424B3 1 d196831d424b3.htm 424B3 424B3
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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-178649
333-178649-01
333-178649-02
333-178649-03
333-178649-04
333-178649-05
333-178649-06
333-178649-07

PROSPECTUS

CHRYSLER GROUP LLC

Offers to Exchange

up to $1,500,000,000 aggregate principal amount of new 8% Secured Senior Notes due 2019 registered under the Securities Act of 1933, for any and all of our outstanding 8% Secured Senior Notes due 2019, and

up to $1,700,000,000 aggregate principal amount of new 8 1/4% Secured Senior Notes due 2021 registered under the Securities Act of 1933, for any and all of our outstanding 8 1/4% Secured Senior Notes due 2021

 

 

We are offering to exchange, upon the terms and subject to the conditions set forth in this prospectus and the accompanying letter of transmittal, our new 8% Secured Senior Notes due 2019, which we refer to as the 2019 Notes, for all of our outstanding old 8% Senior Notes due 2019, which we refer to as the old 2019 notes, and our new 8 1/4% Secured Senior Notes due 2021, which we refer to as the 2021 Notes, for all of our outstanding old 8 1/4% Secured Senior Notes due 2021, which we refer to as the old 2021 notes. We refer to old 2019 notes and the old 2021 notes together as the old notes, and the 2019 Notes and the 2021 Notes together as the Notes.

Material Terms of the Exchange Offers

 

   

The exchange offers will expire at 5:00 p.m. New York City time, on February 1, 2012, unless extended.

 

   

You will receive an equal principal amount of 2019 Notes for all old 2019 notes and an equal principal amount of 2021 Notes for all old 2021 notes, in each case that you validly tender and do not validly withdraw.

 

   

The form and terms of the 2019 Notes and the 2021 Notes will be identical in all material respects to the old 2019 notes and old 2021 notes, respectively, that we issued on May 24, 2011, except the Notes will not contain restrictions on transfer, will bear different CUSIP numbers and will not entitle their holders to certain registration rights relating to the old notes.

 

   

The exchange should not be a taxable exchange for United States federal income tax purposes.

 

   

There has been no public market for the old notes and we cannot assure you that any public market for the Notes will develop. We do not intend to list the Notes on any securities exchange.

 

   

If you fail to tender your old notes for the Notes, you will continue to hold unregistered securities and it may be difficult for you to transfer them.

 

 

Investing in the Notes involves risks. You should read carefully the “Risk Factors” beginning on page 16 of this prospectus before participating in the exchange offers.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

The date of this prospectus is December 29, 2011.


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We are responsible for the information contained in this prospectus. We have not authorized anyone to give you any other information, and take no responsibility for any other information that others may give you. We are offering to sell the Notes only in places where offers and sales are permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front cover of this prospectus.

TABLE OF CONTENTS

 

     Page  

Industry Data

     ii   

Presentation of Results

     ii   

Disclosure Regarding Forward-Looking Statements

     iii   

Summary

     1   

Risk Factors

     16   

The Exchange Offers

     46   

Use of Proceeds

     54   

Selected Historical Consolidated Financial and Other Data

     55   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     58   

Business

     123   

Management

     152   

Executive Compensation

     164   

Security Ownership of Certain Beneficial Owners and Management

     189   

Certain Relationships and Related Party Transactions

     190   

Description of Other Indebtedness

     194   

Description of the Notes

     204   

Book-Entry, Delivery and Form

     270   

Registration Rights

     273   

Certain U.S. Federal Income Tax Considerations

     275   

Plan of Distribution

     280   

Validity of the Notes

     282   

Experts

     282   

Where You Can Find More Information

     282   

Index to Consolidated Financial Statements

     F-1   

 

 

This prospectus contains summaries of the material terms of certain documents and refers you to certain documents that we have filed with the Securities and Exchange Commission, or the SEC. See “Where You Can Find More Information.” Copies of these documents, except for certain exhibits and schedules, will be made available to you without charge upon written or oral request to:

Chrysler Group LLC

Attn: Investor Relations

1000 Chrysler Drive

Auburn Hills, Michigan 48326

(248) 512-2950

In order to obtain timely delivery of such materials, you must request information from us no later than five business days prior to February 1, 2012, the date you must make your investment decision.

 

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INDUSTRY DATA

In this prospectus, we include and refer to industry and market data obtained or derived from internal surveys, market research, publicly available information and industry publications. Industry publications and surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of included information. Although we believe that this information is reliable, we have not independently verified the data from third-party sources. Similarly, while we believe our internal estimates with respect to our industry are reliable, our estimates have not been verified by any independent sources. While we believe the industry data presented in this prospectus is reliable, our estimates, in particular as they relate to market share and our future expectations, involve risks and uncertainties and are subject to change based on various factors, including those discussed under the caption “Risk Factors.”

PRESENTATION OF RESULTS

As used in this prospectus, all references to the Company, Chrysler Group and any results of operations (i) on and after June 10, 2009 refer only to Chrysler Group LLC, (ii) for the period from August 4, 2007 through June 9, 2009 refer only to Old Carco LLC (f/k/a Chrysler LLC) and (iii) before August 4, 2007 refer only to Chrysler Automotive, an unincorporated business of Daimler AG (f/k/a DaimlerChrysler AG), or Daimler, which was not separately organized under an existing legal structure. Any full-year 2009 information contained in this prospectus includes the combined results of Chrysler Group LLC and Old Carco LLC; and any full-year 2007 information contained in this prospectus includes the combined results of Old Carco LLC and Chrysler Automotive.

CG Co-Issuer Inc., a Delaware corporation and wholly owned subsidiary of Chrysler Group LLC, was formed as a special purpose finance subsidiary to facilitate the offering of the old notes and the Notes.

 

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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that reflect our current views about future events. We use the words “anticipate,” “assume,” “believe,” “estimate,” “expect,” “will,” “intend,” “may,” “plan,” “project,” “should,” “could,” “seek,” “designed,” “potential,” “forecast,” “target,” “objective,” “goal,” or the negatives of such terms or other similar expressions. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include those listed under “Risk Factors” and elsewhere in this prospectus. These factors include, but are not limited to:

 

   

our ability to maintain confidence in our long-term viability;

 

   

our ability to realize benefits from our industrial alliance with Fiat;

 

   

our ability to control costs and implement cost reduction and productivity improvement initiatives;

 

   

changes and fluctuations in the prices of raw materials, parts and components;

 

   

continued economic weakness and weak vehicle demand, especially in North America;

 

   

uncertainty relating to the sovereign debt crisis affecting economic conditions in several European nations in which we plan to increase sales, and where Fiat, our alliance partner, is organized and derives significant revenue;

 

   

our lack of a captive finance company and the potential inability of our dealers and customers to obtain affordably priced financing;

 

   

our ability to increase vehicle sales outside of North America;

 

   

changes in currency exchange rates and interest rates;

 

   

our ability to regularly introduce new and significantly refreshed vehicles that appeal to consumers;

 

   

competitive pressures that may limit our ability to reduce sales incentives and achieve better pricing;

 

   

increases in fuel prices that may adversely impact demand for our vehicles;

 

   

changes in consumer preferences that could reduce relative demand for our product offerings;

 

   

our ability to accurately forecast demand for our vehicles;

 

   

our ability to obtain U.S. Department of Energy funding of our advanced technology vehicle programs under Section 136 of the Energy Independence and Security Act of 2007;

 

   

our substantial indebtedness and limitations on our liquidity that may limit our ability to execute our business plan;

 

   

disruption of production or delivery of new vehicles due to shortages of materials, including supply disruptions resulting from natural disasters, labor strikes, or supplier insolvencies;

 

   

changes in laws, regulations and government policies, particularly those relating to vehicle emissions, fuel economy and safety; and

 

   

the impact of vehicle defects and/or product recalls.

 

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If any of these risks and uncertainties materialize, or if the assumptions underlying any of our forward-looking statements prove incorrect, then our actual results, level of activity, performance or achievements may be materially different from those we express or imply by such statements. The risks described in the “Risk Factors” section in this prospectus are not exhaustive. Other sections of this prospectus describe additional factors that could adversely affect our business, financial condition or results of operations. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time and we cannot predict all such risk factors, nor can we assess the impact of all such risks on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those implied by any forward-looking statements. We do not intend, or assume any obligation, to update these forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements referred to above and included elsewhere in this prospectus.

 

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SUMMARY

In this prospectus, unless otherwise specified, the terms “we,” “our,” “us,” “Chrysler Group” and

the “Company” refer to Chrysler Group LLC and its consolidated subsidiaries, or any one or more of them, as the context may require, “Old Carco” refers to Old Carco LLC f/k/a Chrysler LLC and its consolidated subsidiaries, or any one or more of them, as the context may require, and “Fiat” refers to Fiat S.p.A., a corporation organized under the laws of Italy, and its consolidated subsidiaries, or any one or more of them, as the context may require. This summary highlights selected information contained in greater detail elsewhere in this prospectus. This summary may not contain all of the information that you should consider before participating in the exchange offers. You should carefully read the entire prospectus, including the sections under the headings “Risk Factors” and “Disclosure Regarding Forward-Looking Statements.”

CHRYSLER GROUP LLC

Our Company

We are a leading North American automotive manufacturer. We design, engineer, manufacture, distribute and sell vehicles under the brand names Chrysler, Jeep, Dodge, and Ram. Our product lineup includes passenger cars, utility vehicles (which include sport utility vehicles and crossover vehicles), minivans, pick-up trucks, and medium-duty trucks. We also sell automotive service parts and accessories under the Mopar brand name.

We sell products in more than 120 countries around the world. The majority of our operations, employees, independent dealers and sales are in North America, primarily in the U.S. Our U.S. new vehicle market share in the nine months ended September 30, 2011 was 10.4 percent, up from 9.2 percent in 2010, and 8.8 percent in 2009. Approximately 10 percent of our vehicle sales in the nine months ended September 30, 2011 and in 2010 were outside North America, primarily in South America, Asia Pacific and Europe.

We sell our products both to dealers for sale to retail customers and to fleet customers, including rental car companies, commercial fleet customers, leasing companies and government entities. We maintain a broad dealer network of 4,905 dealers worldwide, of which 2,335 are located in the U.S.

We began operations on June 10, 2009, following our purchase of the principal assets of Old Carco in a U.S. Bankruptcy Court-approved transaction supported financially by the United States Department of the Treasury, or U.S. Treasury, and the federal Canadian and certain provincial governments, which we refer to as the 363 Transaction. As part of this transaction, we formed an industrial alliance with Fiat S.p.A., a leading global automotive manufacturer that sells vehicles primarily in Europe and South America, pursuant to which Fiat became our principal industrial partner. The Fiat alliance provides us with a number of long-term benefits, including access to new vehicle platforms and powertrain technologies, particularly in smaller, more fuel-efficient segments where Old Carco was historically underrepresented, as well as global distribution opportunities and procurement scale and process benefits. Fiat currently holds a 53.5 percent ownership interest in us on a fully diluted basis, which we expect will increase to 58.5 percent upon the occurrence of a performance event described under “Management—Ownership.” For additional information regarding the Fiat alliance, see “Business—Chrysler Group Overview—Alliance with Fiat.”

 

 

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The Refinancing Transactions and Exchange Offers

On May 24, 2011, we completed the offering of $1.5 billion aggregate principal amount of old 2019 notes and $1.7 billion aggregate principal amount of old 2021 notes in a transaction exempt from the registration requirements under the Securities Act of 1933, as amended, or the Securities Act. We used the proceeds from that offering, together with $3.0 billion of term loan borrowings under the credit agreement governing the Senior Credit Facilities described under the heading “Description of Other Indebtedness—Senior Credit Facilities” and approximately $1.3 billion of proceeds from Fiat’s exercise of an option to acquire an incremental 16 percent fully diluted ownership interest in us, to repay in full our obligations under the U.S. Treasury first lien credit facility and the Export Development Canada, or EDC, credit facility and terminate outstanding lending commitments thereunder, as well as related fees and expenses.

In connection with the offering of the old notes, we entered into a registration rights agreement, dated as of May 24, 2011, with the initial purchasers of the old notes. In the registration rights agreement, we agreed to offer the Notes, which will be registered under the Securities Act, in exchange for the old notes. The exchange offers are intended to satisfy our obligations under the registration rights agreement.

Additional Information

Chrysler Group is a Delaware limited liability company and CG Co-Issuer Inc. is a Delaware corporation that was formed in 2011 for purposes of issuing the old notes and the Notes. Our principal executive offices are located at 1000 Chrysler Drive, Auburn Hills, Michigan 48326. Our phone number at this address is (248) 512-2950 and our corporate website is www.chryslergroupllc.com. We do not incorporate information available on, or accessible through, our corporate website into this prospectus, and you should not consider it part of this prospectus.

Risk Factors

Investing in the Notes involves substantial risks. Before participating in the exchange offers, you should carefully consider all of the information in this prospectus, including matters set forth in the section entitled “Risk Factors” beginning on page 16.

 

 

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The Exchange Offers

The summary below describes the principal terms of the exchange offers. Some of the terms and conditions described below are subject to important limitations and restrictions. You should carefully review “The Exchange Offers” section of this prospectus, which contains a more detailed description of the terms and conditions of the exchange offers.

 

The Exchange Offers

The exchange offers relate to the exchange of:

 

   

up to $1,500,000,000 aggregate principal amount of outstanding 8% Secured Senior Notes due 2019, for an equal aggregate principal amount of 2019 Notes; and

 

   

up to $1,700,000,000 aggregate principal amount of outstanding 8¼% Secured Senior Notes due 2021, for an equal aggregate principal amount of 2021 Notes.

 

  We will exchange all outstanding old notes that are validly tendered and not validly withdrawn. However, you may only exchange old notes in minimum denominations of $200,000 and integral multiples of $1,000 in excess thereof.

 

  The form and terms of the Notes will be identical in all material respects to the form and terms of the corresponding outstanding old notes, except that the Notes will not contain restrictions on transfer, will bear different CUSIP numbers and will not entitle their holders to certain registration rights relating to the old notes.

 

Resale of the Notes

Based on interpretations by the staff of the SEC set forth in no-action letters issued to other parties, we believe that you may offer for resale, resell and otherwise transfer your Notes without compliance with the registration and prospectus delivery provisions of the Securities Act if you are not our affiliate and you acquire the Notes issued in the exchange offers in the ordinary course.

 

  You must also represent to us that you are not participating, do not intend to participate, and have no arrangement or understanding with any person to participate, in the distribution of the Notes we issue to you in the exchange offers.

 

  Each broker-dealer that receives Notes in the exchange offers for its own account in exchange for old notes that it acquired as a result of market-making or other trading activities must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of the Notes issued in the exchange offers. You may not participate in the exchange offers if you are a broker-dealer who purchased such outstanding old notes directly from us for resale pursuant to Rule 144A or any other available exemption under the Securities Act.

 

Expiration Date

The exchange offers will expire at 5:00 p.m., New York City time, on February 1, 2012, unless we decide to extend the expiration date of an exchange offer. We may extend the expiration date for any reason. If

 

 

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we fail to consummate an exchange offer, you will have certain rights against us with respect to the series of old notes for which the exchange offer has been suspended under the registration rights agreement we entered into as part of the offering of the old notes.

 

Special Procedures For Beneficial Owners

If you are the beneficial owner of old notes and you registered your old notes in the name of a broker or other institution, and you wish to participate in the exchange offers, you should promptly contact the person in whose name you registered your old notes and instruct that person to tender the old notes on your behalf. If you wish to tender on your own behalf, you must, prior to completing and executing the letter of transmittal and delivering your outstanding old notes, either make appropriate arrangements to register ownership of the outstanding old notes in your name or obtain a properly completed bond power from the registered holder. The transfer of record ownership may take considerable time.

 

Guaranteed Delivery Procedures

If you wish to tender your old notes and time will not permit your required documents to reach the exchange agent by the expiration date, or you cannot complete the procedure for book-entry transfer on time or you cannot deliver your certificates for registered old notes on time, you may tender your old notes pursuant to the procedures described in this prospectus under the heading “The Exchange Offers—How to use the guaranteed delivery procedures if you will not have enough time to send all documents to us.”

 

Withdrawal Rights

You may withdraw the tender of your old notes at any time prior to the expiration date.

 

Certain U.S. Federal Income Tax Considerations

An exchange of old notes for Notes should not be subject to United States federal income tax. See “Certain U.S. Federal Income Tax Considerations.”

 

Use of Proceeds

We will not receive any proceeds from the issuance of Notes pursuant to the exchange offers. Old notes that are validly tendered and exchanged will be retired and canceled. We will pay all expenses incidental to the exchange offers.

 

Exchange Agent

You can reach the Exchange Agent, Citibank, N.A. at 388 Greenwich Street, 14th Floor, New York, New York 10013, Attn: Global Transaction Services—Chrysler Group Exchange Offer. For more information with respect to the exchange offers, you may call the Exchange Agent at (212) 816-5614; the fax number for the Exchange Agent is (212) 816-5527 (for eligible institutions only).

 

 

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The Notes

The summary below describes the principal terms of the Notes. Some of the terms and conditions described below are subject to important limitations and exceptions. You should carefully review the “Description of the Notes” section of this prospectus, which contains a more detailed description of the terms and conditions of the Notes. For purposes of the summary below, the terms “we,” “our,” “us,” and “Chrysler Group” refer only to Chrysler Group LLC and not to any of its subsidiaries.

 

Issuers

Chrysler Group LLC, a Delaware limited liability company, and CG Co-Issuer Inc., a Delaware corporation and wholly owned subsidiary of Chrysler Group LLC, or the “Co-Issuer.” The Notes will be the joint and several obligations of the Issuers. See “Description of the Notes—General.”

 

Notes Offered

$1,500,000,000 aggregate principal amount of 2019 Notes.

 

  $1,700,000,000 aggregate principal amount of 2021 Notes.

 

Maturity Date

June 15, 2019 for the 2019 Notes.

 

  June 15, 2021 for the 2021 Notes.

 

Interest Payment Dates

June 15 and December 15 of each year, commencing June 15, 2012.

 

Guarantees by our Subsidiaries

The Notes will be fully and unconditionally guaranteed on a senior secured junior-priority basis by each of our existing and future domestic Restricted Subsidiaries (as defined herein) that guarantee the Senior Credit Facilities, as well as certain other future domestic Restricted Subsidiaries. See “Description of the Notes—Certain Covenants in the Indenture—Future Guarantors.”

 

Ranking

The Notes will be the secured senior obligations of the Issuers on a joint and several basis and:

 

   

will be senior in right of payment to any indebtedness of the Issuers which is by its terms subordinated in right of payment to the Notes;

 

   

will rank pari passu in right of payment with respect to all existing and future unsubordinated indebtedness of the Issuers, including the Senior Credit Facilities and any Permitted DOE Facility (as defined herein);

 

   

will be effectively junior to any obligations of the Issuers that are either (i) secured by a lien on the Collateral (as defined herein) that is senior or prior to the liens securing the Notes, including the Liens (as defined herein) securing the Senior Credit Facilities, and to other Permitted Liens (as defined herein), to the extent of the value of the assets securing such obligations, or (ii) secured by a lien on property or assets that do not constitute Collateral to the extent of the value of the assets securing such obligations; and

 

 

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will be structurally subordinated to all existing and future obligations of any of our existing or future subsidiaries that do not guarantee the Notes, including all of our non-U.S. subsidiaries.

 

  As of September 30, 2011, (i) the Issuers and the guarantors had approximately $6.3 billion of secured indebtedness outstanding, of which approximately $3.2 billion constitutes First-Priority Lien Obligations (as defined herein) (including $2.9 billion of secured senior Indebtedness under the Senior Credit Facilities), in each case, excluding $1.3 billion of unused commitments under the revolving credit facility in the Senior Credit Facilities; (ii) the Issuers and the guarantors had approximately $4.5 billion of unsecured indebtedness outstanding and (iii) the non-guarantor subsidiaries had approximately $1.6 billion of indebtedness outstanding.

 

  As of September 30, 2011, our non-guarantor subsidiaries had approximately $11 billion in total assets, and approximately $8 billion of total liabilities (including trade payables) to which the Notes were structurally subordinated.

 

Security

The Notes and the related guarantees will, subject to prior Liens and certain other limitations, be secured by junior-priority liens on the Collateral owned by the Issuers and each guarantor. The Collateral generally consists of (i) 100% of the capital stock of the Co-Issuer and 100% of the capital stock of our existing and future domestic subsidiaries that is owned directly by us or any guarantor, (ii) 65% of the capital stock of all of our existing and future non-U.S. subsidiaries that is owned directly by us or any guarantor or by certain entities (including domestic subsidiaries) that are treated as pass through entities for U.S. federal income tax purposes and whose assets primarily consist of interests in non-U.S. subsidiaries (such entities “Transparent Subsidiaries”) and (iii) substantially all of the other property and assets that are held directly by the Issuers or any guarantor, to the extent that such assets secure any First-Priority Lien Obligations and to the extent that a junior-priority security interest is able to be granted or perfected therein.

 

  The Collateral does not include (i) any assets of any of our non-U.S. subsidiaries, (ii) any capital stock of any of our non-U.S. subsidiaries, other than 65% of the capital stock of our or any guarantor’s or any Transparent Subsidiary’s direct non-U.S. subsidiaries, (iii) any equity interest of a Transparent Subsidiary, or (iv) any DOE Collateral (as defined herein).

 

 

In addition, the indenture governing the Notes will provide that any capital stock and other securities of any of our subsidiaries will be

 

 

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excluded from the Collateral for so long as the pledge of such capital stock or other securities to secure the Notes would cause such subsidiary to be required to file separate financial statements with the SEC.

