3.06. Securities Redeemed in Part.
          Upon surrender of a Security that is to be redeemed in part, the Trustee shall authenticate for the Holder a new Security or Securities equal in principal amount to the unredeemed portion of the Security surrendered.
ARTICLE IV
COVENANTS
SECTION 4.01. Payment of Securities.
          The Company shall pay the principal of and interest on the Securities in the manner provided in the Securities. An installment of principal of or interest on the Securities shall be considered paid on the date it is due if the Trustee or Paying Agent holds on that date U.S. Legal Tender designated for and sufficient to pay the installment.
          The Company shall pay, to the extent such payments are lawful, interest on overdue principal and it shall pay interest on overdue installments of interest (without regard to any applicable grace periods) from time to time on demand at the rate borne by the Securities plus 2% per annum. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months.
SECTION 4.02. Maintenance of Office or Agency.
          The Company shall maintain an office or agency required under Section 2.03. The Company shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the address of the Trustee set forth in Section 11.02. The Company hereby initially designates the Trustee’s office located at c/o Wells Fargo Bank, N.A., 230 W. Monroe Street, Suite 2900, Chicago, IL 60606 as its office or agency.
SECTION 4.03. Limitation on Incurrence of Additional Indebtedness.
          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:

 

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     (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; 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; 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 2.25 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”).
          The Company and the Guarantors will not incur or suffer to exist any Indebtedness that is subordinated in right of payment to any other Indebtedness of the Company or the Guarantors unless such Indebtedness is at least equally subordinated in right of payment to the Securities and any Subsidiary Guarantee.
SECTION 4.04. Limitation on Restricted Payments.
          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

 

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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);
     (c) make any principal payment on, or purchase, redeem, defease, retire or otherwise acquire for value, prior to any scheduled principal payment, sinking fund or maturity, any Subordinated Indebtedness (other than the principal payment on, or the purchase, redemption, defeasance, retirement or other acquisition for value of, Subordinated Indebtedness made in satisfaction of or anticipation of satisfying a sinking fund obligation, principal installment or final maturity within one year of the due date of such obligation, installment or final maturity); or
     (d) make any Investment (other than Permitted Investments)
(each of the foregoing actions set forth in clauses (a), (b), (c) and (d) 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 Section 4.03; or
     (3) the aggregate amount of Restricted Payments (including such proposed Restricted Payment) made after March 31, 2003 (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:
     (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 commencing on April 1, 2003 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

 

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     (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 March 31, 2003 and on or prior to the Reference Date of Qualified Capital Stock of the Company or from the issuance of Indebtedness of the Company that has been converted into or exchanged for Qualified Capital Stock of the Company subsequent to the Issue Date and on or prior to the Reference Date; 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 subsequent to March 31, 2003; 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 Section 4.20 or (B) the Designation Amount with respect to such Unrestricted Subsidiary on the date of the Designation of such Subsidiary as an Unrestricted Subsidiary in accordance with Section 4.20.
          Notwithstanding the foregoing, the provisions set forth in the immediately preceding paragraph do not prohibit:
     (I) 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;
     (II) 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;
     (III) 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 $25.0 million in the aggregate subsequent to March 31, 2003;

 

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     (IV) dividends and distributions paid on Common Stock of a Restricted Subsidiary on a pro rata basis; and
     (V) an Investment with the 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;
     (VI) any purchase or redemption of Indebtedness that ranks subordinate and junior in right of payment to the Securities utilizing any Net Cash Proceeds remaining after the Company has complied with the requirements of Section 4.12;
     (VII) any purchase, redemption, defeasance, retirement, payment or prepayment of principal of Subordinated Indebtedness either (i) solely in exchange of shares of Qualified Capital Stock of the Company or (ii) 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 or Refinancing Indebtedness; and
     (VIII) other Restricted Payments in an amount not to exceed $50 million in the aggregate since the Issue Date.
          In determining the aggregate amount of Restricted Payments made subsequent to March 31, 2003 in accordance with clause (3) of the first paragraph of this Section 4.04, amounts expended pursuant to clauses (I), (II), (III), (V) and (VII) shall be included in such calculation.
          Not later than the date the Company is required to file its financial statements with the Commission (without giving effect to any extensions thereof) with respect to any fiscal quarter during which any Restricted Payment was made which, together with any Restricted Payments not previously reported hereunder, exceeds $30.0 million (which, in the case of the Company’s fourth fiscal quarter of any fiscal year, shall be the date on which the Company is required to file its annual financial statements for that fiscal year), the Company will deliver to the Trustee an Officers’ Certificate stating that such Restricted Payment complies with this Indenture and setting forth in reasonable detail the basis upon which the required calculations were computed, which calculations may be based upon the Company’s latest available internal quarterly financial statements.
SECTION 4.05. Corporate Existence.
          Except as otherwise permitted by Article Five, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the corporate, partnership or other existence of each of the Restricted Subsidiaries in accordance with the respective organizational documents of each Restricted Subsidiary and

 

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the rights (charter and statutory) and material franchises of the Company and each of its Restricted Subsidiaries; provided, however, that the Company shall not be required to preserve any such right or franchise, or the corporate existence of any Restricted Subsidiary, if the Board of Directors of the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Restricted Subsidiaries, taken as a whole, and that the loss thereof is not, and will not be, adverse in any material respect to the Holders.
SECTION 4.06. Payment of Taxes and Other Claims.
          The Company shall pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (i) all material taxes, assessments and governmental charges levied or imposed upon it or any of the Restricted Subsidiaries or upon the income, profits or property of it or any of the Restricted Subsidiaries and (ii) all lawful claims for labor, materials and supplies which, in each case, if unpaid, might by law become a material liability or Lien upon the property of it or any of the Restricted Subsidiaries; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which appropriate provision has been made.
SECTION 4.07. Maintenance of Properties and Insurance.
          (a) The Company shall cause all material properties owned by or leased by it or any of the Restricted Subsidiaries used in the conduct of its business or the business of any of the Restricted Subsidiaries to be improved or maintained and kept in normal condition, repair and working order (reasonable wear and tear excepted) and supplied with all necessary equipment and shall cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in its judgment may be necessary, so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section 4.07 shall prevent the Company or any of the Restricted Subsidiaries from discontinuing the use, operation or maintenance of any of such properties, or disposing of any of them, if such discontinuance or disposal is, in the judgment of the Board of Directors of the Company or of the Board of Directors of any Restricted Subsidiary, or of an officer (or other agent employed by the Company or of any of the Restricted Subsidiaries) of the Company or any of its Restricted Subsidiaries having managerial responsibility for any such property, desirable in the conduct of the business of the Company or any Restricted Subsidiary, and if such discontinuance or disposal is not adverse in any material respect to the Holders.
          (b) The Company shall maintain, and shall cause the Restricted Subsidiaries to maintain, insurance with responsible carriers against such risks and in such amounts, and with such deductibles, retentions, self-insured amounts and co-insurance provisions, as

 

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are customarily carried by similar businesses of similar size, including property and casualty loss, workers’ compensation and interruption of business insurance.
SECTION 4.08. Compliance Certificate; Notice of Default.
          (a) The Company shall deliver to the Trustee, within 100 days after the close of each fiscal year, an Officers’ Certificate stating that a review of the activities of the Company has been made under the supervision of the signing officers with a view to determining whether it has kept, observed, performed and fulfilled its obligations under this Indenture and further stating, as to each such Officer, Secretary or Controller of the Company signing such certificate, that to the best of his knowledge the Company during such preceding fiscal year has kept, observed, performed and fulfilled each and every such covenant and no Default or Event of Default occurred during such year and at the date of such certificate no Default or Event of Default has occurred and is continuing or, if such signers do know of such Default or Event of Default, the certificate shall describe its status with particularity. The Officers’ Certificate shall also notify the Trustee should the Company elect to change the manner in which it fixes its fiscal year end.
          (b) The annual financial statements delivered pursuant to Section 4.10 shall be accompanied by a written report of the Company’s independent accountants (who shall be a firm of established national reputation) that in conducting their audit of such financial statements nothing has come to their attention that would lead them to believe that the Company has violated any provisions of Article Four, Five or Six of this Indenture insofar as they relate to accounting matters or, if any such violation has occurred, specifying the nature and period of existence thereof, it being understood that such accountants shall not be liable directly or indirectly to any Person for any failure to obtain knowledge of any such violation.
          (c) The Company shall deliver to the Trustee, within ten days after becoming aware of any Default or Event of Default in the performance of any covenant, agreement or condition contained in this Indenture, an Officers’ Certificate specifying the Default or Event of Default and describing its status with particularity. Upon the written request of the Trustee (which may be given at any time and from time to time), the Company shall promptly provide written notice to the Trustee confirming that no Default or Event of Default has occurred or is continuing, or if a Default or Event of Default has occurred or is continuing, written notice briefly describing such Default or Event of Default.
SECTION 4.09. Compliance with Laws.
          The Company shall comply, and shall cause each of the Restricted Subsidiaries to comply, with all applicable statutes, rules, regulations, orders and restrictions of the United States of America, all states and municipalities thereof, and of any governmental department, commission, board, regulatory authority, bureau, agency and instrumentality of the foregoing, in respect of the conduct of their respective businesses and the ownership of their respective

 

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properties, except for such noncompliances as would not in the aggregate have a material adverse effect on the financial condition or results of operations of the Company and the Restricted Subsidiaries taken as a whole.
SECTION 4.10. Reports to Holders.
          (a) Notwithstanding that the Company may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, to the extent permitted by the Exchange Act, the Company will file with the Commission, and provide to the Trustee and the Holders of the Securities, the annual reports and the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may by rules and regulations prescribe) that are specified in Sections 13 and 15(d) of the Exchange Act within the time periods required; provided, however, that availability of the foregoing materials on the Commission’s EDGAR service shall be deemed to satisfy the Company’s delivery obligations hereunder. In the event that the Company is not permitted to file such reports, documents and information with the Commission pursuant to the Exchange Act, the Company will nevertheless provide such Exchange Act information to the Trustee and the Holders of the Securities as if the Company were subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act within the time periods required by law.
          (b) If the Company has designated any of its Subsidiaries as an Unrestricted Subsidiary, then the quarterly and annual financial information required by the preceding paragraph will include a reasonably detailed presentation, either on the face of the financial statements or in the footnotes to the financial statements, and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of the financial condition and results of operations of the Company and the Restricted Subsidiaries.
          (c) In addition, the Company has agreed that, for so long as any Securities remain outstanding, it will furnish to the Holders and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
          (d) Notwithstanding anything in this Indenture, the Company will not be deemed to have failed to comply with any of its obligations under clause (a) of this Section 4.10 for purposes of Section 6.01(3) until 90 days after the date any report hereunder is due.
          Delivery of such reports, information and documents to the Trustee pursuant to this Section 4.10 is for informational purposes only and the Trustee’s receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company’s compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers’ Certificates).

 

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SECTION 4.11. Waiver of Stay, Extension or Usury Laws.
          The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury law or other law that would prohibit or forgive the Company from paying all or any portion of the principal of and/or interest on the Securities as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Indenture, and (to the extent that it may lawfully do so) the Company hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted.
SECTION 4.12. Limitation on Asset Sales.
          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 prepay any Indebtedness secured by a Lien on such asset to the extent of the Net Cash Proceeds of such asset and, in the case of any such Indebtedness under any revolving credit facility, effect a permanent reduction in the availability under such revolving credit facility (or effect a permanent reduction in availability under such revolving credit facility, regardless of the fact that no prepayment is required), (B) to acquire Replacement Assets, or (C) a combination of prepayment and investment permitted by the foregoing clauses (3)(A) and (3)(B).
Pending the final application of the Net Cash Proceeds, the Company and the Restricted Subsidiaries may invest such Net Cash Proceeds in any manner not prohibited by this Indenture.
          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

 

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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 Securities equal to the Net Proceeds Offer Amount at a price equal to 100% of the principal amount of the Securities to be purchased, plus accrued and unpaid interest, if any, thereon to the date of purchase; provided, however, that if the Company elects (or is required by the terms of Indebtedness that ranks pari passu with the Securities), such Net Proceeds Offer may be made ratably to purchase the Securities and such pari passu Indebtedness.
          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 Section 4.12.
          The Company may defer the Net Proceeds Offer until there is an aggregate unutilized Net Proceeds Offer Amount equal to or in excess of $50.0 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 $50.0 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 $50.0 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 Issue Date as an entirety to a Person in a transaction permitted under Section 5.01, 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 Section 4.12, and shall comply with the provisions of this Section 4.12 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 Section 4.12.
          Notice of each Net Proceeds Offer will be mailed or caused to be mailed, by first class mail, by the Company within 30 days following the Net Proceeds Offer Trigger Date to all record Holders as shown on the register of Holders, with a copy to the Trustee. The notice shall contain all instructions and materials necessary to enable such Holders to tender Securities pursuant to the Net Proceeds Offer and shall state the following terms:

 

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     (1) that the Net Proceeds Offer is being made pursuant to this Section 4.12 and that the Holders may elect to tender their Securities in whole or in part in integral multiples of $1,000 in exchange for cash; provided, however, that if the aggregate principal amount of Securities properly tendered in a Net Proceeds Offer exceeds the Net Proceeds Offer Amount, Securities of tendering Holders will be purchased on a pro rata basis (based on amounts tendered);
     (2) the purchase price (including the amount of accrued interest, if any) and the Net Proceeds Offer Payment Date (which shall be at least 20 Business Days from the date of mailing of notice of such Net Proceeds Offer, or such longer period as required by law);
     (3) that any Security not tendered will continue to accrue interest;
     (4) that, unless the Company defaults in making payment therefor, any Security accepted for payment pursuant to the Net Proceeds Offer shall cease to accrue interest after the Net Proceeds Offer Payment Date;
     (5) that Holders electing to have a Security purchased pursuant to a Net Proceeds Offer will be required to surrender the Security, with the form entitled “Option of Holder To Elect Purchase” on the reverse of the Security completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Net Proceeds Offer Payment Date;
     (6) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the Business Day prior to the Net Proceeds Offer Payment Date, a facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Security the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Security purchased; and
     (7) that Holders whose Securities are purchased only in part will be issued new Securities in a principal amount equal to the unpurchased portion of the Securities surrendered.
          On or before the Net Proceeds Offer Payment Date, the Company shall (i) accept for payment Securities or portions thereof tendered pursuant to the Net Proceeds Offer which are to be purchased in accordance with item (1) above, (ii) deposit with the Paying Agent in accordance with Section 2.14 U.S. Legal Tender sufficient to pay the purchase price plus accrued interest, if any, of all Securities to be purchased and (iii) deliver to the Trustee Securities so accepted together with an Officers’ Certificate stating the Securities or portions thereof being purchased by the Company. The Paying Agent shall promptly mail to the Holders of Securities so accepted payment in an amount equal to the purchase price plus accrued interest, if any. For purposes of this Section 4.12, the Trustee shall act as the Paying Agent.

 

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          To the extent that the aggregate amount of the notes tendered pursuant to a Net Proceeds Offer is less than the Net Proceeds Offer Amount, the Company may use such excess Net Proceeds Offer Amount for general corporate purposes or for any other purposes not prohibited by this Indenture. Upon completion of any such Net Proceeds Offer, the Net Proceeds Offer Amount shall be reset to zero.
          The Company will comply with all tender offer rules under state and federal securities laws and regulations, including, but not limited to, Section 14(e) under the Exchange Act and Rule 14e-1 thereunder, to the extent applicable to such offer. To the extent that the provisions of any securities laws or regulations conflict with the foregoing “Asset Sale” provisions of this Indenture, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under the foregoing provisions of this Indenture by virtue thereof.
          The Trustee shall make such adjustments as are needed so that no unauthorized denominations are purchased in part when the aggregate principal amount of Securities properly tendered in a Net Proceeds Offer pursuant to this Section 4.12 exceeds the Net Proceeds Offer Amount and Securities of tendering Holders are purchased on a pro rata basis (based on amounts tendered). Each Notice of Net Proceeds Offer required pursuant to this Section 4.12 shall state that such adjustments may be made under such circumstances. 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 or become effective 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 (it being understood that the priority of any preferred stock in receiving dividends or liquidating distributions prior to dividends or liquidating distributions being paid on common stock shall not be deemed a restriction on the ability to make distributions on 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 reason of:
     (1) applicable law;

 

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     (2) this Indenture;
     (3) the Credit Agreement and/or the documentation for the Credit Agreement;
     (4) the Senior Secured Notes and/or the documentation for the Senior Secured Notes;
     (5) customary non-assignment provisions of any contract or any lease governing a leasehold interest of any Restricted Subsidiary;
     (6) 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;
     (7) agreements existing on the Issue Date to the extent and in the manner such agreements are in effect on the Issue Date;
     (8) any other agreement entered into after the Issue 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 Issue Date;
     (9) any instrument governing Indebtedness of a Foreign Restricted Subsidiary;
     (10) customary restrictions on the transfer of any property or assets arising under a security agreement governing a Lien permitted under this Indenture;
     (11) secured Indebtedness otherwise permitted to be incurred pursuant to Section 4.03 and Section 4.15 that limit the right of the debtor to dispose of the assets securing such Indebtedness;
     (12) any agreement governing Refinancing Indebtedness incurred to Refinance the Indebtedness issued, assumed or incurred pursuant to an agreement referred to in clause (2), (4), (6), (7) or (9) 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), (4), (6), (7) or (9);
     (13) any agreement governing the sale or disposition of any Restricted Subsidiary which restricts dividends and distributions pending such sale or disposition;

 

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     (14) any agreement, instrument or Lien placing encumbrances or restrictions applicable only to a Finance Subsidiary or an Accounts Receivable Entity; or
     (15) any agreement governing Indebtedness permitted to be incurred pursuant to Section 4.03; provided that the provisions relating to such encumbrance or restriction contained in such Indebtedness, taken as a whole, are not materially more restrictive than the provisions contained in the Credit Agreement or in the Indenture as in effect on the Issue Date.
SECTION 4.14. 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 (other than to the Company or to a Restricted Subsidiary) or permit any Person (other than the Company or a Restricted Subsidiary) to own any Preferred Stock of any Restricted Subsidiary (other than a Finance Subsidiary or an Accounts Receivable Entity).
SECTION 4.15. 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 any Liens of any kind against or upon any property or assets of the Company or any of the Restricted Subsidiaries, whether now owned or hereafter acquired, 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 Securities or a Subsidiary Guarantee, the Securities or such Subsidiary Guarantee is 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 Securities are equally and ratably secured,
except for:
     (A) Liens existing as of the Issue Date to the extent and in the manner such Liens are in effect on the Issue Date;
     (B) Liens securing Indebtedness permitted to be incurred pursuant to clause (2) or (11) of the definition of “Permitted Indebtedness” and all other Obligations relating thereto;
     (C) Liens securing the Securities or any Subsidiary Guarantee;

 

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     (D) Liens in favor of the Company or any Guarantor;
     (E) Liens securing Refinancing Indebtedness which is incurred to Refinance any Indebtedness (including, without limitation, Acquired Indebtedness) which has been secured by a Lien permitted under this Indenture and which has been incurred in accordance with the provisions of this Indenture; provided, however, that such Liens:
     (I) are no less favorable to Holders of the Securities and are not more favorable to the lienholders with respect to such Liens than the Liens in respect of the Indebtedness being Refinanced; and
     (II) do not extend to or cover any property or assets of the Company or any of its Restricted Subsidiaries not securing the Indebtedness so Refinanced; and
     (F) Permitted Liens.
SECTION 4.16. [Intentionally Omitted]
SECTION 4.17. 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 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) 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 Issue Date that involves an aggregate Fair Market

 

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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 paragraph (a) above 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 this Indenture; and
     (4) Restricted Payments, Permitted Investments or Permitted Liens permitted by this Indenture.
SECTION 4.18. Issuance of Subsidiary Guarantees.
          If, on or after the Issue Date, 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 Issue Date, any Restricted Subsidiary that is not a Guarantor guarantees (a “Guarantee”) any Indebtedness of the Company or a Guarantor (other than Indebtedness owing to the Company or a Restricted Subsidiary) (“Guaranteed Indebtedness”), 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 “Subsidiary Guarantee”) all of the Company’s obligations under the Securities and this Indenture on the terms set forth in this Indenture; and

 

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          (2) execute and 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 this Indenture. The Company may cause any other Restricted Subsidiary of the Company to issue a Subsidiary Guarantee and become a Guarantor.
          If the Guaranteed Indebtedness is pari passu with the Securities, then the Guarantee of such Guaranteed Indebtedness shall be pari passu with the Subsidiary Guarantee. If the Guaranteed Indebtedness is subordinated to the Securities, then the Guarantee of such Guaranteed Indebtedness shall be subordinated to the Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is subordinated to the Securities.
          Notwithstanding the foregoing, a Subsidiary Guarantee of the Securities provided by a Guarantor will be released without any action required on the part of the Trustee or any Holder of the Securities:
     (1) if the guarantee of the Credit Agreement and of the Senior Secured Notes made by such Guarantor is released, unless such Guarantor has any Indebtedness outstanding or remains a guarantor of Indebtedness of the Company or another Guarantor;
     (2) if (a) all of the Capital Stock of, or all or substantially all of the assets of, such Guarantor is sold or otherwise disposed of (including by way of merger or consolidation) to a Person other than the Company or any of its Domestic Restricted Subsidiaries or (b) such Guarantor ceases to be a Restricted Subsidiary, and the Company otherwise complies, to the extent applicable, with Section 4.12;
     (3) if the Company designates such Guarantor as an Unrestricted Subsidiary in accordance with Section 4.20; and
     (4) upon the Company’s request if the Fair Market Value of the assets of the applicable Guarantor (as determined in good faith by the Board of Directors of the Company), together with the Fair Market Value of the assets of other Guarantors whose Subsidiary Guarantee was released in the same calendar year in reliance on this paragraph (4), does not exceed $1.0 million (subject to cumulative carryover for amounts not used in any prior calendar year).

 

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          At the Company’s request, the Trustee will execute and deliver any instrument evidencing such release. A Guarantor may also be released from its obligation under its Subsidiary Guarantee in connection with amendments permitted in accordance with the provisions of Article Nine of this Indenture. The Trustee shall only be obligated to deliver any such instrument upon receipt of an Officers’ Certificate stating that such release is in compliance with this Indenture.
SECTION 4.19. 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 Securities for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of this Indenture, the Securities or the Subsidiary 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.
SECTION 4.20. Limitation on Designations of Unrestricted Subsidiaries.
          The Company may, on or after the Issue Date, designate any Subsidiary of the Company (other than a Subsidiary of the Company which owns Capital Stock of a Restricted Subsidiary or is a Guarantor) as an “Unrestricted Subsidiary” under this 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 this 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 Section 4.03 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 Section 4.04 for all purposes of this Indenture.

 

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          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 Section 4.04 hereof.
          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;
     (2) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding immediately following such Revocation would, if incurred at such time, have been permitted to be incurred for all purposes of this Indenture; and
     (3) such Subsidiary shall for purposes of Section 4.18 be treated as having then been acquired by the Company.
          All Designations and Revocations must be evidenced by an Officers’ Certificate of the Company delivered to the Trustee certifying compliance with the foregoing provisions.
SECTION 4.21. Change of Control.
          (a) 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 Securities 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 and unpaid interest, if any, and any liquidated damages if any, thereon to the date of purchase.