 

  The granting of a lien on an asset and the priority of any lien are subject to exceptions. See “Description of the Notes—Security”, “Description of the Notes—Certain Covenants in the Indenture—Liens”, “Description of the Notes—Certain Covenants in the Indenture—Future Collateral”, “Description of the Notes—Certain Covenants in the Indenture—Covenant Fall-Away”, “Description of the Notes—Certain Definitions and Conventions—Permitted Liens” and “Risk Factors—Risks Related to Our Structure, the Notes and the Exchange Offers.”

 

Intercreditor Agreement

The collateral agent is a party to an intercreditor agreement with us, the guarantors and administrative agent and collateral agent under the Senior Credit Facilities, which will establish the relative priority of the liens securing the Senior Credit Facilities and the Notes and will govern the relationship of the noteholders and the lenders under the Senior Credit Facilities with respect to the Collateral. See “Description of Other Indebtedness—Intercreditor Agreement.”

 

Optional Redemption

The 2019 Notes will be redeemable, in whole or in part, at any time on or after June 15, 2015 at the redemption prices listed under “Description of the Notes—Optional Redemption—2019 Notes,” plus accrued and unpaid interest, if any, to the date of redemption. Prior to June 15, 2014, we may also redeem up to 35% of the aggregate principal amount of the 2019 Notes at a redemption price equal to 108.000% of the principal amount of the 2019 Notes redeemed plus accrued and unpaid interest, if any, to the date of redemption with the net cash proceeds from certain equity offerings. The 2019 Notes will be redeemable, in whole or in part, at any time prior to June 15, 2015 at a redemption price equal to 100% of their principal amount, plus a “make whole” premium, together with accrued and unpaid interest, if any, to the redemption date.

The 2021 Notes will be redeemable, in whole or in part, at any time on or after June 15, 2016 at the redemption prices listed under “Description of the Notes—Optional Redemption—2021 Notes,” plus accrued and unpaid interest, if any, to the date of redemption. Prior to June 15, 2014, we may also redeem up to 35% of the aggregate principal amount of the 2021 Notes at a redemption price equal to 108.250% of the principal amount of the 2021 Notes redeemed plus accrued and unpaid interest, if any, to the date of redemption with the net cash proceeds from certain equity offerings. The 2021 Notes will be redeemable, in whole or in part, at any time prior to June 15, 2016 at a redemption price equal to 100% of their principal amount plus a “make whole” premium, together with accrued and unpaid interest, if any, to the redemption date.

 

 

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See “Description of the Notes–Optional Redemption.”

 

Change of Control Event

If a Change of Control Event occurs, as that term is defined in “Description of the Notes—Certain Definitions and Conventions,” holders of the Notes will have the right, subject to certain conditions, to require us to repurchase their Notes at a purchase price equal to 101% of the aggregate principal amount of the Notes repurchased plus accrued and unpaid interest, if any, to the date of repurchase. See “Description of the Notes—Repurchase at the Option of Holders—Change of Control Event” for further information regarding the conditions that would apply if we must offer holders this repurchase right.

 

Certain Covenants

The indenture that will govern the Notes contains covenants limiting our and our Restricted Subsidiaries’ ability to:

 

   

incur liens to secure indebtedness;

 

   

pay dividends or make distributions or purchase or redeem capital stock or certain subordinated indebtedness;

 

   

make certain other restricted payments;

 

   

sell assets;

 

   

enter into sale and lease-back transactions;

 

   

enter into transactions with affiliates; and

 

   

effect a consolidation, amalgamation or merger.

 

  These covenants are subject to a number of important limitations and exceptions and in many circumstances may not significantly restrict our ability to take any of the actions described above. For more details, see “Description of the Notes—Certain Covenants in the Indenture.” If the Notes receive an Investment Grade rating, covenants in the indenture governing the Notes will, subject to limited exceptions, be terminated and the liens on the Collateral will be automatically released with respect to the Notes and the related guarantees. See “Description of the Notes—Certain Covenants in the Indenture—Covenant Fall-Away.”

 

Risk Factors

Investing in the Notes involves substantial risks. You should carefully consider all the information contained in this prospectus prior to participating in the exchange offers. In particular, we urge you to carefully consider the information set forth in the section under the heading “Risk Factors” for a description of certain risks you should consider before participating in the exchange offers.

 

 

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Absence of a Public Market for the Notes

The Notes will be new issues of securities for which there is currently no established market. The initial purchasers advised us that they intend to make a market in the Notes. However, they are not obligated to do so and any market making with respect to the Notes may be discontinued without notice. There can be no assurance that a market for the Notes will develop or as to the liquidity of any market that may develop. See “Risk Factors—Risks Related to Our Structure, the Notes and the Exchange Offers—There is currently no market for the Notes. We cannot assure you that an active trading market will develop for the Notes, in which case your ability to transfer the Notes will be limited.”

 

Indenture

The Notes will be issued under an indenture, with Wilmington Trust, National Association (as successor by merger to Wilmington Trust FSB), as trustee, and a supplemental indenture thereto, which documents will govern the rights of holders of the Notes, including rights with respect to default, waivers and amendments.

 

Governing Law

The indenture, the security documents, the intercreditor agreement and the Notes are governed by the laws of the State of New York (or, to the extent required, by the laws of the jurisdiction in which the collateral is located).

 

 

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Summary Historical Consolidated Financial and Other Data

The following table presents summary historical consolidated financial and other data of Chrysler Group (Successor), Old Carco (Predecessor A) and Chrysler Automotive (Predecessor B). The historical financial data has been derived from:

 

   

Chrysler Group’s accompanying condensed consolidated financial statements as of September 30, 2011 and for the nine months ended September 30, 2011 and 2010 (Successor);

 

   

Chrysler Group’s accompanying audited consolidated financial statements as of December 31, 2010 and 2009 and for the year ended December 31, 2010 and the period from June 10, 2009 to December 31, 2009 (Successor);

 

   

Old Carco’s accompanying audited consolidated financial statements as of June 9, 2009 and December 31, 2008 and for the period from January 1, 2009 to June 9, 2009 and the year ended December 31, 2008 (Predecessor A);

 

   

Old Carco’s audited consolidated and combined financial statements as of December 31, 2007 (Predecessor A) and for the period from August 4, 2007 to December 31, 2007 (Predecessor A), which are not included in this prospectus; and

 

   

Chrysler Automotive’s audited combined financial statements for the period from January 1, 2007 to August 3, 2007 and as of and for the year ended December 31, 2006 (Predecessor B), which were derived from the audited consolidated financial statements and accounting records of Daimler and include expense allocations applicable to the business. The financial results of Chrysler Automotive are not necessarily indicative of those for a stand-alone company. Chrysler Automotive’s financial statements are not included in this prospectus.

The condensed consolidated financial statements have been prepared on substantially the same basis as the audited consolidated financial statements and include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the condensed consolidated financial statements. Interim results are not necessarily indicative of results that may be expected for a full year or any future interim period.

In 2007, Old Carco became an indirect, wholly-owned subsidiary of Chrysler Holding in connection with a business combination transaction between Daimler and Cerberus. Prior to August 3, 2007, Old Carco was an indirect, wholly-owned subsidiary of Daimler. The results of Old Carco’s automotive business operations prior to August 3, 2007 (excluding its finance company, Chrysler Financial) are shown as the results of Chrysler Automotive, which was not separately organized under an existing legal structure.

Chrysler Group was formed on April 28, 2009. On June 10, 2009, we purchased the principal operating assets and assumed certain liabilities of Old Carco and its principal domestic subsidiaries, in addition to acquiring the equity of Old Carco’s principal foreign subsidiaries, in the 363 Transaction approved by the bankruptcy court. Chrysler Group represents the successor to Old Carco for financial reporting purposes. Old Carco and Chrysler Automotive represent Predecessor A and Predecessor B, respectively, to Chrysler Group for financial reporting purposes.

Refer to “Business” for additional discussion of Chrysler Group’s background and formation.

 

 

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Table of Contents

The following data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Risk Factors,” “Selected Historical Consolidated Financial and Other Data,” and the audited consolidated financial statements and notes thereto included elsewhere in this prospectus. Historical results for any prior period are not necessarily indicative of results to be expected in any future period.

 

    Successor         Predecessor A         Predecessor B  
    Nine
Months
Ended
September 30,
2011
    Nine
Months
Ended
September 30,
2010
    Year Ended
December 31,
2010
    Period from
June 10,
2009 to
December 31,
2009
         Period from
January 1,
2009 to
June 9,
2009
    Year Ended
December 31,
2008
    Period from
August 4,
2007 to
December 31,
2007
         Period
from
January  1,
2007 to
August 3,
2007(1)
    Year Ended
December 31,
2006
 
   

(in millions of dollars)

 

Consolidated Statements of Operations Data:

                         

Revenues, net

    $ 39,852        $ 31,183        $ 41,946        $ 17,710            $ 11,082        $ 48,477        $ 26,561            $ 34,556        $ 59,272   

Gross margin

    6,305        4,420        6,060        1,599            (1,934     1,928        2,734            1,938        4,062   

Selling, administrative and other expenses

    3,517        2,770        3,797        4,336            1,599        3,991        2,070            3,583        4,973   

Restructuring expenses (income), net(2)

    13        47        48        34            (230     1,306        21            1,200          

Impairment of brand name intangible assets(3)

                                    844        2,857                            

Impairment of goodwill(4)

                                           7,507                            

Reorganization expense, net(5)

                                    843                                   

Interest expense(6)

    958        940        1,276        470            615        1,080        640            515        705   

Loss on extinguishment of debt

    551                                                          677          

Net income (loss)

    (42     (453     (652     (3,785         (4,425     (16,844     (639         (4,402     (3,506
   

Consolidated Statements of Cash Flows Data:

                         

Cash flows provided by (used in):

                         

Operating activities

    $ 3,537        $ 4,227        $ 4,195        $ 2,335            $ (7,130     $ (5,303     $ 3,238            $ (829     $ 781   

Investing activities

    (874     (652     (1,167     250            (404     (3,632     (3,172         (1,530     (5,053

Financing activities

    (556     (1,177     (1,526     3,268            7,517        1,058        8,638            (772     761   
   

Other Financial Information:

                         

Depreciation and amortization expense

      2,170        $ 2,312        $ 3,051        $ 1,587            $ 1,537        $ 4,808        $ 2,016            $ 3,499        $ 5,330   

Capital expenditures(7)

    1,908        1,680        2,385        1,088            239        2,765        1,603            1,796        3,721   
   

Consolidated Balance Sheets Data at Period End:

                         

Cash, cash equivalents and marketable securities

    $ 9,454        8,260        $ 7,347        $ 5,877            $ 1,845        $ 1,898        $ 9,531            $ 850        $ 4,689   

Restricted cash

    386        187        671        730            1,133        1,355        2,484            219          

Total assets

    37,250        36,890        35,449        35,423            33,577        39,336        66,538            51,435        51,435   

Current maturities of financial liabilities

    236        440        2,758        1,092            2,694        11,308        2,446            7,363        1,517   

Long-term financial liabilities

    12,148        12,443        10,973        8,459            1,900        2,599        11,457            4,196        8,813   

Members’ Interest (deficit)

    (3,068     (3,763     (4,489     (4,230         (16,562     (15,897     1,713            (8,335     (6,470
   

Other Statistical Information (unaudited):

                         

Worldwide factory shipments (in thousands)(8)

    1,468        1,220        1,602        670            381        1,987        1,045            1,565        2,655   

Number of employees at period end(9)

    54,818        51,333        51,623        47,326            48,237        52,191        73,286            76,624        80,267   

Modified EBITDA(10)(11)

    $ 3,583        $ 2,579        $ 3,461        $ 538            $ (2,169     $ 250             

Adjusted Net Income (Loss)(10)(11)

    509        (453     (652     (3,785         (4,425     (16,844          

Modified Operating Profit (Loss)(10)(11)

    1,467        565        763        (895         (3,352     (2,977          

Free Cash Flow(10)(12)

    2,001        2,171        1,355        830                     

 

 

11


Table of Contents
        Successor     Predecessor A     Predecessor B  
        Nine Months
Ended
September 30,
2011
    Year Ended
December 31,
2010
    Period from
June 10,

2009 to
December 31,
2009
        Period from
January 1,
2009 to
June 9,
2009
    Year Ended
December 31,
2008
    Period from
August 4,
2007 to
December 31,
2007
        Period from
January 1,
2007 to
August 3,
2007
    Year Ended
December 31,
2006
 
        (in millions of dollars)        

Ratio of earnings to fixed charges(13)

    1.04x        N/A        N/A          N/A        N/A        N/A          N/A        N/A   

Deficiency of earnings to cover fixed charges(14)

    N/A      $ 677      $ 3,845        $ 4,769      $ 16,106      $ 394        $ 4,133      $ 3,119   

 

(1) Balance sheet data as of August 3, 2007 was derived from unaudited information.

 

(2) In 2007, Old Carco announced a three year Recovery and Transformation Plan (“RTP”), or RTP I Plan, which was aimed at restructuring its business. In conjunction with the Cerberus transaction in 2007, Old Carco initiated the RTP II Plan. Then, in 2008 and 2009, the RTP III Plan and RTP IV Plan were initiated, respectively. For additional information refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Results of Operations.”

 

(3) Old Carco recorded indefinite-lived intangible asset impairment charges of $844 million and $2,857 million in the period from January 1, 2009 to June 9, 2009 and the year ended December 31, 2008, respectively, related to its brand names. The impairments were primarily a result of the significant deterioration in Old Carco’s revenues, the ongoing volatility in the U.S. economy, in general, and in the automotive industry in particular, and a significant decline in its projected production volumes and revenues considering the market conditions at that time.

 

(4) In 2008, Old Carco recorded a goodwill impairment charge of $7,507 million, primarily as a result of significant declines in its projected financial results considering the deteriorating economic conditions and the weakening U.S. automotive market at that time.

 

(5) In connection with Old Carco’s bankruptcy filings, Old Carco recognized $843 million of net losses from the settlement of pre-petition liabilities, provisions for losses resulting from the reorganization and restructuring of the business, as well as professional fees directly related to the process of reorganizing Old Carco and its principal domestic subsidiaries under Chapter 11 of the U.S. Bankruptcy Code. These losses were partially off-set by a gain on extinguishment of certain financial liabilities and accrued interest.

 

(6) Interest expense for the period from January 1, 2009 to June 9, 2009 excludes $57 million of contractual interest expense on debt subject to compromise. Refer to Note 4, Interest Expense, of Old Carco’s accompanying audited consolidated financial statements for additional information.

 

(7) Capital expenditures represent the purchase of property, plant and equipment and intangible assets.

 

(8) Represents vehicle sales to our dealers, distributors and fleet customers. For additional information refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Worldwide Factory Shipments.”

 

(9) The number provided for August 3, 2007 is as of July 31, 2007. The number provided for June 9, 2009 is as of June 30, 2009.

 

(10) Adjusted Net Income (Loss), Modified Operating Profit (Loss), Modified EBITDA and Free Cash Flow are non-GAAP financial measures that we present because we believe they provide useful information about our operating results and enhance the overall assessment of our financial performance. They provide us with comparable measures of our financial performance based on normalized operational factors which then facilitate management’s ability to identify operational trends as well as make decisions regarding future spending, resource allocations and other operational decisions, and because they and similar measures are widely used in the industry in which we operate. These financial measures may not be comparable to other similarly titled measures of other companies and are not an alternative to net income (loss) or net cash flows from operating and investing activities as calculated and presented in accordance with U.S. GAAP. These measures should not be used as a substitute for any U.S. GAAP financial measures.

 

(11) Adjusted Net Income (Loss) is defined as net income (loss) excluding the impact of infrequent charges, which includes losses on extinguishment of debt. We use Adjusted Net Income (Loss) as a key indicator of the trends in our overall financial performance, excluding the impact of such infrequent charges. We measure Modified Operating Profit (Loss) to assess the performance of our core operations, establish operational goals and forecasts that are used to allocate resources, and evaluate our performance period over period. Modified Operating Profit (Loss) is computed starting with net income (loss), and then adjusting the amount to (i) add back income tax expense and exclude income tax benefits, (ii) add back net interest expense (excluding interest expense related to financing activities associated with a vehicle lease portfolio we refer to as Gold Key Lease), (iii) add back all pension, OPEB and other employee benefit costs other than service costs, (iv) add back restructuring expense and exclude restructuring income, (v) add back other financial expense, (vi) add back losses and exclude gains due to cumulative change in accounting principles, and (vii) add back certain other costs, charges and expenses, which include the charges factored into the calculation of Adjusted Net Income (Loss). In accordance with the terms of the new four-year national collective bargaining agreement with the United Automobile, Aerospace and Agricultural Implement Workers of America, or the UAW, ratified in October 2011, our UAW represented employees’ annual profit sharing payments will be calculated based on our reported Modified Operating Profit. In addition, we also use performance targets based on Modified Operating Profit as a factor in our incentive compensation calculations for our non-represented employees.

 

 

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Table of Contents
   We measure the performance of our business using Modified EBITDA to eliminate the impact of items that we do not consider indicative of our core operating performance. We compute Modified EBITDA starting with net income (loss) adjusted to Modified Operating Profit (Loss) as described above, and then add back depreciation and amortization expense (excluding depreciation and amortization expense for vehicles held for lease). We believe that Modified EBITDA is useful to determine the operational profitability of our business which we use as a basis for making decisions regarding future spending, budgeting, resource allocations and other operational decisions.

 

   The reconciliation of net loss to Adjusted Net Income (Loss), Modified Operating Profit (Loss) and Modified EBITDA is set forth below:

 

    Successor          Predecessor A  
    Nine
Months Ended
September 30,
2011
    Nine
Months Ended
September 30,
2010
    Year Ended
December 31,
2010
    Period from
June 10, 2009 to
December 31,
2009
         Period from
January 1, 2009
to June 9,

2009
    Year Ended
December 31,
2008
 
   

(in millions of dollars)

         (in millions of dollars)  

Net income (loss)

  $ (42   $ (453     $ (652     $ (3,785         $ (4,425     $ (16,844

Plus:

               

Loss on extinguishment of debt

    551                                          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

   

 

 

 

Adjusted Net Income (Loss)

  $ 509      $ (453     $ (652     $ (3,785         $ (4,425     $ (16,844
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

   

 

 

 

Plus:

               

Income tax expense (benefit)

    148        107        139        29            (317     790   

Net interest expense(a)

    927        899        1,228        359            584        796   

Pension, OPEB and other employee benefit costs other than service costs:

               

Remeasurement loss on VEBA Trust Note and Membership Interests (b)

                         2,051                     

Interest expense and accretion on VEBA Trust Note

                         270                     

Other employee benefit costs

    (132     (38     (52     136            236        423   

Loss on Canadian HCT Settlement(c)

                  46                            

Restructuring expenses (income), net(d)

    13        47        48        34            (230     1,306   

Other financial expense, net

    2        3        6        11            6        82   

Impairment of goodwill(e)

                                           7,507   

Impairment of brand name intangible assets(f)

                                    844        2,857   

Impairment of property, plant and equipment(g)

                                    391          

Reorganization expense, net(h)

                                    843          

Certain troubled supplier concessions

                                           106   

Less:

               

Gain on NSC settlement(i)

                                    (684       

Gain on Daimler pension contribution(j)

                                    (600       
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Modified Operating Profit (Loss)

  $ 1,467      $ 565        $ 763        $ (895         $ (3,352     $ (2,977
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Plus:

               

Depreciation and amortization expense

    2,170        2,312        3,051        1,587            1,537        4,808   

Less:

               

Depreciation and amortization expense for vehicles held for lease

    (54     (298     (353     (154         (354     (1,581
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Modified EBITDA

  $ 3,583      $ 2,579        $ 3,461        $ 538            $ (2,169     $ 250   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

 

  (a) Interest expense for the period from January 1, 2009 to June 9, 2009 excludes $57 million of contractual interest expense on debt subject to compromise. Refer to Note 4, Interest Expense, of Old Carco’s accompanying audited consolidated financial statements for additional information.

 

  (b) As a result of the December 31, 2009 remeasurement, the OPEB obligation increased primarily due to a change in discount rate, resulting in a loss. Our policy is to immediately recognize actuarial gains or losses for OPEB plans that are short-term in nature and under which our obligation is capped. Therefore, we immediately recognized a loss of $2,051 million in OPEB net periodic benefit costs due to increases in the fair values of the VEBA Trust Note and Membership Interests issued to the VEBA Trust of $1,540 million and $511 million, respectively, from June 10, 2009 to December 31, 2009.

 

  (c) In August 2010, Chrysler Canada entered into a settlement agreement with the National Automobile, Aerospace, Transportation and General Workers Union of Canada, or the CAW, to permanently transfer the responsibility for providing postretirement health care benefits to the Covered Group to a new retiree plan. The new retiree plan will be funded by the HCT. During the year ended December 31, 2010, we recognized a $46 million loss as a result of the Canadian HCT Settlement Agreement.

 

 

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Table of Contents
  (d) During 2008, Old Carco developed a multi-year plan, RTP III Plan, to further restructure its business in order to reduce its cost structure in response to continued deterioration of its business. Charges recorded for the RTP III Plan included costs related to workforce reductions, including a curtailment loss as a result of the salaried and hourly workforce reductions, as well as supplier contract cancellation costs and other costs. Restructuring income, net for the period from January 1, 2009 to June 9, 2009 was primarily due to refinements to existing supplier contract cancellation costs and workforce reduction reserves recorded in connection with Old Carco’s RTP I, II and III Plans.

 

  (e) In 2008, Old Carco recorded a goodwill impairment charge of $7,507 million, primarily as a result of significant declines in its projected financial results considering the deteriorating economic conditions and the weakening U.S. automotive market at that time.

 

  (f) Old Carco recorded indefinite-lived intangible asset impairment charges of $844 million and $2,857 million during the period from January 1, 2009 to June 9, 2009 and the year ended December 31, 2008, respectively, related to its brand names. The impairments were primarily a result of the significant deterioration in Old Carco’s revenues, the ongoing volatility in the U.S. economy, in general, and in the automotive industry in particular, and a significant decline in its projected production volumes and revenues considering the market conditions at that time.

 

  (g) During the period from January 1, 2009 to June 9, 2009, Old Carco recorded a property, plant and equipment impairment charge of $391 million on the long-lived assets which were not acquired by us. The impairment was primarily the result of the Old Carco bankruptcy cases, continued deterioration of Old Carco’s revenues, ongoing volatility in the U.S. economy, in general, and in the automotive industry in particular, as well as taking into consideration the expected proceeds to be received upon liquidation of the assets.

 

  (h) In connection with Old Carco’s bankruptcy filings, Old Carco recognized $843 million of net losses from the settlement of pre-petition liabilities, provisions for losses resulting from the reorganization and restructuring of the business, as well as professional fees directly related to the process of reorganizing Old Carco and its principal domestic subsidiaries under Chapter 11 of the U.S. Bankruptcy Code. These losses were partially off-set by a gain on extinguishment of certain financial liabilities and accrued interest. On April 30, 2010, Old Carco transferred its remaining assets and liabilities to a liquidating trust and was dissolved in accordance with a plan of liquidation approved by the bankruptcy court.

 

  (i) On March 31, 2009, Daimler transferred its ownership of 23 national sales companies, or NSCs, to Chrysler Holding, which simultaneously transferred the NSCs to Old Carco. Old Carco paid Daimler $99 million in exchange for the settlement of obligations related to the NSCs and other international obligations, resulting in a net gain of $684 million.

 

  (j) On June 5, 2009, Old Carco, Chrysler Holding, Cerberus, Daimler and the Pension Benefit Guaranty Corporation entered into a binding agreement settling various matters. Under the agreement, Daimler agreed to make three equal annual cash payments to Old Carco totaling $600 million, which were to be used to fund contributions into Old Carco’s U.S. pension plans in 2009, 2010 and 2011. This receivable and certain pension plans were subsequently transferred to us as a result of the 363 Transaction.

 

   The table below shows a reconciliation of Modified EBITDA as currently defined and reported to Modified EBITDA as previously defined and reported by Old Carco in its accompanying audited consolidated financial statements as of June 9, 2009 and December 31, 2008 and for the period from January 1, 2009 to June 9, 2009 and for the year ended December 31, 2008.

 

     Predecessor A  
     Period from
January 1, 2009 to
June 9, 2009
    Year Ended
December 31,
2008
 
     (in millions of dollars)  

Modified EBITDA

     $ (2,169     $ 250   

Adjustment to include:

    

Certain employee benefit costs

     (236     (423
  

 

 

   

 

 

 

Modified EBITDA as previously reported

     $ (2,405     $ (173
  

 

 

   

 

 

 

 

(12) Free Cash Flow is defined as cash flow from operating and investing activities, excluding any debt related investing activities, adjusted for financing activities related to Gold Key Lease financing. Free Cash Flow is presented because we believe that it is used by analysts and other parties in evaluating the Company. However, Free Cash Flow does not necessarily represent cash available for discretionary activities, as certain debt obligations and capital lease payments must be funded out of Free Cash Flow. Free Cash Flow should not be considered as an alternative to, or substitute for, net change in cash and cash equivalents. We believe it is important to view Free Cash Flow as a complement to our entire consolidated statements of cash flows.

 

 

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Table of Contents
   We calculate Free Cash Flow as follows:

 

     Successor  
     Nine Months
Ended
September 30,

2011
    Nine Months
Ended
September 30,

2010
    Year Ended
December 31,
2010
    Period from
June 10, 2009 to
December 31,
2009
 
    

(in millions of dollars)

 

Net cash provided by operating activities

     $ 3,537        $ 4,227        $ 4,195        $ 2,335   

Net cash (used in) provided by investing activities

     (874     (652     (1,167     250   

Investing activities excluded from Free Cash Flow:

        

Change in loans and note receivables

     (4     (37     (36     (7

Proceeds from the USDART(a)

     (96                   (500

Financing activities included in Free Cash Flow:

        

Proceeds from Gold Key Lease financing

            266        266          

Repayments of Gold Key Lease financing

     (562     (1,633     (1,903     (1,248
  

 

 

   

 

 

   

 

 

   

 

 

 

Free Cash Flow

     $ 2,001        $ 2,171        $ 1,355        $ 830   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) U.S. Dealer Automotive Receivables Transition LLC, or USDART, as described under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Liquidity and Capital Resources—Chrysler Group—Ally”.
(13) For purposes of computing the ratio of earnings to fixed charges, “earnings” consists of: income (loss) before income taxes plus the sum of (i) fixed charges, (ii) amortization of capitalized interest, (iii) distributed income of equity investees and (iv) our share of pre-tax losses of equity investees for which charges arising from guarantees are included in fixed charges, less the sum of (i) income or loss from equity investees, (ii) capitalized interest, (iii) preference security dividend requirements of consolidated subsidiaries and (iv) the non-controlling interest in pre-tax income of subsidiaries that have not incurred fixed charges. “Fixed charges” consist of, (i) interest expense, (ii) capitalized interest, (iii) amortization of debt issuance costs, discounts and premiums (iv) the estimated interest component of rental expense (calculated as one-third of net rental expense) and (v) preference security dividend requirements of consolidated subsidiaries. The ratio does not have the same definition as the “Fixed Charge Coverage Ratio” under the Notes as discussed in the “Description of the Notes.”

 

(14) Earnings for the year ended December 31, 2010, period from June 10, 2009 to December 31, 2009, period from January 1, 2009 to June 9, 2009, year ended December 31, 2008, period from August 4, 2007 to December 31, 2007, period from January 1, 2007 to August 3, 2007 and year ended December 31, 2006 were inadequate to cover fixed charges.

 

 

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RISK FACTORS

Investing in the Notes involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus before deciding whether to participate in the exchange offers. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we are unaware of or that we currently believe to be immaterial, may also become important factors that affect us. If any of the following events occur, our business, financial condition and results of operations could be materially and adversely affected. In that case, we may not be able to make payments on the Notes, the value of the Notes could decline and you may lose some or all of your investment.

Risks Relating to Our Business

We may not be able to instill and maintain widespread confidence in our long-term viability, which may impair our ability to become a consistently profitable company.

If we are unable to instill and maintain confidence in our business prospects among consumers, suppliers and others within our industry, then our financial condition, results of operations and business prospects will likely suffer. Motor vehicles require maintenance and support, typically over a very long period. If consumers become concerned that we may not continue operations into the indefinite future, they may become concerned about difficulties they would face in maintaining their vehicles if parts and technical support became more difficult to obtain. They may also be concerned that we could be unable to provide long-term warranty service, perform obligations under our services agreements or execute a recall if one becomes necessary. As a result, consumers may be less likely to purchase our vehicles. We experienced this in 2009, as automakers that did not participate in the government-sponsored restructuring of the U.S. automotive industry garnered an increasing share of sales volumes as compared to our company and to General Motors Company, or General Motors. Industry-wide vehicle sales in the U.S. declined from 16.5 million vehicles in 2007, to a seasonally adjusted annual rate, or SAAR, of less than ten million vehicles in the first quarter of 2009, and have recovered only modestly since. Annual U.S. vehicle sales of Chrysler Group vehicles declined from 2.1 million in 2007 to 0.9 million in 2009, before recovering to 1.1 million in 2010. In the nine months ended September 30, 2011, we sold 1.0 million vehicles in the U.S. Sales through November 2011, indicate a 2011 annual U.S. SAAR level of 13.0 million vehicles.

In addition to the impact on vehicle sales, our suppliers and other third parties may be reluctant to develop or maintain business relationships with us if they are concerned that we will not remain viable over the long term or continue operations for the indefinite future. For example, during the economic downturn of 2008-09, Old Carco experienced difficulties maintaining certain supply relationships, which was due in part to suppliers’ concerns over Old Carco’s viability and creditworthiness.

Accordingly, in order to build and maintain our business, we must maintain confidence among consumers, suppliers and other parties in our long-term business prospects and liquidity. In contrast to many other automobile manufacturers, our ability to build and maintain such confidence may be complicated by a number of factors, including the following:

 

   

our recent status as a Troubled Asset Relief Program, or TARP, recipient and our association with the U.S. government’s 2009 restructuring of the automobile industry;

 

   

uncertainty about our ability to sustain our recently improved market share over the long-term;

 

   

unpredictable marketplace acceptance of our vehicles, many of which were only recently introduced;

 

   

our concentration in and dependence on, vehicle sales in North America, which accounted for approximately 90 percent of our unit volumes in 2009, 2010 and the nine months ended September 30, 2011;

 

   

our current product lineup, which is weighted toward larger vehicles, the demand for which could suffer if fuel prices increase;

 

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our dependence on the Fiat alliance, and consumer acceptance of the Fiat 500, the first Fiat product we brought to market in North America under the Fiat alliance;

 

   

our limited liquidity and access to additional funding on terms available to many of our principal competitors; and

 

   

the competitive pressure from other automobile manufacturers, many of which are larger and better capitalized than we are, and offer a broader product portfolio across a larger geographic footprint than we do.

Many of these factors are largely outside of our control, and any negative perceptions about our long-term business prospects or liquidity, even if exaggerated or unfounded, would likely harm our business and make it more difficult for us to raise additional funds, if and when needed, which could have a material adverse effect on our financial condition and results of operations.

We depend on the Fiat alliance to provide new vehicle platforms and powertrain technologies, additional scale, and management resources that are critical to our viability and success.

In connection with the 363 Transaction, we entered into an alliance with Fiat in which Fiat became our principal industrial partner. The Fiat alliance is intended to provide us with a number of long-term benefits, including access to new vehicle platforms and powertrain technologies, particularly in smaller, more fuel-efficient segments where we do not have a significant presence, as well as procurement benefits, management services and global distribution opportunities. The Fiat alliance is also intended to facilitate our penetration in many international markets where we believe our products would be attractive to consumers, but where we do not have significant penetration.

We believe that our ability to realize the benefits of the alliance is critical for us to compete with our larger and better-funded competitors. If we are unable to convert the opportunities presented by the alliance into long-term commercial benefits, either by improving sales of our vehicles and service parts, reducing costs or both, our financial condition and results of operations will be materially adversely affected.

Because of our dependence on the Fiat alliance, any adverse development in the Fiat alliance could have a material adverse effect on our business prospects, financial condition and results of operations. Therefore, if the Fiat alliance does not bring us its intended benefits, or if there is any adverse change in the Fiat alliance due to disagreements between the parties, changes in circumstances at Fiat or at our Company, there may be a material adverse effect on our business prospects, financial condition and results of operations.

In addition, our dependence on the Fiat alliance may subject us to risks associated with Fiat’s own business and financial condition. Although Fiat has executed its own significant industrial restructuring and financial turnaround over the past several years, it remains smaller and less well-capitalized than many of its principal competitors in Europe and globally, and Fiat has historically operated with more limited capital than many other global automakers. Moreover, Fiat’s sales and revenue have been negatively affected by the continued uncertainty arising from the sovereign debt crisis affecting economic conditions in Europe. If Fiat cannot fulfill all of its obligations under the Fiat alliance, we would not realize all of the benefits we have anticipated from the Fiat alliance, which may adversely affect our financial condition and results of operations.

Fiat may terminate the master industrial agreement dated June 10, 2009 and related ancillary agreements at any time on 120 days’ prior written notice, although each party would be required to continue to provide certain distribution services and technology rights and other items provided under the agreement for certain transition periods as described below under the caption “Certain Relationships and Related Party Transactions—Transactions with Fiat.” In addition, either we or Fiat may terminate the master industrial agreement and related ancillary agreements if the other party either commits a breach that is material, considering all ancillary

 

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agreements taken as a whole, or in the event of certain bankruptcy, liquidation or reorganization proceedings. Upon a termination for breach or bankruptcy event, the terminating party will be entitled to receive continued distribution services and technology rights and other items from the other party as noted above. A termination of the Fiat alliance could have a material adverse effect on our business prospects, financial condition and results of operations.

Notwithstanding our close industrial alliance, Fiat’s significant control over our management, operations and corporate decisions may result in conflicts of interest.

Our Amended and Restated Limited Liability Company Operating Agreement, or LLC Operating Agreement, accords significant management oversight and governance rights to Fiat as a holder of the majority of our membership interests. Fiat currently holds a majority ownership interest in us on a fully diluted basis, and therefore has the right to appoint a majority of our board of directors, or the Board. As a result, Fiat has the ability to control our management and operations, including with respect to significant corporate transactions such as mergers and acquisitions, asset sales, borrowings, issuances of securities and our dissolution, as well as amendments to our LLC Operating Agreement, subject only to a requirement that the Company must have the consent of the UAW Retiree Medical Benefits Trust, or the VEBA Trust, holder of the remaining ownership interest in us, to make certain major decisions that would disproportionately affect the VEBA Trust. Despite processes we have implemented to guard against conflicts of interest and to review affiliate transactions, there can be no assurance that Fiat will not take actions or cause the Company to take actions that are not in the best interests of the Company. See “Certain Relationships and Related Party Transactions—Review Process” for a description of the review processes in place.

Actual or perceived conflicts of interest may arise between us and Fiat in a number of areas relating to our industrial alliance. These may include:

Management. We benefit from the significant management experience of Fiat’s leadership team, which was gained in part through Fiat’s own industrial turnaround. Both our Chief Executive Officer and Chief Financial Officer serve in those same roles for Fiat and serve on a Fiat executive management committee (the Group Executive Council, or GEC) formed to oversee the management and integration of all Fiat interests, including its interest in Chrysler Group. Members of this committee include several other employees of Chrysler Group. Chrysler Group executives who serve on the GEC owe duties to Chrysler Group and therefore may have conflicts of interest with respect to matters involving both companies. Moreover, although the GEC cannot contractually bind Chrysler Group, and recommendations made by the GEC to Chrysler Group, including transactions with Fiat affiliates, are subject to our own internal review and approval procedures, there can be no assurance that these potential conflicts will not affect us. See “Certain Relationships and Related Party Transactions—Review Process” for a description of the review processes in place.

Industrial alliance. We have entered into a number of agreements with Fiat to implement and extend our industrial alliance pursuant to which each party has provided and agreed to provide the other with goods, services and other resources. We expect to enter into additional agreements to further our industrial alliance from time to time. Although we believe that these arrangements bolster a sense of cooperation and mutual dependence between the two companies, conflicts may arise in the performance of the parties’ obligations under these agreements or in the interpretation, renewal or negotiation of these arrangements. Although the terms of any such transactions with Fiat will be established based upon negotiations between us and Fiat and, in certain cases, will be subject to the approval of the “disinterested” members of our Board or a committee of such directors, there can be no assurance that the terms of any such transactions will be as favorable to us as we may otherwise have obtained in arm’s length negotiations with a party other than Fiat. In addition, while our Senior Credit Agreement and the indenture governing the Notes include covenants restricting transactions between us and Fiat, compliance with these covenants may not prevent us from entering into transactions that are, particularly with the benefit of hindsight, unfavorable to us.

 

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Business Opportunities. Although we believe that our operational strengths complement those of Fiat, which limits the scope for business conflicts, there may be areas in which the companies will compete with one another, including with respect to business opportunities that may be of interest to one or both parties. We may be restricted from pursuing such opportunities by virtue of Fiat’s control of us.

Our future competitiveness and ability to achieve long-term profitability depend on our ability to control our costs, which requires us to successfully implement cost reduction and productivity improvement initiatives throughout our automotive operations.

We are continuing to implement a number of cost reduction and productivity improvement initiatives in our automotive operations, through the Fiat alliance and otherwise, including, for example, increasing the percentage of our vehicles that are based on a common platform, reducing our dependence on sales incentives offered to dealers and retail customers, leveraging our purchasing capacity with Fiat’s and implementing World Class Manufacturing, or WCM, principles. Our future competitiveness depends upon our continued success in implementing these initiatives throughout our operations. In addition, while some of the elements of cost reduction and productivity improvement are within our control, others, such as interest rates and commodity prices, depend more on external factors. These external factors may materially adversely affect our ability to reduce our costs. Furthermore, reducing costs may prove difficult due to our focus on introducing new and improved products in order to meet customer expectations.

Economic weakness, particularly in North America, has adversely affected our business, and if economic conditions do not continue to improve, or if they weaken, our results of operations could continue to be negatively affected.

Our business, financial condition and results of operations have been, and may continue to be, adversely affected by worldwide economic conditions. Overall demand for our vehicles, as well as our profit margins, could decline as a result of many factors outside our control, including economic recessions, changes in consumer preferences, increases in commodity prices, changes in laws and regulations affecting the automotive industry and the manner in which they are enforced, inflation, fluctuations in interest and currency exchange rates and changes in the fiscal or monetary policies of governments in the areas in which we operate, the effect of each of which may be exacerbated during periods of general economic weakness. Depressed demand for vehicles affects our suppliers as well. Any decline in vehicle sales we experience may, in turn, adversely affect our suppliers’ ability to fulfill their obligations to us, which could result in production delays, defaults and inventory management challenges. These supplier events could further impair our ability to sell vehicles.

Current financial conditions and, in particular, unemployment levels, limited availability of dealer and consumer financing and lower consumer confidence levels, continue to place significant economic pressures on our customers and dealer network and have negatively impacted our vehicle sales. Any significant further deterioration in economic conditions may further impair the demand for our products and our results of operations, financial position and cash flows could be materially and adversely affected.

Availability of adequate financing on competitive terms for our dealers and retail customers is critical to our success. In lieu of a captive finance company, we depend on our relationship with Ally to supply a significant percentage of this financing.

Our dealers enter into wholesale financing arrangements to purchase vehicles from us to hold in inventory to facilitate vehicle sales, and our retail customers use a variety of finance and lease programs to acquire vehicles. Insufficient availability of financing to Old Carco’s dealers and retail customers contributed to sharp declines in Old Carco’s vehicle sales and lease volumes, and in turn, its cash inflows, during 2008, and was one of the key factors leading to Old Carco’s bankruptcy filing. Our results of operations therefore depend on establishing and maintaining appropriate sources of finance for our dealers and retail customers.

Historically, most large automakers have relied on a captive finance company to provide the majority of dealer and customer financing and to develop and implement financing programs designed principally to maximize

 

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vehicle sales in a manner that optimized profitability for them and their captive finance company on an aggregate basis. We do not have a captive finance company and are not affiliated with Old Carco’s former captive finance company, Chrysler Financial Services Americas LLC, or Chrysler Financial (now known as TD Auto Finance LLC). Our lack of a captive finance company may increase the risk that our dealers and retail customers will not have access to sufficient financing on acceptable terms and may adversely affect our vehicle sales in the future.

In connection with the 2009 restructuring of the U.S. automotive industry, and with the assistance of the U.S. Treasury, we entered into an auto finance relationship with Ally Financial Inc., or Ally, which historically was the captive finance company of General Motors, one of our principal competitors. Following its own participation in the 2009 restructuring of the U.S. automotive industry, Ally has been majority owned by the U.S. Department of Treasury, although General Motors and Ally’s former majority owner, Cerberus, each retain partial ownership. As of September 30, 2011, Ally was financing approximately 60 percent of our dealers in the U.S.

Pursuant to our agreement with Ally, Ally will consider applications for financing made by our dealers and their retail customers in accordance with Ally’s usual and customary standards, and will make lending decisions in accordance with its business judgment. Nevertheless, Ally is not obligated to provide financing to our dealers, nor is Ally required to fund a certain number of vehicle sales or leases for our customers. On the other hand, we must offer all subvention programs to Ally, and we are required to ensure that Ally finances a specified minimum percentage of the units we sell in North America under rate subvention programs in which it elects to participate.

We expect Ally to provide us services comparable to those Ally provides to its other strategic business partners, including General Motors. Nevertheless, our ability to fully realize the value of our relationship with Ally may be adversely affected by a number of factors, including General Motors’ historic and ongoing relationship with Ally, and General Motors’ current equity ownership in Ally.

In addition, Ally, as a bank-holding company is subject to extensive federal regulation (including risk-based and leverage capital requirements, as well as various financial safety and soundness standards). As a regulated financial institution, Ally may be subject to more stringent underwriting and other lending criteria as compared to captive finance companies of our competitors. In addition, Ally may face other demands on its capital, including the need or desire to satisfy funding requirements for dealers or customers of our competitors as well as liquidity issues relating to investments in non-automotive financial assets, including sub-prime real estate mortgages. Therefore, Ally may not have the capital and liquidity necessary to support our vehicle sales, and even with sufficient capital and liquidity, Ally may apply lending criteria in a manner that will adversely affect our vehicle sales. In addition, Ally may suspend its performance under the agreement, after notice to us, in the event that Ally’s unsecured financial exposure (as defined in the agreement) exceeds a specified amount. Our agreement with Ally extends through April 20, 2013, with automatic one year renewals unless either party elects not to renew by a renewal deadline that is twelve months prior to the expiration date of the agreement.