 

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          (b) 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,
     (1) that the Change of Control Offer is being made pursuant to this Section 4.21 and that all Securities tendered and not withdrawn will be accepted for payment;
     (2) the purchase price (including the amount of accrued interest) and 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”);
     (3) that any Security not tendered will continue to accrue interest;
     (4) that, unless the Company defaults in making payment therefor, any Security accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Payment Date;
     (5) that Holders electing to have a Security purchased pursuant to a Change of Control Offer will be required to surrender the Security, with the form entitled “Option of Holder To Elect Purchase” on the reverse of the Security 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;
     (6) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the Business Day prior to the Change of Control Payment Date, a facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Securities the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Securities purchased;
     (7) that Holders whose Securities are purchased only in part will be issued new Securities in a principal amount equal to the unpurchased portion of the Securities surrendered; and
     (8) the circumstances and relevant facts regarding such Change of Control.
           On or before the Change of Control Payment Date, the Company shall (i) accept for payment Securities or portions thereof tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent, in accordance with Section 2.14, U.S. Legal Tender sufficient to pay the purchase price plus accrued interest, if any, of all Securities so tendered and (iii) deliver to the Trustee Securities so accepted together with an Officers’ Certificate stating the Securities or portions thereof being purchased by the Company. Upon receipt by

 

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the Paying Agent of the monies specified in clause (ii) above and a copy of the Officers’ Certificate specified in clause (iii) above, the Paying Agent shall promptly mail to the Holders of Securities so accepted payment in an amount equal to the purchase price plus accrued interest, if any, and the Trustee shall promptly authenticate and mail to such Holders new Securities equal in principal amount to any unpurchased portion of the Securities surrendered. Any Securities not so accepted shall be promptly mailed by the Company to the Holder thereof. For purposes of this Section 4.21, the Trustee shall act as the Paying Agent.
          The Company will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in this Indenture applicable to a Change of Control Offer made by the Company and purchases all Securities validly tendered and not withdrawn under such Change of Control Offer.
          Any amounts remaining after the purchase of all validly tendered and not validly withdrawn Securities pursuant to a Change of Control Offer shall be returned by the Trustee to the Company.
          The Company shall and shall cause its Subsidiaries to comply with all tender offer rules under state and federal securities laws, including, but not limited to, Section 14(e) under the Exchange Act and Rule 14e-1 thereunder, to the extent applicable to such offer. To the extent that the provisions of any securities laws or regulations conflict with this Section 4.21, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Section 4.21 by virtue thereof.
          Notwithstanding the occurrence of a Change of Control, the Company will not be obligated to repurchase the Securities under this covenant if it has exercised its right to redeem the Securities under the terms of Paragrah 5 of the Securities.
ARTICLE V
SUCCESSOR CORPORATION
SECTION 5.01. Merger, Consolidation and Sale of Assets.
          (a) 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) 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:

 

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     (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 Securities and the performance of every covenant of the Securities, this 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 on a pro forma basis 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 Section 4.03;
     (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 or to be released 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 this Indenture and that all conditions precedent in this Indenture relating to such transaction have been satisfied.
          (b) 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 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.
          (c) No Guarantor (other than any Guarantor whose Subsidiary Guarantee is to be released in accordance with the terms of the Subsidiary Guarantee and this Indenture in connection with any transaction complying with the provisions of Section 4.12) will, and the

 

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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 expressly assumes by supplemental indenture (in form and substance satisfactory to the Trustee), executed and delivered to the Trustee, the performance of every covenant of the Securities, this Indenture and the Registration Rights Agreement on the part of such Guarantor to be performed or observed;
     (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 (a)(2) of this Section 5.01; 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 this Indenture and that all conditions precedent in this Indenture relating to such transaction have been satisfied.
SECTION 5.02. Successor Corporation Substituted.
          In accordance with the foregoing, upon any such consolidation, combination, merger, conveyance, lease or any transfer of all or substantially all of the assets of the Company in which the Company is not the continuing corporation, the Surviving Entity 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 this Indenture and the Securities with the same effect as if such successor had been named as the Company herein, and thereafter the predecessor corporation will be relieved of all further obligations and covenants under this Indenture, the Securities and the Registration Rights Agreement; provided that solely for purposes of computing amounts described in subclause (iii) of the first paragraph of Section 4.04, any such Surviving Entity shall only be deemed to have succeeded to and be substituted for the Company with respect to periods subsequent to the effective time of such merger, consolidation or transfer of assets.

 

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ARTICLE VI
DEFAULT AND REMEDIES
SECTION 6.01. Events of Default.
          An “Event of Default” occurs if
     (1) the failure to pay interest on any Security when the same becomes due and payable and the default continues for a period of 30 days;
     (2) the failure to pay the principal on any Securities when such principal becomes due and payable, at maturity, upon redemption or otherwise (including the failure to make a payment to purchase Securities tendered pursuant to a Change of Control Offer or a Net Proceeds Offer);
     (3) a default by the Company or any Restricted Subsidiary in the observance or performance of any other covenant or agreement contained in this 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 Securities (except in the case of a default with respect to Article Five, 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 Issue 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, exceeds $75.0 million or more at any time;
     (5) the Company or any of its Restricted Subsidiaries (A) admits in writing its inability to pay its debts generally as they become due, (B) commences a voluntary case or proceeding under any Bankruptcy Law with respect to itself, (C) consents to the entry of a judgment, decree or order for relief against it in an involuntary case or proceeding under any Bankruptcy Law, (D) consents to the appointment of a Custodian of it or for substantially all of its property, (E) consents to or acquiesces in the institution

 

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of a bankruptcy or an insolvency proceeding against it, (F) makes a general assignment for the benefit of its creditors, or (G) takes any corporate action to authorize or effect any of the foregoing;
     (6) a court of competent jurisdiction enters a judgment, decree or order for relief in respect of the Company or any of its Significant Subsidiaries in an involuntary case or proceeding under any Bankruptcy Law, which shall (A) approve as properly filed a petition seeking reorganization, arrangement, adjustment or composition in respect of the Company or any of its Significant Subsidiaries, (B) appoint a Custodian of the Company or any of its Significant Subsidiaries or for substantially all of any of their property or (C) order the winding-up or liquidation of its affairs; and such judgment, decree or order shall remain unstayed and in effect for a period of 60 consecutive days;
     (7) one or more judgments in an aggregate amount in excess of $75.0 million not covered by adequate insurance (other than self-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; or
     (8) any Subsidiary Guarantee of a Significant Subsidiary ceases to be in full force and effect, or any Subsidiary Guarantee of such a Significant Subsidiary is declared to be null and void and unenforceable or any Subsidiary Guarantee of such a Significant Subsidiary is found to be invalid or any Guarantor which is a Significant Subsidiary denies its liability under its Subsidiary Guarantee (other than by reason of release of such Guarantor in accordance with the terms of this Indenture).
          The Trustee shall, within 90 days after the occurrence of any Default actually known to a Responsible Officer of the Trustee, give to the Securityholders notice of such Default; provided that, except in the case of a Default in the payment of principal of or interest on any of the Securities, the Trustee shall be protected in withholding such notice if and so long as a Responsible Officer of the Trustee in good faith determines that the withholding of such notice is in the interest of the Securityholders.
SECTION 6.02. Acceleration.
          If an Event of Default (other than an Event of Default specified in clause (5) or (6) above) shall occur and be continuing, the Trustee or the Holders of at least 25% in principal amount of outstanding Securities may declare the principal of, premium, if any, and accrued and unpaid interest on all the Securities to be due and payable by notice in writing to the Company (and to the Trustee, if given by the Holders) 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 (5) or (6) above occurs and is continuing,

 

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then all unpaid principal of, premium, if any, and accrued and unpaid interest on all of the outstanding Securities 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.
          At any time after a declaration of acceleration with respect to the Securities as described in the preceding paragraph, the Holders of a majority in principal amount of the then outstanding Securities may rescind and cancel such declaration and its consequences;
     (i) if the rescission would not conflict with any judgment or decree;
     (ii) 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;
     (iii) 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;
     (iv) if the Company has paid the Trustee its compensation and reimbursed the Trustee for its reasonable expenses, disbursements and advances and any other sums owing to the Trustee pursuant to Section 7.07; and
     (v) in the event of the cure or waiver of an Event of Default of the type described in clauses (5) and (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.
SECTION 6.03. Other Remedies.
          If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy by proceeding at law or in equity to collect the payment of principal of or interest on the Securities or to enforce the performance of any provision of the Securities, this Indenture or any Subsidiary Guarantee.
          The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Securityholder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative to the extent permitted by law.

 

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SECTION 6.04. Waiver of Past Defaults.
          Subject to Sections 6.02, 6.07 and 9.02, the Holders of a majority in principal amount of the then outstanding Securities by written notice to the Trustee may waive an existing Default or Event of Default and its consequences, except a Default in the payment of principal of or premium, if any, or interest on any Security as specified in clauses (1) and (2) of Section 6.01. The Company shall deliver to the Trustee an Officers’ Certificate stating that the requisite percentage of Holders have consented to such waiver and attaching copies of such consents upon which the Trustee may conclusively rely. When a Default or Event of Default is waived, it is cured and ceases.
SECTION 6.05. Control by Majority.
          The Holders of not less than a majority in principal amount of the outstanding Securities may 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 it. Subject to Section 7.01, however, the Trustee may refuse to follow any direction that conflicts with any law or this Indenture, that the Trustee determines may be unduly prejudicial to the rights of another Securityholder, or that may involve the Trustee in personal liability; provided that the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction.
          Prior to taking any action or following any direction pursuant to this Section 6.05, the Trustee shall be entitled to indemnification from such Holders satisfactory to it in its sole discretion against any fees, loss, liability, cost or expense caused by taking such action or following such direction.
SECTION 6.06. Limitation on Suits.
          A Securityholder may not pursue any remedy with respect to this Indenture, the Securities or any Subsidiary Guarantee unless
     (1) the Holder gives to the Trustee written notice of a continuing Event of Default;
     (2) the Holder or Holders of at least 25% in principal amount of the outstanding Securities make a written request to the Trustee to pursue the remedy;
     (3) such Holder or Holders offer and, if requested, provide to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense;
     (4) the Trustee does not comply with the request within 30 days after receipt of the request and the offer and, if requested, the provision of indemnity; and

 

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     (5) during such 30-day period the Holder or Holders of a majority in principal amount of the outstanding Securities do not give the Trustee a direction which, in the opinion of the Trustee, is inconsistent with the request.
          A Securityholder may not use this Indenture to prejudice the rights of another Securityholder or to obtain a preference or priority over such other Securityholder.
SECTION 6.07. Rights of Holders To Receive Payment.
          Notwithstanding any other provision of this Indenture, the right of any Holder to receive payment of principal of, premium and interest on a Security, on or after the respective due dates expressed in such Security, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of the Holder.
SECTION 6.08. Collection Suit by Trustee.
          If an Event of Default in payment of principal, premium or interest specified in clause (1) or (2) of Section 6.01 occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company or any other obligor on the Securities for the whole amount of principal and accrued interest remaining unpaid, together with interest on overdue principal and, to the extent that payment of such interest is lawful, interest on overdue installments of interest, in each case at the rate per annum borne by the Securities and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel.
SECTION 6.09. Trustee May File Proofs of Claim.
          The Trustee may file such proofs of claim and other papers or documents and take such other actions as it may determine in its reasonable discretion to be necessary or advisable (including participating as a member of any creditors committee acting in the matter) in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, legal fees, disbursements and advances of the Trustee, its agents, nominees, custodians, counsel, accountants and experts) and the Securityholders allowed in any judicial proceedings relating to the Company, its creditors or its property and shall be entitled and empowered to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same, and any Custodian in any such judicial proceedings is hereby authorized by each Securityholder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Securityholders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, legal fees, disbursements and advances of the Trustee, its agents, nominees, custodians and counsel, and any other amounts due the Trustee under Section 7.07. Nothing herein contained

 

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shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding.
SECTION 6.10. Priorities.
          If the Trustee collects any money or property pursuant to this Article Six, it shall pay out the money or property in the following order:
     First: without duplication, to the Trustee for amounts owing under Section 7.07;
     Second: if the Holders are forced to proceed against the Company, a Guarantor or any other obligor on the Securities directly without the Trustee, to Holders for their collection costs;
     Third: subject to Article Twelve, to Holders for amounts due and unpaid on the Securities for principal, premium and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal, premium and interest, respectively; and
     Fourth: to the Company or any Guarantors, as their respective interests may appear or to such party as directed by a court of competent jurisdiction.
          The Trustee, upon prior notice to the Company, may fix a record date and payment date for any payment to Securityholders pursuant to this Section 6.10.
SECTION 6.11. Payment of Interest; Interest Rights Preserved.
          Interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security is registered at the close of business on the Record Date for such interest.
          Any interest on any Security which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called “Defaulted Interest”) shall forthwith cease to be payable to the Holder on such Record Date by virtue of having been such Holder; and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in subsection (1) or (2) below:
     (1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities are registered at the close of business on a special Record Date (the “Special Record Date”) for the payment of such Defaulted

 

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Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this subsection provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date. In the name and at the expense of the Company, the Trustee shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder at his address as it appears in the Security Register, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Securities (or their respective predecessor securities) are registered on such Special Record Date and shall no longer be payable pursuant to the following subsection (2).
     (2) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Company has caused the Securities to be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this subsection, such payment shall be deemed practicable by the Trustee.
          Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security.
SECTION 6.12. Undertaking for Costs.
          In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys’ fees and expenses, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section

 

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6.12 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07, or a suit by a Holder or Holders of more than 10% in principal amount of the outstanding Securities.
ARTICLE VII
TRUSTEE
SECTION 7.01. Duties of Trustee.
          (a) If an Event of Default actually known to a Responsible Officer of the Trustee has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this 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. Subject to such provisions, the Trustee shall be under no obligation to exercise any of its rights or powers under this Indenture at the request of any of the Holders of Securities, unless they shall have offered to the Trustee security and indemnity satisfactory to it in its sole discretion.
          (b) Except during the continuance of an Event of Default actually known to a Responsible Officer of the Trustee:
     (1) The Trustee need perform only those duties as are specifically set forth herein and no others and no implied covenants or obligations shall be read into this Indenture against the Trustee.
     (2) In the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions and such other documents delivered to it pursuant to Section 11.04 hereof furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture (but need not confirm or investigate the accuracy of mathematical calculations or other facts stated therein).
          (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that:
     (1) This paragraph does not limit the effect of paragraph (b) of this Section 7.01.

 

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     (2) The Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer of the Trustee, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts.
     (3) The Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05.
          (d) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or to take or omit to take any action under this Indenture or take any action at the request or direction of Holders if it shall have reasonable grounds for believing that repayment of such funds is not assured to it or it does not receive an indemnity satisfactory to it in its sole discretion against such risk, liability, loss, fee or expense which might be incurred by it in compliance with such request or direction.
          (e) Every provision of this Indenture that in any way relates to the Trustee is subject to this Section 7.01.
          (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law.
SECTION 7.02. Rights of Trustee.
          Subject to Section 7.01:
     (a) The Trustee may conclusively rely and shall be protected in acting or refraining from acting on any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document.
     (b) Before the Trustee acts or refrains from acting, it may require an Officers’ Certificate and an Opinion of Counsel, which shall conform to the provisions of Section 11.05. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such certificate or opinion.
     (c) The Trustee may act through its attorneys, agents, custodians and nominees and shall not be responsible for the misconduct or negligence of any attorney, agent, custodian or nominee (other than such a person who is an employee of the Trustee) appointed with due care.

 

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     (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it reasonably believes to be authorized or within its rights or powers.
     (e) The Trustee may consult with counsel and the advice or opinion of such counsel as to matters of law shall be full and complete authorization and protection from liability in respect of any action taken, omitted or suffered by it under this Indenture, in good faith and in accordance with the advice or opinion of such counsel.
     (f) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Holders pursuant to the provisions of this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the fees, costs, expenses and liabilities which may be incurred therein or thereby.
     (g) Except with respect to Section 4.01, the Trustee shall not have any duty as to inquire as to the performance by the Company of its covenants or obligations under this Indenture. The Trustee shall not be deemed to have notice or any knowledge of any matter (including without limitation defaults or events of default) unless a Responsible Officer assigned to and working in the Trustee’s Corporate Trust Department has actual knowledge thereof or unless written notice thereof is received by the Trustee, attention: Corporate Trust Department, and such notice references the Securities generally, the Company or this Indenture.
     (h) The rights, privileges, protections, immunities and benefits given to the Trustee, including, without limitation, its right to be indemnified, are extended to, and shall be enforceable by, the Trustee in each of its capacities hereunder, and to each agent, custodian and other Person employed to act hereunder.
     (i) The Trustee may request that the Company deliver an Officers’ Certificate setting forth the names of individuals and/or titles of officers authorized at such time to take specified actions pursuant to this Indenture, which Officers’ Certificate may be signed by any person authorized to sign an Officers’ Certificate, including any person specified as so authorized in any such certificate previously delivered and not superseded.
SECTION 7.03. Individual Rights of Trustee.
          The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company, its Subsidiaries, any Guarantors and their respective Affiliates with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. However, the Trustee must comply with Sections 7.10 and 7.11 of this Indenture as well as the provisions of the TIA.

 

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SECTION 7.04. Trustee’s Disclaimer.
          The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Securities, it shall not be accountable for the Company’s use of the proceeds from the Securities or any money paid to the Company or upon the Company’s direction under any provision of this Indenture, and it shall not be responsible for any statement of the Company in this Indenture or any document issued in connection with the sale of Securities (including without limitation any preliminary or final offering memorandum) or any statement in the Securities other than the Trustee’s certificate of authentication. The Trustee shall not be accountable for the use or application of any money received by any Paying Agent other than the Trustee. The Trustee makes no representations with respect to the effectiveness or adequacy of this Indenture. The Trustee shall not be responsible for independently ascertaining or maintaining such validity, if any, and shall be fully protected in relying upon certificates and opinions delivered to it in accordance with the terms of this Indenture.
SECTION 7.05. Notice of Default.
          If a Default or an Event of Default occurs and is continuing and a Responsible Officer of the Trustee receives actual notice of such event, the Trustee shall mail to each Securityholder, as their names and addresses appear on the Securityholder list described in Section 2.05, notice of the uncured Default or Event of Default within 90 days after the Trustee receives such notice (or 30 days in the case of a Default or Event of Default specified in the following sentence). Except in the case of a Default or an Event of Default in payment of principal of, premium or interest on, any Security, including the failure to make payment on (i) the Change of Control Payment Date pursuant to a Change of Control Offer or (ii) the Excess Proceeds Offer Payment Date pursuant to an Excess Proceeds Offer, the Trustee may withhold the notice if and so long as a Responsible Officer of the Trustee in good faith determines that withholding the notice is in the interest of the Securityholders.
SECTION 7.06. Reports by Trustee to Holders.
          This Section 7.06 shall not be operative as a part of this Indenture until this Indenture is qualified under the TIA, and, until such qualification, this Indenture shall be construed as if this Section 7.06 were not contained herein.
          Within 60 days after each May 15 of each year beginning with 2008, the Trustee shall, to the extent that any of the events described in TIA § 313(a) occurred within the previous twelve months, but not otherwise, mail to each Securityholder a brief report dated as of such May 15 that complies with TIA § 313(a). The Trustee also shall comply with TIA §§ 313(b), 313(c) and 313(d).

 

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          A copy of each report at the time of its mailing to Securityholders shall be mailed to the Company and filed with the Commission and each securities exchange, if any, on which the Securities are listed.
          The Company shall notify a Responsible Officer of the Trustee if the Securities become listed on any securities exchange or of any delisting thereof.
SECTION 7.07. Compensation and Indemnity.
          (a) The Company shall pay to the Trustee from time to time such compensation for its services hereunder as the Company and the Trustee shall from time to time agree in writing. The Trustee’s compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee upon request for all reasonable disbursements, expenses and advances (including reasonable fees and expenses of counsel) incurred or made by it in addition to the compensation for its services, except any such disbursements, expenses and advances as may be attributable to the Trustee’s negligence or bad faith. Such expenses shall include the reasonable compensation, legal fees, disbursements and expenses of the Trustee’s agents, accountants, experts, nominees, custodians and counsel and any taxes or other expenses incurred by a trust created pursuant to Section 8.01.
          (b) The Company shall indemnify each of the Trustee, its directors, officers and employees and each predecessor Trustee for, and hold them harmless against, any loss, liability or expense incurred by the Trustee, without negligence or bad faith on its part arising out of or in connection with the acceptance and administration of this trust and its duties under this Indenture, including the reasonable expenses and attorneys’ fees of defending itself against any claim of liability arising hereunder. The Trustee shall notify the Company promptly of any claim asserted against the Trustee for which it may seek indemnity. However, the failure by the Trustee to so notify the Company shall not relieve the Company of its obligations hereunder. The Company shall defend the claim and the Trustee shall cooperate in the defense (and may employ its own counsel) at the Company’s expense. The Company need not pay for any settlement made without its written consent, which consent shall not be unreasonably withheld or delayed. The Company need not reimburse any expense or indemnify against any loss or liability incurred by the Trustee as a result of the violation of this Indenture by the Trustee if such violation arose from the Trustee’s negligence or bad faith.
          (c) To secure the payment obligations of the Company and Guarantors in this Section 7.07, the Trustee shall have a Lien prior to any Lien held by the Securityholders on all money and property held or collected by the Trustee as such for so long as the Trustee holds such money and property, except funds and property held in trust for the payment of principal of (and premium, if any) or interest on particular Securities. Such Lien shall survive the satisfaction and discharge of this Indenture for so long as the Trustee holds such money and property.

 

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          When the Trustee incurs expenses or renders services after an Event of Default specified in clause (5) or (6) of Section 6.01 occurs, the expenses (including the reasonable fees and expenses of its agents and counsel) and the compensation for the services shall be preferred over the status of the Holders in a proceeding under any Bankruptcy Law and are intended to constitute expenses of administration under any Bankruptcy Law. The Company’s obligations under this Section 7.07 and any claim arising hereunder shall survive termination of this Indenture, the resignation or removal of any Trustee, the discharge of the Company’s obligations pursuant to Article Eight and any rejection or termination under any Bankruptcy Law.
SECTION 7.08. Replacement of Trustee.
          The Trustee may resign at any time by so notifying the Company in writing. The Holders of a majority in principal amount of the outstanding Securities may remove the Trustee by so notifying the Company and the Trustee in writing and may appoint a successor Trustee with the Company’s consent. The Company may remove the Trustee if
     (1) the Trustee fails to comply with Section 7.10;
     (2) the Trustee is adjudged a bankrupt or an insolvent;
     (3) a receiver or other public officer takes charge of the Trustee or its property; or
     (4) the Trustee becomes legally incapable of acting with respect to its duties hereunder.
          If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall notify each Holder of such event and shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the Securities may appoint a successor Trustee to replace the successor Trustee appointed by the Company.
          A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Immediately after that, the retiring Trustee shall transfer, after payment of all sums then owing to the Trustee pursuant to Section 7.07, all property held by it as Trustee to the successor Trustee, subject to the lien provided in Section 7.07, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture; provided, however, that no Trustee under this Indenture shall be liable for any act or omission of any successor Trustee. A successor Trustee shall mail notice of its succession to each Securityholder.

 

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          If a successor Trustee does not take office within 30 days after the retiring Trustee resigns or is removed, the retiring Trustee (at the expense of the Company), the Company or the Holders of at least 10% in principal amount of the outstanding Securities may petition any court of competent jurisdiction for the appointment of a successor Trustee.
          If the Trustee fails to comply with Section 7.10, any Securityholder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee.
          Notwithstanding replacement of the Trustee pursuant to this Section 7.08, the Company’s obligations under Section 7.07 shall continue for the benefit of the retiring Trustee and the Company shall pay to any such replaced or removed Trustee all amounts owed under Section 7.07 upon such replacement or removal.
SECTION 7.09. Successor Trustee by Merger, Etc.
          If the Trustee consolidates with, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the resulting, surviving or transferee corporation without any further act shall, if such resulting, surviving or transferee corporation is otherwise eligible hereunder, be the successor Trustee. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities.
SECTION 7.10. Eligibility; Disqualification.
          This Indenture shall always have a Trustee who satisfies the requirement of TIA §§ 310(a)(1) and 310(a)(5). The Trustee shall have a combined capital and surplus of at least $50,000,000 as set forth in its most recent published annual report of condition. The Trustee shall comply with TIA § 310(b); provided, however, that there shall be excluded from the operation of TIA § 310(b)(1) any indenture or indentures under which other securities, or certificates of interest or participation in other securities, of the Company are outstanding, if the requirements for such exclusion set forth in TIA § 310(b)(1) are met.
SECTION 7.11. Preferential Collection of Claims Against Company.
          The Trustee, in its capacity as Trustee hereunder, shall comply with TIA § 311(a), excluding any creditor relationship listed in TIA § 311(b). A Trustee who has resigned or been removed shall be subject to TIA § 311(a) to the extent indicated.

 

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ARTICLE VIII
SATISFACTION AND DISCHARGE OF INDENTURE
SECTION 8.01. Legal Defeasance and Covenant Defeasance.
          (a) The Company may, at its option and at any time, with respect to the Securities, elect to have either paragraph (b) or paragraph (c) below applied to the outstanding Securities upon compliance with the conditions set forth in paragraph (d).
          (b) Upon the Company’s exercise under paragraph (a) of the option applicable to this paragraph (b), the Company shall be deemed to have been released and discharged from its obligations with respect to the outstanding Securities on the date the conditions set forth below are satisfied (hereinafter, “Legal Defeasance”). For this purpose, such Legal Defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the outstanding Securities, which shall thereafter be deemed to be “outstanding” only for the purposes of the Sections and matters under this Indenture referred to in (i) and (ii) below, and to have satisfied all its other obligations under such Securities and this Indenture insofar as such Securities are concerned, except for the following, which shall survive until otherwise terminated or discharged hereunder: (i) the rights of the Holders of outstanding Securities to receive payments in respect of the principal of, premium, if any, and interest on such Securities when such payments are due, (ii) the Company’s obligations to issue temporary Securities, register the transfer or exchange of any Securities, replace mutilated, destroyed, lost or stolen Securities and maintain an office or agency for payments in respect of the Securities, (iii) the rights, powers, trusts, duties and immunities of the Trustee and the Company’s obligations in connection therewith and (iv) the Legal Defeasance provisions of this Indenture. The Company may exercise its option under this paragraph (b) notwithstanding the prior exercise of its option under paragraph (c) below with respect to the Securities.
          (c) Upon the Company’s exercise under paragraph (a) of the option applicable to this paragraph (c), the Company shall be released and discharged from its obligations under any covenant contained in Article Five and in Sections 4.03 through 4.21 with respect to the outstanding Securities on and after the date the conditions set forth below are satisfied (hereinafter, “Covenant Defeasance”), and the Securities shall thereafter be deemed to be not “outstanding” for the purpose of any direction, waiver, consent or declaration or act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed “outstanding” for all other purposes hereunder. For this purpose, such Covenant Defeasance means that, with respect to the outstanding Securities, the Company and any Guarantor may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any

 

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such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 6.01(3), nor shall any event referred to in Section 6.01(4) or (7) thereafter constitute a Default or an Event of Default thereunder but, except as specified above, the remainder of this Indenture and such Securities shall be unaffected thereby.
          (d) The following shall be the conditions to application of either paragraph (b) or paragraph (c) above to the outstanding Securities:
     (1) The Company must irrevocably deposit with the Trustee, in trust, for the benefit of the Holder pursuant to an irrevocable trust and security agreement in form and substance reasonably satisfactory to the Trustee, U.S. Legal Tender or direct non-callable obligations of, or non-callable obligations guaranteed by, the United States of America for the payment of which obligation or guarantee the full faith and credit of the United States of America is pledged (“U.S. Government Obligations”) or a combination thereof, maturing as to principal and interest in such amounts and at such times as are sufficient, without consideration of the reinvestment of such interest and principal and after payment of all federal, state and local taxes or other charges or assessments in respect thereof payable by the Trustee, in the opinion of a nationally recognized firm of Independent public accountants, selected by the Company, expressed in a written certification thereof (in form and substance reasonably satisfactory to the Trustee) delivered to the Trustee, to pay the principal of, premium, if any, and interest on all the outstanding Securities on the dates on which any such payments are due and payable in accordance with the terms of this Indenture and of the Securities;
     (2) Such deposits shall not cause the Trustee to have a conflicting interest as defined in and for purposes of the TIA;
     (3) The Trustee shall have received Officers’ Certificates stating that no Default or Event of Default or event which with notice or lapse of time or both would become a Default or an Event of Default with respect to the Securities shall have occurred and be continuing on the date of such deposit or, insofar as Section 6.01(5) or (6) is concerned, at any time during the period ending on the 91st day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period);
     (4) The Trustee shall have received Officers’ Certificates stating that such deposit will not result in a Default under this Indenture or a breach or violation of, or constitute a default under, any other material instrument or agreement to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound;

 

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     (5) (i) In the event the Company elects paragraph (b) hereof, the Company shall deliver to the Trustee an Opinion of Counsel in the United States, in form and substance reasonably satisfactory 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 Issue Date, 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, Holders of the Securities will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and the defeasance contemplated hereby and will be subject to federal income taxes on the same amounts, in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred, or (ii) in the event the Company elects paragraph (c) hereof, the Company shall deliver to the Trustee an Opinion of Counsel in the United States, in form and substance reasonably satisfactory to the Trustee, confirming that, Holders of the Securities will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and the defeasance contemplated hereby and will be subject to federal income tax on the same amounts and in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred;
     (6) The Company shall have delivered to the Trustee an Opinion of Counsel stating that as a result of the Legal Defeasance or Covenant Defeasance, neither the Trustee nor the trust have become or are deemed to have become an “investment company” under the Investment Company Act of 1940, as amended;
     (7) The Company shall have delivered to the Trustee an Officers’ Certificate, in form and substance reasonably satisfactory to the Trustee, stating that the deposit under clause (1) was not made by the Company, a Guarantor or any Subsidiary of the Company with the intent of defeating, hindering, delaying or defrauding any other creditors of the Company, a Guarantor, or any Subsidiary of the Company or others;
     (8) The Company shall have delivered to the Trustee an Opinion of Counsel, in form and substance reasonably satisfactory to the Trustee, to the effect that, 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;
     (9) The Company has delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that all conditions precedent specified herein relating to the defeasance contemplated by this Section 8.01 have been complied with; provided, however, that no deposit under clause (1) above shall be effective to terminate

 

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the obligations of the Company under the Securities or this Indenture prior to 90 days following any such deposit; and
     (10) The Company shall have paid all amounts owing to the Trustee pursuant to Section 7.07.
          Notwithstanding the foregoing, the Opinion of Counsel required by paragraph (5) above need not be delivered if all Securities not theretofore delivered to the Trustee for cancellation (i) have become due and payable, (ii) will become due and payable on the maturity date for the securities within one year, or (iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company.
          In the event all or any portion of the Securities are to be redeemed through such irrevocable trust, the Company must make arrangements satisfactory to the Trustee, at the time of such deposit, for the giving of the notice of such redemption or redemptions by the Trustee in the name and at the expense of the Company.
SECTION 8.02. Satisfaction and Discharge.
          In addition to the Company’s rights under Section 8.01, the Company may terminate all of its obligations under this Indenture (subject to Section 8.03) when
     (1) all Securities theretofore authenticated and delivered (other than Securities which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 2.07 and Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company or thereafter repaid to the Company from such trust) have been delivered to the Trustee for cancellation; or
     (2) all Securities not theretofore delivered to the Trustee for cancellation (except lost, stolen or destroyed Securities which have been replaced or paid) have (i) become due and payable, (ii) will become due and payable at their stated maturity within one year or (iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee, 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 Securities not theretofore delivered to the Trustee for cancellation, for principal of, premium, if any, and interest on the Securities 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; and

 

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     (3) the Company and/or the Guarantors have paid or caused to be paid all other sums payable under this Indenture; and
     (4) there exists no Default or Event of Default under this Indenture; and
     (5) the Company has delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that all conditions precedent specified herein relating to the satisfaction and discharge of this Indenture have been complied with; and
     (6) the Company shall have paid all amounts owing to the Trustee pursuant to Section 7.07.
SECTION 8.03. Survival of Certain Obligations.
          Notwithstanding the satisfaction and discharge of this Indenture and of the Securities referred to in Section 8.01 or 8.02, the respective obligations of the Company and the Trustee under Sections 2.02, 2.03, 2.04, 2.05, 2.06, 2.07, 2.10, 2.12, 2.13, 4.01, 4.02 and 6.07, Article Seven and Sections 8.05, 8.06 and 8.07 shall survive until the Securities are no longer outstanding, and thereafter the obligations of the Company and the Trustee under Sections 7.07, 8.05, 8.06 and 8.07 shall survive. Nothing contained in this Article Eight shall abrogate any of the rights, obligations or duties of the Trustee under this Indenture.
SECTION 8.04. Acknowledgment of Discharge by Trustee.
          Subject to Section 8.07, after (i) the conditions of Section 8.01 or 8.02 have been satisfied, (ii) the Company has paid or caused to be paid all other sums payable hereunder by the Company, and (iii) the Company has delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that all conditions precedent referred to in clause (i) above relating to the satisfaction and discharge of this Indenture have been complied with, the Trustee upon written request shall acknowledge in writing the discharge of the Company’s obligations under this Indenture except for those surviving obligations specified in Section 8.03.
SECTION 8.05. Application of Trust Assets.
          The Trustee shall hold any U.S. Legal Tender or U.S. Government Obligations deposited with it in the irrevocable trust established pursuant to Section 8.01. The Trustee shall apply the deposited U.S. Legal Tender or the U.S. Government Obligations, together with earnings thereon, through the Paying Agent, in accordance with this Indenture and the terms of the irrevocable trust agreement established pursuant to Section 8.01, to the payment of principal of and interest on the Securities. The U.S. Legal Tender or U.S. Government Obligations so held in trust and deposited with the Trustee in compliance with Section 8.01 shall

 

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not be part of the trust estate under this Indenture, but shall constitute a separate trust fund for the benefit of all Holders entitled thereto.
          The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 8.01 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of Outstanding Securities.
SECTION 8.06. Repayment to the Company or Guarantors; Unclaimed Money.
          Subject to Sections 7.07 and 8.01 and to applicable laws relating to escheat, the Trustee shall promptly pay to the Company, or if deposited with the Trustee by any Guarantor, to such Guarantor, upon receipt by the Trustee of an Officers’ Certificate, any excess money, determined in accordance with Section 8.01, held by it at any time. The Trustee and the Paying Agent shall pay to the Company or any Guarantor, as the case may be, upon receipt by the Trustee or the Paying Agent, as the case may be, of an Officers’ Certificate, any money held by it for the payment of principal, premium, if any, or interest that remains unclaimed for two years after payment to the Holders is required; provided, however, that the Trustee and the Paying Agent before being required to make any payment may, but need not, at the expense of the Company cause to be published once in a newspaper of general circulation in The City of New York or mail to each Holder entitled to such money notice that such money remains unclaimed and that after a date specified therein (which shall not be less than 30 days from the date of such mailing or publication and shall be at least two years after the date such money held by the Trustee for the payment of principal, premium, if any, or interest remains unclaimed), any unclaimed balance of such money then remaining will be repaid to the Company. After payment to the Company or any Guarantor, as the case may be, Securityholders entitled to such money must look solely to the Company for payment as general creditors unless an applicable abandoned property law designates another Person, and all liability of the Trustee or Paying Agent with respect to such money shall thereupon cease.
SECTION 8.07. Reinstatement.
          If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with this Indenture by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then and only then the Company’s and each Guarantor’s, if any, obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had been made pursuant to this Indenture until such time as the Trustee is permitted to apply all such money or U.S. Government Obligations in accordance with this Indenture; provided, however, that if the Company or the Guarantors, as the case may be, have made any payment of principal of, premium, if any, or interest on any Securities

 

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because of the reinstatement of their obligations, the Company or the Guarantors, as the case may be, shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent.
ARTICLE IX
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 9.01. Without Consent of Holders.
          The Company and any Guarantors (when authorized by Board Resolutions), and the Trustee, together, may amend or supplement this Indenture without notice to or consent of any Securityholder
     (1) to cure any ambiguity, defect or inconsistency;
     (2) to evidence the succession in accordance with Article Five hereof of another Person to the Company or a Guarantor and the assumption by any such successor of the covenants of the Company or a Guarantor herein and in the Securities or a Subsidiary Guarantee, as the case may be;
     (3) to provide for uncertificated Securities in addition to or in place of certificated Securities;
     (4) to make any other change that does not materially adversely affect the rights of any Securityholders hereunder;
     (5) to comply with any requirements of the Commission in connection with the qualification of this Indenture under the TIA; or
     (6) to add or release any Guarantor pursuant to the terms of this Indenture;
provided that each of the Company and any Guarantors has delivered to the Trustee an Opinion of Counsel and an Officers’ Certificate, each stating that such amendment or supplement complies with the provisions of this Section 9.01; and provided, further, that such amendment or supplement 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.

 

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SECTION 9.02. With Consent of Holders.
          Subject to Section 6.07, the Company and any Guarantors (when authorized by Board Resolutions) and the Trustee, together, with the written consent of the Holder or Holders of at least a majority in aggregate principal amount of the then outstanding Securities, may amend or supplement this Indenture, the Securities and any Subsidiary Guarantees without notice to any other Securityholders. Subject to Section 6.07, the Holder or Holders of a majority in aggregate principal amount of the then outstanding Securities may waive compliance by the Company with any provision of this Indenture or the Securities without notice to any other Securityholder (including, without limitation, the provisions of Section 4.22). Without the consent of each Securityholder affected, however, no amendment, supplement or waiver, including a waiver pursuant to Section 6.04, may
     (1) reduce the principal amount of Securities whose Holders must consent to an amendment, supplement or waiver of any provision of this Indenture, the Securities or any Subsidiary Guarantees;
     (2) reduce the rate of or change or have the effect of changing the time for payment of interest, including defaulted interest, on any Security;
     (3) reduce the principal of or change or have the effect of changing the fixed maturity of any Securities; or change the date on which any Securities may be subject to redemption, or reduce the redemption price therefor;
     (4) make any Securities payable in money other than that stated in the Securities;
     (5) make any change in provisions of this Indenture protecting the right of each Holder to receive payment of principal of, premium, if any, and interest on such Securities 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 Securities to waive Defaults or Events of Default;
     (6) amend, change or modify in any material respect the obligations 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 this Indenture or the related definitions affecting the ranking of the Securities or any Subsidiary Guarantee in a manner which adversely affects the Holders;

 

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     (8) modify the provisions of Section 4.19, 6.04, 6.07 or this Section 9.02 in any manner adverse to a Holder of Securities; or
     (9) release any Guarantor from any of its obligations under its Subsidiary Guarantee or this Indenture otherwise than in accordance with the terms of this Indenture.
          It shall not be necessary for the consent of the Holders under this Section 9.02 to approve the particular form of any proposed amendment, supplement or waiver, but it shall be sufficient if such consent approves the substance thereof.
          After an amendment, supplement or waiver under this Section 9.02 becomes effective, the Company shall mail to the Holders affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture.
SECTION 9.03. Compliance with TIA.
          From the date on which this Indenture is qualified under the TIA, every amendment, waiver or supplement of this Indenture or the Securities shall comply with the TIA as then in effect.
SECTION 9.04. Revocation and Effect of Consents.
          Until an amendment, waiver or supplement becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder’s Security, even if notation of the consent is not made on any Security. However, any such Holder or subsequent Holder may revoke the consent as to his Security or portion of his Security by notice to the Trustee or the Company received before the date on which the Trustee receives an Officers’ Certificate certifying that the Holders of the requisite principal amount of Securities have consented (and not theretofore revoked such consent) to the amendment, supplement or waiver.
          The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any amendment, supplement or waiver. If a record date is fixed, then notwithstanding the last sentence of the immediately preceding paragraph, those Persons who were Holders at such record date (or their duly designated proxies), and only those Persons, shall be entitled to revoke any consent previously given, whether or not such Persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 90 days after such record date.

 

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          After an amendment, supplement or waiver becomes effective, it shall bind every Securityholder, unless it makes a change described in any of clauses (1) through (11) of Section 9.02, in which case, the amendment, supplement or waiver shall bind only each Holder of a Security who has consented to it and every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder’s Security; provided that any such waiver shall not impair or affect the right of any Holder to receive payment of principal of and interest on a Security, on or after the respective due dates expressed in such Security, or to bring suit for the enforcement of any such payment on or after such respective dates without the consent of such Holder.
SECTION 9.05. Notation on or Exchange of Securities.
          If an amendment, supplement or waiver changes the terms of a Security, the Trustee may require the Holder of the Security to deliver it to the Trustee. The Trustee may place an appropriate notation on the Security about the changed terms and return it to the Holder. Alternatively, if the Company or the Trustee so determines, the Company in exchange for the Security shall issue and the Trustee shall authenticate a new Security that reflects the changed terms. Failure to make the appropriate notation or to issue a new Security shall not affect the validity and effect of such amendment, supplement or waiver.
SECTION 9.06. Trustee To Sign Amendments, Etc.
          The Trustee shall execute any amendment, supplement or waiver authorized pursuant to this Article Nine; provided that the Trustee may, but shall not be obligated to, execute any such amendment, supplement or waiver which affects the Trustee’s own rights, duties or immunities under this Indenture. The Trustee shall be entitled to receive, and shall be fully protected in relying upon, an Opinion of Counsel and an Officers’ Certificate, each stating that the execution of any amendment, supplement or waiver authorized pursuant to this Article Nine is authorized or permitted by this Indenture and constitutes the legal, valid and binding obligation of the Company and any Guarantor enforceable in accordance with its terms (subject to customary exceptions) and, in the case of any supplemental indenture required by Section 4.18, constitutes a guarantee as defined therein. Such Opinion of Counsel shall be at the expense of the Company, and the Trustee shall have a lien under Section 7.07 for any such expense.
ARTICLE X
GUARANTEE
SECTION 10.01. Unconditional Guarantee.
          Each Guarantor agrees to unconditionally, jointly and severally, guarantee to each Holder of a Security authenticated and delivered by the Trustee, and to the Trustee and

 

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its successors and assigns, that (i) the principal of, premium, if any, and interest on the Securities will be promptly paid in full when due, subject to any applicable grace period, whether at maturity, by acceleration or otherwise and interest on the overdue principal, if any, and interest on any interest, to the extent lawful, of the Securities and all other Obligations of the Company to the Holders or the Trustee hereunder or thereunder will be promptly paid in full or performed, all in accordance with the terms hereof and thereof; and (ii) in case of any extension of time of payment or renewal of any Securities or of any such other Obligations, the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, subject to any applicable grace period, whether at stated maturity, by acceleration or otherwise subject, however, in the case of clauses (i) and (ii) above, to the limitations set forth in Section 10.03. Each Guarantor agrees that its obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Securities or this Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Securities with respect to any provisions hereof or thereof, the recovery of any judgment against the Company, any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a Guarantor. Each Guarantor waives diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company, protest, notice and all demands whatsoever and covenants that its Subsidiary Guarantee will not be discharged except by complete performance of the obligations contained in the Securities, this Indenture and each Subsidiary Guarantee. If any Securityholder or the Trustee is required by any court or otherwise to return to the Company, any Guarantor or any custodian, trustee, liquidator or other similar official acting in relation to the Company or any Guarantor, any amount paid by the Company or any Guarantor to the Trustee or such Securityholder, each Subsidiary Guarantee to the extent theretofore discharged, shall be reinstated in full force and effect. Each Guarantor further agrees that, as between each Guarantor, on the one hand, and the Holders and the Trustee, on the other hand, (x) the maturity of the obligations guaranteed hereby may be accelerated as provided in Article Six for the purposes of each Subsidiary Guarantee notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations guaranteed hereby, and (y) in the event of any acceleration of such obligations as provided in Article Six, such obligations (whether or not due and payable) shall forthwith become due and payable by each Guarantor for the purpose of its Subsidiary Guarantee.
SECTION 10.02. Severability.
          In case any provision of a Subsidiary Guarantee shall be invalid, illegal or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

 

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SECTION 10.03. Release of a Guarantor.
          In the event of either (i) the issuance or sale of Capital Stock of a Guarantor in compliance with this Indenture 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 of Section 4.12, the applicable Guarantor’s Subsidiary Guarantee will be released.
          The Trustee shall deliver an appropriate instrument evidencing such release upon receipt of a request by the Company accompanied by an Officers’ Certificate and Opinion of Counsel certifying as to the compliance with this Section 10.03. Any Guarantor not so released remains liable for the full amount of principal of and interest on the Securities as provided in this Article Ten.
SECTION 10.04. Limitation of a Guarantor’s Liability.
          Each Guarantor and, by its acceptance hereof, each Holder hereby confirms that it is the intention of all such parties that the guarantee by such Guarantor pursuant to its Subsidiary Guarantee not constitute a fraudulent transfer or conveyance for purposes of any Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law. To effectuate the foregoing intention, the Holders and each Guarantor irrevocably agree that the obligations of each Guarantor under its Subsidiary Guarantee shall be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such Guarantor, and after giving effect to any collections from or payments made by or on behalf of any other Guarantor in respect of the obligations of such other Guarantor under its Subsidiary Guarantee, or pursuant to Section 10.05, result in the obligations of such Guarantor under its Subsidiary Guarantee not constituting such fraudulent transfer or conveyance.
SECTION 10.05. Contribution.
          In order to provide for just and equitable contribution among the Guarantors, the Guarantors agree, inter se, that in the event any payment or distribution is made by any Guarantor (a “Funding Guarantor”) under its Subsidiary Guarantee, such Funding Guarantor shall be entitled to a contribution from all other Guarantors in a pro rata amount based on the Adjusted Net Assets of each Guarantor (including the Funding Guarantor) for all payments, damages and expenses incurred by that Funding Guarantor in discharging the Company’s obligations with respect to the Securities or any other Guarantor’s obligations with respect to its Subsidiary Guarantee. “Adjusted Net Assets” of a Guarantor at any date shall mean the lesser of the amount by which (x) the fair value of the property of such Guarantor exceeds the total amount of liabilities, including, without limitation, contingent liabilities (after giving effect to all other fixed and contingent liabilities incurred or assumed on such date), but excluding liabilities

 

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under the Subsidiary Guarantee of such Guarantor at such date and (y) the present fair salable value of the assets of such Guarantor at such date exceeds the amount that will be required to pay the probable liability of such Guarantor on its debts (after giving effect to all other fixed and contingent liabilities incurred or assumed on such date), excluding debt in respect of the Subsidiary Guarantee of such Guarantor, as they become absolute and matured.
SECTION 10.06. Waiver of Subrogation.
          Until all Subsidiary Guarantee Obligations are paid in full, each Guarantor hereby irrevocably waives any claims or other rights which it may now or hereafter acquire against the Company that arise from the existence, payment, performance or enforcement of such Guarantor’s obligations under its Subsidiary Guarantee and this Indenture, including, without limitation, any right of subrogation, reimbursement, exoneration, indemnification, and any right to participate in any claim or remedy of any Holder of Securities against the Company, whether or not such claim, remedy or right arises in equity, or under contract, statute or common law, including, without limitation, the right to take or receive from the Company, directly or indirectly, in cash or other property or by set-off or in any other manner, payment or security on account of such claim or other rights. If any amount shall be paid to any Guarantor in violation of the preceding sentence and the Securities shall not have been paid in full, such amount shall be deemed to have been paid to such Guarantor for the benefit of, and held in trust for the benefit of, the Holders of the Securities, and shall forthwith be paid to the Trustee for the benefit of such Holders to be credited and applied upon the Securities, in accordance with the terms of this Indenture. Each Guarantor acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated by this Indenture and that the waiver set forth in this Section 10.06 is knowingly made in contemplation of such benefits.
SECTION 10.07. Execution of Subsidiary Guarantees.
          To evidence its guarantee to the Securityholders set forth in this Article Ten, each Guarantor shall execute a Subsidiary Guarantee in substantially the form of Exhibit D attached hereto, which shall be endorsed on each Security ordered to be authenticated and delivered by the Trustee. Each Guarantor agrees that its Subsidiary Guarantee set forth in this Article Ten shall remain in full force and effect notwithstanding any failure to endorse on each Security a notation of such Subsidiary Guarantee as well as a supplemental indenture as required by Section 4.18. Each such Subsidiary Guarantee shall be signed on behalf of each Guarantor by two Officers, or an Officer and a secretary, treasurer, controller or an assistant secretary of the Guarantor or one Officer shall sign and one Officer or a secretary, treasurer, controller or an assistant secretary of the Guarantor (each of whom shall, in each case, have been duly authorized by all requisite corporate actions) shall attest to such Subsidiary Guarantee prior to the authentication of the Security on which it is endorsed, and the delivery of such Security by the Trustee, after the authentication thereof hereunder, shall constitute due delivery

 

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of such Subsidiary Guarantee on behalf of such Guarantor. Such signatures upon the Subsidiary Guarantee may be by manual or facsimile signature of such officers and may be imprinted or otherwise reproduced on the Subsidiary Guarantee, and in case any such officer who shall have signed the Subsidiary Guarantee shall cease to be such officer before the Security on which such Subsidiary Guarantee is endorsed shall have been authenticated and delivered by the Trustee or disposed of by the Company, such Security nevertheless may be authenticated and delivered or disposed of as though the person who signed the Subsidiary Guarantee had not ceased to be such officer of the Guarantor.
SECTION 10.08. Waiver of Stay, Extension or Usury Laws.
          Each Guarantor covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury law or other law that would prohibit or forgive each such Guarantor from performing its Subsidiary Guarantee as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Indenture; and (to the extent that it may lawfully do so) each such Guarantor hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted.
ARTICLE XI
MISCELLANEOUS
SECTION 11.01. TIA Controls.
          If any provision of this Indenture limits, qualifies, or conflicts with the duties imposed by operation of TIA § 318(c), the imposed duties shall control.
SECTION 11.02. Notices.
          Any notices or other communications required or permitted hereunder shall be in writing, and shall be sufficiently given if made by hand delivery, by telecopier or registered or certified mail, postage prepaid, return receipt requested, addressed as follows:
          if to the Company or a Guarantor:
Tenneco Inc.
500 North Field Drive
Lake Forest, Illinois 60045
Attention: Kenneth R. Trammell

 

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Executive Vice President and
Chief Financial Officer
Facsimile: (847) 482-5180
          with a copy to:
David A. Wardell
Senior Vice President and
General Counsel
Tenneco Inc.
500 North Field Drive
Lake Forest, Illinois 60045
Facsimile: (847) 482-5040
          if to the Trustee:
Wells Fargo Bank, N.A.
230 W. Monroe Street, Suite 2900
Chicago, IL  60606
Facsimile: (312) 726-2158
          Each of the Company and the Trustee by written notice to each other such Person may designate additional or different addresses for notices to such Person. Any notice or communication to the Company or a Guarantor or the Trustee shall be deemed to have been given or made as of the date so delivered if personally delivered; when receipt is acknowledged, if telecopied; and five (5) calendar days after mailing if sent by registered or certified mail, postage prepaid (except that a notice of change of address shall not be deemed to have been given until actually received by the addressee).
          Any notice or communication mailed to a Securityholder shall be mailed to him by first class mail or other equivalent means at his address as it appears on the registration books of the Registrar and shall be sufficiently given to him if so mailed within the time prescribed.
          Failure to mail a notice or communication to a Securityholder or any defect in it shall not affect its sufficiency with respect to other Securityholders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it.

 

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SECTION 11.03. Communications by Holders with Other Holders.
          Securityholders may communicate pursuant to TIA § 312(b) with other Securityholders with respect to their rights under this Indenture, the Securities or any Subsidiary Guarantees. The Company, the Trustee, the Registrar and any other Person shall have the protection of TIA § 312(c).
SECTION 11.04. Certificate and Opinion as to Conditions Precedent.
          Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee at the request of the Trustee:
     (1) an Officers’ Certificate, in form and substance satisfactory to the Trustee, stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and
     (2) an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with.
SECTION 11.05. Statements Required in Certificate or Opinion.
          Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture, other than the Officers’ Certificate required by Section 4.08, shall include
     (1) a statement that the person making such certificate or opinion has read such covenant or condition;
     (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based;
     (3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and
     (4) a statement as to whether or not, in the opinion of each such person, such condition or covenant has been complied with; provided, however, that with respect to matters of fact an Opinion of Counsel may rely on an Officers’ Certificate or certificates of public officials.