In addition, retail customer leasing arrangements historically accounted for a significant percentage of Old Carco’s sales. For example, lease arrangements accounted for 13.7 percent of sales in 2007 and 15.9 percent of sales in 2006. During the recent credit crisis, market availability of leasing fell substantially and Chrysler Financial entirely discontinued lease financing in the U.S. and Canada in August 2008. Our 2010 leasing volumes were significantly below historical levels, and despite recent increases for the nine months ended September 30, 2011, our leasing volumes may negatively impact our vehicle sales volumes and market share.

To the extent that Ally is unable or unwilling to provide sufficient financing at competitive rates to our dealers and retail customers, and our dealers and retail customers do not otherwise have sufficient access to such financing, our vehicle sales and market share will suffer, which would adversely affect our financial condition and results of operations.

 

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Our lack of a captive finance company could place us at a competitive disadvantage to competitors that have a captive finance company and therefore may be able to offer consumers and dealers financing and leasing on better terms than our customers and dealers are able to obtain.

Most of our competitors operate and control their own captive finance companies. As a result, they may be better able to implement financing programs designed principally to maximize vehicle sales in a manner that optimizes profitability for them and their captive finance companies on an aggregate basis, including with respect to the amount and terms of the financing provided. If those competitors with a captive finance company offer retail customers and dealers financing and leasing on better terms than our customers and dealers are able to obtain, consumers may be more inclined to purchase our competitors’ vehicles and our competitors’ dealers may be better able to stock our competitors’ products each of which could adversely affect our results of operations. In addition, unless financing arrangements other than for retail purchase continue to be developed and offered by banks to our retail customers in Canada, our lack of a captive finance company could present a competitive disadvantage in Canada, since banks are restricted by law from providing retail lease financing in Canada.

Our profitability depends on reaching certain minimum vehicle sales volumes. If vehicle sales do not continue to increase, or if they deteriorate further, our results of operations will suffer.

Our business and results of operations depend upon our ability to achieve certain minimum vehicle sales volumes. As is typical for an automobile manufacturer, we have significant fixed costs and therefore, changes in our vehicle sales volume can have a disproportionately large effect on profitability. In addition, we generally receive payments from vehicle sales to dealers in North America within a few days of shipment from our assembly plants, whereas there is a lag between the time we receive parts and materials from our suppliers and the time we are required to pay for them. As a result, we tend to operate with working capital supported by these terms with our suppliers, and periods of vehicle sales declines therefore have a significant negative impact on our cash flow and liquidity as we continue to pay suppliers during a period in which we receive no proceeds from vehicle sales. If our vehicle sales do not continue to increase, or if they were to decline to levels significantly below our assumptions, due to financial crisis, renewed recessionary conditions, changes in consumer confidence, geopolitical events, limited access to financing or other factors, our financial condition and results of operations would be substantially adversely affected.

The substantial majority of our vehicle sales are in North America, and weak demand in the North American markets may continue or worsen, which would have a disproportionately large negative impact on our vehicle sales and profitability relative to our principal competitors.

Substantially all of our vehicle sales occur in North America, particularly in the U.S. and Canada. In the nine months ended September 30, 2011 and in 2010, over 85 percent of our vehicle sales were to customers in the U.S. and Canada. In the U.S., where we sell most of the vehicles we manufacture, industry-wide vehicle sales declined from 16.5 million vehicles in 2007 to 10.6 million vehicles in 2009. Old Carco’s U.S. vehicle sales were 2.1 million vehicles in 2007 versus combined U.S. vehicle sales for Old Carco and Chrysler Group of 0.9 million vehicles in 2009.

As vehicle sales declined in 2008 and 2009, Old Carco recorded significant losses, culminating in requests for government support beginning in late 2008 and, on April 30, 2009, a filing for bankruptcy protection. Although vehicle sales in North America recovered somewhat in 2010 and in the first nine months of 2011, the recovery has been slower and shallower than many industry analysts predicted. This limited recovery in vehicle sales may not be sustained. For instance, continued weakness in the U.S. new home construction market would likely depress sales of pick-up trucks, one of our strongest selling products. As a result, we may experience further declines in vehicle sales in the future, which would materially and adversely affect our financial condition and results of operations.

Although we are seeking to increase the proportion of our vehicle sales outside of North America, we anticipate that our results of operations will continue to depend substantially on vehicle sales in the principal North American markets. Our vehicle sales in North America will therefore continue to be critical to our plans to maintain and improve current levels of profitability. Our principal competitors, including General Motors and

 

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Ford Motor Company, or Ford, however, are more geographically diversified and are less dependent on sales in North America. As a result, any further significant decline in demand in the North American market would have a disproportionately large negative effect on our vehicle sales and profitability relative to our principal competitors, whose vehicle sales are not similarly concentrated.

We may not be successful in increasing our vehicle sales outside of North America, and if we do increase our vehicle sales outside of North America we will be exposed to additional risks of operating in different regions and countries.

We currently generate a small proportion of our vehicle sales outside of North America. As part of our business plan, and to capitalize on opportunities presented by our industrial alliance with Fiat, we intend to actively pursue growth opportunities in a number of markets outside North America. Expanding our operations and vehicle sales internationally may subject us to additional regulatory requirements and cultural, political and economic challenges, including the following:

 

   

securing relationships to help establish our presence in local markets, including distribution and vehicle finance relationships;

 

   

hiring and training personnel capable of marketing our vehicles, supporting dealers and retail customers, and managing operations in local jurisdictions;

 

   

identifying and training qualified service technicians to maintain our vehicles, and ensuring that they have timely access to diagnostic tools and parts;

 

   

localizing our vehicles to target the specific needs and preferences of local customers, including with respect to vehicle safety, fuel economy and emissions, which may differ from our traditional customer base in North America;

 

   

implementing new systems, procedures and controls to monitor our operations in new markets;

 

   

multiple, changing and often inconsistent enforcement of laws and regulations;

 

   

satisfying local regulatory requirements, including those for vehicle safety, fuel economy or emissions;

 

   

competition from existing market participants that may have a longer history in, and greater familiarity with, the local markets we enter;

 

   

differing labor regulations and union relationships;

 

   

consequences from changes in tax laws;

 

   

tariffs and trade barriers;

 

   

laws and business practices that favor local competitors;

 

   

fluctuations in currency exchange rates;

 

   

extended payment terms and the ability to collect accounts receivable;

 

   

imposition of limitations or conversion of foreign currencies into U.S. dollars or remittance of dividends and other payments by foreign subsidiaries; and

 

   

changes in a specific country’s or region’s political or economic conditions.

If we fail to address these challenges and risks associated with international expansion, we may encounter difficulties implementing our strategy, which could impede our growth or harm our operating results.

 

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Limitations on our liquidity and access to funding may limit our ability to execute our business plan and improve our business, financial condition and results of operations.

Our business is capital intensive and we require significant liquidity to support our business plan and meet other funding requirements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Chrysler Group” for a more detailed discussion of our liquidity and capital requirements. In addition, during periods of vehicle sales decreases, we expect our cash flow and liquidity to be significantly negatively impacted because we typically receive revenues from vehicle sales before we are required to pay our suppliers. Any limitations on our liquidity, due to decreases in vehicle sales, the amount of or restrictions in our existing indebtedness, conditions in the credit markets, general economic conditions or otherwise, may adversely impact our ability to execute our business plan and improve our business prospects, financial condition and results of operations. In addition, any actual or perceived limitations of our liquidity may limit the ability or willingness of counterparties, including dealers, customers, suppliers and financial service providers, to do business with us, which may adversely affect our business, financial condition and results of operations. See “–We may not be able to instill and maintain widespread confidence in our long-term viability, which may impair our ability to become a consistently profitable company.”

Our defined benefit pension plans are currently underfunded, and our pension funding obligations could increase significantly due to a reduction in funded status as a result of a variety of factors, including weak performance of financial markets, declining interest rates, investment decisions that do not achieve adequate return, and investment risk inherent in our investment portfolio, which could have a material adverse effect on our business, financial condition or results of operations.

Our defined benefit pension plans are currently underfunded, and our pension funding obligations may increase significantly if investment performance of plan assets does not keep pace with increases in obligations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Chrysler Group—Defined Benefit Pension Plan and OPEB Contributions—OPEB Plans–Funded Status.” These funding obligations may increase based upon the future returns on the assets placed in trusts for these plans, the level of interest rates used to determine funding levels, the level of benefits provided for by the plans, investment decisions that do not achieve adequate return and any changes in applicable law related to funding requirements. Our defined benefit pension plans currently hold significant investments in equity and fixed income securities, as well as investments in less liquid instruments such as private equity, real estate and hedge funds. Due to the complexity and magnitude of certain of our investments, additional risks may exist, including significant changes in investment policy, insufficient market capacity to complete a particular investment strategy, and an inherent divergence in objectives between the ability to manage risk in the short term and inability to quickly rebalance illiquid and long-term investments.

To determine the appropriate level of funding and contributions to our defined benefit pension plans, as well as the investment strategy for the plans, we are required to make various assumptions, including an expected rate of return on plan assets and a discount rate used to measure the obligations under the defined benefit pension plans. Interest rate increases generally will result in a decline in the value of fixed income securities while reducing the present value of the obligations. Conversely, interest rate decreases will increase the value of fixed income securities, partially offsetting the related increase in the present value of the obligations. Our next scheduled re-measurement is December 31, 2011, and discount rates and plan assets may be significantly different from those at December 31, 2010. If the total values of the assets held by our defined benefit plans fall and/or the returns on these assets underperform our assumptions, our pension expenses and contributions could increase and, as a result, could materially adversely affect our financial condition and results of operations. If we fail to make required minimum funding contributions, we could be subjected to reportable event disclosure to the Pension Benefit Guaranty Corporation, as well as interest and excise taxes calculated based upon the amount of funding deficiency.

 

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We may be unable to obtain federal funding for our advanced technology vehicle and component programs under Section 136 of the EISA.

The U.S. Department of Energy, or DOE, is operating a program in which it may provide up to $25.0 billion in low cost loans to eligible applicants for the costs of re-equipping, expanding, and establishing manufacturing facilities in the U.S. to produce advanced technology vehicles and components for these vehicles. We have pending with the DOE a consolidated application for a loan under Section 136 of the U.S. Energy Independence and Security Act of 2007, or the EISA, and have requested $3.5 billion in loans to support certain of our advanced technology vehicle and component programs. We are in discussions with the DOE regarding the terms of a potential loan and will need to reach agreement with respect to several matters with the DOE. There can be no assurance that Section 136 loans will continue to be available, that we will receive the amount we previously requested, or that we will be able to successfully negotiate terms acceptable to us, the DOE and our other lenders. If we do not receive Section 136 loans, our liquidity may be further constrained and we may be required to reduce our investment in new, advanced technology for our product development, which could make our vehicles less competitive in the future.

We may be adversely affected by fluctuations in foreign currency exchange rates, commodity prices, and interest rates.

Our manufacturing and sales operations are exposed to a variety of market risks, including the effects of changes in foreign currency exchange rates, commodity prices and interest rates. We monitor and manage these exposures as an integral part of our overall risk management program, which is designed to reduce the potentially adverse effects of these fluctuations. Nevertheless, changes in these market indicators cannot always be predicted or hedged. In addition, because of intense price competition, our significant fixed costs and our financial and liquidity restrictions, we may not be able to minimize the impact of such changes, even if they are foreseeable. Further, our ability to trade derivative instruments to manage market risks is somewhat limited by our overall credit profile. As a result, substantial unfavorable changes in foreign currency exchange rates, commodity prices or interest rates could have a material adverse effect on our revenues, financial condition and results of operations.

Laws, regulations or governmental policies in foreign countries may limit our ability to access to our own funds.

When we sell vehicles in countries other than the U.S., we are subject to various laws, regulations and policies regarding the exchange and transfer of funds back to the U.S. In rare cases, we may be limited in our ability to transfer some or all of our funds for unpredictable periods of time. In addition, the local currency of a country may be devalued as a result of adjustments to the official exchange rate made by the government with little or no notice. For instance, we are subject to the rules and regulations of the Venezuelan government concerning our ability to exchange cash or marketable securities denominated in Venezuelan bolivar fuerte, or BsF, into U.S. dollars. Under these regulations, the purchase and sale of foreign currency must be made through the Commission for the Administration of Foreign Exchange, or CADIVI, or the Transaction System for Foreign Currency Denominated Securities, or SITME, at official rates of exchange and subject to volume restrictions. These factors limit our ability to access and transfer liquidity out of Venezuela to meet demands in other countries and also subject us to increased risk of devaluation or other foreign exchange losses during that period. On December 30, 2010, the Venezuelan government announced an adjustment to the official CADIVI exchange rate, which resulted in a devaluation of our BsF denominated balances as of December 31, 2010.

Product development cycles can be lengthy, and there is no assurance that new designs will lead to revenues from vehicle sales.

It generally takes two years or more to design and develop a new product, and there may be a number of factors which could lengthen that schedule. Because of this product development cycle and the various elements that may contribute to consumers’ acceptance of new vehicle designs, including competitors’ product introductions, fuel prices, general economic conditions and changes in styling preferences, we cannot be certain that an initial

 

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product concept or design that appears to be attractive will result in a production model that will generate sales in sufficient quantities and at high enough prices to be profitable. If our designs do not result in development of products that are accepted in the market, our financial condition and results of operation may be adversely affected.

Our future success depends on our continued ability to introduce new and refreshed vehicles that appeal to consumers.

Until 2011, our vehicle portfolio had fewer new or significantly refreshed vehicle models than many of our competitors, largely due to capital constraints experienced by Old Carco over the period from 2007 to 2009. Our relative lack of new or significantly refreshed product offerings during this period had an adverse effect on our vehicle sales, market share, average selling price and profitability. In late 2010 and early 2011, we began selling 16 vehicles that we significantly upgraded and updated to meet our customers’ changing demands and expectations as described in detail under the caption “Business–Products.” In order to meet these goals, we had to invest heavily in vehicle design, engineering and manufacturing. Our ability to realize acceptable returns on these investments will depend in large part on consumers’ acceptance of our new and significantly refreshed vehicles.

We undertake significant market research and testing prior to developing and launching new or significantly refreshed vehicles. Nevertheless, market acceptance of our products depends on a number of factors, many of which are outside of our control and require us to anticipate customer preferences and competitive products several years in advance. These factors include the market perception of styling, safety, reliability and cost of ownership of our vehicles as compared to those of our competitors, as well as other factors that affect demand, including price competition and financing or lease programs. Competition has traditionally been intense in the automotive industry and has intensified further in recent years, including in the utility vehicle, minivan and truck segments that historically have represented most of our U.S. vehicle sales. In 2010 and in the nine months ended September 30, 2011, these segments accounted for approximately 74 percent of our vehicle sales in the U.S. If our new or significantly refreshed products are not received favorably by customers, our vehicle sales, market share and profitability will suffer. If we are required to cut capital expenditures due to insufficient vehicle sales and profitability or we decide otherwise to reduce costs and conserve cash, our ability to continue our program of improving and updating our vehicle portfolio and keeping pace with product and technological innovations introduced by our competitors will be diminished, which may further reduce demand for our vehicles.

We have historically depended on limited vehicle offerings, and a decline in our vehicle sales in our key products due to changes in consumer preferences, economic conditions and government regulations or increased competition could adversely affect our ability to achieve and maintain profitability.

We have historically depended on limited vehicle offerings and have had a higher proportion of our best-selling vehicles concentrated in the large car and pick-up truck, utility vehicle and minivan segments than our competitors. For example, in 2010 and in the nine months ended September 30, 2011, truck, utility vehicle and minivan sales comprised approximately 74 percent of our total vehicle sales in the U.S., whereas truck, utility vehicle and minivan sales accounted for only about 52 percent of the overall U.S. market. In prior years, our competitors had been successful in introducing new vehicles in these segments that have taken market share away from us. At times, consumer preference has shifted away from these vehicles, which all have relatively low fuel economy, due to elevated fuel prices, environmental concerns, economic conditions, governmental actions or incentives, and other reasons, adversely affecting our overall market share and profitability.

If we fail to continue to introduce new and/or significantly refreshed vehicles in these segments that can compete successfully in the market, or if we fail to successfully reduce our concentration in these vehicle segments and declining consumer preference for these vehicles continues or accelerates, our financial condition and results of operations could deteriorate.

 

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In the event of higher fuel prices, our vehicle sales and market share may be more adversely affected than those of our competitors because of the nature of our vehicle offerings.

A return to higher fuel prices, possible volatility in fuel prices or fuel shortages, particularly in the U.S., could cause demand for our relatively higher volume and more profitable models, such as minivans, sport utility vehicles and pick-up trucks, to deteriorate. We expect that any increase in fuel prices will likely have a disproportionate effect on our vehicle sales as compared to most of our competitors because our vehicle lineup continues to be more concentrated in larger, less fuel-efficient vehicles. In addition, as we anticipate changes in consumer preferences, we may adjust our investments in vehicle design, engineering and manufacturing to capture share in the vehicle segments in which we expect increased sales. Therefore, unexpected trends in vehicle demand, as well as volatility in demand for these segments, could have a substantial adverse effect on our business prospects, financial condition and results of operations.

The automotive industry is highly competitive and suffers from excess manufacturing capacity. Our competitors’ efforts to increase their share of vehicle sales could have a significant negative impact on our vehicle pricing, market share and operating results.

The automotive industry is highly competitive, particularly in the U.S., our primary market. Moreover, we believe aggregate manufacturing capacity in the global automotive industry substantially exceeds demand, particularly over the past several years. We have a relatively high proportion of fixed costs and have significant limitations on our ability to reduce fixed costs by closing facilities and/or reducing labor expenses in the short term. Our competitors may respond to these conditions by attempting to make their vehicles more attractive or less expensive to customers by adding vehicle enhancements, providing subsidized financing or leasing programs, offering option package discounts, price rebates or other sales incentives, or by reducing vehicle prices in certain markets. In addition, manufacturers in countries such as China and India, which have lower production costs, have announced that they intend to export lower-cost automobiles to established markets, including North America. These actions have had, and are expected to continue to have, a significant negative impact on our vehicle pricing, market share, and operating results, and present a significant risk to our ability to improve or even maintain our average selling price per vehicle.

Offering desirable vehicles that appeal to customers can mitigate the risks of stiffer price competition, but vehicles that are perceived to be less desirable (whether in terms of price, quality, styling, safety, or other attributes) can exacerbate these risks.

Our ability to achieve cost reductions and to realize production efficiencies is critical to our ability to achieve profitability.

We are implementing a number of cost reduction and productivity initiatives, including a substantial restructuring of our operating methods. Our future success depends upon our ability to implement these restructuring initiatives throughout our operations. In addition, while some of the productivity improvements are within our control, others depend on external factors, such as commodity prices or trade regulation. These external factors may impair our ability to reduce our structural costs as planned, and we may sustain larger than expected production expenses, materially affecting our business and results of operations.

We may not be able to accurately forecast demand for our vehicles, potentially leading to inefficient use of our production capacity, which could harm our business.

We have a high proportion of fixed costs, both due to our significant investment in property, plant and equipment as well as the requirements of our collective bargaining agreements, which limit our flexibility in calibrating personnel costs to changes in demand for our products. Demand for our vehicles depends on many factors, including consumer preference, vehicle pricing, availability of financing and general economic conditions, some of which are beyond our control, and current challenges in developing accurate forecasts will likely continue in

 

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the future. Significant unanticipated fluctuations in demand could cause the following problems in our operations:

 

 

If demand increases beyond our forecasts, we would have to rapidly increase production and our ability to do so would depend in part on our suppliers’ ability to provide greater than forecast volumes of raw materials and components and those suppliers might not be able to increase their own production rapidly enough to meet unexpected demand.

 

 

Increases in production levels to meet unanticipated demand could result in excessive employee overtime, expedited procurement of raw materials and parts, and other potential expenditures, all of which could drive up costs for manufacturing and logistics. These higher costs could impact our profitability.

 

 

Rapid and unexpected increases in manufacturing volumes may also adversely affect our manufacturing quality, which could delay production, or could generate product recalls and warranty claims. These results could reduce our gross margins and adversely impact customer satisfaction.

 

 

If, on the other hand, demand does not develop as we forecast, we could have excess inventory, and we may need to increase sales incentives to sell off inventory, and/or take impairments or other charges. Lower than forecasted demand could also result in excess manufacturing capacity and reduced manufacturing efficiencies, which could reduce margins and profitability.

Dealer sourcing and inventory management decisions could adversely affect sales of our vehicles and service parts.

We sell most of our vehicles and service parts through our dealer network. The dealers carry inventories of vehicles and service parts in their ongoing operations and they adjust those inventories based on their assessment of future sales prospects, their ability to obtain wholesale financing, and other factors. Certain of our dealers may also carry products or operate separate dealerships that carry products of our competitors and may focus their inventory purchases and sales efforts on products of our competitors due to industry and product demand or profitability. These inventory and sourcing decisions can adversely impact our sales, financial condition and results of operations.

Our vehicle and service part sales depend on the willingness and ability of our dealer network to purchase vehicles and service parts for resale to retail customers. Our dealers’ willingness and ability to make these purchases depends, in turn, on the rate of their retail vehicle sales, as well as the availability and cost of capital and financing necessary for dealers to acquire and hold inventories for resale. To the extent sales of our vehicles from dealers’ inventories decline, or if dealers either experience or foresee difficulties in obtaining wholesale financing at reasonable cost, our vehicle sales may decline and our financial condition and results of operations may be adversely affected. See “–Availability of adequate financing on competitive terms for our dealers and retail customers is critical to our success. In lieu of a captive finance company, we depend on our relationship with Ally to supply a significant percentage of this financing.”