 

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SECTION 11.06. Rules by Trustee, Paying Agent, Registrar.
          The Trustee, Paying Agent or Registrar may make reasonable rules for its functions.
SECTION 11.07. Legal Holidays.
          If a payment date is not a Business Day, payment may be made on the next succeeding day that is a Business Day with the same force and effect as if made on such payment date.
SECTION 11.08. Governing Law.
          THIS INDENTURE, THE SECURITIES 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. Each of the parties hereto hereby irrevocably and unconditionally:
     (a) submits for itself and its property in any legal action or proceeding relating to this Indenture, and the Securities to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the Courts of the State of New York, the courts of the United States of America for the Southern District of New York and appellate courts from any thereof;
     (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same;
     (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar from of mail), postage prepaid, to such person at its address referred to in Section 11.02 or at such other address of which notice shall have been given pursuant thereto;
     (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and

 

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     (e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this Section any special, exemplary, punitive or consequential damages.
SECTION 11.09. No Adverse Interpretation of Other Agreements.
          This Indenture may not be used to interpret another indenture, loan or debt agreement of any of the Company or any of its Subsidiaries or any Guarantor. Any such indenture, loan or debt agreement may not be used to interpret this Indenture.
SECTION 11.10. No Recourse Against Others.
          A director, officer, employee, stockholder or incorporator, as such, of the Company or any of its Subsidiaries or any Guarantor shall not have any liability for any obligations of the Company or any Guarantor under the Securities, this Indenture or any Subsidiary Guarantee or for any claim based on, in respect of or by reason of such obligations or their creations. Each Securityholder by accepting a Security waives and releases all such liability. Such waiver and release are part of the consideration for the issuance of the Securities.
SECTION 11.11. Successors.
          All agreements of the Company and any Guarantors in this Indenture, the Securities and any Subsidiary Guarantees shall bind their respective successors. All agreements of the Trustee in this Indenture shall bind its successor.
SECTION 11.12. Duplicate Originals.
          All parties may sign any number of copies of this Indenture. Each signed copy or counterpart shall be an original, but all of them together shall represent the same agreement.
SECTION 11.13. Severability.
          In case any one or more of the provisions in this Indenture, in the Securities or in any Subsidiary Guarantee shall be held invalid, illegal or unenforceable, in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions shall not in any way be affected or impaired thereby, it being intended that all of the provisions hereof shall be enforceable to the full extent permitted by law.
SECTION 11.14. Table of Contents, Headings, Etc.
          The table of contents, cross-reference sheet and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, and are not to

 

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be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof.
[Signature Pages Follow]

 

SIGNATURES
          IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the date first written above.
         
  TENNECO INC.
 		  
  By:      
    Name:      
    Title:      
 
  TENNECO AUTOMOTIVE OPERATING COMPANY INC., as Guarantor   
 
  By:      
    Name:      
    Title:      
 
  THE PULLMAN COMPANY, as Guarantor
 		  
  By:      
    Name:      
    Title:      
 
  CLEVITE INDUSTRIES INC., as Guarantor
 		  
  By:      
    Name:      
    Title:      
 
  TENNECO GLOBAL HOLDINGS INC.,
as Guarantor
 		  
  By:      
    Name:      
    Title:      
 
S-1

 

 
         
  TMC TEXAS INC., as Guarantor
 		  
  By:      
    Name:      
    Title:      
 
  TENNECO INTERNATIONAL HOLDING CORP., as Guarantor
 		  
  By:      
    Name:      
    Title:      
 
  WELLS FARGO BANK, N.A., as Trustee
 		  
  By:      
    Name:   Gregory S. Clarke   
    Title:   Vice President   
 

S-2

 

EXHIBIT A
[FORM OF SERIES A SECURITY]
          THIS NOTE (AND ANY GUARANTEE THEREOF) HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND NEITHER THIS SECURITY (NOR ANY GUARANTEE THEREOF) NOR ANY INTEREST OR PARTICIPATION HEREIN (OR THEREIN) MAY BE OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER HEREOF, BY ITS ACCEPTANCE OF THIS SECURITY, AGREES FOR THE BENEFIT OF THE ISSUER THAT THIS SECURITY MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED PRIOR TO THE EXPIRATION OF THE HOLDING PERIOD APPLICABLE THERETO UNDER RULE 144(k) UNDER THE SECURITIES ACT WHICH IS APPLICABLE TO THIS SECURITY (THE “RESALE RESTRICTION TERMINATION DATE”) OTHER THAN (1) TO THE ISSUER OR ITS SUBSIDIARIES, (2) SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT (“RULE 144A”), TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A “QUALIFIED INSTITUTIONAL BUYER” WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER, IN EACH CASE TO WHOM NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY IF THIS SECURITY IS NOT IN BOOK-ENTRY FORM), (3) TO A NON-“U.S. PERSON” IN AN “OFFSHORE TRANSACTION” (AS SUCH TERMS ARE DEFINED IN REGULATION S UNDER THE SECURITIES ACT) IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY IF THIS SECURITY IS NOT IN BOOK-ENTRY FORM), (4) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, INCLUDING THE EXEMPTION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT, IF AVAILABLE, OR (5) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, SUBJECT IN EACH OF THE FOREGOING CASES TO ANY REQUIREMENT OF LAW THAT THE DISPOSITION OF ITS PROPERTY OR THE PROPERTY OF SUCH INVESTOR ACCOUNT OR ACCOUNTS BE AT ALL TIMES WITHIN ITS OR THEIR CONTROL, AND SUBJECT TO THE RIGHT OF THE ISSUER OR THE TRUSTEE FOR THE SECURITIES PRIOR TO ANY SUCH SALE, PLEDGE OR OTHER TRANSFER PURSUANT TO CLAUSE (4) ABOVE TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM. THIS LEGEND WILL BE REMOVED UPON

A-1

 

REQUEST OF THE HOLDER ON OR AFTER THE RESALE RESTRICTION TERMINATION DATE.

A-2

 

TENNECO INC.
81/8% Senior Notes
due November 15, 2015
     
 
  CUSIP No.:
 
No. [  ]
  $[     ]
          TENNECO INC., a Delaware corporation (the “Company,” which term includes any successor corporation), for value received promises to pay to Cede & Co. or registered assigns, the principal sum of Two Hundred Fifty Million Dollars, on November 15, 2015.
          Interest Payment Dates: May 15 and November 15, commencing May 15, 2008.
          Record Dates: May 1 and November 1.
          Reference is made to the further provisions of this Security contained herein, which will for all purposes have the same effect as if set forth at this place.

A-3

 

          IN WITNESS WHEREOF, the Company has caused this Security to be signed manually or by facsimile by its duly authorized officers.
Dated: [          ]
         
  TENNECO INC.
 		  
  By:      
    Name:      
    Title:      
 
     
  By:      
    Name:      
    Title:      
 

 

CERTIFICATE OF AUTHENTICATION
          This is one of the 81/8% Senior Notes due 2015 described in the within-mentioned Indenture.
Dated: [          ]
         
  WELLS FARGO BANK, N.A.
as Trustee
 		  
  By:      
    Name:   Gregory S. Clarke   
    Title:   Vice President   

A-5

 

         
(REVERSE OF SECURITY)
TENNECO INC.
81/8% Senior Notes
due November 15, 2015, Series A
1. Interest.
          TENNECO INC., a Delaware corporation (the “Company”), promises to pay interest on the principal amount of this Security at the rate per annum shown above. The Company will pay interest semi-annually on May 15 and November 15 of each year (an “Interest Payment Date”), commencing May 15, 2008. Interest on the Securities will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from November 20, 2007. Interest will be computed on the basis of a 360-day year of twelve 30-day months.
          The Company shall pay interest on overdue principal from time to time on demand at the rate borne by the Securities plus 2% and on overdue installments of interest (without regard to any applicable grace periods) to the extent lawful.
2. Method of Payment.
          The Company shall pay interest on the Securities (except defaulted interest) to the persons who are the registered Holders at the close of business on the Record Date immediately preceding the Interest Payment Date even if the Securities are canceled on registration of transfer or registration of exchange after such Record Date. Holders must surrender Securities to a Paying Agent to collect principal payments. The Company shall pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. The Company may deliver any such interest payment to the Paying Agent or to a Holder at the Holder’s registered address.
3. Paying Agent and Registrar.
          Initially, Wells Fargo Bank, N.A. (the “Trustee”) will act as Paying Agent and Registrar. The Company may change any Paying Agent, Registrar or co-Registrar without notice to the Holders.
4. Indenture.
          The Company issued the Securities under an Indenture, dated as of November 20, 2007 (the “Indenture”), between the Company and the Trustee. Capitalized terms herein are used as defined in the Indenture unless otherwise defined herein. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference

 

to the Trust Indenture Act of 1939 (15 U.S.C. §§ 77aaa-77bbbb) (the “TIA”), as in effect on the date of the Indenture until such time as the Indenture is qualified under the TIA, and thereafter as in effect on the date on which the Indenture is qualified under the TIA. Notwithstanding anything to the contrary herein, the Securities are governed by all such terms, and Holders of Securities are referred to the Indenture and the TIA for a statement of them.
5. Optional Redemption.
          The Securities will be redeemable, at the Company’s option, in whole at any time or in part from time to time, on and after November 15, 2011 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 November 15 of the applicable year set forth below, plus, in each case, accrued and unpaid interest, if any, to the date of redemption (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date):
         
Year   Percentage  
2011
                    104.063 %
2012
                    102.031 %
2013 and thereafter
                    100.000 %
          At any time prior to November 15, 2011, the Securities may also be redeemed in whole or in part, at the Company’s option, at a redemption price equal to 100% of the principal amount thereof plus the Applicable Premium as of, and accrued but unpaid interest, if any, to, the date of redemption (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date).
6. Optional Redemption upon Equity Offerings.
          At any time, or from time to time, on or prior to November 15, 2010, the Company may, at its option, use all or any portion of the net cash proceeds of one or more Equity Offerings (as defined below) to redeem up to 35% of the aggregate principal amount of the Securities issued at a redemption price equal to 108.125% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of redemption (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date); provided that at least 65% of the aggregate principal amount of Securities issued remains outstanding immediately after any such redemption. In order to effect the foregoing redemption with the proceeds of any Equity Offering, the Company shall make such redemption not more than 180 days after the consummation of any such Equity Offering.
          As used in the preceding paragraph, “Equity Offering” means any public or private sale of the common stock of the Company, other than any public offering with respect to the Company’s common stock registered on Form S-8 or other issuances upon exercise of options by employees of the Company or any of its Restricted Subsidiaries.

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7. Notice of Redemption.
          Notice of redemption will be mailed at least 30 days but not more than 60 days before the Redemption Date to each Holder of Securities to be redeemed at such Holder’s registered address. Securities in denominations of $1,000 may be redeemed only in whole. The Trustee may select for redemption portions (equal to $1,000 or any integral multiple thereof) of the principal of Securities that have denominations larger than $1,000.
          If any Security is to be redeemed in part only, the notice of redemption that relates to such Security shall state the portion of the principal amount thereof to be redeemed. A new Security 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 Security. On and after the Redemption Date, interest will cease to accrue on Securities or portions thereof called for redemption.
8. Change of Control Offer.
          Upon the occurrence of a Change of Control, the Company will be required to offer to purchase all of the outstanding Securities at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of repurchase.
9. Limitation on Disposition of Assets.
          The Company is, subject to certain conditions, obligated to make an offer to purchase Securities at 100% of their principal amount plus accrued and unpaid interest to the date of repurchase with certain net cash proceeds of certain sales or other dispositions of assets in accordance with the Indenture.
10. Denominations; Transfer; Exchange.
          The Securities are in registered form, without coupons, in denominations of $1,000 and integral multiples of $1,000. A Holder shall register the transfer of or exchange Securities in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay certain transfer taxes or similar governmental charges payable in connection therewith as permitted by the Indenture. The Registrar need not register the transfer of or exchange any Securities or portions thereof selected for redemption, except the unredeemed portion of any security being redeemed in part.
11. Persons Deemed Owners.
          The registered Holder of a Security shall be treated as the owner of it for all purposes.

A-8

 

12. Unclaimed Funds.
          Subject to any applicable escheat laws, if funds for the payment of principal or interest remain unclaimed for two years, the Trustee and the Paying Agent will repay the funds to the Company at its request. After that, all liability of the Trustee and such Paying Agent with respect to such funds shall cease.
13. Legal Defeasance and Covenant Defeasance.
          The Company may be discharged from its obligations under the Indenture and the Securities except for certain provisions thereof, and may be discharged from its obligations to comply with certain covenants contained in the Indenture and the Securities, in each case upon satisfaction of certain conditions specified in the Indenture.
14. Amendment; Supplement; Waiver.
          Subject to certain exceptions, the Indenture or the Securities may be amended or supplemented with the written consent of the Holders of at least a majority in aggregate principal amount of the Securities then outstanding, and any existing Default or Event of Default or compliance with any provision may be waived with the consent of the Holders of a majority in aggregate principal amount of the Securities then outstanding. Without notice to or consent of any Holder, the parties thereto may amend or supplement the Indenture or the Securities to, among other things, cure any ambiguity, defect or inconsistency, provide for uncertificated Securities in addition to or in place of certificated Securities or comply with any requirements of the Commission in connection with the qualification of the Indenture under the TIA, or make any other change that does not materially adversely affect the rights of any Holder of a Security.
15. Restrictive Covenants.
          The Indenture contains certain covenants that, among other things, limit the ability of the Company and certain of its subsidiaries to make restricted payments, to incur indebtedness, to create liens, to issue preferred or other capital stock of subsidiaries, to sell assets, to permit restrictions on dividends and other payments by subsidiaries to the Company, to consolidate, merge or sell all or substantially all of its assets, to engage in transactions with affiliates or to engage in certain businesses. The limitations are subject to a number of important qualifications and exceptions.
16. Defaults and Remedies.
          If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in aggregate principal amount of Securities then outstanding may declare all the Securities to be due and payable immediately in the manner and with the effect provided in the Indenture. Holders of Securities may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee is not obligated to enforce the Indenture or the Securities

A-9

 

unless it has received indemnity satisfactory to it. The Indenture permits, subject to certain limitations therein provided, Holders of a majority in aggregate principal amount of the Securities then outstanding to direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of Securities notice of any continuing Default or Event of Default (except a Default in payment of principal, premium or interest, including an accelerated payment) if it determines that withholding notice is in their interest.
17. Trustee Dealings with Company.
          The Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with the Company, its Subsidiaries, any Guarantor and their respective Affiliates as if it were not the Trustee.
18. No Recourse Against Others.
          No stockholder, director, officer, employee or incorporator, as such, of the Company shall have any liability for any obligation of the Company under the Securities or the Indenture or for any claim based on, in respect of or by reason of, such obligations or their creation. Each Holder of a Security by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Securities.
19. Authentication.
          This Security shall not be valid until the Trustee or authenticating agent signs the certificate of authentication on this Security.
20. Abbreviations and Defined Terms.
          Customary abbreviations may be used in the name of a Holder of a Security or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act).
21. CUSIP Numbers.
          Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Securities as a convenience to the Holders of the Securities. No representation is made as to the accuracy of such numbers as printed on the Securities and reliance may be placed only on the other identification numbers printed hereon.
          22. Registration Rights.
          Pursuant to the Registration Rights Agreement, the Company will be obligated upon the occurrence of certain events to consummate an exchange offer pursuant to which the

A-10

 

Holder of this Security shall have the right to exchange this Series A Security for the Company’s 81/8% Senior Notes due 2015, Series B (the “Series B Securities”), which have been registered under the Securities Act, in like principal amount and having terms identical in all material respects as the Series A Securities. The Holders shall be entitled to receive certain additional interest payments in the event such exchange offer is not consummated and upon certain other conditions, all pursuant to and in accordance with the terms of the Registration Rights Agreement.
          The Company will furnish to any Holder of a Security upon written request and without charge a copy of the Indenture. Requests may be made to TENNECO INC., 500 North Field Drive, Lake Forest, IL 60045, Attention: Chief Financial Officer.

A-11

 

ASSIGNMENT FORM
I or we assign and transfer this Security to
     
 
     
 
(Print or type name, address and zip code of assignee or transferee)
     
 
(Insert Social Security or other identifying number of assignee or transferee)
and irrevocably appoint                                                                                                     agent to transfer this Security on the books of the Company. The agent may substitute another to act for him.
                 
Dated:
          Signed:    
 
               
 
              (Sign exactly as name appears on the other side of this Security)
     
Signature Guarantee:
    
 
   
 
  Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor reasonably acceptable to the Trustee)

A-12

 

OPTION OF HOLDER TO ELECT PURCHASE
          If you want to elect to have this Security purchased by the Company pursuant to Section 4.12 or Section 4.21 of the Indenture, check the appropriate box:
          Section 4.12 [     ] Section 4.21 [     ]
          If you want to elect to have only part of this Security purchased by the Company pursuant to Section 4.12 or Section 4.21 of the Indenture, state the amount: $                    
                 
Date:
          Your Signature:    
 
               
 
              (Sign exactly as your name appears on the other side of this Security)
     
Signature Guarantee:
    
 
   
 
  Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor reasonably acceptable to the Trustee)

A-13

 

EXHIBIT B
[FORM OF SERIES B SECURITY]
TENNECO INC.
81/8% Senior Notes
due November 15, 2015, Series B
     
 
  CUSIP No.: [     ]
 
No. [  ]
  $[  ]
          TENNECO INC., a Delaware corporation (the “Company,” which term includes any successor corporation), for value received promises to pay to Cede & Co. or registered assigns, the principal sum of Two Hundred Fifty Million Dollars, on November 15, 2015.
          Interest Payment Dates: May 15 and November 15, commencing May 15, 2008.
          Record Dates: May 1 and November 1.
          Reference is made to the further provisions of this Security contained herein, which will for all purposes have the same effect as if set forth at this place.

B-1

 

     IN WITNESS WHEREOF, the Company has caused this Security to be signed manually or by facsimile by its duly authorized officers.
Dated: [      ], [    ]
         
  TENNECO INC.
 		  
  By:      
    Name:      
    Title:      
 
     
  By:      
    Name:      
    Title:      

B-2

 

         
CERTIFICATE OF AUTHENTICATION
     This is one of the 81/8% Senior Notes due 2015, Series B, described in the within-mentioned Indenture.
Dated: [     ], [     ]
         
  WELLS FARGO BANK, N.A.,
as Trustee
 		  
  By:      
    Name:   Gregory S. Clarke   
    Title:   Vice President   

B-3

 

         
(REVERSE OF SECURITY)
TENNECO INC.
81/8% Senior Notes
Due November 15, 2015, Series B
1. Interest.
          TENNECO INC., a Delaware corporation (the “Company”), promises to pay interest on the principal amount of this Security at the rate per annum shown above. The Company will pay interest semi-annually on May 15 and November 15 of each year (an “Interest Payment Date”), commencing on May 15, 2008. Interest on the Securities will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from November 20, 2007. Interest will be computed on the basis of a 360-day year of twelve 30-day months.
          The Company shall pay interest on overdue principal from time to time on demand at the rate borne by the Securities plus 2% and on overdue installments of interest (without regard to any applicable grace periods) to the extent lawful.
2. Method of Payment.
          The Company shall pay interest on the Securities (except defaulted interest) to the persons who are the registered Holders at the close of business on the Record Date immediately preceding the Interest Payment Date even if the Securities are canceled on registration of transfer or registration of exchange after such Record Date. Holders must surrender Securities to a Paying Agent to collect principal payments. The Company shall pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. The Company may deliver any such interest payment to the Paying Agent or to a Holder at the Holder’s registered address.
3. Paying Agent and Registrar.
          Initially, Wells Fargo Bank, N.A. (the “Trustee”) will act as Paying Agent and Registrar. The Company may change any Paying Agent, Registrar or co-Registrar without notice to the Holders.\
4. Indenture.
          The Company issued the Securities under an Indenture, dated as of November 20, 2007 (the “Indenture”), between the Company and the Trustee. Capitalized terms herein are used as defined in the Indenture unless otherwise defined herein. The terms of the

B-4

 

Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. §§ 77aaa-77bbbb) (the “TIA”), as in effect on the date of the Indenture until such time as the Indenture is qualified under the TIA, and thereafter as in effect on the date on which the Indenture is qualified under the TIA. Notwithstanding anything to the contrary herein, the Securities are governed by to all such terms, and Holders of Securities are referred to the Indenture and the TIA for a statement of them.
5. Optional Redemption.
          The Securities will be redeemable, at the Company’s option, in whole at any time or in part from time to time, on and after November 15, 2011 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 November 15 of the applicable year set forth below, plus, in each case, accrued and unpaid interest, if any, to the date of redemption (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date):
         
Year   Percentage
2011
             104.063 %
2012
             102.031 %
2013 and thereafter
     100.000 %
          At any time prior to November 15, 2011, the Securities may also be redeemed in whole or in part, at the Company’s option, at a redemption price equal to 100% of the principal amount thereof plus the Applicable Premium as of, and accrued but unpaid interest, if any, to, the date of redemption (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date).
6. Optional Redemption upon Equity Offerings.
          At any time, or from time to time, on or prior to November 15, 2010, the Company may, at its option, use all or any portion of the net cash proceeds of one or more Equity Offerings (as defined below) to redeem up to 35% of the aggregate principal amount of the Securities issued at a redemption price equal to 108.125% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of redemption (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date); provided that at least 65% of the aggregate principal amount of Securities issued remains outstanding immediately after any such redemption. In order to effect the foregoing redemption with the proceeds of any Equity Offering, the Company shall make such redemption not more than 180 days after the consummation of any such Equity Offering.

B-5

 

          As used in the preceding paragraph, “Equity Offering” means any public or private sale of the common stock of the Company, other than any public offering with respect to the Company’s common stock registered on Form S-8 or other issuances upon exercise of options by employees of the Company or any of its Restricted Subsidiaries.
7. Notice of Redemption.
          Notice of redemption will be mailed at least 30 days but not more than 60 days before the Redemption Date to each Holder of Securities to be redeemed at such Holder’s registered address. Securities in denominations of $1,000 may be redeemed only in whole. The Trustee may select for redemption portions (equal to $1,000 or any integral multiple thereof) of the principal of Securities that have denominations larger than $1,000.
          If any Security is to be redeemed in part only, the notice of redemption that relates to such Security shall state the portion of the principal amount thereof to be redeemed. A new Security 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 Security. On and after the Redemption Date, interest will cease to accrue on Securities or portions thereof called for redemption.
8. Change of Control Offer.
          Upon the occurrence of a Change of Control, the Company will be required to offer to purchase all of the outstanding Securities at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of repurchase.
9. Limitation on Disposition of Assets.
          The Company is, subject to certain conditions, obligated to make an offer to purchase Securities at 100% of their principal amount plus accrued and unpaid interest to the date of repurchase with certain net cash proceeds of certain sales or other dispositions of assets in accordance with the Indenture.
10. Denominations; Transfer; Exchange.
          The Securities are in registered form, without coupons, in denominations of $1,000 and integral multiples of $1,000. A Holder shall register the transfer of or exchange Securities in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay certain transfer taxes or similar governmental charges payable in connection therewith as permitted by the Indenture. The Registrar need not register the transfer of or exchange any Securities or portions thereof selected for redemption, except the unredeemed portion of any security being redeemed in part.

B-6

 

11. Persons Deemed Owners.
     The registered Holder of a Security shall be treated as the owner of it for all purposes.
12. Unclaimed Funds.
          Subject to any applicable escheat laws, if funds for the payment of principal or interest remain unclaimed for two years, the Trustee and the Paying Agent will repay the funds to the Company at its request. After that, all liability of the Trustee and such Paying Agent with respect to such funds shall cease.
13. Legal Defeasance and Covenant Defeasance.
          The Company may be discharged from its obligations under the Indenture and the Securities except for certain provisions thereof, and may be discharged from its obligations to comply with certain covenants contained in the Indenture and the Securities, in each case upon satisfaction of certain conditions specified in the Indenture.
14. Amendment; Supplement; Waiver.
          Subject to certain exceptions, the Indenture or the Securities may be amended or supplemented with the written consent of the Holders of at least a majority in aggregate principal amount of the Securities then outstanding, and any existing Default or Event of Default or compliance with any provision may be waived with the consent of the Holders of a majority in aggregate principal amount of the Securities then outstanding. Without notice to or consent of any Holder, the parties thereto may amend or supplement the Indenture or the Securities to, among other things, cure any ambiguity, defect or inconsistency, provide for uncertificated Securities in addition to or in place of certificated Securities or comply with any requirements of the Commission in connection with the qualification of the Indenture under the TIA, or make any other change that does not materially adversely affect the rights of any Holder of a Security.
15. Restrictive Covenants.
          The Indenture contains certain covenants that, among other things, limit the ability of the Company and certain of its subsidiaries to make restricted payments, to incur indebtedness, to create liens, to issue preferred or other capital stock of subsidiaries, to sell assets, to permit restrictions on dividends and other payments by subsidiaries to the Company, to consolidate, merge or sell all or substantially all of its assets, to engage in transactions with affiliates or to engage in certain businesses. The limitations are subject to a number of important qualifications and exceptions.
16. Defaults and Remedies.

B-7

 

          If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in aggregate principal amount of Securities then outstanding may declare all the Securities to be due and payable immediately in the manner and with the effect provided in the Indenture. Holders of Securities may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee is not obligated to enforce the Indenture or the Securities unless it has received indemnity satisfactory to it. The Indenture permits, subject to certain limitations therein provided, Holders of a majority in aggregate principal amount of the Securities then outstanding to direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of Securities notice of any continuing Default or Event of Default (except a Default in payment of principal, premium or interest, including an accelerated payment) if it determines that withholding notice is in their interest.
17. Trustee Dealings with Company.
          The Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with the Company, its Subsidiaries, any Guarantor and their respective Affiliates as if it were not the Trustee.
18. No Recourse Against Others.
          No stockholder, director, officer, employee or incorporator, as such, of the Company shall have any liability for any obligation of the Company under the Securities or the Indenture or for any claim based on, in respect of or by reason of, such obligations or their creation. Each Holder of a Security by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Securities.
19. Authentication.
          This Security shall not be valid until the Trustee or authenticating agent signs the certificate of authentication on this Security.
20. Abbreviations and Defined Terms.
          Customary abbreviations may be used in the name of a Holder of a Security or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act).\
21. CUSIP Numbers.
          Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Securities as a convenience to the Holders of the Securities. No representation is made as to the accuracy of such numbers as printed on the Securities and reliance may be placed only on the other identification numbers printed hereon.

B-8

 

          The Company will furnish to any Holder of a Security upon written request and without charge a copy of the Indenture. Requests may be made to: TENNECO INC., 500 North Field Drive, Lake Forest, IL 60045, Attention: Chief Financial Officer.

B-9

 

ASSIGNMENT FORM
I or we assign and transfer this Security to
 
 
(Print or type name, address and zip code of assignee or transferee)
 
 
(Insert Social Security or other identifying number of assignee or transferee)
     
and irrevocably appoint
   
 
   
agent to transfer this Security on the books of the Company.
The agent may substitute another to act for him.
         
Dated:                    
  Signed:    
 
       
 
      (Sign exactly as name appears on the other side of this Security)
Signature Guarantee:  
 
Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor program reasonably acceptable to the Trustee)

B-10

 

OPTION OF HOLDER TO ELECT PURCHASE
          If you want to elect to have this Security purchased by the Company pursuant to Section 4.12 or Section 4.21 of the Indenture, check the appropriate box:
          Section 4.12 [     ] Section 4.21 [     ]
          If you want to elect to have only part of this Security purchased by the Company pursuant to Section 4.12 or Section 4.21 of the Indenture, state the amount: $                    
             
Date:                     
  Your Signature:        
 
           
 
      (Sign exactly as your name appears on the other side of this Security)    
Signature Guarantee:  
 
Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor program reasonably acceptable to the Trustee)

B-11

 

EXHIBIT C
FORM OF LEGEND FOR GLOBAL SECURITIES
          Any Global Security authenticated and delivered hereunder shall bear a legend (which would be in addition to any other legends required in the case of a Restricted Security) in substantially the following form:
     THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS SECURITY IS NOT EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE CIRCUMSTANCES DESCRIBED IN THE INDENTURE.
     UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (“DTC”), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

C-1

 

EXHIBIT D
CERTIFICATE TO BE DELIVERED UPON EXCHANGE
OR REGISTRATION OF TRANSFER OF SECURITIES
          Re:   81/8% Senior Notes due 2015, Series A, and
81/8% Senior Notes due 2015, Series B
(the “Securities”), of Tenneco Inc.                  
          This Certificate relates to $___principal amount of Securities held in the form of* ___a beneficial interest in a Global Security or* ___ Physical Securities by ___(the “Transferor”).
The Transferor:*
          o has requested by written order that the Registrar deliver in exchange for its beneficial interest in the Global Security held by the Depositary a Physical Security or Physical Securities in definitive, registered form of authorized denominations and an aggregate number equal to its beneficial interest in such Global Security (or the portion thereof indicated above); or
          o has requested by written order that the Registrar exchange or register the transfer of a Physical Security or Physical Securities.
          o has requested by written order that the Registrar register the transfer of its beneficial interest in the Global Security exempt under Rule 144A held by the Depositary to a beneficial interest in the Global Security exempt under Regulation S held by the Depositary, or vice versa.
          In connection with such request and in respect of each such Security, the Transferor does hereby certify that the Transferor is familiar with the Indenture relating to the above captioned Securities and the restrictions on transfers thereof as provided in Section 2.16 of such Indenture, and that the transfer of this Securities does not require registration under the Securities Act of 1933, as amended (the “Act”), because*:
          o Such Security is being acquired for the Transferor’s own account, without transfer (in satisfaction of Section 2.16(a)(II)(A) or Section 2.16(d)(i)(A) of the Indenture).
 
*   Check applicable box.

D-1

 

          o Such Security is being transferred to a “qualified institutional buyer” (as defined in Rule 144A under the Act), in reliance on Rule 144A.
          o Such Security is being transferred to an institutional “accredited investor” (within the meaning of subparagraph (a)(1), (2), (3) or (7) of Rule 501 under the Act).
          o Such Security is being transferred in reliance on Regulation S under the Act.
          o Such Security is being transferred in reliance on Rule 144 under the Act.
          o Such Security is being transferred in reliance on and in compliance with an exemption from the registration requirements of the Act other than Rule 144A or Rule 144 or Regulation S under the Act to a person other than an institutional “accredited investor.”
         
 
 
  [INSERT NAME OF TRANSFEROR]  
 
  By:      
    [Authorized Signatory]   
       
 
Date:                    

D-2

 

EXHIBIT E
Form of Certificate To Be
Delivered in Connection with
Transfers to Institutional Accredited Investors
                    ,      
Wells Fargo Bank, N.A.
230 W. Monroe Street, Suite 2900
Chicago, IL 60606
Attention: Corporate Trust Services
          Re:   Tenneco Inc. (the “Company”) Indenture (the “Indenture”) relating to 81/8%
Senior Notes due 2015, Series A
Ladies and Gentlemen:
          In connection with our proposed purchase of 81/8% Senior Notes due 2015, Series A of Tenneco Inc. (the “Company”), we confirm that:
     1. We have received such information as we deem necessary in order to make our investment decision.
     2. We understand that any subsequent transfer of the Securities is subject to certain restrictions and conditions set forth in the Indenture and the undersigned agrees to be bound by, and not to resell, pledge or otherwise transfer the Securities except in compliance with, such restrictions and conditions and the Securities Act of 1933, as amended (the “Securities Act”).
     3. We understand that the offer and sale of the Securities have not been registered under the Securities Act, and that the Securities may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except as permitted in the following sentence. We agree for the benefit of the issuer that this Security may not be offered, sold, pledged or otherwise transferred prior to the expiration of the holding period applicable thereto under Rule 144(k) under the Securities Act which is applicable to this Security (the “Resale Restriction Termination Date”) other than (1) to the issuer or its subsidiaries, (2) so long as this Security is eligible for resale pursuant to Rule 144A under the Securities Act (“Rule 144A”), to a person who the seller reasonably believes is a “Qualified Institutional Buyer” within the meaning

E-1

 

of Rule 144A purchasing for its own account or for the account of a Qualified Institutional Buyer, in each case to whom notice is given that the resale, pledge or other transfer is being made in reliance on Rule 144A (as indicated by the box checked by the transferor on the certificate of transfer on the reverse of this Security if this Security is not in book-entry form), (3) to a non-“U.S. person” in an “Offshore Transaction” (as such terms are defined in Regulation S under the Securities Act) in accordance with Regulation S under the Securities Act (as indicated by the box checked by the transferor on the certificate of transfer on the reverse of this Security if this Security is not in book-entry form), (4) pursuant to any other available exemption from the registration requirements of the Securities Act, including the exemption provided by Rule 144 under the Securities Act, if available, or (5) pursuant to an effective registration statement under the Securities Act, subject in each of the foregoing cases to any requirement of law that the disposition of its property or the property of such investor account or accounts be at all times within its or their control, and subject to the right of the issuer or the Trustee for the Securities prior to any such sale, pledge or other transfer pursuant to clause (4) above to require the delivery of an opinion of counsel, certifications and/or other information satisfactory to each of them. This legend will be removed upon request of the holder on or after the Resale Restriction Termination Date.
     4. We understand that, on any proposed resale of Securities, we will be required to furnish to the Trustee and the Company, such certification, legal opinions and other information as the Trustee and the Company may reasonably require to confirm that the proposed sale complies with the foregoing restrictions. We further understand that the Securities purchased by us will bear a legend to the foregoing effect.
     5. We are an institutional “accredited investor” (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Securities, and we and any accounts for which we are acting are each able to bear the economic risk of our or their investment, as the case may be.
     6. We are acquiring the Securities purchased by us for our account or for one or more accounts (each of which is an institutional “accredited investor”) as to each of which we exercise sole investment discretion.
          You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby.\

E-2

 

         
  Very truly yours,

[Name of Transferee]
 		  
  By:      
    [Authorized Signatory]   
       

E-3

 

         
EXHIBIT F
Form of Certificate To Be
Delivered in Connection
with Regulation S Transfers
                    ,      
Wells Fargo Bank, N.A.
230 W. Monroe Street, Suite 2900
Chicago, IL 60606

Attention: Corporate Trust Services
          Re:   Tenneco Inc. (the “Company”) 81/8%
Senior Notes due 2015, Series A
(the “Securities”)
Dear Sirs:
          In connection with our proposed sale of $___ aggregate principal amount of the Securities, we confirm that such sale has been effected pursuant to and in accordance with Regulation S under the Securities Act of 1933, as amended (the “Securities Act”), and, accordingly, we represent that:
     (1) the offer of the Securities was not made to a person in the United States;
     (2) either (a) at the time the buy offer was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States, or (b) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither we nor any person acting on our behalf knows that the transaction has been pre-arranged with a buyer in the United States;
     (3) no directed selling efforts have been made in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S, as applicable;
     (4) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act; and

F-1

 

     (5) we have advised the transferee of the transfer restrictions applicable to the Securities.
          You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Defined terms used herein without definition have the respective meanings provided in Regulation S.
         
  Very truly yours,

[Name of Transferor]
 		  
  By:      
    [Authorized Signatory]   
       
 

F-2

 

EXHIBIT G
[FORM OF SUBSIDIARY GUARANTEE]
          Each undersigned Guarantor (as defined in the Indenture referred to in the Security upon which this notation is endorsed and each referred to as the “Guarantor,” which term includes any successor person under the Indenture) unconditionally guarantees on a senior basis as set forth in the Indenture (such guarantee by the Guarantor being referred to herein as a “Subsidiary Guarantee”) (i) the due and punctual payment of the principal of and interest on the Securities, whether at maturity, by acceleration or otherwise, the due and punctual payment of interest on the overdue principal and interest, if any, on the Securities, to the extent lawful, and the due and punctual performance of all other obligations of the Company to the Holders or the Trustee all in accordance with the terms set forth in Article Ten of the Indenture and (ii) in case of any extension of time of payment or renewal of any Securities or any of such other obligations, that the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise.
          No stockholder, officer, director or incorporator, as such, past, present or future, of the Guarantor shall have any liability under the Subsidiary Guarantee by reason of his or its status as such stockholder, officer, director or incorporator.
          The Subsidiary Guarantee shall not be valid or obligatory for any purpose until the certificate of authentication on the Securities upon which the Subsidiary Guarantee is noted shall have been executed by the Trustee under the Indenture by the manual signature of one of its authorized officers.

G-1

EX-4.9(B) 5 c23259exv4w9xby.htm REGISTRATION RIGHTS AGREEMENT exv4w9xby
 

Exhibit 4.9(b)
EXECUTION COPY
REGISTRATION RIGHTS AGREEMENT
     This REGISTRATION RIGHTS AGREEMENT dated November 20, 2007 (the “Agreement”) is entered into by and among Tenneco Inc., a Delaware corporation (the “Company”), the guarantors listed in Schedule 1 hereto (the “Guarantors”), and the several initial purchasers listed in Schedule 2 hereto (the “Initial Purchasers”), for whom Banc of America Securities LLC is acting as representative.
     The Company, the Guarantors and the Initial Purchasers are parties to the Purchase Agreement dated November 20, 2007 (the “Purchase Agreement”), which provides for the sale by the Company to the Initial Purchasers of $250 million aggregate principal amount of the Company’s 81/8% Senior Notes due 2015 (the “Securities”), which will be guaranteed by each of the Guarantors. As an inducement to the Initial Purchasers to enter into the Purchase Agreement, the Company and the Guarantors have agreed to provide to the Initial Purchasers and their direct and indirect transferees the registration rights set forth in this Agreement. The execution and delivery of this Agreement is a condition to the closing under the Purchase Agreement.
     In consideration of the foregoing, the parties hereto agree as follows:
          1. Definitions. As used in this Agreement, the following terms shall have the following meanings:
     “Business Day” shall mean any day that is not a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to remain closed.
     “Closing Date” shall mean the Closing Date as defined in the Purchase Agreement.
     “Company” shall have the meaning set forth in the preamble and shall also include the Company’s successors.
     “Exchange Act” shall mean the Securities Exchange Act of 1934 and the rules and regulations thereunder, as amended from time to time.
     “Exchange Dates” shall have the meaning set forth in Section 2(a)(ii) hereof.
     “Exchange Offer” shall mean the exchange offer by the Company and the Guarantors of Exchange Securities for Registrable Securities pursuant to Section 2(a) hereof.
Registration Rights Agreement

 

 

     “Exchange Offer Registration” shall mean a registration under the Securities Act effected pursuant to Section 2(a) hereof.
     “Exchange Offer Registration Statement” shall mean an exchange offer registration statement on Form S-4 (or, if applicable, on another appropriate form) and all amendments and supplements to such registration statement, in each case including the Prospectus contained therein, all exhibits thereto and any document incorporated by reference therein.
     “Exchange Securities” shall mean senior notes issued by the Company and guaranteed by the Guarantors under the Indenture containing terms identical to the Securities (except that the Exchange Securities will not be subject to restrictions on transfer or to any increase in annual interest rate for failure to comply with this Agreement) and to be offered to Holders of Securities in exchange for Registrable Securities pursuant to the Exchange Offer.
     “Filing Date” shall mean with respect to the Shelf Registration Statement required to be filed pursuant to Section 2(b)(iii), the 60th day after the delivery of a notice pursuant to Section 2(b)(iii).
     “Guarantors” shall have the meaning set forth in the preamble and shall also include any Guarantor’s successors.
     “Holders” shall mean the Initial Purchasers, for so long as they own any Registrable Securities, and each of their successors, assigns and direct and indirect transferees who become owners of Registrable Securities under the Indenture; provided that for purposes of Sections 4 and 5 of this Agreement, the term “Holders” shall include Participating Broker-Dealers.
     “Indenture” shall mean the Indenture relating to the Securities dated as of November 20, 2007 among the Company, the Guarantors and the Trustee, and as the same may be further amended, modified or supplemented from time to time in accordance with the terms thereof.
     “Initial Purchasers” shall have the meaning set forth in the preamble.
     “Majority Holders” shall mean the Holders of a majority of the aggregate principal amount of outstanding Registrable Securities; provided that whenever the consent or approval of Holders of a specified percentage of Registrable Securities is required hereunder, Registrable Securities owned directly or indirectly by the Company or any of its affiliates shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage or amount.

2

 

     “Participating Broker-Dealers” shall have the meaning set forth in Section 2 hereof.
     “Person” shall mean an individual, partnership, limited liability company, corporation, trust or unincorporated organization, or a government or agency or political subdivision thereof.
     “Prospectus” shall mean the prospectus included in a Registration Statement, including any preliminary prospectus, and any such prospectus as amended or supplemented by any prospectus supplement, including a prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by a Shelf Registration Statement, and by all other amendments and supplements to such prospectus, and in each case including any document incorporated by reference therein.
     “Purchase Agreement” shall have the meaning set forth in the preamble.
     “Registrable Securities” shall mean the Securities; provided that any Security shall cease to be a Registrable Security (i) when a Registration Statement with respect to such Security has been declared effective under the Securities Act and such Security has been exchanged or disposed of pursuant to such Registration Statement, (ii) when such Security is eligible to be sold pursuant to Rule 144(k) (or any similar provision then in force, but not Rule 144A) under the Securities Act upon the expiration of the time period referred to in such rule or (iii) when such Security ceases to be outstanding.
     “Registration Expenses” shall mean any and all expenses incident to performance of or compliance by the Company and the Guarantors with this Agreement, including, without limitation, (i) all SEC, stock exchange or National Association of Securities Dealers, Inc. registration and filing fees, (ii) all fees and expenses incurred in connection with compliance with state securities or blue sky laws in the United States of America (including reasonable fees and disbursements of counsel for any Underwriters or Holders in connection with blue sky qualification in the United States of America of any Exchange Securities or Registrable Securities), (iii) all expenses of any Persons in preparing or assisting in preparing, word processing, printing and distributing any Registration Statement, any Prospectus and any amendments or supplements thereto, any underwriting agreements, securities sales agreements or other similar agreements and any other documents relating to the performance of and compliance with this Agreement, (iv) all rating agency fees, (v) all fees and disbursements relating to the qualification of the Indenture under applicable securities laws, (vi) the fees and disbursements of the Trustee and its counsel, (vii) the fees and disbursements of counsel for the Company and the Guarantors and, in the case of a Shelf Registration Statement, the reasonable fees and disbursements of one counsel for the Holders (which counsel shall be selected by the Majority Holders and which counsel may also be counsel for the Initial Purchasers),

3

 

(viii) the fees and disbursements of the independent public accountants of the Company and the Guarantors, including the expenses of any special audits or “comfort” letters required by or incident to the performance of and compliance with this Agreement, but excluding fees and expenses of counsel to the Underwriters (other than fees and expenses set forth in clause (ii) above) or the Holders and underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of Registrable Securities by a Holder and (ix) in the case of an Exchange Offer, the reasonable fees and disbursements of counsel for the Initial Purchasers.
     “Registration Statement” shall mean any registration statement of the Company and the Guarantors filed with the SEC under the Securities Act that covers any of the Exchange Securities or Registrable Securities pursuant to the provisions of this Agreement and all amendments and supplements to any such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and any document incorporated by reference therein.
     “SEC” shall mean the Securities and Exchange Commission.
     “Securities Act” shall mean the Securities Act of 1933, as amended from time to time.
     “Shelf Effectiveness Period” shall have the meaning set forth in Section 2(b) hereof.
     “Shelf Registration” shall mean a registration effected pursuant to Section 2(b) hereof.
     “Shelf Registration Statement” shall mean a “shelf” registration statement of the Company and the Guarantors filed with the SEC under the Securities Act that covers all the Registrable Securities (but no other securities unless approved by the Holders whose Registrable Securities are to be covered by such Shelf Registration Statement) on an appropriate form under Rule 415 under the Securities Act, or any similar rule that may be adopted by the SEC, and all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and any document incorporated by reference therein.
     “Trust Indenture Act” shall mean the Trust Indenture Act of 1939, as amended from time to time.
     “Trustee” shall mean the trustee with respect to the Securities under the Indenture.
     “Underwriter” shall have the meaning set forth in Section 3 hereof.

4

 

     “Underwritten Offering” shall mean an offering in which Registrable Securities are sold to an Underwriter for reoffering to the public.
          2. Registration Under the Securities Act. (a)  To the extent not prohibited by any applicable law or applicable interpretations of the Staff of the SEC, the Company and the Guarantors shall use their commercially reasonable efforts to (i) cause to be filed an Exchange Offer Registration Statement covering an offer to the Holders to exchange all the Registrable Securities for Exchange Securities and (ii) have such Registration Statement remain effective until 180 days after the closing of the Exchange Offer. The Company and the Guarantors shall commence the Exchange Offer promptly after the Exchange Offer Registration Statement is declared effective by the SEC and use their commercially reasonable efforts to complete the Exchange Offer not later than 60 days after such effective date.
     The Company and the Guarantors shall commence the Exchange Offer by mailing the related Prospectus, appropriate letters of transmittal and other accompanying documents to each Holder stating, in addition to such other disclosures as are required by applicable law,
(i)   that the Exchange Offer is being made pursuant to this Agreement and that all Registrable Securities validly tendered and not properly withdrawn will be accepted for exchange;
 
(ii)   the dates of acceptance for exchange (which shall be a period of at least 20 Business Days from the date such notice is mailed) (the “Exchange Dates”);
 
(iii)   that any Registrable Security not tendered will remain outstanding and continue to accrue interest but will not retain any rights under this Agreement;
 
(iv)   that any Holder electing to have a Registrable Security exchanged pursuant to the Exchange Offer will be required to surrender such Registrable Security, together with the appropriate letters of transmittal, to the institution and at the address (located in the Borough of Manhattan, The City of New York) and in the manner specified in the notice, prior to the close of business on the last Exchange Date; and
 
(v)   that any Holder will be entitled to withdraw its election, not later than the close of business on the last Exchange Date, by sending to the institution and at the address (located in the Borough of Manhattan, The City of New York) specified in the notice, a telegram, telex, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Registrable Securities delivered for exchange and a statement that such Holder is withdrawing its election to have such Securities exchanged.

5

 

     As a condition to participating in the Exchange Offer, a Holder will be required to represent to the Company and the Guarantors that (i) any Exchange Securities to be received by it will be acquired in the ordinary course of its business, (ii) at the time of commencement of the Exchange Offer it has no arrangement or understanding with any Person to participate in the distribution (within the meaning of the Securities Act) of the Exchange Securities, (iii) it is not an “affiliate” (within the meaning of Rule 405 under Securities Act) of the Company or any Guarantor and (iv) if such Holder is a broker-dealer that will receive Exchange Securities for its own account in the Exchange Offer in exchange for Securities that were acquired by such broker-dealer as a result of market-making or other trading activities (a “Participating Broker-Dealer”), then such Holder will deliver a Prospectus in connection with any resale of such Exchange Securities.
     As soon as practicable after the last Exchange Date, the Company and the Guarantors shall
(i)   accept for exchange Registrable Securities or portions thereof validly tendered and not properly withdrawn pursuant to the Exchange Offer; and
 
(ii)   deliver, or cause to be delivered, to the Trustee for cancellation all Registrable Securities or portions thereof so accepted for exchange by the Company and issue, and cause the Trustee to promptly authenticate and deliver to each Holder, Exchange Securities equal in principal amount to the principal amount of the Registrable Securities surrendered by such Holder provided that, except as may be otherwise required by the Indenture, in the case of any Registrable Securities held in global form by a depositary, authentication and delivery to such depositary of one or more Exchange Securities in global form in an equivalent principal amount thereto for the account of such Holders in accordance with the Indenture shall satisfy such authentication and delivery requirement.
     The Company and the Guarantors shall use their commercially reasonable efforts to complete the Exchange Offer as provided above and shall comply with the applicable requirements of the Securities Act, the Exchange Act and other applicable laws and regulations in connection with the Exchange Offer. The Exchange Offer shall not be subject to any conditions, other than (i) that the Exchange Offer does not violate any applicable law or applicable interpretations of the Staff of the SEC and (ii) no action or proceeding shall have been instituted or threatened in any court or by any governmental agency with respect to the Exchange Offer.
          (b) In the event that (i) the Company and the Guarantors determine that the Exchange Offer Registration provided for in Section 2(a) above is not available or may not be completed as soon as practicable after the last Exchange Date because it would violate any applicable law or applicable interpretation of the Staff of the SEC, (ii) the Exchange Offer is not for any other reason completed by the 210th day after the

6

 

Closing Date, or (iii) if any Initial Purchaser holds any Securities acquired by it that have, or that are reasonably likely to be determined to have, the status of an unsold allotment in an initial distribution, and any such Initial Purchaser so requests in writing on or prior to the 60th day after the consummation of the Exchange Offer, the Company and the Guarantors shall use commercially reasonable efforts to cause to be filed as soon as practicable after such determination, date or request, as the case may be, a Shelf Registration Statement providing for the sale of all the Registrable Securities by the Holders (or, in the case of clause (iii), any requesting Initial Purchaser) thereof and to have such Shelf Registration Statement declared effective by the SEC.
     In the event that the Company and the Guarantors are required to file a Shelf Registration Statement pursuant to clause (iii) of the preceding sentence, the Company and the Guarantors shall use commercially reasonable efforts to file and have declared effective by the SEC both an Exchange Offer Registration Statement pursuant to Section 2(a) with respect to all Registrable Securities and a Shelf Registration Statement (which may be a combined Registration Statement with the Exchange Offer Registration Statement) with respect to offers and sales of Registrable Securities held by the Initial Purchasers after completion of the Exchange Offer. Notwithstanding the foregoing, the Company and the Guarantors may delay filing a Shelf Registration Statement, and any amendment thereto, and may withhold efforts to cause such Shelf Registration Statement, and any such amendment thereto, to become effective for a period of up to 60 days, if (i) the Company determines in good faith that such Shelf Registration Statement, and any such amendment thereto, might interfere with or affect the negotiation or completion of any transaction that is being contemplated by the Company (whether or not a final decision has been made to undertake such transaction) at the time the right to delay is exercised or (ii) such Shelf Registration Statement, and any such amendment thereto, would otherwise require premature disclosure of non-public information that, in the Company’s judgment, exercised reasonably and in good faith, would have a material adverse effect on or otherwise be detrimental to the Company; provided, however, the Company may only exercise such right of delay or withholding of efforts other than for purposes of avoiding its obligations under this Agreement; provided further however, that the Company may not exercise such right of delay or withholding of efforts more frequently than two times in any 12-month period and the aggregate period of any such delays or withholdings shall not exceed 60 days in any such 12-month period.
     The Company and the Guarantors agree to use commercially reasonable efforts to keep the Shelf Registration Statement continuously effective until all of the Registrable Securities covered thereby are eligible for resale under Rule 144(k) under the Securities Act upon the expiration of the time period referred to in such rule or such earlier time when all the Registrable Securities covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement (the “Shelf Effectiveness Period”). The Company and the Guarantors further agree to supplement or amend the Shelf Registration Statement and the related Prospectus if required by the rules, regulations