Our business plan depends, in part, on reducing the extent to which we depend on dealer and retail incentives to sell vehicles, and our ability to modify these market practices is uncertain.

The intense competition and limited ability to reduce fixed costs that characterize the automotive industry has in many cases resulted in significant over-production of vehicles. These factors, together with significant excess manufacturing capacity, have driven manufacturers, including us, to rely heavily on sales incentives to drive vehicle sales. These incentives have included both dealer incentives, typically in the form of dealer rebates or volume-based awards, as well as retail incentives in a variety of forms, including subsidized financing, price

 

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rebates and other incentives. For instance, Old Carco’s profitability was impaired as a result of incentives, at times to a point that the net vehicle price did not necessarily covered the total vehicle cost. As part of our business plan, we are attempting to reduce our reliance on incentives, which might negatively affect our sales volumes. However, we expect the impact of any reduction in vehicle sales to be offset by improved and more predictable pricing and margins on vehicle sales. If, despite our efforts, we are unable to reduce our reliance on short-term sales incentives, and maintain price discipline, our attempts to do so may adversely affect our financial condition and results of operations.

If our suppliers fail to provide us with the systems, components and parts that we need to manufacture our automotive products, our business operations may be disrupted which would have a material adverse effect on our business.

Our business depends on a significant number of suppliers, which provide the components, parts and systems we require to manufacture vehicles and parts and to operate our business. In recent years, many of our suppliers have experienced financial difficulties, and some have sought protection under bankruptcy or similar reorganization laws. This trend intensified in 2009 due to the combination of general economic weakness, sharply declining vehicle sales and tightened credit availability that affected the automotive industry generally. In addition, we rely on specific suppliers to provide certain components, parts and systems required to manufacture our vehicles, and in some circumstances, we rely exclusively on one such supplier.

When key suppliers on which we depend have experienced financial difficulties in the past, they often sought to increase prices, pass through increased costs, accelerate payments or seek other relief. Many suppliers have been unable to raise sufficient working capital or funding or obtain the additional financing to continue operations, and some have been forced to reduce their output, cease operations or file for bankruptcy protection. Any such actions would likely increase our costs, impair our ability to meet design and quality objectives and in some cases make it difficult or impossible for us to produce certain vehicles. We may take steps to assist key suppliers to remain in business and maintain operations, but this would typically require us to divert capital from other needs and adversely affect our liquidity. It may also be difficult to find a replacement for certain suppliers without significant delay. Over the past several years, we have worked to reduce or eliminate our dependence on certain suppliers that we believed were financially at risk; however, this has increased our dependence on, and the concentration of our credit risk to our remaining suppliers.

We have changed the way in which we do business with certain key suppliers by paying up front for engineering design and development costs, rather than paying for these costs after production has begun via component or materials pricing. We believe that this shift will help financially stabilize our suppliers and will encourage supplier investment in our business, but as a result, we will now bear certain of the costs of new product development years before we will realize any revenue on that new product, which reduces our liquidity. In the event that parts production volumes are lower than forecast, or that the supplier does not perform all the way through the production cycle, we will experience financial losses that we would not otherwise have incurred under the prior payment system. Our competitors may not change their supplier payment programs, and may not experience similar losses, putting us at a potential competitive disadvantage in terms of available capital.

Increase in costs, disruption of supply or shortage of raw materials could materially harm our business.

We use a variety of raw materials in our business including steel, aluminum, lead, resin and copper, and precious metals such as platinum, palladium and rhodium. The prices for these raw materials fluctuate and, at times in recent periods, these commodity prices have increased significantly in response to changing market conditions. We seek to manage this exposure, but we may not always be successful in hedging these risks. See “–We may be adversely affected by fluctuations in foreign currency exchange rates, commodity prices, and interest rates.” Substantial increases in the prices for our raw materials increase our operating costs and could reduce our profitability if we cannot recoup the increased costs through changes in vehicle prices. In addition, certain raw materials are sourced only from a limited number of suppliers and from a limited number of countries. We cannot guarantee that we will be able to maintain arrangements with these suppliers that assure our access to these raw materials, and in some

 

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cases this access may be affected by factors outside of our control and the control of our suppliers. For instance, the recent earthquake and tsunami in Japan negatively affected commodity markets, and may continue to have severe and unpredictable effects on the price of certain raw materials in the future.

As with raw materials, we are also at risk for supply disruption and shortages in parts and components for use in our vehicles. For example, in early 2011, we were forced to idle our minivan assembly plant in Windsor, Ontario for approximately one week as a result of a supply disruption. In addition, in 2010, there was an industry-wide shortage of computer chips that we use for the electrical systems in our vehicles. There was also an industry-wide shortage of tires in 2010, as tire manufacturers that cut back capacity during the 2007-09 recession did not increase capacity at a rate sufficient to meet increasing industry demand. These shortages have continued into 2011, but with less severity. Supply of parts and components may also be disrupted or interrupted by natural disasters such as the recent flooding in Thailand and in the eastern U.S. We will continue to work with our suppliers to monitor potential shortages and to mitigate the effects of any emerging shortages on our production volumes and revenues; however, there can be no assurances that these events will not have an adverse effect on our production in the future, and any such effect may be material.

Any interruption in the supply or any increase in the cost of raw materials, parts and components could negatively impact our ability to achieve the growth in vehicle sales and profitability improvement contemplated by our business plan and the impact to our vehicle sales and profitability could be material.

From time to time we enter into long-term supply arrangements that commit us to purchase minimum or fixed quantities of certain parts or materials, or to pay a minimum amount to a supplier, or “take-or-pay” contracts, through which we may incur costs that cannot be recouped by vehicles sales.

From time to time, we enter into long-term supply contracts that require us to purchase a minimum or fixed quantity of parts to be used in the production of our vehicles. If our need for any of these parts were to lessen, we would still be required to purchase a specified quantity of the part or pay a minimum amount to the supplier pursuant to the take- or-pay contract. We also have entered into a small number of long-term supply contracts for raw materials that require us to purchase fixed quantities. If our needs for raw materials decline, we could be required to purchase more materials than we need.

Laws, regulations and governmental policies, including those regarding increased fuel economy requirements and reduced GHG emissions, may have a significant effect on how we do business and may adversely affect our results of operations.

In order to comply with government regulations related to fuel economy and emissions standards, we must devote significant financial and management resources, as well as vehicle engineering and design attention to these legal requirements. We expect the number and scope of these regulatory requirements, along with the costs associated with compliance, to increase significantly in the future. In the U.S., for example, governmental regulation is driven by a variety of sometimes conflicting concerns, including vehicle safety, fuel economy and environmental impact (including greenhouse gas, or GHG, emissions). These government regulatory requirements could significantly affect our plans for product development, particularly our plans to further integrate product development with our industrial partner, Fiat, and may result in substantial costs, including civil penalties, if we are unable to comply fully. They may also limit the types of vehicles we produce and sell and where we sell them, which can affect our vehicle sales and revenues. These requirements may also limit the benefits of the Fiat alliance, as we expend financial, vehicle design and engineering resources to the localization of Fiat vehicle platforms and adapt other Fiat technologies for use in our principal markets in North America, where Fiat has had a limited presence in recent years.

Among the most significant regulatory changes we face over the next several years are the heightened requirements for fuel economy and GHG emissions. The Corporate Average Fuel Economy, or CAFE, provisions under the EISA mandate that by 2020, car and truck fleet-wide average fuel economy must be materially higher

 

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than that required today. Moreover, the State of California, through the California Air Resources Board, or the CARB, is implementing its own program to regulate vehicle emissions compliance that require even further improved fuel economy. This California program currently has standards established for the 2009 through 2016 model years. Some additional states and Canadian provinces have also adopted variations of the California emissions standards.

In May 2009, President Obama announced a goal of implementing harmonized federal standards for fuel economy and GHG emissions. The Environmental Protection Agency, or EPA, and the National Highway Transportation Safety Administration, or NHTSA, issued a joint final rule to implement this new federal program in May 2010. These standards apply to passenger cars, light-duty trucks, and medium-duty passenger vehicles built in model years 2012 through 2016, and CARB has agreed that compliance with the these federal emissions standards will be deemed compliance with the California emissions standards for the 2012 through 2016 model years. In the absence of these rules, we would be subject to conflicting and in some cases more onerous requirements enacted by California and adopted by other states. While there are no national standards in effect for model years after 2016, President Obama and the automotive industry have collectively agreed to a proposed joint framework that would increase the emissions standards from 2017 through 2025, such that the car and truck fleet-wide average fuel economy achieves 54.5 miles per gallon by 2025. A proposed joint rule based upon this framework is now pending. As with the current national program, compliance with the proposed joint rule will be deemed compliance with California emissions requirements. Implementation of this rule would require us to take costly design actions. In addition, if circumstances arise where CARB and EPA regulations regarding GHG emissions and fuel economy conflict, this too could require costly actions or limit the sale of certain of our vehicles in certain states. We could also be adversely affected if pending litigation by third parties outside of the automotive industry challenging EPA’s regulatory authority with respect to GHGs is successful, and, as a result, CARB were to enforce its GHG standards.

We are committed to meeting these new regulatory requirements, and our current product plan incorporates the technology and associated cost to comply with the federal program through the 2016 model year. Our current vehicle technology, however, cannot yield the improvement in fuel efficiency necessary to achieve compliance with the requirements of the proposed 2017-2025 joint rule. Even in the years leading up to 2016, we may not be able to develop appealing vehicles that comply with these requirements that can be sold at a competitive price. Our customers may not purchase these vehicles in the volumes necessary to achieve the proper fleet mix to achieve fuel economy requirements.

Canadian federal emissions regulations largely mirror the U.S. regulations.

The European Union, or EU, promulgated new passenger car carbon dioxide emissions regulations beginning in 2012. This directive sets an industry target for 2020 of a fleet average measured in grams per kilometer, with the requirements for each manufacturer calculated based on the average weight of vehicles across its fleet. In addition, some EU member states have adopted or are considering some form of carbon-dioxide based vehicle tax, which may affect consumer preferences for certain vehicles in unpredicted ways, and which could result in specific market requirements that are more stringent than the EU emissions standards.

Other countries are also developing or adopting new policies to address these issues. These policies could significantly affect our product development and international expansion plans and, if adopted in the form of new laws or regulations, could subject us to significant civil penalties or require that we modify our products to remain in compliance. Any such modifications may reduce the appeal of our vehicles to our customers.

Additionally, any new regulations could result in substantial increased costs, which we may be unable to pass through to customers, and could limit the vehicles we design, manufacture and sell and the markets we can access. These changes could adversely affect our business, financial condition and results of operations. For example, pending litigation may prompt EPA to reexamine the use of selective catalyst reduction, or SCR, technology in diesel engines. Regulatory constraints on such use could adversely affect our ability to sell heavy-duty vehicles.

 

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Safety standards set by regulatory authorities, as well as design, safety and quality ratings by widely accepted independent parties may have a significant negative effect on our costs and our vehicle sales.

Our vehicles must satisfy safety requirements that are developed and overseen by a variety of governmental bodies within the U.S. and foreign countries. Our vehicles are also tested by independent vehicle rating programs such as the Insurance Institute for Highway Safety. In addition, independent ratings services such as Consumers Union and J.D. Power and Associates perform reviews on safety, design and quality issues, which often influence consumers’ purchase decisions.

Meeting or exceeding government-mandated safety standards and improving independent safety, design and quality ratings can be difficult and costly in many cases. Often, safety requirements or desired quality and design attributes hinder our efforts to meet emissions and fuel economy standards, since the latter are often facilitated by reducing vehicle weight. The need to meet regulatory or other generally accepted rating standards can substantially increase costs for product development, testing and manufacturing, particularly if new requirements or testing standards are implemented in the middle of a product cycle, and the vehicle does not already meet the new requirements or standards.

To the extent that the ratings of independent parties are negative, or are below our competitors’ ratings, our vehicle sales may be negatively impacted.

Vehicle defects may delay vehicle launches, or increase our warranty costs.

Manufacturers are required to remedy defects related to motor vehicle safety and to emissions through safety recall campaigns, and a manufacturer is obligated to recall vehicles if it determines that they do not comply with an applicable Federal Motor Vehicle Safety Standard. In addition, if we determine that a safety or emissions defect or a noncompliance exists with respect to certain of our vehicles prior to the start of production, the launch of such vehicle could be delayed until we remedy the defect or noncompliance. The costs associated with any protracted delay in new model launches necessary to remedy such defect, and the cost of providing a free remedy for such defects or noncompliance in vehicles that have been sold, could be substantial. We are also obligated under the terms of our warranty to make repairs or replace parts in our vehicles at our expense for a specified period of time. Therefore, any failure rate that exceeds our expectations may result in unanticipated losses.

Product recalls may result in direct costs and loss of vehicle sales that could have material adverse effect on our business.

From time to time, we have been required to recall vehicles to address performance, compliance or safety-related issues. The costs we incur to recall vehicles typically includes the cost of the new remedy parts and labor to remove and replace the problem parts, and may be substantial depending on the nature of the remedy and the number of vehicles affected. Product recalls also harm our reputation and may cause consumers to question the safety or reliability of our products.

Any costs incurred, or lost vehicle sales resulting from, product recalls could materially adversely affect our business. Moreover, if we face consumer complaints, or we receive information from vehicle rating services that calls into question the safety or reliability of one of our vehicles and we do not issue a recall, or if we do not do so on a timely basis, our reputation may also be harmed and we may lose future vehicle sales.

We are exposed to ongoing litigation and other legal and regulatory actions and risks in the ordinary course of our business, and we could incur significant liabilities and substantial legal fees.

In the ordinary course of business, we face a significant volume of litigation as well as other legal claims and proceedings and regulatory enforcement actions. The results of these legal proceedings cannot be predicted with certainty, and adverse results in current or future legal proceedings may materially harm our business, financial

 

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condition and results of operations, whether because of significant damage awards or injunctions or because of harm to our reputation and market perception of our vehicles and brands. We may incur losses in connection with current or future legal proceedings that exceed any provisions we may have set aside in respect of such proceedings or that exceed any applicable insurance coverage.

Although we design and develop vehicles to comply with all applicable safety standards, compliance with governmental standards does not necessarily prevent individual or class action lawsuits, which can entail significant costs and risks. For example, whether Federal Motor Vehicle Safety Standards preempt state common law claims is often a contested issue in litigation, and some courts have found us in breach of legal duties and liable in tort, though our vehicles comply with all applicable federal and state regulations. Furthermore, simply responding to actual or threatened litigation or government investigations regarding our compliance with regulatory standards, even in cases in which no liability is found, often requires significant expenditures of funds, time and other resources, and may cause reputational harm.

In addition, our vehicles may have “long-tail” exposures, including as a result of potential product recalls and product liability claims, giving rise to liabilities many years after their sale. Any insurance we hold currently may not be available when costs arise in the future and, in the case of harm caused by a component sourced from a supplier, the supplier may no longer be available to provide indemnification or contribution.

Taxing authorities could challenge our historical and future tax positions as well as our allocation of taxable income among our subsidiaries.

The amount of income tax we pay is subject to our interpretation of applicable tax laws in the jurisdictions in which we file. We have taken, and will continue to take, tax positions based on our interpretation of such tax laws. While we believe that we have complied with all applicable income tax laws, there can be no assurance that a taxing authority will not have a different interpretation of the law and assess additional taxes. Should additional taxes be assessed, this may result in a material adverse effect on our results of operations and financial condition.

We conduct sales, contract manufacturing, marketing, distribution and research and development operations with affiliated companies located in various tax jurisdictions around the world. While our transfer pricing methodologies are based on economic studies that we believe are reasonable, the transfer prices for these products and services could be challenged by the various tax authorities resulting in additional tax liabilities, interest and/or penalties, and the possibility of double taxation. To reduce the risk of transfer pricing adjustments, efforts are underway to secure an advance pricing agreement, or APA, with Canada, and we are also considering whether to pursue one with Mexico, but we currently have no APA in place with either jurisdiction.

We depend on the services of our key executives, whose loss could materially harm our business.

Several of our senior executives, including our Chief Executive Officer, Sergio Marchionne, are important to our success because they have been instrumental in establishing our new strategic direction and implementing our business plan. If we were to lose the services of any of these individuals this could have a material adverse effect on our business, financial condition and results of operations. We believe that these executives, in particular Mr. Marchionne, could not easily be replaced with executives of equivalent experience and capabilities.

Mr. Marchionne’s dual positions as Fiat’s Chief Executive Officer and as our initial Chief Executive Officer, and Mr. Palmer’s dual positions as our Chief Financial Officer and as the Chief Financial Officer of Fiat, may create a potential for conflicts of interest.

Mr. Marchionne’s dual role as Chief Executive Officer of both Chrysler Group and Fiat, and Mr. Richard Palmer’s dual role as Chief Financial Officer of both companies, could present potential conflicts of interest under our industrial alliance with respect to the development of products, brands, and global distribution strategies, and component sourcing to Fiat affiliates. There can be no assurance that the governance processes in our LLC Operating Agreement and the covenants in our outstanding debt agreements will be sufficient to protect against such conflicts.

 

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Moreover, in addition to serving as Chief Executive Officer of both Fiat and Chrysler Group, Mr. Marchionne also serves as Chairman or Chief Executive Officer of several significant business units within Fiat and Fiat Industrial including Fiat Group Automobiles, Case New Holland, or CNH, and Iveco. Mr. Marchionne does not receive any salary compensation from us for serving as our Chief Executive Officer, and we do not have a specified allocation of Mr. Marchionne’s time and attention. If Mr. Marchionne allocates more of his time and attention to non-Chrysler matters, our business may suffer as a result.

We are operating our business with far fewer salaried employees than Old Carco and our current employees may lack some of the skills and qualifications that Old Carco’s employees had, which may harm our business and threaten our ability to hire and retain salaried employees, especially those with critical skills.

We employ substantially fewer salaried employees than Old Carco employed. As part of cost reduction efforts in the 2007-2009 period, Old Carco had offered early retirement packages and voluntary separation incentives to a broad cross-section of experienced salaried employees. As a result, we do not have the services of key employees who worked for Old Carco in a number of critical areas including vehicle design and engineering, finance, accounting, tax and legal. The remaining employees have heavier workloads than employees have historically had. We are currently in the process of trying to hire additional experienced salaried employees, particularly engineers, the market for whom is particularly competitive. Companies in similar situations have experienced significant difficulties in hiring and retaining highly skilled employees, particularly in competitive specialties, and we may experience such difficulties going forward. Due to increasing demands on the salaried workforce, and the potential lack of critical skills in our employee population, we may not be able to achieve our business plan targets in as cost-effective or efficient a manner as we had projected.

Our collective bargaining agreements limit our ability to modify our operations and reduce costs in response to market conditions.

Substantially all of our hourly employees in the U.S. and Canada are represented by unions and covered by collective bargaining agreements. We recently negotiated a new four-year collective bargaining agreement with the UAW, which was ratified in October 2011. Our agreement with the Canadian Auto Workers, or the CAW, is set to expire in September 2012, and we may lose the advantage of some of the concessions we had previously negotiated with the CAW. As a practical matter, both these agreements restrict our ability to modify our operations and reduce costs in response to market conditions during the terms of the agreements. These and other provisions in our collective bargaining agreements may impede our ability to restructure our business successfully to compete more effectively, especially with those automakers whose U.S. employees are not represented by unions.

Work stoppages at our suppliers’ facilities or other interruptions of production may harm our business.

A work stoppage or other interruption of production could occur at our facilities or those of our suppliers as a result of disputes under existing collective bargaining agreements with labor unions or in connection with negotiations of new collective bargaining agreements, as a result of supplier financial distress, or for other reasons. For example, many suppliers are experiencing financial distress due to decreasing production volume and increasing prices for raw materials, jeopardizing their ability to produce parts for us. A work stoppage or interruption of production at our facilities or those of our suppliers due to labor disputes, shortages of supplies, or any other reason (including but not limited to tight credit markets or other financial distress, natural or man-made disasters, or production difficulties) could substantially adversely affect our financial condition and results of operations.

We depend on our computer and data processing systems, and a significant malfunction or disruption in their operation could disrupt our business.

Our ability to keep our business operating effectively depends on the functional and efficient operation of our enterprise resource planning and telecommunications systems, including our vehicle design, manufacturing,

 

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inventory tracking and billing and collection systems. We rely on these systems to make a variety of day-to-day business decisions as well as to track transactions, billings, payments and inventory. Our systems are susceptible to malfunctions and interruptions (including due to equipment damage, power outages, computer viruses and a range of other hardware, software and network problems) and we may experience such malfunctions or interruptions in the future. Although our systems are diversified, including multiple server locations and a range of software applications for different regions and functions, a significant or large-scale malfunction or interruption of our computer or data processing systems could adversely affect our ability to manage and keep our operations running efficiently, and damage our reputation if we are unable to track transactions and deliver products to our customers. A malfunction that results in a wider or sustained disruption to our business could have a material adverse effect on our business, financial condition and results of operations.

We are currently in the process of transitioning, retiring or replacing a significant number of our software applications at an accelerated rate, an effort that will continue in future years. These applications include, among others, our engineering, finance, procurement and communication systems. During the transition periods, and until we fully migrate to our new systems, we may experience material disruptions in communications, in our ability to conduct our ordinary business processes and in our ability to report out on the results of our operations. Though we are taking commercially reasonable steps to transition our data properly, we may also lose significant amounts of data in the transition, or we may be unable to access data for periods of time without forensic intervention. Loss of data may affect our ability to continue ongoing business processes according to the dates in our business plan, or could affect our ability to file timely reports required by a wide variety of regulators, including the SEC. Our ability to comply with the requirements of the Sarbanes-Oxley Act, to the extent required of us, may also be compromised.