7

 

or instructions applicable to the registration form used by the Company and the Guarantors for such Shelf Registration Statement or by the Securities Act or by any other rules and regulations thereunder for shelf registration or if reasonably requested by a Holder of Registrable Securities with respect to information relating to such Holder, and to use commercially reasonable efforts to cause any such amendment to become effective and such Shelf Registration Statement and Prospectus to become usable as soon as thereafter practicable. The Company and the Guarantors agree to furnish to the Holders of Registrable Securities covered by any such Shelf Registration Statement copies of any such supplement or amendment promptly after its being used or filed with the SEC.
          (c) The Company and the Guarantors shall pay all Registration Expenses in connection with the registration pursuant to Section 2(a) and Section 2(b) hereof. Each Holder shall pay all underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of such Holder’s Registrable Securities pursuant to the Exchange Offer Registration Statement or Shelf Registration Statement.
          (d) An Exchange Offer Registration Statement pursuant to Section 2(a) hereof or a Shelf Registration Statement pursuant to Section 2(b) hereof will not be deemed to have become effective unless it has been declared effective by the SEC.
     In the event that (i) either the Exchange Offer is not completed or a Shelf Registration Statement required under Section (2)(b)(i) or (ii) hereof is not declared effective on or prior to the 210th day after the Closing Date (the “Target Registration Date”) or (ii) a Shelf Registration Statement required under Section 2(b)(iii) hereof is not declared effective on or prior to the 60th day following the Filing Date (also a “Target Registration Date”), the interest rate on the Registrable Securities will be increased by (i) 0.25% per annum for the first 90-day period immediately following the applicable Target Registration Date and (ii) an additional 0.25% per annum with respect to each subsequent 90-day period, in each case until the Exchange Offer is completed or the Shelf Registration Statement, if required hereby, is declared effective by the SEC or the Securities covered thereby are eligible for resale under Rule 144(k) under the Securities Act upon the expiration of the time period referred to in such rule; provided however, that in no event shall the aggregate amount of additional interest accruing under this paragraph exceed in the aggregate 1.00% per annum.
     If the Shelf Registration Statement has been declared effective and thereafter either ceases to be effective or the Prospectus contained therein ceases to be usable at any time during the Shelf Effectiveness Period, and such failure to remain effective or usable exists for more than 60 days (whether or not consecutive) in any 12-month period, then the interest rate on the Registrable Securities will be increased by 1.00% per annum commencing on the 61st day in such 12-month period and ending on such date

8

 

that the Shelf Registration Statement has again been declared effective or the Prospectus again becomes usable.
     In no event shall the Company or Guarantors be obligated to pay additional interest under more than one provisions of this Section 2(d) at any one time. Upon the effectiveness of the Exchange Offer Registration Statement or the Shelf Registration Statement (in the case of clauses (i) and (ii) of the second paragraph of this Section 2(d), as applicable) or the Shelf Registration Statement which had ceased to remain effective (in the case of the penultimate paragraph of this Section 2(d)), or the Securities become eligible for sale pursuant to Rule 144(k) under the Securities Act upon the expiration of the time period referred to in such rule (in the case of the second and third paragraphs of this Section 2(d)), additional interest on the Securities as a result of such provisions (or the relevant subclause thereof), as the case may be, shall cease to accrue.
          (e) Without limiting the remedies available to the Initial Purchasers and the Holders, the Company and the Guarantors acknowledge that any failure by the Company or the Guarantors to comply with their obligations under Section 2(a) and Section 2(b) hereof may result in material irreparable injury to the Initial Purchasers or the Holders for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of any such failure, the Initial Purchasers or any Holder may obtain such relief as may be required to specifically enforce the Company’s and the Guarantors’ obligations under Section 2(a) and Section 2(b) hereof.
          (f) No Holder of Registrable Securities may include any of its Registrable Securities in any Shelf Registration if such Holder shall have failed to furnish to the Company the information with respect to such Holder and the proposed disposition specified in Items 507 and 508 (as applicable) of Regulation S-K under the Securities Act and any other applicable rules, regulations or policies of the SEC for use in connection with any Shelf Registration or Prospectus included therein. No Holder of Registrable Securities shall be entitled to additional interest pursuant to Section 2(b) if such Holder shall have failed to provide all such information. Each selling Holder as to which a Shelf Registration is being effected agrees to furnish promptly to the Company additional information to be disclosed so that the information previously furnished to the Company by such Holder does not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statement therein not misleading.
          3. Registration Procedures. In connection with their obligations pursuant to Section 2(a) and Section 2(b) hereof, the Company and the Guarantors shall as expeditiously as possible:

9

 

     (a) prepare and file with the SEC a Registration Statement on the appropriate form under the Securities Act, which form (x) shall be selected by the Company and the Guarantors, (y) shall, in the case of a Shelf Registration, be available for the sale of the Registrable Securities to be included therein by the selling Holders thereof and (z) shall comply as to form in all material respects with the requirements of the applicable form and include all financial statements required by the SEC to be filed therewith; and use commercially reasonable efforts to cause such Registration Statement to become effective and remain effective for the applicable period in accordance with Section 2 hereof;
     (b) prepare and file with the SEC such amendments and post-effective amendments to each Registration Statement as may be necessary to keep such Registration Statement effective for the applicable period in accordance with Section 2 hereof and cause each Prospectus to be supplemented by any required prospectus supplement and, as so supplemented, to be filed pursuant to Rule 424 under the Securities Act; and keep each Prospectus current during the period described in Section 4(3) of and Rule 174 under the Securities Act that is applicable to transactions by brokers or dealers with respect to the Registrable Securities or Exchange Securities;
     (c) in the case of a Shelf Registration, furnish to each Holder of Registrable Securities covered thereby, to counsel for the Initial Purchasers, to counsel for such Holders and to each Underwriter of an Underwritten Offering of Registrable Securities, if any, without charge, as many copies of each Prospectus, including each preliminary Prospectus, and any amendment or supplement thereto, as may be reasonably requested in order to facilitate the sale or other disposition of the Registrable Securities covered thereunder; and the Company and the Guarantors consent to the use of such Prospectus and any amendment or supplement thereto in accordance with applicable law by each of the selling Holders of Registrable Securities and any such Underwriters in connection with the offering and sale of the Registrable Securities covered by and in the manner described in such Prospectus or any amendment or supplement thereto in accordance with applicable law;
     (d) use commercially reasonable efforts to register or qualify the Registrable Securities under all applicable state securities or blue sky laws of such jurisdictions in the United States of America as any Holder of Registrable Securities covered by a Registration Statement shall reasonably request in writing by the time the applicable Registration Statement is declared effective by the SEC; cooperate with the Holders in connection with any filings required to be made with the National Association of Securities Dealers, Inc.; and do any and all other acts and things that may be reasonably necessary or advisable to enable each Holder to complete the disposition in each such jurisdiction of the Registrable

10

 

Securities owned by such Holder; provided that neither the Company nor any Guarantor shall be required to (i) qualify as a foreign corporation or other entity or as a dealer in securities in any such jurisdiction where it would not otherwise be required to so qualify, (ii) file any general consent to service of process in any such jurisdiction or (iii) subject itself to taxation in any such jurisdiction if it is not so subject;
     (e) in the case of a Shelf Registration, notify each Holder of Registrable Securities covered thereby, counsel for such Holders and counsel for the Initial Purchasers promptly and, if requested by any such Holder or counsel, confirm such advice in writing (i) when a Registration Statement has become effective and when any post-effective amendment thereto has been filed and becomes effective, (ii) of any request by the SEC or any state securities authority for amendments and supplements to a Registration Statement and Prospectus or for additional information after the Registration Statement has become effective, (iii) of the issuance by the SEC or any state securities authority of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose, (iv) if, between the effective date of a Registration Statement and the closing of any sale of Registrable Securities covered thereby, the representations and warranties of the Company or any Guarantor contained in any underwriting agreement, securities sales agreement or other similar agreement, if any, relating to an offering of such Registrable Securities cease to be true and correct in all material respects or if the Company or any Guarantor receives any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation of any proceeding for such purpose, (v) of the happening of any event during the period a Shelf Registration Statement is effective that makes any statement made in such Registration Statement or the related Prospectus untrue in any material respect or that requires the making of any changes in such Registration Statement or Prospectus in order to make the statements therein not misleading and of the delay in filing a Shelf Registration Statement, or any amendment thereto, or of the withholding of efforts to cause such Shelf Registration Statement, or any such amendment thereto, to become effective, pursuant to the third sentence of Section 2(b) and (vi) of any determination by the Company or any Guarantor that a post-effective amendment to a Registration Statement would be appropriate; provided that, in the case of clause (iv), (v) or (vi), with respect to any event, development or transaction that would permit the Company to exercise its rights of delay or withholding of efforts under the third sentence of Section 2(b), the Company shall provide written notice that, in its good faith judgment, such an event, development or transaction has occurred or is pending and that it is exercising its rights of delay or withholding of efforts pursuant to the third sentence of Section 2(b) of this Agreement; provided further that the Company shall not be required to describe such event, development or transaction in the written notice provided.

11

 

     (f) use their commercially reasonable efforts to obtain the withdrawal of any order suspending the effectiveness of a Registration Statement at the earliest possible moment and provide immediate notice to each Holder of the withdrawal of any such order;
     (g) in the case of a Shelf Registration, furnish to each Holder of Registrable Securities covered thereby, without charge, at least one conformed copy of each Registration Statement and any post-effective amendment thereto (without any documents incorporated therein by reference or exhibits thereto, unless requested);
     (h) in the case of a Shelf Registration, cooperate with the selling Holders of Registrable Securities covered thereby to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends and enable such Registrable Securities to be issued in such denominations and registered in such names (consistent with the provisions of the Indenture) as the selling Holders may reasonably request at least one Business Day prior to the closing of any sale of Registrable Securities;
     (i) subject to the third sentence of Section 2(b), in the case of a Shelf Registration, upon the occurrence of any event contemplated by Section 3(e)(v) hereof, use their commercially reasonable efforts to prepare and file with the SEC a supplement or post-effective amendment to a Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to purchasers of the Registrable Securities, such Prospectus will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and the Company and the Guarantors shall notify the Holders of Registrable Securities covered by such Shelf Registration to suspend use of the Prospectus as promptly as practicable after the occurrence of such an event, and such Holders hereby agree to suspend use of the Prospectus until the Company and the Guarantors have amended or supplemented the Prospectus to correct such misstatement or omission and expressly agree to maintain the information contained in such notice confidential (except that such information may be disclosed to their counsel) until it has been publicly disclosed by the Company; provided that, with respect to any event, development or transaction that would permit the Company and the Guarantors to exercise their rights of delay or withholding of efforts under the third sentence of Section 2(b), such notice shall state that, in the Company’s good faith judgment, such an event, development or transaction has occurred or is pending and that it is exercising its rights of delay or withholding of efforts pursuant to the third sentence of Section 2(b) of this Agreement;

12

 

provided further that the Company shall not be required to describe such event, development or transaction in such notice.
     (j) a reasonable time prior to the filing of any Registration Statement, any Prospectus, any amendment to a Registration Statement or amendment or supplement to a Prospectus or of any document that is to be incorporated by reference into a Registration Statement or a Prospectus after initial filing of a Registration Statement, provide copies of such document to the Initial Purchasers and their counsel (and, in the case of a Shelf Registration Statement, to the Holders of Registrable Securities covered thereby and their counsel) and make such of the representatives of the Company and the Guarantors as shall be reasonably requested by the Initial Purchasers or their counsel (and, in the case of a Shelf Registration Statement, the Holders of such Registrable Securities or their counsel) available for discussion of such document; and the Company and the Guarantors shall not, at any time after initial filing of a Registration Statement, file any Prospectus, any amendment of or supplement to a Registration Statement or a Prospectus, or any document that is to be incorporated by reference into a Registration Statement or a Prospectus, of which the Initial Purchasers and their counsel (and, in the case of a Shelf Registration Statement, the Holders of Registrable Securities covered thereby and their counsel) shall not have previously been advised and furnished a copy or to which the Initial Purchasers or their counsel (and, in the case of a Shelf Registration Statement, such Holders or their counsel) shall reasonably object on a timely basis, except for any Registration Statement or amendment thereto or related Prospectus or supplement thereto (a copy of which has been previously furnished as provided in the preceding sentence) which counsel to the Company has advised the Company in writing (with a copy to the objecting Initial Purchasers or Holders, as the case may be) is required to be filed in order to comply with applicable law;
     (k) obtain a CUSIP number for all Exchange Securities or Registrable Securities, as the case may be, not later than the effective date of a Registration Statement;
     (l) cause the Indenture to be qualified under the Trust Indenture Act in connection with the registration of the Exchange Securities or Registrable Securities, as the case may be; cooperate with the Trustee and the Holders to effect such changes to the Indenture as may be required for the Indenture to be so qualified in accordance with the terms of the Trust Indenture Act; and execute, and use their reasonable best efforts to cause the Trustee to execute, all documents as may be required to effect such changes and all other forms and documents required to be filed with the SEC to enable the Indenture to be so qualified in a timely manner;

13

 

     (m) in the case of a Shelf Registration, make available for inspection by a representative of the Holders of the Registrable Securities covered thereby (an “Inspector”), any underwriter participating in any disposition pursuant to such Shelf Registration Statement, and attorneys and accountants designated by the Holders, at reasonable times and in a reasonable manner, all pertinent financial and other records, documents and properties of the Company and the Guarantors, and cause the respective officers, directors and employees of the Company and the Guarantors to supply all information reasonably requested by any such Inspector, Underwriter, attorney or accountant in connection with a Shelf Registration Statement; provided that each such representative, Underwriter, attorney or accountant shall agree in writing that it will keep such information confidential and that it will not disclose any of the information that the Company determines, in good faith, to be confidential and notifies them is confidential unless (i) the disclosure of such information is required by law (including as necessary to avoid or correct a material misstatement or material omission in such Registration Statement or Prospectus), (ii) the release of such information is ordered pursuant to a subpoena or other order from a court of competent jurisdiction, or (iii) such information has been made generally available to the public other than by any of such persons or their affiliates; provided, however, that each such representative, underwriter, attorney or accountant shall use commercially reasonable efforts to give prior notice as soon as practicable to the Company of the potential disclosure of any information by such person pursuant to clause (i) or (ii) of this sentence in order to permit the Company to obtain a protective order (or waive the provisions of this paragraph (m));
     (n) if reasonably requested by any Holder of Registrable Securities covered by a Registration Statement, promptly incorporate in a Prospectus supplement or post-effective amendment such information with respect to such Holder as such Holder reasonably requests to be included therein and make all required filings of such Prospectus supplement or such post-effective amendment as soon as the Company has received notification of the matters to be incorporated in such filing; and
     (o) in the case of a Shelf Registration, enter into such customary agreements and take all such other actions in connection therewith (including those requested by the Holders of a majority in principal amount of the Registrable Securities being sold) in order to expedite or facilitate the disposition of such Registrable Securities including, but not limited to, an Underwritten Offering and in such connection, (i) to the extent possible, make such representations and warranties to the Holders and any Underwriters of such Registrable Securities with respect to the business of the Company and its subsidiaries, the Registration Statement, Prospectus and documents incorporated by reference or deemed incorporated by reference, if any, in each case, in form, substance and scope as

14

 

are customarily made by issuers to underwriters in underwritten offerings and confirm the same if and when requested, (ii) obtain opinions of counsel to the Company and the Guarantors (which counsel and opinions, in form, scope and substance, shall be reasonably satisfactory to the Holders and such Underwriters and their respective counsel) addressed to each selling Holder and Underwriter of Registrable Securities, covering the matters customarily covered in opinions requested in underwritten offerings, (iii) obtain “comfort” letters from the independent certified public accountants of the Company and the Guarantors (and, if necessary, any other certified public accountant of any subsidiary of the Company or any Guarantor, or of any business acquired by the Company or any Guarantor for which financial statements and financial data are or are required to be included in the Registration Statement) addressed to each selling Holder and Underwriter of Registrable Securities, such letters to be in customary form and covering matters of the type customarily covered in “comfort” letters in connection with underwritten offerings and (iv) deliver such documents and certificates as may be reasonably requested by the Holders of a majority in principal amount of the Registrable Securities being sold thereunder or the Underwriters, and which are customarily delivered in underwritten offerings, to evidence the continued validity of the representations and warranties of the Company and the Guarantors made pursuant to clause (i) above and to evidence compliance with any customary conditions contained in an underwriting agreement.
     In the case of a Shelf Registration Statement, each Holder of Registrable Securities agrees that, upon receipt of any notice from the Company and the Guarantors of the happening of any event of the kind described in Section 3(e)(iii) or 3(e)(v) hereof, such Holder will forthwith discontinue disposition of Registrable Securities pursuant to a Registration Statement until such Holder’s receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3(i) hereof and, if so directed by the Company and the Guarantors, such Holder will deliver to the Company and the Guarantors all copies in its possession, other than permanent file copies then in such Holder’s possession, of the Prospectus covering such Registrable Securities that is current at the time of receipt of such notice.
     If the Company and the Guarantors shall give any such notice to suspend the disposition of Registrable Securities pursuant to a Registration Statement, the Company and the Guarantors shall extend the period during which the Registration Statement shall be maintained effective pursuant to this Agreement by the number of days during the period from and including the date of the giving of such notice to and including the date when the Holders shall have received copies of the supplemented or amended Prospectus necessary to resume such dispositions. The Company and the Guarantors may give any such notice only twice during any 365-day period and any such suspensions shall not exceed 30 days for each suspension and there shall not be more than two suspensions in effect during any 365-day period.

15

 

     The Holders of Registrable Securities covered by a Shelf Registration Statement who desire to do so may sell such Registrable Securities in an Underwritten Offering. In any such Underwritten Offering, the investment banker or investment bankers and manager or managers (the “Underwriters”) that will administer the offering will be selected by the Majority Holders of the Registrable Securities included in such offering.
          4. Participation of Broker-Dealers in Exchange Offer. (a)  The Staff of the SEC has taken the position that any broker-dealer that receives Exchange Securities for its own account in the Exchange Offer in exchange for Securities that were acquired by a Participating Broker-Dealer may be deemed to be an “underwriter” within the meaning of the Securities Act and must deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Securities.
     The Company and the Guarantors understand that it is the Staff’s position that if the Prospectus contained in the Exchange Offer Registration Statement includes a plan of distribution containing a statement to the above effect and the means by which Participating Broker-Dealers may resell the Exchange Securities, without naming the Participating Broker-Dealers or specifying the amount of Exchange Securities owned by them, such Prospectus may be delivered by Participating Broker-Dealers to satisfy their prospectus delivery obligation under the Securities Act in connection with resales of Exchange Securities for their own accounts, so long as the Prospectus otherwise meets the requirements of the Securities Act.
          (b) In light of the above, and notwithstanding the other provisions of this Agreement, the Company and the Guarantors agree to amend or supplement the Prospectus contained in the Exchange Offer Registration Statement, as would otherwise be contemplated by Section 3(i), for a period of up to 180 days after the last Exchange Date (as such period may be extended pursuant to the penultimate paragraph of Section 3 of this Agreement), if reasonably requested by the Initial Purchasers or by one or more Participating Broker-Dealers, in order to expedite or facilitate the disposition of any Exchange Securities by Participating Broker-Dealers consistent with the positions of the Staff recited in Section 4(a) above. The Company and the Guarantors further agree that Participating Broker-Dealers shall be authorized to deliver such Prospectus during such period in connection with the resales contemplated by this Section 4.
          (c) The Initial Purchasers shall have no liability to the Company, any Guarantor or any Holder with respect to any request that they may make pursuant to Section 4(b) above.
          5. Indemnification and Contribution. (a)  The Company and each Guarantor, jointly and severally, agree to indemnify and hold harmless each Initial Purchaser and each Holder, their respective affiliates, directors and officers and each person, if any, who controls any Initial Purchaser or any Holder within the meaning of Section

16

 

15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages and liabilities (including, without limitation, reasonable legal fees and other expenses incurred in connection with any suit, action or proceeding or any claim asserted, as such fees and expenses are incurred), joint or several, that arise out of, or are based upon, any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or any Prospectus or any omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, except (i) insofar as such losses, claims, damages or liabilities arise out of, or are based upon, any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with any information relating to any Initial Purchaser or any Holder furnished to the Company in writing by any Initial Purchaser or any selling Holder expressly for use therein or (ii) that with respect to any such untrue statement in or omission from or alleged untrue statement in or omission from any preliminary Prospectus, the indemnity provided in this Section 5(a) shall not inure to the benefit of any Holder from whom the person asserting any such loss, claim, damage or liability received Registrable Securities or Exchange Securities to the extent that such loss, claim, damage or liability results from the fact that (A) such Holder was required under the Securities Act to deliver a copy of the final Prospectus to such person at or prior to the written confirmation of the sale of Registrable Securities or Exchange Securities to such person, (B) a copy of the final Prospectus was not so sent or given to such person at or prior to the written confirmation of the sale of such Registrable Securities or Exchange Securities to such person and (C) such untrue statement in or omission from or alleged untrue statement in or omission from the preliminary Prospectus was corrected in the final Prospectus unless, in either case, such failure to deliver the final Prospectus was a result of non-compliance by the Company or any of the Guarantors with Section 2(b) or 3 hereof. In connection with any Underwritten Offering permitted by Section 3, the Company and the Guarantors, jointly and severally, will also indemnify the Underwriters, if any, selling brokers, dealers and similar securities industry professionals participating in the distribution, their respective affiliates and each Person who controls such Persons (within the meaning of the Securities Act and the Exchange Act) to the same extent as provided above with respect to the indemnification of the Holders, if requested in connection with any Registration Statement.
          (b) Each Holder agrees, severally and not jointly, to indemnify and hold harmless the Company, the Guarantors, the Initial Purchasers and the other selling Holders, their respective affiliates, the directors of the Company and the Guarantors, each officer of the Company and the Guarantors who signed the Registration Statement and each Person, if any, who controls the Company, the Guarantors, any Initial Purchaser and any other selling Holder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the indemnity set forth in paragraph (a) above, but only with respect to any losses, claims, damages or liabilities

17

 

that arise out of, or are based upon, any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with any information relating to such Holder furnished to the Company in writing by such Holder expressly for use in any Registration Statement or any Prospectus.
          (c) If any suit, action, proceeding (including any governmental or regulatory investigation), claim or demand shall be brought or asserted against any Person in respect of which indemnification may be sought pursuant to either paragraph (a) or (b) above, such Person (the “Indemnified Person”) shall promptly notify the Person against whom such indemnification may be sought (the “Indemnifying Person”) in writing; provided that the failure to notify the Indemnifying Person shall not relieve it from any liability that it may have under this Section 5 except to the extent that it has been materially prejudiced (through the forfeiture of substantive rights or defenses) by such failure; and provided, further, that the failure to notify the Indemnifying Person shall not relieve it from any liability that it may have to an Indemnified Person otherwise than under this Section 5. If any such proceeding shall be brought or asserted against an Indemnified Person and it shall have notified the Indemnifying Person thereof, the Indemnifying Person shall retain counsel reasonably satisfactory to the Indemnified Person to represent the Indemnified Person and any others entitled to indemnification pursuant to this Section 5 that the Indemnifying Person may designate in such proceeding and shall pay the reasonable fees and expenses of such counsel related to such proceeding, as incurred. In any such proceeding, any Indemnified Person shall have the right to retain its own counsel, but the reasonable fees and expenses of such counsel shall be at the expense of such Indemnified Person unless (i) the Indemnifying Person and the Indemnified Person shall have mutually agreed to the contrary; (ii) the Indemnifying Person has failed within a reasonable time to retain counsel reasonably satisfactory to the Indemnified Person; (iii) the Indemnified Person shall have reasonably concluded that there may be legal defenses available to it that are different from or in addition to those available to the Indemnifying Person; or (iv) the named parties in any such proceeding (including any impleaded parties) include both the Indemnifying Person and the Indemnified Person and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood and agreed that the Indemnifying Person shall not, in connection with any proceeding or related proceeding in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm (in addition to any local counsel) for all Indemnified Persons, and that all such fees and expenses shall be reimbursed as they are incurred. Any such separate firm (x) for any Initial Purchaser, its affiliates, directors and officers and any control Persons of such Initial Purchaser shall be designated in writing by Banc of America Securities LLC, (y) for any other Holders, their affiliates, directors and officers and any control Persons of such Holders shall be designated in writing by the Majority Holders and (z) in all other cases shall be designated in writing by the Company. The Indemnifying Person shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff,

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the Indemnifying Person agrees to indemnify each Indemnified Person from and against any loss or liability by reason of such settlement or judgment to the extent provided herein and therein. Notwithstanding the foregoing sentence, if at any time an Indemnified Person shall have requested that an Indemnifying Person reimburse the Indemnified Person for reasonable fees and expenses of counsel as contemplated by this paragraph, the Indemnifying Person shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 60 days after receipt by the Indemnifying Person of such request and (ii) the Indemnifying Person shall not have reimbursed the Indemnified Person in accordance with such request prior to the date of such settlement. No Indemnifying Person shall, without the written consent of the Indemnified Person, effect any settlement of any pending or threatened proceeding in respect of which any Indemnified Person is or could have been a party and indemnification could have been sought hereunder by such Indemnified Person, unless such settlement (A) includes an unconditional release of such Indemnified Person, in form and substance reasonably satisfactory to such Indemnified Person, from all liability on claims that are the subject matter of such proceeding and (B) does not include any statement as to or any admission of fault, culpability or a failure to act by or on behalf of any Indemnified Person.
          (d) If the indemnification provided for in paragraphs (a) and (b) above is unavailable to an Indemnified Person or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each Indemnifying Person under such paragraph, in lieu of indemnifying such Indemnified Person thereunder, shall contribute to the amount paid or payable by such Indemnified Person as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Guarantors from the offering of the Securities and the Exchange Securities, on the one hand, and by the Holders from receiving Securities or Exchange Securities registered under the Securities Act, on the other hand, or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) but also the relative fault of the Company and the Guarantors on the one hand and the Holders on the other in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault of the Company and the Guarantors on the one hand and the Holders on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company and the Guarantors or by the Holders and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.
          (e) The Company, the Guarantors and the Holders agree that it would not be just and equitable if contribution pursuant to this Section 5 were determined by pro rata allocation (even if the Holders were treated as one entity for such purpose) or

19

 

by any other method of allocation that does not take account of the equitable considerations referred to in paragraph (d) above. The amount paid or payable by an Indemnified Person as a result of the losses, claims, damages and liabilities referred to in paragraph (d) above shall be deemed to include, subject to the limitations set forth above, any reasonable legal or other expenses incurred by such Indemnified Person in connection with any such action or claim. Notwithstanding the provisions of this Section 5, in no event shall a Holder be required to contribute any amount in excess of the amount by which the total price at which the Securities or Exchange Securities sold by such Holder exceeds the amount of any damages that such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation.
          (f) The remedies provided for in this Section 5 are not exclusive and shall not limit any rights or remedies that may otherwise be available to any Indemnified Person at law or in equity.
          (g) The indemnity and contribution provisions contained in this Section 5 shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of the Initial Purchasers or any Holder, their respective affiliates or any Person controlling any Initial Purchaser or any Holder, or by or on behalf of the Company or the Guarantors, their respective affiliates or the officers or directors of or any Person controlling the Company or the Guarantors, (iii) acceptance of any of the Exchange Securities and (iv) any sale of Registrable Securities pursuant to a Shelf Registration Statement.
          6. General.
          (a) No Inconsistent Agreements. The Company and the Guarantors, jointly and severally, represent, warrant and agree that (i) the rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of any other outstanding securities issued or guaranteed by the Company or any Guarantor under any other agreement and (ii) neither the Company nor any Guarantor has entered into, or on or after the date of this Agreement will enter into, any agreement that is inconsistent with the rights granted to the Holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof.
          (b) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company and the Guarantors have obtained the written consent of

20

 

Holders of at least a majority in aggregate principal amount of the outstanding Registrable Securities affected by such amendment, modification, supplement, waiver or consent; provided that no amendment, modification, supplement, waiver or consent to any departure from the provisions of Section 5 hereof shall be effective as against any Holder of Registrable Securities unless consented to in writing by such Holder. Any amendments, modifications, supplements, waivers or consents pursuant to this Section 6(b) shall be by a writing executed by each of the parties hereto.
          (c) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, telex, telecopier, or any courier guaranteeing overnight delivery (i) if to a Holder, at the most current address given by such Holder to the Company by means of a notice given in accordance with the provisions of this Section 6(c), which address initially is, with respect to the Initial Purchasers, the address set forth in the Purchase Agreement; (ii) if to the Company and the Guarantors, initially at the Company’s address set forth in the Purchase Agreement and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 6(c); and (iii) to such other persons at their respective addresses as provided in the Purchase Agreement and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 6(c). All such notices and communications shall be deemed to have been duly given at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt is acknowledged, if telecopied; and on the next Business Day if timely delivered to an air courier guaranteeing overnight delivery. Copies of all such notices, demands or other communications shall be concurrently delivered by the Person giving the same to the Trustee, at the address specified in the Indenture.
          (d) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors, assigns and transferees of each of the parties, including, without limitation and without the need for an express assignment, subsequent Holders; provided that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Registrable Securities in violation of the terms of the Purchase Agreement or the Indenture. If any transferee of any Holder shall acquire Registrable Securities in any manner, whether by operation of law or otherwise, such Registrable Securities shall be held subject to all the terms of this Agreement, and by taking and holding such Registrable Securities such Person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement and such Person shall be entitled to receive the benefits hereof. The Initial Purchasers (in their capacity as Initial Purchasers) shall have no liability or obligation to the Company or the Guarantors with respect to any failure by a Holder to comply with, or any breach by any Holder of, any of the obligations of such Holder under this Agreement.

21

 

          (e) Purchases and Sales of Securities. The Company and the Guarantors shall not, and shall use their reasonable best efforts to cause their affiliates (as defined in Rule 405 under the Securities Act) not to, purchase and then resell or otherwise transfer any Registrable Securities.
          (f) Third Party Beneficiaries. Each Holder shall be a third party beneficiary to the agreements made hereunder between the Company and the Guarantors, on the one hand, and the Initial Purchasers, on the other hand, and shall have the right to enforce such agreements directly to the extent it deems such enforcement necessary or advisable to protect its rights or the rights of other Holders hereunder.
          (g) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.
          (h) Headings. The headings in this Agreement are for convenience of reference only, are not a part of this Agreement and shall not limit or otherwise affect the meaning hereof.
          (i) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York.
          (j) Miscellaneous. This Agreement contains the entire agreement between the parties relating to the subject matter hereof and supersedes all oral statements and prior writings with respect thereto. If any term, provision, covenant or restriction contained in this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable or against public policy, the remainder of the terms, provisions, covenants and restrictions contained herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated. The Company, the Guarantors and the Initial Purchasers shall endeavor in good faith negotiations to replace the invalid, void or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, void or unenforceable provisions.

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EXECUTION COPY
     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
         
  TENNECO INC.
 		  
  By:      
    Name:      
    Title:      
 
  TENNECO AUTOMOTIVE OPERATING COMPANY INC.
 		  
  By:      
    Name:      
    Title:      
 
  THE PULLMAN COMPANY
 		  
  By:      
    Name:      
    Title:      
 
  CLEVITE INDUSTRIES INC.
 		  
  By:      
    Name:      
    Title:      
 
  TENNECO GLOBAL HOLDINGS INC.
 		  
  By:      
    Name:      
    Title:      
 
Registration Rights Agreement

 

 

         
  TMC TEXAS INC.
 		  
  By:      
    Name:      
    Title:      
 
  TENNECO INTERNATIONAL HOLDING CORP.
 		  
  By:      
    Name:      
    Title:      
 
Registration Rights Agreement

 

 

Confirmed and accepted as of the date first written above:
BANC OF AMERICA SECURITIES LLC
For itself and on behalf of the
several Initial Purchasers
         
By:
        
 
 
 
Authorized Signatory 		   
Registration Rights Agreement

 

 

Schedule 1
List of Subsidiary Guarantors
     
Tenneco Automotive Operating Company Inc.
  Delaware
The Pullman Company
  Delaware
Clevite Industries Inc.
  Delaware
Tenneco Global Holdings Inc.
  Delaware
TMC Texas Inc.
  Delaware
Tenneco International Holding Corp.
  Delaware
Registration Rights Agreement

 

 

Schedule 2
Initial Purchasers
Banc of America Securities LLC
Citigroup Global Markets Inc.
Deutsche Bank Securities Inc.
Greenwich Capital Markets, Inc.
J.P. Morgan Securities Inc.
BNP Paribas Securities Corp.
BNY Capital Markets, Inc.
Commerzbank Capital Markets Corp.
Fifth Third Securities, Inc.
HVB Capital Markets
KeyBanc Capital Markets
Morgan Stanley
NatCity Investments, Inc.
Scotia Capital
Wells Fargo Securities, LLC
Registration Rights Agreement

 