Risks Related to Our Structure, the Notes and the Exchange Offers

There may be adverse consequences if you do not exchange your old notes.

If you do not exchange your old notes for Notes in the exchange offers, you will continue to be subject to restrictions on transfer of your old notes as set forth in the Offering Memorandum distributed in connection with the private offering of the old notes. In general, the old notes may not be offered or sold unless they are registered or exempt from registration under the Securities Act and applicable state securities laws. Except as required by the registration rights agreement, we do not intend to register resales of the old notes under the Securities Act. You should refer to “Summary — The Exchange Offers” and “The Exchange Offers” for information about how to tender your old notes.

The tender of old notes under the exchange offers will reduce the outstanding amount of the old notes, which may have an adverse effect upon, and increase the volatility of, the market prices of the old notes due to a reduction in liquidity.

There is currently no public trading market for the Notes. We cannot assure you that an active trading market will develop for the Notes, in which case your ability to transfer the Notes will be limited.

The Notes will be new issues of securities with no established trading market, and an active trading market may not develop. We do not intend to list the Notes on any national securities exchange or to arrange for their quotation on any automated dealer quotation system. The initial purchasers advised us they intend to make a market in the Notes after we complete the exchange offers. However, the initial purchasers may cease their market-making activity at any time.

The liquidity of the trading markets, if any, for the Notes, and the market prices quoted for the Notes, may be adversely affected by changes in the overall market for high-yield securities and by changes in our operating and financial performance or in the prospects of companies in our industry generally. As a result, you cannot be certain that active trading markets will develop for the Notes or, if such markets develop, that they will be maintained.

 

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Historically, the market for non-investment grade debt has been subject to disruptions that have caused substantial volatility in the prices and liquidity of securities similar to the Notes. The market, if any, for the Notes may be subject to similar disruptions and any such disruptions may adversely affect the value of the Notes. In addition, subsequent to their initial issuance, the Notes may trade at a discount from their principal amount, depending upon prevailing interest rates, the market for similar notes, our financial and operating performance and other factors.

Our substantial indebtedness could adversely affect our financial condition, our cash flow, our ability to operate our business and could prevent us from fulfilling our obligations under our indebtedness, including the Notes.

We have a substantial amount of indebtedness. As of September 30, 2011, our total debt, including the debt of our subsidiaries, was $12,384 million (based on the carrying value of such indebtedness), excluding unused commitments of $1,300 million under our revolving credit facility (of which $3,200 million consists of the old notes and $3,000 million consists of term loans under the Senior Credit Facilities).

Our debt levels could have significant negative consequences, including:

 

   

making it more difficult to satisfy our obligations, including our obligations with respect to the Notes;

 

   

a reduction of our future earnings;

 

   

increasing our vulnerability to general adverse economic and industry conditions;

 

   

limiting our ability to obtain additional financing;

 

   

requiring us to issue debt or raise equity or to sell some of our principal assets, possibly on unfavorable terms, to meet debt payment obligations;

 

   

exposing us to risks that are inherent in interest rate and currency fluctuations because certain of our indebtedness bears variable rates of interest and is in various currencies;

 

   

subject us to financial and other restrictive covenants, and if we fail to comply with these covenants and that failure is not waived or cured, could result in and event of default under our indebtedness;

 

   

requiring us to devote a substantial portion of our available cash and cash flow to make interest and principal payments on our debt, thereby reducing the amount of cash available for other purposes, including for vehicle design and engineering, manufacturing improvements, other capital expenditures and other general corporate uses;

 

   

limiting our financial and operating flexibility in responding to changing economic and competitive conditions or exploiting strategic business opportunities; and

 

   

placing us at a disadvantage compared to our competitors that have relatively less debt and may therefore be better positioned to invest their funds in design, engineering and manufacturing improvements, among other expenses.

If compliance with our debt obligations materially hinders our ability to operate our business and adapt to changing industry conditions, we may lose market share, our revenues may decline and our operating results may suffer. If we do not have sufficient earnings to service our indebtedness, we may be required to refinance all or part of our indebtedness, sell assets, borrow more money or sell securities, which we may not be able to do on acceptable terms if at all.

 

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Despite our substantial indebtedness, we may be able to incur substantially more debt.

Despite our substantial amount of indebtedness, we may be able to incur substantial additional debt, including secured debt, in the future. The indenture governing the Notes does not restrict our ability to incur unsecured Indebtedness. Although restrictions on the incurrence of additional debt are contained in the indenture governing the Notes (in the case of secured debt), in the terms of our Senior Credit Facilities and in our other financing arrangements, these restrictions are subject to a number of qualifications and exceptions. Also, these restrictions do not prevent us from incurring obligations that do not constitute indebtedness. In addition, as of September 30, 2011, we had $1,300 million available for additional borrowing under our revolving credit facility, all of which is secured by a lien senior to the lien securing the Notes. The more leveraged we become, the more we, and in turn holders of the Notes, become further exposed to the risks associated with substantial leverage described above.

Restrictive covenants in the Notes and our other indebtedness could adversely affect our business by limiting our operating and strategic flexibility.

The indenture governing the Notes contains restrictive covenants that limit our ability to, among other things:

 

   

incur or guarantee additional secured indebtedness;

 

   

pay dividends or make distributions or purchase or redeem capital stock;

 

   

make certain other restricted payments;

 

   

incur liens;

 

   

sell assets;

 

   

enter into sale and lease-back transactions;

 

   

enter into transactions with affiliates; and

 

   

effect a consolidation, amalgamation or merger.

These restrictive covenants could have an adverse effect on our business by limiting our ability to take advantage of financing, mergers and acquisitions, joint ventures or other corporate opportunities. In addition, the Senior Credit Facilities contain, and our future indebtedness may contain, other and more restrictive covenants and also prohibit us from prepaying certain of our other indebtedness, including the Notes, prior to discharge of the Senior Credit Facilities or such future indebtedness. In addition, the Senior Credit Facilities and the indenture governing the VEBA Trust Notes, or the VEBA Indenture, may limit our ability and the ability of our subsidiaries to incur debt. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Chrysler Group” for a description of the VEBA Trust Notes. The Senior Credit Facilities require us to maintain borrowing base collateral coverage and liquidity ratios. Our future indebtedness may contain similar or other financial ratios set at levels determined by us and our future lenders. Our ability to meet those financial ratios could be affected by a deterioration in our operating results, as well as by events beyond our control, including unfavorable economic conditions, and we cannot assure you that those ratios will be met. It may be necessary to obtain waivers or amendments with respect to covenants under the indenture governing the Notes, the terms of the Senior Credit Facilities or our future indebtedness from time to time, but we cannot assure you that we will be able to obtain such waivers or amendments or the cost of obtaining such waivers. A breach of any of these covenants, ratios or restrictions could result in an event of default under the indenture governing the Notes, the terms of the Senior Credit Facilities or our future indebtedness and any of our other indebtedness or result in cross-defaults under certain of our indebtedness. Upon the occurrence of an event of default under the indenture governing the Notes, the terms of the Senior Credit Facilities or such other indebtedness, the lenders could terminate their commitment to lend and elect to declare all amounts outstanding under such indebtedness, together with accrued interest, to be immediately due and payable. If the lenders accelerate the payment of that

 

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indebtedness or foreclose on the assets securing that indebtedness (including the collateral), we cannot assure you that our assets would be sufficient to repay in full that indebtedness and our other indebtedness then outstanding, including the Notes. Even if the lenders do not elect to accelerate our indebtedness in the event of any such event of default under our other indebtedness, the lenders may prevent us from making payments of principal, premium (if any) or interest on the Notes, which could substantially decrease the market value of the Notes.

We may not be able to generate sufficient cash to service all of our indebtedness, including the Notes, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to generate sufficient cash flow from operations to make scheduled payments on, or to refinance obligations under, our debt depends on our financial and operating performance, which, in turn, is subject to prevailing economic and competitive conditions and to financial and business-related factors, many of which may be beyond our control. See “—Risks Relating to Our Business” above.

As of September 30, 2011, we had $12,384 million of outstanding indebtedness (based on the carrying value of such indebtedness), excluding unused commitments of $1,300 million under our revolving credit facility. After giving effect to the May 2011 refinancing transactions as if they had occurred on September 30, 2010, interest expense on our Senior Credit Facilities, the Notes and our other indebtedness would have been $1,063 million for the twelve months ended September 30, 2011.

If our cash flow and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce working capital levels, reduce or delay capital expenditures, sell assets, seek additional equity capital or restructure all or a portion of our debt. We may not be able to complete any of these on commercially reasonable terms or at all, and even if successful, we still may be unable to meet our scheduled debt service obligations, including the payment of interest or principal in respect of the Notes. In particular, our ability to refinance our indebtedness or obtain additional financing may be adversely affected by our anticipated high levels of debt, prevailing market conditions and the debt incurrence restrictions imposed by our debt instruments. In the absence of sufficient cash flow and capital resources, we could face substantial liquidity problems and may be required to dispose of material assets or operations to meet our debt service and other obligations. The indenture governing the Notes, the terms of the Senior Credit Facilities and the agreements governing our other debt restrict, and our future indebtedness is likely to further restrict, both our ability to dispose of assets and the use of proceeds from any such disposition. We cannot assure you that we will be able to consummate any asset sales, or if we do, what the timing of the sales will be or whether the proceeds that we realize will be adequate to meet our debt service obligations when due or that we will be contractually permitted to apply such proceeds for that purpose. In addition, any failure to make scheduled payments of interest and principal on our outstanding indebtedness would likely result in a reduction in our credit rating, which could harm our ability to incur additional indebtedness on commercially reasonable terms, or at all. Our inability to generate sufficient cash flow to satisfy our debt obligations, or to implement any of these alternative measures, would have a material adverse effect on our business, financial condition and results of operations, as well as our ability to satisfy our obligations in respect of the Notes.

The Notes will mature later than a substantial portion of our other indebtedness, including the Senior Credit Facilities.

The 2019 Notes will mature in 2019 and the 2021 Notes will mature in 2021. Substantially all of our other existing indebtedness will mature prior to the maturity of the Notes. For example, the term loans under the Senior Credit Facilities will mature two years before the 2019 Notes and four years before the 2021 Notes. In addition, the revolving facilities under the Senior Credit Facilities are expected to mature three years before the 2019 Notes and five years before the 2021 Notes. We are also required to make annual amortization payments under our VEBA Indenture. Therefore, we will be required to repay substantially all of our other creditors, including the lenders under the Senior Credit Facilities, before the holders of the Notes, which may significantly deplete

 

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the amount of cash available to repay all amounts owing on the Notes at maturity. There can be no assurance that we will have the ability to borrow or otherwise raise the amounts necessary to repay such amounts if our cash flow is insufficient, and the prior maturity of such other indebtedness may make it difficult to refinance the Notes.

Holders of the Notes will not control decisions regarding collateral.

The rights of holders of the Notes with respect to the collateral securing the First-Priority Lien Obligations and the Notes will be limited pursuant to the terms of the intercreditor agreement with the lenders under our Senior Credit Facilities. Under the intercreditor agreement, any actions that may be taken in respect of the collateral (including the ability to commence enforcement proceedings against the collateral and to control the conduct of such proceedings, and to approve amendments to, releases of the collateral from the lien of, and waivers of past defaults under, the collateral documents) will be at the direction of the lenders under our Senior Credit Facilities. Under those circumstances, neither the collateral agent nor the trustee on behalf of the holders of the Notes, with limited exceptions, will have the ability to control or direct such actions, even if the rights of the holders of the Notes are adversely affected. Any release by the lenders under our Senior Credit Facilities of the collateral that secures the Senior Credit Facilities (other than in connection with a termination of the Senior Credit Facilities or a release of all collateral) will also release the junior-priority lien securing the Notes on the same collateral (subject to the interest of the holders of the Notes in the proceeds of that collateral), and holders of the Notes will have no control over such release. In addition, because the holders of the First-Priority Lien Obligations control the disposition of the collateral, such holders could decide not to proceed against such collateral, regardless of whether there is a default under the documents governing such indebtedness or under the indenture governing the Notes. In such event, the only remedy available to the holder of the Notes would be to sue for payment on the Notes and the related guarantees.

The indenture governing the Notes and the intercreditor agreement also contain provisions prohibiting the trustee and the collateral agent from objecting following the filing of a bankruptcy petition to a number of important matters regarding the collateral and the financing to be provided to us. After such filing, the value of this collateral could materially deteriorate and holders of the Notes would be unable to raise an objection. In addition, the intercreditor agreement gives the holders of the First-Priority Lien Obligations the right to access and use the collateral that will secure the Notes to allow those holders to protect such collateral and to process, store and dispose of the collateral.

The collateral will also be subject to any and all exceptions, defects, encumbrances, liens and other imperfections as may be accepted by the lenders under our Senior Credit Facilities and other creditors that have the benefit of senior liens on such collateral from time to time, whether on or after the date the Notes and related guarantees are issued. The existence of any such exceptions, defects, encumbrances, liens and other imperfections could adversely affect the value of the collateral securing the Notes as well as the ability of the collateral agent to realize or foreclose on such collateral.

Furthermore, the security documents generally allow us and our subsidiaries to remain in possession of, retain exclusive control over, to freely operate, and to collect, invest and dispose of any income from, the collateral securing the Notes. In addition, to the extent we sell any assets that constitute collateral, the proceeds from such sale will be subject to the junior-priority lien securing the Notes only to the extent such proceeds would otherwise constitute “collateral” securing the Notes under the security documents. To the extent the proceeds from any such sale of collateral do not constitute “collateral” under the security documents, the pool of assets securing the Notes would be reduced and the Notes would not be secured by such proceeds.

In addition, the collateral will be taken in the name of a collateral agent for the benefit of the holders of the Notes and the trustee. As a result, the collateral agent or representative of the collateral agent may effectively control actions with respect to collateral which may impair the rights that a noteholder would otherwise have as a secured creditor. The collateral agent or representative, as applicable, may take actions that a noteholder

 

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disagrees with or fail to take actions that a noteholder wishes to pursue. For example, the collateral agent or representative, as applicable, could decide to credit bid using the value of a noteholder’s secured claim even if such noteholder would not individually have done so. Furthermore, the collateral agent or representative under the intercreditor agreement may fail to act in a timely manner which could impair the recovery of noteholders. In addition, the collateral agent for the holders of the Notes will be the same as the collateral agent under the Senior Credit Facilities. As such, in the event of a default the collateral agent will have a conflict of interest. If the collateral agent for the holders of the Notes is not able to remove the conflict of interest, it will need to resign.

There may not be sufficient collateral to satisfy our obligations under the Notes, and the collateral securing the Notes may be diluted under certain circumstances.

The Notes are secured by a junior priority lien on the collateral that secures the Senior Credit Facilities (except to the extent that the Senior Credit Facilities may be granted a lien on DOE Assets). In the event of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding against us or any current or future domestic subsidiary, the assets that are pledged as shared collateral securing the First-Priority Lien Obligations and the Notes must be used first to pay the First-Priority Lien Obligations in full before making any payments on the Notes. As of September 30, 2011, we had outstanding approximately $3,200 million of indebtedness (excluding unused commitments of $1,300 million under our revolving credit facility) with a senior claim to the collateral. In addition, the indenture governing the Notes will allow a significant amount of additional indebtedness and other obligations to be secured by a lien on the collateral securing the Notes on a senior or equal and ratable basis, provided that, in each case, such indebtedness or other obligations could be incurred under the debt incurrence covenant contained in the indenture. Any additional obligations secured by a lien on the collateral securing the Notes (whether senior to or equal with the lien securing the Notes) will adversely affect the relative position of the Notes with respect to the collateral securing the Notes and your rights would be diluted by any such increase in the obligations secured by such collateral.

A significant portion of our assets will not be collateral for the Notes. The assets that will be excluded from the collateral include all assets of our foreign subsidiaries, which subsidiaries will be permitted to incur substantial indebtedness in compliance with the covenants under the Senior Credit Facilities and the indenture governing the Notes. As of September 30, 2011, our non-guarantor subsidiaries had approximately $11 billion of total assets and approximately $8 billion of total liabilities (including trade payables) to which the Notes would have been structurally subordinated. With respect to those assets that are not part of the collateral securing the Notes but which secure other obligations, the Notes will be effectively junior to these obligations to the extent of the value of such assets. There is no requirement that the holders of the First-Priority Lien Obligations first look to these excluded assets before foreclosing, selling or otherwise acting upon the collateral shared with the Notes.

No appraisals of the fair market value of any assets that will be collateral have been prepared in connection with this offering. The value of the collateral at any time will depend on market and other economic conditions, including the availability of suitable buyers for the collateral. The book value of our assets may not be indicative of the fair market value of such assets, which could be substantially lower. By their nature, some or all of the pledged assets may be illiquid and may have no readily ascertainable market value or market. The value of the assets pledged as collateral for the Notes or our other secured indebtedness could be impaired in the future as a result of changing economic conditions, changing legal regimes, our failure to implement our business strategy, competition and other future trends. In the event of a foreclosure, liquidation, bankruptcy or similar proceeding, the proceeds from any sale or liquidation of the collateral may be insufficient to pay our obligations under the Notes in full or at all.

The lender under any Permitted DOE Facility will benefit from a more expansive security package than the holders of the Notes.

Any Permitted DOE Facility will benefit from a more expansive security package than the Notes. The Notes and Guarantees will not have a security interest in any DOE Assets. See “Description of the Notes—Security—Description of Collateral.” In addition, there will not be any requirement that the obligations under any Permitted

 

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DOE Facility first be satisfied using proceeds from the assets that do not secure the Notes, which means the holders of the Notes may recover less than they would have if the lender under any Permitted DOE Facility first proceeded against such assets that do not secure the Notes.

Some foreign jurisdictions may not recognize the enforceability of junior liens, which may result in the Notes having a less expansive security package than the Senior Credit Facilities.

Some jurisdictions in which our subsidiaries are located, including Belgium, Brazil, Germany, Korea, the Netherlands, Russia and South Africa, may not recognize the validity or enforceability of a junior lien, or allow the perfection of a junior lien. If that is the case, the holders of the Notes, unlike the lenders under our Senior Credit Facilities, may not have the benefit of an enforceable security interest in the stock of our subsidiaries located in those jurisdictions.

The value of the collateral securing the Notes may not be sufficient to secure post-petition interest.

In the event of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding against any issuer, guarantor or security provider, holders of the Notes will only be entitled to post-petition interest under the U.S. federal bankruptcy code to the extent that the value of their security interest in the collateral is greater than their pre-bankruptcy claim. Holders of the Notes may be deemed to have an unsecured claim to the extent that our

obligations in respect of the Notes exceed the fair market value of the collateral securing the Notes. As a result, holders of the Notes that have a security interest in collateral with a value equal to or less than their pre-bankruptcy claim will not be entitled to post-petition interest under the bankruptcy code. In addition, it is possible that the bankruptcy trustee, the debtor-in-possession or competing creditors will assert that the fair market value of the collateral with respect to the Notes on the date of the bankruptcy filing was less than the then-current principal amount of the Notes. Upon a finding by a bankruptcy court that the Notes are under-collateralized, the claims in the bankruptcy proceeding with respect to the Notes would be bifurcated between a secured claim and an unsecured claim, and the unsecured claim would not be entitled to the benefits of security in the collateral. Other consequences of a finding of under-collateralization would be, among other things, a lack of entitlement on the part of the Notes to receive post-petition interest and a lack of entitlement on the part of the unsecured portion of the Notes to receive other “adequate protection” under U.S. federal bankruptcy laws. In addition, if any payments of post-petition interest had been made at the time of such a finding of under-collateralization, those payments could be re-characterized by the bankruptcy court as a reduction of the principal amount of the secured claim with respect to the Notes. No appraisal of the fair market value of the collateral has been prepared in connection with the exchange offers and we therefore cannot assure you that the value of the noteholders’ interest in the collateral equals or exceeds the principal amount of the Notes.

There are circumstances other than repayment or discharge of the Notes under which the collateral and related guarantees will be released automatically, without the consent of the holders of the Notes, the collateral agent or the trustee under the indenture governing the Notes.

Under various circumstances, collateral securing the Notes may be released automatically, including:

 

   

if all other liens on such property or assets securing First-Priority Lien Obligations are released;

 

   

a sale, transfer or other disposal of such collateral in a transaction not prohibited under the indenture governing the Notes or our Senior Credit Facilities, including the sale of any entity in its entirety that owns or hold such collateral;

 

   

with respect to collateral held by a guarantor, upon the release of such guarantor from its guarantee;

 

   

with respect to collateral that is capital stock, upon the dissolution of the issuer of such capital stock in accordance with the indenture governing the Notes; and

 

   

with respect to any collateral, upon any release by the lenders under our Senior Credit Facilities of their senior-priority security interest in such collateral.

 

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Moreover, as described below, although the Notes will initially be secured by the pledge of the capital stock of certain of our subsidiaries, the pledge of any such subsidiary will be released to the extent that separate financial statements of the subsidiary would be required pursuant to Rule 3-16 of Regulation S-X under the Securities Act in connection with the filing of a registration statement related to the Notes.