EX-10.37 6 c23259exv10w37.txt SUMMARY OF 2008 OUTSIDE DIRECTORS' COMPENSATION Exhibit 10.37 Summary of 2008 Director's Compensation --------------------------------------- Fee Structure. In 2008, each outside director will be paid an annual retainer fee of $50,000 for service on the Board of Directors. In general, 100% of the retainer fee is to be paid in the form of common stock equivalents, as described below. A director may elect, however, to have up to 40%, or $20,000, of the fee paid in cash. The outside directors will also receive meeting attendance fees, committee chair and membership fees, and reimbursement of their expenses for attending meetings of the Board of Directors and its committees. The fees are generally paid in cash, but at the option of the director may be paid in directors' stock equivalents. Outside directors will receive $1,000 for each in-person meeting of the Board of Directors attended, and $500 for each telephonic meeting. Outside directors who are members of the Audit Committee and Compensation/Nominating/Governance Committee will receive $1,000 for each in-person meeting, and $500 for each telephonic meeting attended. Each outside director who serves as a Chairman of the Audit Committee or the Compensation/Nominating/Governance Committee will be paid a fee of $8,000 per chairmanship. Also, the lead independent director will be paid a $6,000 retainer fee for serving as the chairman and primary spokesman when the Board of Directors meets in executive session. Outside directors who serve as members of the Audit Committee or Compensation/Nominating/Governance Committee will be paid $4,000 per committee membership. Members of the Three-year Independent Director Evaluation Committee will receive $1,000 for each meeting of that committee attended. Common Stock Equivalents and Restricted Stock. As described above, all or a portion of an outside director's retainer fee is generally paid in common stock equivalent units. These directors' stock equivalents are payable in cash or, at the Company's option, shares of common stock after an outside director ceases to serve as a director. Final distribution of these amounts 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. In January 2008, each outside director received 3,010 shares of restricted stock, which vest on the first anniversary of the date of grant. Deferred Compensation Plan. The Company has 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 $20,000, 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 with various investment options. The investment options include stock equivalent units of the Company's common stock, which may be paid out in either cash or, at the Company's option, shares of common stock. EX-10.38 7 c23259exv10w38.txt SUMMARY OF 2008 NAMED EXECUTIVE OFFICER COMPENSATION Exhibit 10.38 Summary of 2008 Named Executive Officer Compensation ---------------------------------------------------- The table below shows the current annual salary and 2008 target bonus under the Tenneco Inc. Value Added ("TAVA") Incentive Plan for the Company's Chief Executive Officer, the Company's Chief Financial Officer and each of the next three most highly compensated officers of the Company other than the Chief Executive Officer or Chief Financial Officer (based on compensation received during 2007).
Name Current Salary 2007 Target Bonus ---- -------------- ----------------- Gregg Sherrill $950,000 $950,000 Hari N. Nair $625,000 $468,750 Kenneth R. Trammell $500,000 $350,000 Neal A. Yanos $388,125 $232,875 Timothy E. Jackson $393,300 $235,980
EX-10.67 8 c23259exv10w67.txt FORM OF LONG TERM PERFORMANCE UNIT AWARD EXHIBIT 10.67 TENNECO INC. LONG TERM PERFORMANCE UNIT AWARD AGREEMENT (2008) , 2008 Dear Participant: Pursuant to the provisions of the Tenneco Inc. (the "Company") 2006 Long-Term Incentive Plan (the "Plan"), you were granted an Award (the "Award") of ______ Long Term Performance Units (the "Units"), on , 2008. The Award covers calendar year 2008 (the "Performance Period"). 1. Defined Terms. (a) "Total Shareholder Return or TSR" means, as to any given calendar year, the amount (expressed as a percentage) equal to (i) (A) the closing sales price of a share of the Company's common stock on the New York Stock Exchange ("NYSE") on the last business day of such year, minus (B) the closing sales price of a share of the Company's common stock on the NYSE on the last business day of the prior year, plus (C) the amount of any dividends per share of the Company's common stock declared during such year and paid, divided by (ii) the closing sales price of a share of the Company's common stock on the NYSE on the last business day of the prior year (b) "Stock Price" means the average of the closing prices of the Company's common stock on the NYSE for each of the ten NYSE trading days immediately following the Company's public announcement of its results of operations for the Performance Period (the "Average Period"). 2. Performance and Award Settlement. (a) If the Company's TSR for the Performance Period is zero or a positive number, on December 31 of the Performance Period you will earn that amount of your Units that is equal to (i) the number of Units, multiplied by (ii) the Unit Payout Modifier as defined in and determined pursuant to Exhibit A to this Award; provided, however, that the maximum Unit Payout Modifier shall be 1.67. If the Company's TSR for the Performance Period does not equal or exceed zero, you will not earn any of your Units. (b) Following the end of the Performance Period, the Company will pay you cash in an amount equal to the total number of Units represented by this Award which you earned for the Performance Period, if any, times the cash value of one share of common stock of the Company. The cash value of a share of the Company's common stock will be equal to the Stock Price. The payment will be made no later than the next regularly scheduled payroll payment date that is at least five business days after the end of the Average Period; provided, however, that if the Company fails to announce publicly its results of operations for the Performance Period before February 15 of 2009, you may elect to receive your payment for the Performance Period on February 20 of 2009 based on an Average Period equal to the ten NYSE trading days ending two business days before that February 20. (c) The provisions of this Paragraph 2 are subject to the provisions of any written employment agreement you may have with the Company and the Tenneco Inc. Change In Control Severance Benefit Plan for Key Executives or any successor thereto (as the same may be amended from time to time, the "Severance Plan"). 3. Committee Discretion to Amend Award. The Committee may amend or terminate this Award at any time in its sole discretion (a) to exercise downward discretion in the amount payable under this Award if the Committee determines that the payout yielded or that would be yielded by this Award for the Performance Period does not accurately reflect the Company's performance for the Performance Period because the payout is too great, (b) to reflect changes in the number of outstanding Long Term Performance Units (and similar awards) of the Company outstanding for the Performance Period (as compared to the number of such outstanding awards at the time when this Award Agreement was issued), and (c) to reflect the effects of any corporate transaction as contemplated by the Plan. Notwithstanding the foregoing, the Committee may not amend or terminate this Award in a manner that adversely impacts your payment under this Award at any time after your employment by Tenneco Inc. and its Subsidiaries terminates due to your Retirement, death or Total Disability (each as defined below). 4. Retirement, Death and Total Disability. Notwithstanding anything to the contrary contained herein or in any written employment agreement you may have with the Company (subject, however, to any applicable provisions of the Severance Plan and the provisions hereof related thereto), if your employment by Tenneco Inc. and its Subsidiaries terminates on or before the end of the Performance Period as a result of your Retirement, death or Total Disability, (A) you will be deemed to have earned 100% of the Units initially assigned to you under this Award and (B) within 60 days following such termination, you or your beneficiary will be entitled to receive a cash payment equal to the total number of Units initially assigned to you under this Award times the cash value of one share of common stock of the Company (which shall be equal to the average of the closing sales prices of the Company's common stock on the NYSE for the ten trading days immediately following such termination) and such amount shall be pro rated based upon your number of full months employed during the Performance Period as a percentage of the number of months in the Performance Period. For purposes hereof, the term "Retirement" means termination of your employment after you have met the eligibility requirements for early or normal retirement as established in accordance with the retirement plan of the Company or its Subsidiaries covering you at the time such termination occurs and the term "Total Disability" means your permanent and total disability as determined under the rules and guidelines established by the Company in order to qualify for long-term disability coverage under the Company's long-term disability plan in effect at the time of such determination. 5. Termination in Other Circumstances. Notwithstanding anything to the contrary contained herein (subject, however, to any applicable provisions of the Severance Plan or any written employment agreement you may have with the Company and the provisions hereof related thereto), if your employment with Tenneco Inc. and its Subsidiaries terminates on or before the end of the Performance Period other than as a result of your Retirement, death or Total Disability, you will forfeit the Units evidenced by this Award, unless the Committee determines otherwise. 6. Fair Market Value Payment in Certain Cases. If you are entitled to receive payment for the fair market value of this Award pursuant to the Plan or the Severance Plan, that fair market value will be equal to, at least, the amount you would have received hereunder (based on the then-current fair market value of the Company's common stock as determined by reference to the average closing prices therefor on the NYSE for the ten trading days prior to the date on which you become entitled to payment) as if (1) your service had continued through the end of the Performance Period and (2) you had earned 100% of your Units. 7. Withholding Taxes. As set forth in the Plan, the Company shall be entitled to withhold from any payment due hereunder an amount sufficient to satisfy any federal, state, local or other withholding taxes. 8. Miscellaneous. As a condition of this Award, you are required to execute the acknowledgment at the bottom of the enclosed copy of this Award notice and return the acknowledged copy of this Award notice to the Human Resources Department of Tenneco Inc. not later than [DATE], [2008]. By accepting this Award, you agree and acknowledge that you have received and read the copy of the Plan and that you accept this Award subject to the terms and conditions of the Plan. The Units are transferable only by will, the laws of descent and distribution, pursuant to a qualified domestic relations order, or by designation of beneficiary in the event of death (enclosed). This Award is subject to all the definitions, terms and conditions of the Plan, a copy of which is enclosed. To the extent any provision of this Award conflicts with applicable law, the Committee shall have the discretion to modify or amend this Award, or adopt additional terms and or conditions, as may be deemed necessary or advisable in order to comply with the local, state, federal or foreign laws and regulations of any jurisdiction. In the event of any discrepancy between the provisions of the Plan and this or any other communication regarding the Plan, the provisions of the Plan control. This Award shall be binding upon and inure to the benefit of the Company and its successors and assigns, on the one hand, and you and your permitted transferees, on the other hand. TENNECO INC.: By: ------------------------- Name: ----------------------- Title: ---------------------- EMPLOYEE: - -------------------------------------- Signature - -------------------------------------- Type or Print Legal name - -------------------------------------- Social Security Number of Natural ID - -------------------------------------- Address - -------------------------------------- City/State/Zip/Country EXHIBIT A EX-10.68 9 c23259exv10w68.txt FORM OF LONG TERM PERFORMANCE UNIT AWARD EXHIBIT 10.68 TENNECO INC. THREE YEAR LONG TERM PERFORMANCE UNIT AWARD AGREEMENT (2008 and future years) , 20__ Dear Participant: Pursuant to the provisions of the Tenneco Inc. (the "Company") 2006 Long-Term Incentive Plan (the "Plan"), you were granted an Award (the "Award") of Long Term Performance Units (the "Units"), on , 20__. The Award covers the three calendar years listed on Exhibit A (the "Performance Period"). 1. Defined Terms. (a) "Average Price" means the average of the closing prices of the Company's common stock on the New York Stock Exchange ("NYSE") for each of the ten NYSE trading days immediately following the Company's public announcement of its results of operations for a particular year ("Average Period"). (b) "Beginning Stock Price" means, as to any calendar year, the Average Price calculated immediately following the Company's release of its annual earnings for the prior calendar year. (For example, for 2008, the Beginning Stock Price is the Average Price calculated immediately following the Company's release of its 2007 annual earnings.) (c) "Ending Stock Price" means, as to any calendar year, the Average Price calculated immediately following the Company's release of its annual earnings for that calendar year. (For example, for 2008, the Ending Stock Price is the Average Price calculated immediately following the Company's release of its 2008 annual earnings.) (d) "Payout Stock Price" means the Average Price calculated immediately following the Company's release of its annual earnings for the last calendar year in the Performance Period. (e) "Three Year Annualized TSR" means the sum of the TSR for each of the three calendar years, divided by three." (f) "Total Shareholder Return or TSR" means, as to any given calendar year, the amount (expressed as a percentage) equal to (i) (A) Ending Stock Price, minus (B) the Beginning Stock Price, plus (C) the amount of any dividends per share of the Company's common stock declared during such year and paid, divided by (ii) Beginning Stock Price. 2. Performance and Award Settlement. (a) If the Company's Three Year Annualized TSR is zero or a positive number, on December 31 of the last year of the Performance Period you will earn that amount of your Units that is equal to (i) the number of Units, multiplied by (ii) the Unit Payout Modifier as defined in and determined pursuant to Exhibit A to this Award; provided, however, that the maximum Unit Payout Modifier shall be ____. If the Company's Three Year Annualized TSR does not equal or exceed zero, you will not earn any of your Units. (b) Following the end of the Performance Period, the Company will pay you cash in an amount equal to the total number of Units represented by this Award which you earned for the Performance Period, if any, times the cash value of one share of common stock of the Company. The cash value of a share of the Company's common stock will be equal to the Payout Stock Price. The payment will be made no later than the next regularly scheduled payroll payment date that is at least five business days after the date on which the Payout Stock Price can first be calculated; provided, however, that if the Company fails to announce publicly its results of operations for the final year in the Performance Period before February 15 of 20__, you may elect to receive your payment for the Performance Period on February 20 of 20__ based on an Average Period equal to the ten NYSE trading days ending two business days before February 20, 20__. (c) The provisions of this Paragraph 2 are subject to the provisions of any written employment agreement you may have with the Company and the Tenneco Inc. Change In Control Severance Benefit Plan for Key Executives or any successor thereto (as the same may be amended from time to time, the "Severance Plan"). 3. Committee Discretion to Amend Award. The Committee may amend or terminate this Award at any time in its sole discretion (a) to exercise downward discretion in the amount payable under this Award if the Committee determines that the payout yielded or that would be yielded by this Award for the Performance Period does not accurately reflect the Company's performance for the Performance Period because the payout is too great, (b) to reflect changes in the number of outstanding Long Term Performance Units (and similar awards) of the Company outstanding for the Performance Period (as compared to the number of such outstanding awards at the time when this Award Agreement was issued), and (c) to reflect the effects of any corporate transaction as contemplated by the Plan. Notwithstanding the foregoing, the Committee may not amend or terminate this Award in a manner that adversely impacts your payment under this Award at any time after your employment by Tenneco Inc. and its Subsidiaries terminates due to your Retirement, death or Total Disability (each as defined below). 4. Retirement, Death and Total Disability. Notwithstanding anything to the contrary contained herein or in any written employment agreement you may have with the Company (subject, however, to any applicable provisions of the Severance Plan and the provisions hereof related thereto), if your employment by Tenneco Inc. and its Subsidiaries terminates on or before the end of the Performance Period as a result of your Retirement, death or Total Disability, (A) you will be deemed to have earned 100% of the Units initially assigned to you under this Award and (B) within 60 days following such termination, you or your beneficiary will be entitled to receive a cash payment equal to the total number of Units initially assigned to you under this Award times the cash value of one share of common stock of the Company (which shall be equal to the average of the closing sales prices of the Company's common stock on the NYSE for the ten trading days immediately following such termination) and such amount shall be pro rated based upon your number of full months employed during the Performance Period as a percentage of the number of months in the Performance Period. For purposes hereof, the term "Retirement" means termination of your employment after you have met the eligibility requirements for early or normal retirement as established in accordance with the retirement plan of the Company or its Subsidiaries covering you at the time such termination occurs and the term "Total Disability" means your permanent and total disability as determined under the rules and guidelines established by the Company in order to qualify for long-term disability coverage under the Company's long-term disability plan in effect at the time of such determination. 5. Termination in Other Circumstances. Notwithstanding anything to the contrary contained herein (subject, however, to any applicable provisions of the Severance Plan or any written employment agreement you may have with the Company and the provisions hereof related thereto), if your employment with Tenneco Inc. and its Subsidiaries terminates on or before the end of the Performance Period other than as a result of your Retirement, death or Total Disability, you will forfeit the Units evidenced by this Award, unless the Committee determines otherwise. 6. Fair Market Value Payment in Certain Cases. If you are entitled to receive payment for the fair market value of this Award pursuant to the Plan or the Severance Plan, that fair market value will be equal to, at least, the amount you would have received hereunder (based on the then-current fair market value of the Company's common stock as determined by reference to the average closing prices therefor on the NYSE for the ten trading days prior to the date on which you become entitled to payment) as if (1) your service had continued through the end of the Performance Period and (2) you had earned 100% of your Units. 7. Withholding Taxes. As set forth in the Plan, the Company shall be entitled to withhold from any payment due hereunder an amount sufficient to satisfy any federal, state, local or other withholding taxes. 8. Miscellaneous. As a condition of this Award, you are required to execute the acknowledgment at the bottom of the enclosed copy of this Award notice and return the acknowledged copy of this Award notice to the Human Resources Department of Tenneco Inc. not later than [DATE], [____]. By accepting this Award, you agree and acknowledge that you have received and read the copy of the Plan and that you accept this Award subject to the terms and conditions of the Plan. The Units are transferable only by will, the laws of descent and distribution, pursuant to a qualified domestic relations order, or by designation of beneficiary in the event of death (enclosed). This Award is subject to all the definitions, terms and conditions of the Plan, a copy of which is enclosed. To the extent any provision of this Award conflicts with applicable law, the Committee shall have the discretion to modify or amend this Award, or adopt additional terms and or conditions, as may be deemed necessary or advisable in order to comply with the local, state, federal or foreign laws and regulations of any jurisdiction. In the event of any discrepancy between the provisions of the Plan and this or any other communication regarding the Plan, the provisions of the Plan control. This Award shall be binding upon and inure to the benefit of the Company and its successors and assigns, on the one hand, and you and your permitted transferees, on the other hand. TENNECO INC.: By: ------------------------- Name: ----------------------- Title: ---------------------- EMPLOYEE: - -------------------------------------- Signature - -------------------------------------- Type or Print Legal name - -------------------------------------- Social Security Number of Natural ID - -------------------------------------- Address - -------------------------------------- City/State/Zip/Country EXHIBIT A EX-10.69 10 c23259exv10w69.txt LETTER AGREEMENT Exhibit 10.69 [TENNECO LETTERHEAD] January 5, 2007 PERSONAL AND CONFIDENTIAL Mr. Timothy E. Jackson 13694 Shady Lane Monroe, MI 48161 Dear Mr. Jackson: On behalf of Tenneco Inc. (the "Company"), I am pleased to set forth and confirm the terms and conditions of your continued service as Senior Vice President, Technology and General Manager -- Asia Pacific of the Company. This letter agreement amends your employment letter agreement with the Company dated July 11, 2000, as it was amended by your expatriate agreement dated July 21, 2005 (the "Original Agreement"). 1. Base Salary. Your minimum base salary of $260,000 per year as set forth in Paragraph 2 of the Original Agreement is hereby amended to be $327,600 per year, which will be subject to such increases as may from time to time be approved by the Board or such committee of the Board to which such power has been delegated (the "Committee"), payable according to the regular pay schedule for salaried employees. 2. Annual Bonus. Your minimum annual target bonus of $155,000 as set forth in Paragraph 3 of the Original Agreement is hereby amended such that, commencing with calendar year 2006, your annual target bonus will be, at least, $161,000 subject to fulfillment of performance goals or other criteria as determined by the Board or Committee. 3. Amendment to KEPP and SERP. Effective as of August 31, 2006, you hereby consent and agree to the following changes to (a) the Company's Key Executive Pension Plan and its successor, the Company's Supplemental Pension Plan for Management (collectively, the "KEPP"), and (b) the Company's Supplemental Executive Retirement Plan and its successor, the Company's Supplemental Retirement Plan (collectively, the "SERP"). The Company may (i) amend the Supplemental Retirement Plan to provide that (a) all of your benefit accruals under that plan will be frozen effective as of December 31, 2006, (b) you shall not be a participant in that plan after December 31, 2006, (c) no compensation or service (for purposes of benefit accrual) for periods after December 31, 2006 shall be taken into account under that plan, and (d) you will not accrue any additional benefits under that plan after December 31, 2006, and (ii) amend the Supplemental Pension Plan for Management, effective as of January 1, 2007, to (x) reduce from 4% to 3.6% the annual rate (expressed as a percentage of final average compensation as defined in that plan) at which you will accrue benefits under such plan for each year of service earned after December 31, 2006, (y) reduce from 50% to 47.5% the maximum accrual under such plan and (z) provide as an offset to benefits under such plan the actuarial equivalent value (determined in accordance with the assumptions used for such purpose under such plan) of any amounts paid to you in respect of "DB Replacement Contributions" as described in the Company's Current Report on Form 8-K dated August 23, 2006. 4. Governing Law; No Other Amendments. This letter agreement shall be governed by, and shall be construed in accordance with, the internal laws (and not the laws of conflicts) of the State of Illinois. Except as expressly set forth herein, the Original Agreement shall not be amended or modified hereby. The Original Agreement shall, as expressly amended hereby, remain in full force and effect. Sincerely, TENNECO INC. /s/ Timothy R. Donovan By: Timothy R. Donovan Its: Executive Vice President and General Counsel ACKNOWLEDGED AND ACCEPTED Date: - -------------------------- ------------------------- Timothy E. Jackson EX-12 11 c23259exv12.txt COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES COMBINED WITH 50% OWNED UNCONSOLIDATED SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
YEARS ENDED DECEMBER 31, ------------------------------------- 2007 2006 2005 2004 2003 ----- ----- ----- ----- ----- (DOLLARS IN MILLIONS) Income (loss) before cumulative effect of change in accounting principle........................ $ (5) $ 49 $ 56 $ 9 $ 25 Add: Interest expense............................... 164 136 133 178 146 Portion of rentals representative of the interest factor............................. 12 12 12 11 11 Income tax expense (benefit) and other taxes on income...................................... 83 5 26 (21) (6) Minority interest.............................. 10 6 2 4 6 Amortization of interest capitalized........... 3 3 2 1 1 Undistributed (earnings) losses of affiliated companies in which less than a 50% voting interest is owned........................... (1) (3) (1) -- 2 ----- ----- ----- ----- ----- Earnings as defined......................... $ 266 $ 208 $ 230 $ 182 $ 185 ===== ===== ===== ===== ===== Interest expense................................. $ 164 $ 136 $ 133 $ 178 $ 146 Interest capitalized............................. 6 6 3 2 4 Portion of rentals representative of the interest factor......................................... 12 12 12 11 11 ----- ----- ----- ----- ----- Fixed charges as defined.................... $ 182 $ 154 $ 148 $ 191 $ 161 ===== ===== ===== ===== ===== Ratio of earnings to fixed charges............... 1.46 1.35 1.55 0.95 1.15 ===== ===== ===== ===== =====
- -------- NOTE: Earnings were inadequate to cover fixed charges by $9 million for the year ended December 31, 2004. 142 EX-21 12 c23259exv21.txt LIST OF SUBSIDIARIES . . . Exhibit-21 Corporate Directory (TENNECO LOGO)
TENNECO INC. (DELAWARE) AUTOPARTES WALKER S.A. DE C.V. (MEXICO) (The Pullman Company owns >99%; and Tenneco Inc. owns Heinrich Gillet GmbH 5.4 (Tenneco Deutschland Holdinggesellschaft mbH < 95% and Tenneco Inc. owns > 5%) MONROE-MEXICO S.A. DE C.V. (MEXICO) (Autopartes Walker, S.A. de C.V. owns >99%; and each of Proveedora Walker and Tenneco Inc. owns TENNECO AUTOMOTIVE BRASIL LTDA. (BRAZIL) (Tenneco Brazil Ltda. owns >99%; and Tenneco Inc. owns TENNECO AUTOMOTIVE CHINA COMPANY (SHANGHAI) LTD (PRC) 4 (Tenneco Inc. owns 4% and Tenneco Automotive Operating Company Inc. owns 96%) TENNECO AUTOMOTIVE INC. (NEVADA) 100 TENNECO AUTOMOTIVE OPERATING COMPANY INC. 100 Tenneco (Beijing) Ride Control System Company Limited (PRC) 51 (Tenneco Automotive Operating Company Inc. owns 65%; and an unaffiliated company owns 35%) Tenneco Lingchuan (Chongqing) Exhaust System Co. Ltd. 60 (Tenneco Automotive Operating Company Inc. owns 60%; and an unaffiliated company owns 40%) Dalian Walker-Gillet Automobile Muffler Co. Ltd. (PRC) 60 (Tenneco Automotive Operating Company Inc. owns 60%; and an unaffiliated company owns 40%) Walker-Eberspacher Automotive Exhaust System Co., Ltd. 25 (Tenneco Automotive Operating Company Inc. owns 30%; and Dalian Walker-Gillet Automobile Muffler Company Ltd. owns 25% and an unaffiliated entity owns 45%) Maco Inversiones S.A. (Argentina) 5.5 (Tenneco Automotive Operating Company Inc. owns 5.5%; Tenneco Global Holdings Inc. owns 94.49%; and an unaffiliated party owns 0.01%) McPherson Strut Company Inc. (Delaware) 100 Precision Modular Assembly Corp. (Delaware) 100 Shanghai Walker Exhaust System Corporation Ltd. (PRC) 55 (Tenneco Automotive Operating Company Inc. owns 55%; and an unaffiliated company, owns 45%) Tenneco Asheville Inc. (Delaware) 100 Tenneco Asia Inc. (Delaware) 100 Tenneco Automotive China Company (Shanghai) Ltd. 96 (Tenneco Inc. owns 4% and Tenneco Automotive Operating Company Inc. owns 96%) Tenneco Automotive Japan Ltd. (Japan) 100 Tenneco Automotive Foreign Sales Corporation Limited (Jamaica) 100 Tenneco Automotive Nederland B.V. (Netherlands) 100 Tenneco Automotive RSA Company (Delaware) 100 Tenneco Automotive (Thailand) Limited (Thailand) >99 (Tenneco Automotive Operating Company Inc. owns >99%; and individuals each own Walker Exhaust Co. Ltd. (Thailand) 80 (Tenneco Automotive Thailand owns >75% of the shares, three individuals own unaffiliated entity owns 25%) Tenneco Automotive Trading Company (Delaware) 100 Tenneco Europe Limited (Delaware) 100 Tenneco International Holding Corp. (Delaware) 100 Tenneco Automotive France S.A.S. (France) 100 Gillet Tubes Technologies S.A.S. (France) 100 Monroe Packaging BVBA (Belgium) <1 (Tenneco Automotive Europe N.V. owns >99%; and Tenneco Automotive France S.A.S. owns <1% Tenneco Automotive Italia S.r.l. (Italy) 15 (Tenneco International Holding Corp. owns 85%; and Tenneco Automotive France S.A.S. owns 15%)
Wimetal S.A.S. (France) 100 Tenneco Automotive Services SAS (France) 100 Tenneco Automotive Italia S.r.l. (Italy) 85 (Tenneco International Holding Corp. owns 85%; and Tenneco Automotive France, S.A.S. owns 15%) Tenneco Automotive Polska Sp. z.o.o. (Poland) <1 (Tenneco International Holding Corp. owns (1%; and Tenneco Global Holdings Inc. owns) 99%) Tenneco Canada Inc. (Canada) 100 Tenneco Australia Group Pty. Ltd. 100 Monroe Australia Pty. Limited (Australia) 100 Monroe Springs Australia Pty. Ltd. (Australia) 100 Walker Australia Pty. Limited (Australia) 100 Tenneco Global Holdings Inc. (Delaware) 100 Fric-Rot S.A.I.C. (Argentina) 55 (Tenneco Global Holdings Inc. owns 55%; Maco Inversiones S.A. owns 44.85%; and unaffiliated parties own .15%) Maco Inversiones S.A. (Argentina) 94.49 (Tenneco Global Holdings Inc. owns 94.49%; Tenneco Automotive Operating Company Inc. owns 5.5%; and an unaffiliated party owns 0.01%) Fric-Rot S.A.I.C. (Argentina) 44.85 (Maco Inversiones S.A. owns 44.85%; Tenneco Global Holdings Inc. owns 55%; and unaffiliated parties own .15%) Monroe Springs (New Zealand) Pty. Ltd. (New Zealand) 100 Monroe Czechia s.r.o. (Czech Republic) 100 Tenneco Automotive Europe N.V (Belgium) (Tenneco Global Holdings Inc. owns (<1%; Tenneco International Luxembourg S.A. owns>99%) Tenneco Automotive Iberica, S.A. (Spain) 100 Tenneco Automotive Europe Coordination Center BVBA (Belgium) 99 (Tenneco Automotive Iberica, S.A. owns >99%; and Tenneco Automotive Sverige A.B. owns <1% Tenneco Automotive Sverige A.B. (Sweden) 100 Tenneco Automotive Europe Coordination Center BVBA (Belgium) <1 (Tenneco Automotive Iberica, S.A. owns >99%, and Tenneco Automotive Sverige A.B. owns <1% Gillet Exhaust Technologie Pty Ltd (South Africa) 100 Tenneco Automotive Port Elizabeth (Pty) Limited (South Africa) 100 Tenneco Automotive Portugal -- Componentes para Automovel, Unipessoal, Lda (Portugal) 100 Tenneco Automotive Polska Sp. z.o.o. (Poland) >99 (Tenneco Global Holdings Inc. owns >99%; and Tenneco International Holding Corp. owns <1% Tenneco Automotive Romania Srl (Romania) 100 Tenneco International Luxembourg S.A. (Luxembourg) 100 Tenneco Automotive Europe N.V. (Belgium) >99 (Tenneco International Luxembourg S.A. owns >99%; and Tenneco Global Holdings Inc. owns <1%) Monroe Amortisor imalat ve Ticaret A.S. (Turkey) >99 (Tenneco Automotive Europe N.V. owns >99%; and unaffiliated parties own <1%) Monroe Packaging BVBA (Belgium) >99 (Tenneco Automotive Europe N.V. owns >99%; and Tenneco Automotive France S.A.S. owns <1%) Tenneco Deutschland Holdinggesellschaft mbH (Germany) 100 Gillet Unternehmesverwaltungs GmbH (Germany) 100 Heinrich Gillet GmbH (Germany) 95 (Tenneco Deutschland Holdinggesellschaft mbH owns 94.6%, Tenneco Inc owns 5.4%) Elgira Montagebetrieb fur Abgasanlagen Rastatt GmbH (Germany) 50 (Heinrich Gillet GmbH owns 50%; and an unaffiliated party owns 50%) Gillet-Abgassysteme Zwickau GmbH (Germany) 100 Elagest AB (Sweden) 50 (Gillet-Abgassysteme Zickau GmbH owns 50%; and an unaffiliated party owns 50%) Montagewerk Abgastechnik Emden GmbH (Germany) 50 (Heinrich Gillet GmbH owns 50%; and an unaffiliated party owns 50%) Tenneco Automotive Deutschland GmbH (Germany) 100
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Walker Gillet (Europe) GmbH (Germany) 100 Tenneco Mauritius Limited (Mauritius) 100 Tenneco RC India Private Limited (India) 100 Renowned Auto Products Manufacturers Ltd. (India) >98 (Tenneco RC India Pvt Limited owns >98%; and non-affiliates own <2%) Tenneco Mauritius Holdings Ltd. (Mauritius) 100 Tenneco Automotive India Private Limited (India) 100 Walker Exhaust India Private Limited (India) 100 Tenneco India Eng. & Shared Services (India) >99 (Tenneco Mauritius Holdings Ltd. owns 99.9% and an affiliated party owns <1% Tenneco Holdings Danmark ApS. (Denmark) 100 Kinetic Pty Ltd. (Australia) Ltd 100 Tenneco Automotive Eastern Europe Sp. zo.o. (Poland) 100 Tenneco Automotive Holdings South Africa Pty. Ltd. (South Africa) 75 (Tenneco Holdings Danmark ApS owns 74.9%; and an unaffiliated entity owns 25.1%) Armstrong Hydraulics South Africa (Pty.) Ltd. (South Africa) 100 Armstrong Properties (Pty.) Ltd. (South Africa) 100 Monroe Manufacturing (Pty.) Ltd. (South Africa) 100 Tenneco Automotive Volga LLC (Russia) 100 Walker Danmark ApS (Denmark) 100 Walker Europe, Inc. (Delaware) 100 Tenneco Mauritius China Holding Limited (Mauritius) 100 Tenneco (Suzhou) Company Limited (China) >99 The Pullman Company (Delaware) 100 Autopartes Walker S.A. de C.V. (Mexico) >99 (The Pullman Company owns >99%; and Tenneco Inc. owns Monroe-Mexico S.A. de C.V. (Mexico) >99 (Autopartes Walker, S.A. de C.V. owns >99%; and each of Proveedora Walker and Tenneco Inc. own less than Tenneco Automotive Servicios de Mexico, S.A. de C.V. (Mexico) (Monroe-Mexico, S.A. de C.V. owns (1%; and Proveedora Walker S. de R.L. de C.V. owns)99%) Proveedora Walker S. de R.L. de C.V. (Mexico) >99 (Autopartes Walker S.A. de C.V.owns >99%; and Monroe-Mexico S.A. de C.V. owns Monroe-Mexico S.A. de C.V. (Mexico) (Autopartes Walker, S.A. de C.V. owns >99%; and each of Proveedora Walker and Tenneco Inc. own Proveedora Walker S. de R.L. de C.V. (Mexico) (Autopartes Walker S.A. de C.V.owns >99%; and Monroe-Mexico S.A. de C.V. owns .0 Tenneco Automotive Servicios de Mexico, S.A. de C.V. (Mexico) >99 (Proveedora Walker S. de R.L. de C.V. owns >99%, and Monroe-Mexico, S.A. de C.V. owns Clevite Industries Inc. (Delaware) 100 Peabody International Corporation (Delaware) 100 Barasset Corporation (Ohio) 100 Peabody Galion Corporation (Delaware) 100 Peabody Gordon-Piatt, Inc. (Delaware) 100 Peabody N.E., Inc. (Delaware) 100 Peabody-Myers Corporation (Illinois) 100 Pullman Canada Ltd. (Canada) 61 (Peabody International Corporation owns 61%; and The Pullman Company owns 39%) Tenneco Automotive China Inc. (Delaware) 100 Pullman Canada Ltd. (Canada) 39 (The Pullman Company owns 39%; and Peabody International Corporation owns 61%) Pullman Standard Inc. (Delaware) 100 Tenneco Brazil Ltda. (Brazil) >99 (The Pullman Company owns >99%; and an unaffiliated individual owns
3
Tenneco Automotive Brasil Ltda. (Brazil) >99 (Tenneco Brazil Ltda. owns >99%; and Tenneco Inc. owns Thompson and Stammers (Dunmow) Number 6 Limited (United Kingdom) 100 Thompson and Stammers (Dunmow) Number 7 Limited (United Kingdom) 100 TMC Texas Inc. (Delaware) 100 Walker-Eberspacher Automotive Exhaust System Co., Ltd. 30 (Tenneco Automotive Operating Company Inc owns 30%; and Dalian Walker Gillet Automobile Muffler Company Ltd. owns 25% and an unaffiliated entity owns 45%) Walker Electronic Silencing Inc. (Delaware) 100 Walker Limited (United Kingdom) 100 Futaba Tenneco UK Limited. 49 (Walker Limited. owns 49% and an unaffiliated party owns 51%) Tenneco Automotive UK Limited (United Kingdom) 100 Gillet Exhaust Manufacturing Limited (United Kingdom) 100 Gillet Pressings Cardiff Limited (United Kingdom) 100 The Tenneco Automotive (UK) Pension Scheme Trustee Limited 100 Walker UK Limited (United Kingdom) 100 J.W. Hartley (Motor Trade) Limited (United Kingdom) 100 Tenneco-Walker (U.K.) Limited (United Kingdom) 100 Tenneco Management (Europe) Limited (United Kingdom) 100 Walker Manufacturing Company (Delaware) 100 Ced's Inc. (Illinois) 100
4 EX-23 13 c23259exv23.txt CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM EXHIBIT 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement Nos. 333-17485, 333-30933, 333-17487, 333-41535, 333-27279, 333-23249, 333-27281, 333-41537, 333-48777, 333-76261, 333-33442, 333-33934, 333-58056, 333-101973, 333-113705, 333-142475 and 333-142473 on Form S-8, and Registration Statement No. 333-24291 on Form S-3 of our reports dated February 29, 2008, relating to the consolidated financial statements and financial statement schedule of Tenneco Inc. and consolidated subsidiaries (which report expresses an unqualified opinion and includes explanatory paragraphs regarding the Company's adoption of the measurement date provisions of Statement of Financial Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans -- an amendment of FASB Statements No 87, 88, 106, and 132(R)" on January 1, 2007 and the Company's adoption of Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment" on January 1, 2006 and the Company's adoption of the recognition and disclosure provisions of Statement of Financial Accounting Standards No. 158, "Employer's Accounting for Defined Benefit Pension and Other Postretirement Plans -- an amendment of FASB Statements No. 87, 88, 106 and 132(R)" on December 31, 2006) and Tenneco's internal control over financial reporting (which report expresses an adverse opinion on the effectiveness of the Company's internal control over financial reporting because of a material weakness), appearing in this Annual Report on Form 10-K of Tenneco Inc. for the year ended December 31, 2007. DELOITTE & TOUCHE, LLP Chicago, Illinois February 29, 2008 EX-24 14 c23259exv24.txt POWERS OF ATTORNEY EXHIBIT 24 TENNECO INC. POWER OF ATTORNEY The undersigned does hereby appoint David A. Wardell, Kenneth R. Trammell and Paul D. Novas, and each of them, with full power to act alone, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute the Annual Report on Form 10-K for the year ended December 31, 2007 of Tenneco Inc., including any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 28th day of February, 2008. /s/ Gregg Sherrill ---------------------------------- Name: Gregg Sherrill TENNECO INC. POWER OF ATTORNEY The undersigned does hereby appoint David A. Wardell and Paul D. Novas, and each of them, with full power to act alone, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute the Annual Report on Form 10-K for the year ended December 31, 2007 of Tenneco Inc., including any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 28th day of February, 2008. /s/ Kenneth R. Trammell ---------------------------------- Name: Kenneth R. Trammell TENNECO INC. POWER OF ATTORNEY The undersigned does hereby appoint David A. Wardell and Kenneth R. Trammell, and each of them, with full power to act alone, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute the Annual Report on Form 10-K for the year ended December 31, 2007 of Tenneco Inc., including any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 28th day of February, 2008. /s/ Paul D. Novas ---------------------------------- Name: Paul D. Novas TENNECO INC. POWER OF ATTORNEY The undersigned does hereby appoint David A. Wardell, Kenneth R. Trammell and Paul D. Novas, and each of them, with full power to act alone, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute the Annual Report on Form 10-K for the year ended December 31, 2007 of Tenneco Inc., including any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 13th day of February, 2008. /s/ Charles W. Cramb ---------------------------------- Name: Charles W. Cramb TENNECO INC. POWER OF ATTORNEY The undersigned does hereby appoint David A. Wardell, Kenneth R. Trammell and Paul D. Novas, and each of them, with full power to act alone, as her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for her and in her name, place and stead, in any and all capacities, to execute the Annual Report on Form 10-K for the year ended December 31, 2007 of Tenneco Inc., including any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, or their or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 12th day of February, 2008. /s/ Dennis J. Letham ---------------------------------- Name: Dennis J. Letham TENNECO INC. POWER OF ATTORNEY The undersigned does hereby appoint David A. Wardell, Kenneth R. Trammell and Paul D. Novas, and each of them, with full power to act alone, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute the Annual Report on Form 10-K for the year ended December 31, 2007 of Tenneco Inc., including any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 15th day of February, 2008. /s/ Frank E. Macher ---------------------------------- Name: Frank E. Macher TENNECO INC. POWER OF ATTORNEY The undersigned does hereby appoint David A. Wardell, Kenneth R. Trammell and Paul D. Novas, and each of them, with full power to act alone, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute the Annual Report on Form 10-K for the year ended December 31, 2007 of Tenneco Inc., including any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 14th day of February, 2008. /s/ Roger B. Porter ---------------------------------- Name: Roger B. Porter TENNECO INC. POWER OF ATTORNEY The undersigned does hereby appoint David A. Wardell, Kenneth R. Trammell and Paul D. Novas, and each of them, with full power to act alone, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute the Annual Report on Form 10-K for the year ended December 31, 2007 of Tenneco Inc., including any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 15th day of February, 2008. /s/ David B. Price, Jr. ---------------------------------- Name: David B. Price, Jr. TENNECO INC. POWER OF ATTORNEY The undersigned does hereby appoint David A. Wardell, Kenneth R. Trammell and Paul D. Novas, and each of them, with full power to act alone, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute the Annual Report on Form 10-K for the year ended December 31, 2007 of Tenneco Inc., including any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 13th day of February, 2008. /s/ Paul T. Stecko ---------------------------------- Name: Paul T. Stecko TENNECO INC. POWER OF ATTORNEY The undersigned does hereby appoint David A. Wardell, Kenneth R. Trammell and Paul D. Novas, and each of them, with full power to act alone, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute the Annual Report on Form 10-K for the year ended December 31, 2007 of Tenneco Inc., including any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 14th day of February, 2008. /s/ Mitsunobu Takeuchi ---------------------------------- Name: Mitsunobu Takeuchi TENNECO INC. POWER OF ATTORNEY The undersigned does hereby appoint David A. Wardell, Kenneth R. Trammell and Paul D. Novas, and each of them, with full power to act alone, as her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for her and in her name, place and stead, in any and all capacities, to execute the Annual Report on Form 10-K for the year ended December 31, 2007 of Tenneco Inc., including any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, or their or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 20th day of February, 2008. /s/ Jane L. Warner ---------------------------------- Name: Jane L. Warner EX-31.1 15 c23259exv31w1.txt SECTION 302 CERTIFICATION EXHIBIT 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT I, Gregg Sherrill, certify that: 1. I have reviewed this annual report on Form 10-K of Tenneco Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15 (f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of the registrant's internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ GREGG SHERRILL ---------------------------------------- Gregg Sherrill Chairman and Chief Executive Officer Dated: February 29, 2008 143 EX-31.2 16 c23259exv31w2.txt SECTION 302 CERTIFICATION EXHIBIT 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT I, Kenneth R. Trammell, certify that: 1. I have reviewed this annual report on Form 10-K of Tenneco Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15 (f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of the registrant's internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ KENNETH R. TRAMMELL ---------------------------------------- Kenneth R. Trammell Executive Vice President and Chief Financial Officer Dated: February 29, 2008 144 EX-32.1 17 c23259exv32w1.txt SECTION 906 CERTIFICATION EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the accompanying Annual Report on Form 10-K of Tenneco Inc. (the "Company") for the period ended December 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), and pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Gregg Sherrill, as Chief Executive Officer of the Company, and Kenneth R. Trammell, as Chief Financial Officer of the Company, hereby certify that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ GREGG SHERRILL ---------------------------------------- Gregg Sherrill Chief Executive Officer /s/ KENNETH R. TRAMMELL ---------------------------------------- Kenneth R. Trammell Chief Financial Officer February 29, 2008 This certification shall not be deemed "filed" by the Company for purposes of Section 18 of the Securities Exchange Act of 1934. In addition, this certification shall not be deemed to be incorporated by reference into any filing under the Securities Exchange Act of 1933 or the Securities Exchange Act of 1934. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. 145 -----END PRIVACY-ENHANCED MESSAGE-----