In addition, the guarantee of a guarantor will be released in connection with a sale of such guarantor in a transaction not prohibited by the indenture. The indenture governing the Notes will also permit us to designate one or more of our restricted subsidiaries that is a guarantor of the Notes as an unrestricted subsidiary. If we designate a guarantor as an unrestricted subsidiary, all of the liens on any collateral owned by such subsidiary or any of its subsidiaries and any guarantees of the Notes by such subsidiary or any of its subsidiaries will be released under the indenture governing the Notes but not under our Senior Credit Facilities. Designation of an unrestricted subsidiary will reduce the aggregate value of the collateral securing the Notes to the extent that liens on the assets of the unrestricted subsidiary and its subsidiaries are released. In addition, the creditors of the unrestricted subsidiary and its subsidiaries will have a senior claim on the assets of such unrestricted subsidiary and its subsidiaries. See “Description of the Notes.”

Many of the covenants in the indenture that will govern the Notes will not apply if the Notes are rated investment grade by Moody’s and Standard & Poor’s.

If the Notes are assigned an investment grade rating by both Moody’s and Standard & Poor’s for 60 consecutive days, and no event of default has occurred or is continuing, many of the covenants in the indenture governing the Notes will not apply to us and the liens on the Collateral will be automatically released. There can be no assurance that the Notes will ever be rated investment grade, or that if they are rated investment grade, that the Notes will maintain these ratings. However, if the Notes do achieve investment grade ratings and the covenants are terminated and the collateral is released, the Notes will still only benefit from the limited covenants and be without the benefit of the guarantees or the collateral even if the Notes subsequently lose their investment grade ratings after such date. For additional information see “Description of the Notes—Certain Covenants in the Indenture—Covenant Fall-Away.”

There can be no assurance that the Notes will ever be rated investment grade, or that, if they are rated investment grade, that the Notes will maintain these ratings. Termination of some of the covenants in the indenture that will govern the Notes, however, would allow us to engage in certain transactions that would not be permitted while these covenants were in force. In addition, if the Notes are rated investment grade the liens on the collateral will be automatically released. In addition, upon the termination of these covenants, any defaults with respect to such terminated covenants that have not matured into events of default will be rescinded. For additional information, see “Description of the Notes—Certain Covenants in the Indenture—Covenant Fall-Away.”

Because each guarantor’s liability under its guarantee or security may be reduced to zero, avoided or released under certain circumstances, you may not receive any payments from some or all of the guarantors.

Noteholders have the benefit of the guarantees of certain of our subsidiaries. However, the guarantees are limited to the maximum amount that the guarantors are permitted to guarantee under applicable law. As a result, a guarantor’s liability under its guarantee could be reduced to zero, depending on the amount of other obligations of such guarantor. Furthermore, under the circumstances discussed more fully below, a court, under applicable fraudulent conveyance and transfer statutes, could void the obligations under a guarantee or further subordinate it to all other obligations of the guarantor. In addition, you will lose the benefit of a particular guarantee if it is released under certain circumstances described under “Description of the Notes—Security—Releases of Collateral.”

The pledge of the securities of our subsidiaries that secures the Notes will automatically be released to the extent and for so long as that pledge would require the filing of separate financial statements with the SEC for that subsidiary.

The Notes are secured by a pledge of the stock and other securities of certain of our subsidiaries held by the issuers or the guarantors. Under the SEC regulations in effect as of the issue date of the Notes, if the par value, book value

 

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as carried by us, or market value (whichever is greatest) of the capital stock, other securities or similar items of a subsidiary pledged as part of the collateral is greater than or equal to 20 percent of the aggregate principal amount of the Notes then outstanding, such a subsidiary would be required to provide separate financial statements to the SEC. The indenture governing the Notes provides that any capital stock and other securities of any of our subsidiaries will be excluded from the collateral for so long as the pledge of such capital stock or other securities to secure the Notes would cause such subsidiary to be required to file separate financial statements with the SEC pursuant to Rule 3-16 of Regulation S-X or another similar rule. We conduct a substantial portion of our business through our subsidiaries, many of which have capital stock with a value in excess of 20 percent of the aggregate principal amount of the Notes offered hereby. Accordingly, the pledge of stock and securities with respect to each such subsidiary will be limited in value to less than 20 percent of the aggregate principal amount of the Notes offered hereby. As a result, holders of the Notes could lose a portion or all of their security interest in the capital stock or other securities of those subsidiaries during that period. It may be more difficult, costly and time-consuming for holders of the Notes to foreclose on the assets of a subsidiary than to foreclose on its capital stock or other securities, so the proceeds realized upon any such foreclosure could be significantly less than those that would have been received upon any sale of the capital stock or other securities of such subsidiary. In addition, the lenders under the Senior Credit Facilities are not subject to such limitation and may have a substantially more valuable security interest and different interests as a result thereof. There is no requirement that the lenders under the Senior Credit Facilities first look to the securities that are not pledged to secure the Notes before foreclosing, selling or otherwise acting upon the collateral shared with the Notes.

An increase in interest rates would increase the cost of servicing our debt and could reduce our profitability.

A portion of our outstanding debt, including additional indebtedness we may incur under the Senior Credit Facilities and, potentially, our future indebtedness, bears interest at variable rates. As of September 30, 2011, we had $3,373 million of variable rate debt outstanding (based on the carrying value of such indebtedness). As a result, an increase in interest rates, whether because of an increase in market interest rates or an increase in our cost of borrowing, would increase the cost of servicing this debt and could materially reduce our profitability and adversely affect our ability to meet our obligations under the Notes. The impact of such an increase would be more significant than it would be for some other companies because of our substantial debt.

We may not be able to repurchase Notes upon a change of control.

The term “change of control” as used in the indenture governing the Notes is limited in terms of its scope and does not include every event that might adversely affect the value of the Notes. The change of control provisions may not protect you if we undergo a highly leveraged transaction, reorganization, restructuring, acquisition or similar transaction unless such transaction is included within the definition of a change of control, notwithstanding the fact that such events could increase the level of our indebtedness or otherwise adversely affect our capital structure, credit ratings or the value of the Notes. Furthermore, we are required to repurchase the Notes following a change of control only if, within a specified time period following public notice of a proposed change of control transaction, the rating of the Notes by either Standard & Poor’s or Moody’s is reduced by at least one notch in the gradation of the ratings scale.

The source of funds for any purchase of the Notes will be our available cash or cash generated from our and our subsidiaries’ operations or other sources, including borrowings, sales of assets or sales of equity. We may not be able to repurchase the Notes upon a change of control because we may not have sufficient financial resources to purchase all of the Notes that are tendered upon a change of control and to repay our other indebtedness that will become due. We may require additional financing from third parties to fund any such purchases, and we cannot assure you that we would be able to obtain financing on satisfactory terms, or at all. Our failure to repurchase the Notes upon a change of control would cause a default under the indenture governing the Notes. Such a default would, in turn, constitute a default under our Senior Credit Facilities. In order to avoid the obligations to repurchase the Notes, we may have to avoid certain change in control transactions that would otherwise be beneficial to the Company.

 

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Not all of our subsidiaries will guarantee the Notes, and the Notes and the guarantees of the Notes will be structurally subordinated to all of the claims of creditors of those non-guarantor subsidiaries, which includes all of our non-U.S. subsidiaries. In addition, the Notes and the guarantees of the Notes, will only be secured by a limited pledge of certain of such foreign subsidiaries’ capital stock, with no pledge of the assets of any non-U.S. subsidiaries of us or our U.S. subsidiaries.

The Notes are structurally subordinated to indebtedness and other liabilities of our subsidiaries that do not guarantee the Notes. As of the issue date, the Notes will be guaranteed by each of our domestic subsidiaries that also guarantee the Senior Credit Facilities. The Notes will not be guaranteed by any of our non-U.S. subsidiaries. In the future, other subsidiaries will be required to guarantee the Notes only under certain limited circumstances. See “Description of the Notes—Certain Covenants in the Indenture—Future Guarantors.” Our non-guarantor subsidiaries accounted for approximately $27 billion of our net revenues and approximately $1 billion of our net income (loss) before interest expense, income tax expense, depreciation and amortization of property, plant and equipment and intangible assets, or EBITDA, in each case, for the year ended December 31, 2010. Our non-guarantor subsidiaries accounted for approximately $24 billion of our net revenues and approximately $1 billion of our EBITDA, in each case, for the nine months ended September 30, 2011. As of September 30, 2011, our non-guarantor subsidiaries accounted for approximately $11 billion of our total assets, and had approximately $8 billion of total liabilities (including trade payables) to which the Notes would have been structurally subordinated. In addition, these non-guarantor subsidiaries will be permitted to incur substantial indebtedness in compliance with the covenants under the Senior Credit Facilities and the indenture governing the Notes. Generally, claims of creditors (both secured and unsecured) of a non-guarantor subsidiary, including trade creditors and claims of preference shareholders (if any) of the subsidiary will have priority with respect to the assets and cash flow of the non-guarantor subsidiary over the claims of creditors of its parent entity. In the event of a bankruptcy, liquidation or reorganization of any of our non-guarantor subsidiaries, these non-guarantor subsidiaries will pay the holders of their debts, holders of preferred equity interests and their trade creditors before they will be able to distribute any of their assets to us and the holders of the Notes will participate with all other holders of our indebtedness in the assets remaining and dividended or otherwise paid to us after the subsidiaries involved in such proceedings have paid all of their debts and liabilities. In any of these cases, the relevant subsidiaries may not have sufficient funds to make payments to us, and holders of the Notes may receive less, ratably, than the holders of debt of our non-guarantor subsidiaries.

In addition, with respect to the Notes, the pledge of the securities of any first tier non-U.S. subsidiaries of us and our U.S. subsidiaries will be limited to 100 percent of their non-voting capital stock and 65 percent of their voting capital stock. There will be no pledge of the capital stock of non-U.S. subsidiaries of us and our U.S. subsidiaries other than first-tier non-U.S. subsidiaries. The Notes will not be secured by a pledge of the assets of any non-U.S. subsidiary of us or our U.S. subsidiaries.

We are not required to reorganize our corporate structure such that any non-U.S. subsidiaries of us or our U.S. subsidiaries will provide a pledge of 100 percent of their voting and non-voting capital stock or a pledge of their assets.

Rights of holders of the Notes in the collateral may be adversely affected by bankruptcy proceedings in the United States.

The right of the collateral agent or its representative to repossess and dispose of the collateral securing the Notes upon acceleration is likely to be significantly impaired by U.S. federal bankruptcy law if bankruptcy proceedings are commenced by or against us prior to or possibly even after the collateral agent has repossessed and disposed of the collateral. Under the U.S. bankruptcy code, a secured creditor, such as the collateral agent, is prohibited from repossessing its security from a debtor in a bankruptcy case, or from disposing of security repossessed from a debtor, without bankruptcy court approval. Moreover, U.S. bankruptcy law permits the debtor to continue to retain and to use collateral, and the proceeds, products, rents or profits of the collateral, even though the debtor is

 

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in default under the applicable debt instruments, provided that the secured creditor is given “adequate protection.” The meaning of the term “adequate protection” may vary according to circumstances, but it is intended in general to protect the value of the secured creditor’s interest in the collateral and may include cash payments or the granting of additional security, if and at such time as the court in its discretion determines, for any diminution in the value of the collateral as a result of the stay of repossession or disposition or any use of the collateral by the debtor during the pendency of the bankruptcy case. In view of the broad discretionary powers of a bankruptcy court, it is impossible to predict how long payments under the Notes could be delayed following commencement of a bankruptcy case, whether or when the collateral agent would repossess or dispose of the collateral, or whether or to what extent holders of the Notes would be compensated for any delay in payment of loss of value of the collateral through the requirements of “adequate protection.”

U.S. federal and state fraudulent transfer laws permit a court to void the Notes and the guarantees and security interests, and, if that occurs, you may not receive any payments on the Notes or may be required to return payments made on the Notes.

The issuance of the Notes, the guarantees and the security interests may be subject to review under U.S. federal and state fraudulent transfer and conveyance statutes if a bankruptcy, liquidation or reorganization case or a lawsuit, including under circumstances in which bankruptcy is not involved, were commenced at some future date by us, by the guarantors or on behalf of our unpaid creditors or the unpaid creditors of a guarantor. While the relevant laws may vary from state to state, under such laws the payment of consideration in certain transactions could be considered a fraudulent conveyance if (1) the consideration was paid with the intent of hindering, delaying or defrauding creditors or (2) we or any of our guarantors, as applicable, received less than reasonably equivalent value or fair consideration in return for issuing Notes, a guarantee or a security interest and, in the case of (2) only, one of the following is also true:

 

   

we or any of our guarantors were or was insolvent or rendered insolvent by reason of issuing Notes or the guarantees;

 

   

payment of the consideration left us or any of our guarantors with an unreasonably small amount of capital to carry on our or its business; or

 

   

we or any of our guarantors intended to, or believed that we or it would, incur debts beyond our or its ability to pay as they mature.

If a court were to find that the issuance of the Notes or a guarantee was a fraudulent conveyance, the court could void the payment obligations under the Notes, the guarantees or the related security agreements, further subordinate the Notes or the payment obligations under such guarantee or security agreement to existing and future indebtedness of ours or such guarantor or require the holders of the Notes to repay any amounts received with respect to the Notes or such guarantee. In the event of a finding that a fraudulent conveyance occurred, you may not receive any repayment on the Notes. Further, the voidance of the Notes could result in an event of default with respect to our other debt and that of our guarantors that could result in acceleration of such debt. The measures of insolvency for purposes of fraudulent conveyance laws vary depending upon the laws of the jurisdiction that is being applied. Generally, an entity would be considered insolvent if, at the time it incurred indebtedness:

 

   

the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all its assets;

 

   

the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts and liabilities, including contingent liabilities, as they become absolute and mature; or

 

   

it could not pay its debts as they become due.

 

 

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We cannot be certain as to the standards a court would use to determine whether or not we or the guarantors were solvent at the relevant time, or regardless of the standard that a court uses, that the issuance of the Notes and the guarantees would not be subordinated to our or any guarantors’ other debt.

If the guarantees were legally challenged, any guarantee could be subject to the finding of a court that, since the guarantee was incurred for our benefit, and only indirectly for the benefit of the guarantor, the obligations of the applicable guarantor were incurred for less than fair consideration. A court could thus void the obligations under the guarantees and related security agreements, subordinate them to the applicable guarantor’s other debt or take other action detrimental to the holders of the Notes.

Changes in the ratings of the Notes may cause their trading price to fall and affect the marketability of the Notes.

The old notes are, and upon issuance, the Notes will be, rated by Moody’s and S&P. A rating agency’s rating of the Notes is not a recommendation to purchase, sell or hold any particular security, including the Notes. Such ratings are limited in scope and do not comment as to material risks relating to an investment in the Notes. An explanation of the significance of such ratings may be obtained from such rating agency. There is no assurance that such credit ratings will be issued or remain in effect for any given period of time. Rating agencies also may lower, suspend or withdraw ratings on the Notes or our other debt in the future. Noteholders will have no recourse against us or any other parties in the event of a change in or suspension or withdrawal of such ratings. Any lowering, suspension or withdrawal of such ratings may have an adverse effect on the market prices or marketability of the Notes.

The collateral is subject to casualty risk.

Even if we maintain insurance, there are certain losses that may be either uninsurable or not economically insurable, in whole or part. Insurance proceeds may not compensate us fully for our losses. If there is a complete or partial loss of any collateral, the insurance proceeds may not be sufficient to satisfy all of our obligations, including the Notes and related guarantees.

Any future grant of a security interest in the collateral might be avoided by a trustee in bankruptcy.

Any future pledge of collateral in favor of the trustee, the collateral agent or its representative, as applicable, including pursuant to security documents delivered after the date of the indenture governing the Notes, might be avoided by the grantor (as debtor in possession) or by its trustee in bankruptcy if certain events or circumstances exist or occur, including, among others, if the grantor is insolvent at the time of granting the security or becomes insolvent as a result of entering into the security or associated documentation (including a guarantee) or a bankruptcy proceeding in respect of the security provider is commenced within a specified number of days following the granting of the security.

Rights of holders of the Notes in the collateral may be adversely affected by the failure to perfect security interests in certain collateral.

Applicable law requires that certain property and rights acquired after the grant of a general security interest can only be perfected at the time such property and rights are acquired and identified. The trustee, collateral agent or any representative of the collateral agent will have no obligation to monitor, and there can be no assurance that we will inform the trustee, collateral agent or any representative of the collateral agent of, the future acquisition of property and rights that constitute collateral, and that the necessary action will be taken to properly create or perfect the security interest in such after-acquired collateral. Neither the collateral agent nor the trustee for the Notes has any obligation to monitor the acquisition of additional property or rights that constitute collateral or the perfection of any security interest in favor of the Notes against third parties. Failure to perfect any such security interest may result in the loss of the security interest therein or the priority of the security interest in favor of the Notes against third parties.

 

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THE EXCHANGE OFFERS

Purpose of the exchange offers

The sole purpose of the exchange offers is to fulfill our obligations with respect to the registration of the old notes. We originally offered and sold the old notes on May 24, 2011. We did not register those sales under the Securities Act, in reliance upon the exemption provided in Section 4(2) of the Securities Act and Rule 144A and Regulation S promulgated under the Securities Act. In connection with the sale of the old notes we agreed to file with the SEC an exchange registration statement related to the exchange offers. Under the exchange registration statement, we will offer the Notes, in exchange for the old notes. See under the heading “Registration Rights” in this prospectus for additional information regarding the registration rights agreement.

How to determine if you are eligible to participate in the exchange offers

Upon the terms and subject to the conditions set forth in this prospectus and in the letter of transmittal accompanying it, we will accept all old notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time on the expiration date. The Issuers will issue $1,000 in principal amount of Notes for each $1,000 in principal amount of the old notes accepted in the exchange offers. Holders may tender some or all of their old notes pursuant to the exchange offers in minimum denominations of $200,000 and integral multiples of $1,000 in excess thereof. The terms of the Notes are identical in all material respects to the terms of the old notes that you may exchange pursuant to the exchange offers, except that the Notes will not contain restrictions on transfer, will bear different CUSIP numbers and will not be entitled to certain registration rights and certain other provisions which are applicable to the old notes under the registration rights agreement. The Notes will be entitled to the benefits of the indenture. See “Description of the Notes.”

We are not making the exchange offers to, nor will we accept surrenders for exchange from, holders of outstanding old notes in any jurisdiction in which the exchange offers or the acceptance thereof would not be in compliance with the securities or blue sky laws of such jurisdiction.

We are not making the exchange offers conditional upon the holders tendering, or us accepting, any minimum aggregate principal amount of old notes.

Under existing SEC interpretations, the Notes would generally be freely transferable after the exchange offers without further registration under the Securities Act, except that broker-dealers receiving the Notes in the exchange offers will be subject to a prospectus delivery requirement with respect to their resale. This view is based on interpretations by the staff of the SEC in no-action letters issued to other issuers in exchange offers like these. We have not, however, asked the SEC to consider these particular exchange offers in the context of a no-action letter. Therefore, the SEC might not treat them in the same way it has treated other exchange offers in the past. You will be relying on the no-action letters that the SEC has issued to third parties in circumstances that we believe are similar to ours. Based on these no-action letters, the following conditions must be met:

 

   

you must not be a broker-dealer that acquired the old notes from us or in market-making transactions or other trading activities;

 

   

you must acquire the Notes in the ordinary course of your business;

 

   

you must have no arrangements or understandings with any person to participate in the distribution of the Notes within the meaning of the Securities Act; and

 

   

you must not be an affiliate of ours, as defined in Rule 405 under the Securities Act.

If you wish to exchange old notes for Notes in the exchange offers you must represent to us that you satisfy all of the above listed conditions. If you do not satisfy all of the above listed conditions:

 

   

you cannot rely on the position of the SEC set forth in the no-action letters referred to above; and

 

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you must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a resale of the new notes.

The SEC considers broker-dealers that acquired old notes directly from us, but not as a result of market-making activities or other trading activities, to be making a distribution of the Notes if they participate in the exchange offers. Consequently, these broker-dealers must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a resale of the Notes.

A broker-dealer that has bought old notes for market-making or other trading activities must deliver a prospectus in order to resell any Notes it receives for its own account in the exchange offers. The SEC has taken the position that broker-dealers may fulfill their prospectus delivery requirements with respect to the Notes by delivering the prospectus contained in the registration statement for the exchange offers. Each broker-dealer that receives Notes for its own account pursuant to the exchange offers must acknowledge that it will deliver a prospectus in connection with any resale of such Notes. The letter of transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Notes received in exchange for old notes where such old notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. We have agreed that, for a period of up to 180 days of the effectiveness of the exchange offer registration statement, we will make this prospectus available to any broker-dealer for use in connection with any such resale.

By tendering old notes for exchange, you will exchange, assign and transfer the old notes to us and irrevocably appoint the exchange agent as your agent and attorney-in-fact to assign, transfer and exchange the old notes. You will also represent and warrant that you have full power and authority to tender, exchange, assign and transfer the old notes and to acquire Notes issuable upon the exchange of such tendered old notes. The letter of transmittal requires you to agree that, when we accept your old notes for exchange, we will acquire good, marketable and unencumbered title to them, free and clear of all security interests, liens, restrictions, charges and encumbrances and that they are not subject to any adverse claim.

You will also warrant that you will, upon our request, execute and deliver any additional documents that we believe are necessary or desirable to complete the exchange, assignment and transfer of your tendered old notes. You must further agree that our acceptance of any tendered old notes and the issuance of Notes in exchange for them will constitute performance in full by us of our obligations under the registration rights agreement and that we will have no further obligations or liabilities under that agreement, except in certain limited circumstances. All authority conferred by you will survive your death, incapacity, liquidation, dissolution, winding up or any other event relating to you, and every obligation of you shall be binding upon your heirs, personal representatives, successors, assigns, executors and administrators.

If you are tendering old notes, we will not require you to pay brokerage commissions or fees or, subject to the instructions in the letter of transmittal, transfer taxes with respect to the exchange of the old notes pursuant to the exchange offers. Each of the Notes will bear interest from the most recent date through which interest has been paid on the old notes for which they were exchanged. If we accept your old notes for exchange, you will waive the right to have interest accrue, or to receive any payment in respect to interest, on the old notes from the most recent interest payment date to the date of the issuance of the Notes. Interest on the Notes is payable semiannually in arrears on June 15 and December 15, starting on June 15, 2012.

Information about the expiration date of the exchange offers and changes to it

The exchange offers expire on the expiration date, which is 5:00 p.m., New York City time, on February 1, 2012, unless we, in our sole discretion, extend the period during which an exchange offer is open, and we will extend the expiration date to the extent required by Rule 13e-4 under the Exchange Act of 1934, as amended, or the Exchange Act. If we extend the expiration date for an exchange offer, the term “expiration date” means the latest time and date on which such exchange offer, as so extended, expires. We reserve the right to extend the exchange

 

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offers at any time and from time to time prior to the expiration date by giving written notice to Citibank, N.A., which is the exchange agent, and by timely public announcement communicated by no later than 5:00 p.m. New York City time on the next business day following the expiration date, unless applicable law or regulation requires otherwise, by making a release to the Dow Jones News Service. During any extension of an exchange offer, all old notes previously tendered pursuant to such exchange offer will remain subject to such exchange offer.

The initial exchange date will be the first business day following the expiration date. We expressly reserve the right to terminate the exchange offers and not accept for exchange any old notes for any reason, including if any of the events set forth below under “We may modify or terminate the exchange offers under some circumstances” have occurred and we have not waived them. We also reserve the right to amend the terms of the exchange offers in any manner, whether before or after any tender of the old notes. If we terminate or amend an exchange offer, we will notify the exchange agent in writing and will either issue a press release or give written notice to you as a holder of the old notes as promptly as practicable. Unless we terminate the exchange offers prior to 5:00 p.m., New York City time, on the expiration date, we will exchange the Notes for old notes on the exchange date.

We will mail this prospectus and the related letter of transmittal and other relevant materials to you as a record holder of old notes and we will furnish these items to brokers, banks and similar persons whose names, or the names of whose nominees, appear on the lists of holders for subsequent transmittal to beneficial owners of old notes.

How to tender your old notes

If you tender to us any of your old notes pursuant to one of the procedures set forth below, that tender will constitute an agreement between you and us in accordance with the terms and subject to the conditions that we describe below and in the letter of transmittal for the exchange offers.

You may tender old notes by properly completing and signing the letter of transmittal or a facsimile of it. All references in this prospectus to the “letter of transmittal” include a facsimile of the letter. You must deliver it, together with the certificate or certificates representing the old notes that you are tendering and any required signature guarantees, or a timely confirmation of a book-entry transfer pursuant to the procedure that we describe below, to the exchange agent at its address set forth on the back cover of this prospectus on or prior to the expiration date. You may also tender old notes by complying with the guaranteed delivery procedures that we describe below.

Your signature does not need to be guaranteed if you registered your old notes in your name, you will register the Notes in your name and you sign the letter of transmittal. In any other case, the registered holder of your notes must endorse them or send them with duly executed written instruments of transfer in the form satisfactory to us. Also, an “eligible institution,” such as a bank, broker, dealer, credit union, savings association, clearing agency or other institution that is a member of a recognized signature guarantee medallion program within the meaning of Rule 17Ad-15 under the Exchange Act must guarantee the signature on the endorsement or instrument of transfer. If you want us to deliver the Notes or non-exchanged old notes to an address other than that of the registered holder appearing on the note register for the old notes, an “eligible institution” must guarantee the signature on the letter of transmittal.

If your old notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender old notes, you should contact the registered holder promptly and instruct the holder to tender old notes on your behalf. If you wish to tender your old notes yourself, you must, prior to completing and executing the letter of transmittal and delivering your old notes, either make appropriate arrangements to register ownership of the old notes in your name or follow the procedures described in the immediately preceding paragraph. Transferring record ownership from someone else’s name to your name may take considerable time.

 

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How to tender if you hold your old notes through a broker or other institution and you do not have the actual old notes

Any financial institution that is a participant in The Depository Trust Company’s, or DTC, systems may make book-entry delivery of your old notes by causing DTC to transfer your old notes into the exchange agent’s account at DTC in accordance with DTC’s electronic Automated Tender Offer Procedures for transfer. Although you may deliver your old notes through book-entry transfer at DTC, you still must send either an executed and properly completed letter of transmittal, with any required signature guarantees, or an agent’s message and any other required documents, to the exchange agent at the address specified on the back cover of this prospectus on or prior to the expiration date and the exchange agent must receive these documents on time. Delivery of documents to DTC in accordance with its procedures does not constitute delivery to the exchange agent. If you will not be able to send all the documents on time, you can still tender your old notes by using the guaranteed delivery procedures described below.

You assume the risk of choosing the method of delivery of old notes and all other documents. If you send your old notes and your documents by mail, we recommend that you use registered mail, return receipt requested, you obtain proper insurance, and you mail these items sufficiently in advance of the expiration date to permit delivery to the exchange agent on or before the expiration date.

If you do not provide your taxpayer identification number, which is your social security number or employer identification number, as applicable, and certify that such number is correct, the exchange agent will withhold 28% of the gross proceeds otherwise payable to you pursuant to the exchange offers, unless an exemption applies under the applicable law and regulations concerning “backup withholding” of federal income tax. You should complete and sign the main signature form and the Substitute Form W-9 included as part of the letter of transmittal, so as to provide the information and certification necessary to avoid backup withholding, unless an applicable exemption exists and you prove it in a manner satisfactory to us and the exchange agent.

The term “agent’s message” means a message, transmitted by DTC and received by the exchange agent and forming part of the confirmation of a book-entry transfer, which states that DTC has received an express acknowledgment from a participant in DTC tendering old notes stating:

 

   

the aggregate principal amount of old notes which have been tendered by the participant;

 

   

that such participant has received an appropriate letter of transmittal and agrees to be bound by the terms of the letter of transmittal and the terms of the exchange offer; and

 

   

that we may enforce such agreement against the participant.

Delivery of an agent’s message will also constitute an acknowledgment from the tendering DTC participant that the representations contained in the letter of transmittal and described above under “How to determine if you are eligible to participate in the exchange offers” are true and correct.

How to use the guaranteed delivery procedures if you will not have enough time to send all documents to us

If you desire to accept an exchange offer, and time will not permit a letter of transmittal (or agent’s message) or old notes to reach the exchange agent before the expiration date, you may tender your old notes if the exchange agent has received at its office listed on the letter of transmittal on or prior to the expiration date a letter or facsimile transmission (or an agent’s message) from an eligible institution setting forth your name and address, the principal amount of the old notes that you are tendering, the names in which you registered the old notes and, if possible, the certificate numbers of the old notes that you are tendering.

The eligible institution’s correspondence to the exchange agent must state that the correspondence constitutes the

tender and guarantee that within three New York Stock Exchange trading days after the date that the eligible

 

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institution executes such correspondence, the eligible institution will deliver the old notes, in proper form for transfer, together with a properly completed and duly executed letter of transmittal, or agent’s message with a confirmation of book-entry transfer of the old notes into the exchange agent’s account at DTC, and any other required documents. We may, at our option, reject the tender if you do not tender your old notes and accompanying documents by either the above-described method or by a timely book-entry confirmation, and if you do not deposit your old notes and tender documents with the exchange agent within the time period set forth above. Copies of a notice of guaranteed delivery that eligible institutions may use for the purposes described in this paragraph are available from the exchange agent.

Valid receipt of your tender will occur as of the date when the exchange agent receives your properly completed letter of transmittal, accompanied by either the old notes, or a timely book-entry confirmation accompanied by an agent’s message. We will issue Notes in exchange for old notes that you tendered pursuant to a notice of guaranteed delivery or correspondence to similar effect as described above by an eligible institution only against deposit of the letter of transmittal or an agent’s message, any other required documents and either the tendered old notes or a timely book-entry confirmation.

We reserve the right to determine validity of all tenders

We will be the sole judge of all questions as to the validity, form, eligibility, including time of receipt, and acceptance for exchange of your tender of old notes and our judgment will be final and binding. We reserve the absolute right to reject any or all of your tenders that are not in proper form or the acceptances for exchange of which may, in our opinion or in the opinion of our counsel, be unlawful. We also reserve the absolute right to waive any of the conditions of the exchange offers or any defect or irregularities in your case. Neither we, the exchange agent nor any other person will be under any duty to give you notification of any defects or irregularities in tenders nor shall any of us incur any liability for failure to give you any such notification. Our interpretation of the terms and conditions of the exchange offers, including the letter of transmittal and its instructions, will be final and binding.

If you tender old notes pursuant to the exchange offers, you may withdraw them at any time prior to the expiration date

For your withdrawal to be effective, the exchange agent must timely receive your written or fax (for eligible institutions) notice of withdrawal prior to the expiration date at the exchange agent’s address set forth on the back cover page of this prospectus. Your notice of withdrawal must specify the following information:

 

   

The person named in the letter of transmittal as tendering old notes you are withdrawing;

 

   

The certificate numbers of old notes you are withdrawing;

 

   

The principal amount of old notes you are withdrawing;

 

   

A statement that you are withdrawing your election to have us exchange such old notes; and

 

   

The name of the registered holder of such old notes, which may be a person or entity other than you, such as your broker-dealer.

The person or persons who signed your letter of transmittal, including any eligible institutions that guaranteed signatures on your letter of transmittal, must sign the notice of withdrawal in the same manner as their original signatures on the letter of transmittal including any required signature guarantees. If such persons and eligible institutions cannot sign your notice of withdrawal, you must send it with evidence satisfactory to us that you now hold beneficial ownership of the old notes that you are withdrawing. Alternately, for a withdrawal to be effective

 

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for DTC participants, holders must comply with their respective standard operating procedures for electronic tenders and the exchange agent must receive an electronic notice of withdrawal from DTC. Any notice of withdrawal must specify the name and number of the account at DTC to be credited with the withdrawn old notes and otherwise comply with the procedures of DTC.

The exchange agent will return the properly withdrawn old notes promptly following receipt of notice of withdrawal. We will determine all questions as to the validity of notices of withdrawals, including time of receipt, and our determination will be final and binding on all parties.

How we will either exchange your old notes for Notes or return them to you

On the exchange date, we will determine which old notes the holders validly tendered, and we will issue Notes in exchange for the validly tendered old notes. The exchange agent will act as your agent for the purpose of receiving Notes from us and sending the old notes to you in exchange for Notes promptly after acceptance of the tendered old notes. If we do not accept your old notes for exchange, we will return them without expense to you. If you tender your old notes by book-entry transfer into the exchange agent’s account at DTC pursuant to the procedures described above and we do not accept your old notes for exchange, DTC will credit your non-exchanged old notes to an account maintained with DTC. In either case, we will return your non-exchanged old notes to you promptly following the expiration of the exchange offers.

We may modify or terminate the exchange offers under some circumstances

We are not required to issue Notes in respect of any properly tendered old notes that we have not previously accepted and we may terminate the exchange offers or, at our option, we may modify or otherwise amend the exchange offers. If we terminate an exchange offer, it will be by oral (promptly confirmed in writing) or written notice to the exchange agent and by timely public announcement communicated no later than 5:00 p.m. on the next business day following the expiration date, unless applicable law or regulation requires us to terminate the exchange offers in the following circumstances:

 

   

Any court or governmental agency brings a legal action seeking to prohibit the exchange offers or assessing or seeking any damages as a result of the exchange offers, or resulting in a material delay in our ability to accept any of the old notes for exchange offers; or

 

   

Any government or governmental authority, domestic or foreign, brings or threatens any law or legal action that in our sole judgment, might directly or indirectly result in any of the consequences referred to above; or, if in our sole judgment, such activity might result in the holders of Notes having obligations with respect to resales and transfers of Notes that are greater than those we described above in the interpretations of the staff of the SEC or would otherwise make it inadvisable to proceed with the exchange offers; or

 

   

A material adverse change has occurred in our business, condition (financial or otherwise), operations or prospects.

The foregoing conditions are for our sole benefit and we may assert them with respect to all or any portion of the exchange offers regardless of the circumstances giving rise to such condition. We also reserve the right to waive these conditions in whole or in part at any time or from time to time in our discretion. Our failure at any time to exercise any of the foregoing rights will not be a waiver of any such right, and each right will be an ongoing right that we may assert at any time or from time to time. In addition, we have reserved the right, notwithstanding the satisfaction of each of the foregoing conditions, to terminate or amend the exchange offers.

 

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Any determination by us concerning the fulfillment or nonfulfillment of any conditions will be final and binding upon all parties.

In addition, we will not accept for exchange any tendered old notes, and we will not issue Notes in exchange for any such old notes, if at that time there is, or the SEC has threatened, any stop order with respect to the registration statement that this prospectus is a part of, or if qualification of the indenture is required under the Trust Indenture Act of 1939.

Where to send your documents for the exchange offers

We have appointed Citibank, N.A. as the exchange agent for the exchange offers. You must send your letter of transmittal to the exchange agent at:

 

 

Citibank, N.A.

Attention: Global Transaction Services—Chrysler Group LLC Exchange Offer

388 Greenwich Street, 14th Floor

New York, NY 10013

Telephone: (212) 816-5614

Facsimile: (212) 816-5527

If you send your documents to any other address or fax number, you will have not validly delivered them and you will not receive Notes in exchange for your old notes. We will return your old notes to you.

We are paying our costs for the exchange offers

We have not retained any dealer-manager or similar agent in connection with the exchange offers and will not make any payments to brokers, dealers or others for soliciting acceptances of the exchange offers. We will, however, pay the exchange agent reasonable and customary fees for its services and will reimburse it for reasonable out-of-pocket expenses. We will also pay brokerage houses and other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses that they incur in forwarding tenders for their customers. We will pay the expenses incurred in connection with the exchange offers, including the fees and expenses of the exchange agent and printing, accounting, investment banking and legal fees. We estimate that these fees are approximately $1 million.

No person has been authorized to give you any information or to make any representations to you in connection with the exchange offers other than those that this prospectus contains, and we take no responsibility for any other information that others may give you. If anyone else gives you information or representations about the exchange offers, you should not assume that we have authorized it. Neither the delivery of this prospectus nor any exchange made hereunder shall, under any circumstances, create any implication that there has been no change in our affairs since the respective dates as of which this prospectus gives information. We are not making the exchange offers to, nor will we accept tenders from or on behalf of, holders of old notes in any jurisdiction in which it is unlawful to make the exchange offers or to accept it. However, we may, at our discretion, take such action as we may deem necessary to make the exchange offers in any such jurisdiction and extend the exchange offers to holders of old notes in such jurisdiction. In any jurisdiction where the securities laws or blue sky laws require a licensed broker or dealer to make the exchange offers one or more registered brokers or dealers that are licensed under the laws of that jurisdiction is making the exchange offers on our behalf.

There are no dissenters’ or appraisal rights

Holders of old notes will not have dissenters’ rights or appraisal rights in connection with the exchange offers.

 

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Federal income tax consequences to you

Your exchange of old notes for Notes should not be a taxable exchange for federal income tax purposes, and you should not recognize any taxable gain or loss or any interest income as a result of the exchange. See “Certain U.S. Federal Income Tax Considerations” below.

These are the only exchange offers for the old notes that we are required to make

Your participation in the exchange offers is voluntary, and you should carefully consider whether to accept the terms and conditions of it. You are urged to consult your financial and tax advisors in making your own decisions on what action to take with respect to the exchange offers. If you do not tender your old notes in the exchange offers, you will continue to hold such old notes and you will be entitled to all the rights and limitations applicable to the old notes under the indenture. All non-exchanged old notes will continue to be subject to the restriction on transfer set forth in the indenture. If we exchange old notes in the exchange offers, the trading market, if any, for any remaining old notes could be much less liquid.

We may in the future seek to acquire non-exchanged old notes in the open market or privately negotiated transactions, through subsequent exchange offers or otherwise. We have no present plan to acquire any old notes that are not exchanged in the exchange offers.

 

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USE OF PROCEEDS

We will not receive any proceeds from the issuance of Notes pursuant to the exchange offers. Old notes that are validly tendered and exchanged will be retired and cancelled. We will pay all expenses incident to the exchange offers.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

The following table sets forth selected historical consolidated financial and other data of Chrysler Group (Successor), Old Carco (Predecessor A) and Chrysler Automotive (Predecessor B). The selected historical consolidated financial data has been derived from:

 

   

Chrysler Group’s accompanying condensed consolidated financial statements as of September 30, 2011 and for the nine months ended September 30, 2011 and 2010 (Successor);

 

   

Chrysler Group’s accompanying audited consolidated financial statements as of December 31, 2010 and 2009 and for the year ended December 31, 2010 and the period from June 10, 2009 to December 31, 2009 (Successor);

 

   

Old Carco’s accompanying audited consolidated financial statements as of June 9, 2009 and December 31, 2008 and for the period from January 1, 2009 to June 9, 2009 and the year ended December 31, 2008 (Predecessor A);

 

   

Old Carco’s audited consolidated and combined financial statements as of December 31, 2007 (Predecessor A) and for the period from August 4, 2007 to December 31, 2007 (Predecessor A), which are not included in this prospectus and

 

   

Chrysler Automotive’s audited combined financial statements for the period from January 1, 2007 to August 3, 2007 and as of and for the year ended December 31, 2006 (Predecessor B), which were derived from the audited consolidated financial statements and accounting records of Daimler and include expense allocations applicable to the business. The financial results of Chrysler Automotive are not necessarily indicative of those for a stand-alone company. Chrysler Automotive’s financial statements are not included in this prospectus.

The condensed consolidated financial statements have been prepared on substantially the same basis as the audited consolidated financial statements and include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the condensed consolidated financial statements. Interim results are not necessarily indicative of results that may be expected for a full year or any future interim period.

In 2007, Old Carco became an indirect, wholly-owned subsidiary of Chrysler Holding in connection with a business combination transaction between Daimler and Cerberus. Prior to August 3, 2007, Old Carco was an indirect, wholly-owned subsidiary of Daimler. The results of Old Carco’s automotive business operations prior to August 3, 2007 (excluding its finance company, Chrysler Financial) are shown as the results of Chrysler Automotive, which was not separately organized under an existing legal structure.

Chrysler Group was formed on April 28, 2009. On June 10, 2009, we purchased the principal operating assets and assumed certain liabilities of Old Carco and its principal domestic subsidiaries, in addition to acquiring the equity of Old Carco’s principal foreign subsidiaries, in the 363 Transaction approved by the bankruptcy court. Chrysler Group represents the successor to Old Carco for financial reporting purposes. Old Carco and Chrysler Automotive represent Predecessor A and Predecessor B, respectively, to Chrysler Group for financial reporting purposes.

Refer to “Business” for additional discussion of Chrysler Group’s background and formation.

 

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The following data should be read in conjunction with, and is qualified by reference to, the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors”, our audited consolidated financial statements and notes thereto included herein and Old Carco’s consolidated financial statements and the notes thereto included herein. Historical results for any prior period are not necessarily indicative of results to be expected in any future period.

 

    Successor          Predecessor A          Predecessor B  
    Nine Months
Ended

September 30,
2011
    Nine  Months
Ended
September 30,
2010
    Year Ended
December 31,
2010
    Period from
June 10,
2009 to
December 31,
2009
         Period from
January 1,
2009 to
June 9,
2009
    Year Ended
December 31,
2008
    Period from
August 4,
2007 to
December 31,
2007
         Period from
January 1,
2007 to
August 3,
2007(1)
    Year Ended
December 31,
2006
 
   

(in millions of dollars)

 

Consolidated Statements of Operations Data:

                         

Revenues, net

    $ 39,852        $ 31,183        $ 41,946        $ 17,710            $ 11,082        $ 48,477        $ 26,561            $ 34,556        $ 59,272   

Gross margin

    6,305        4,420        6,060        1,599            (1,934     1,928        2,734            1,938        4,062   

Selling, administrative and other expenses

    3,517        2,770        3,797        4,336            1,599        3,991        2,070            3,583        4,973   

Restructuring expenses (income), net(2)

    13        47        48        34            (230     1,306        21            1,200          

Impairment of brand name intangible assets(3)

                                    844        2,857                            

Impairment of goodwill(4)

                                           7,507                            

Reorganization expense, net(5)

                                    843                                   

Interest expense(6)

    958        940        1,276        470            615        1,080        640            515        705   

Loss on extinguishment of debt

    551                                                          677          

Net income (loss)

    (42     (453     (652     (3,785         (4,425     (16,844     (639         (4,402     (3,506
   

Consolidated Statements of Cash Flows Data:

                         

Cash flows provided by (used in):

                         

Operating activities

    $ 3,537        $ 4,227        $ 4,195        $ 2,335            $ (7,130     $ (5,303     $ 3,238            $ (829     $ 781   

Investing activities

    (874     (652     (1,167     250            (404     (3,632     (3,172         (1,530     (5,053

Financing activities

    (556     (1,177     (1,526     3,268            7,517        1,058        8,638            (772     761   
   

Other Financial Information:

                         

Depreciation and amortization expense

    $ 2,170        $ 2,312        $ 3,051        $ 1,587            $ 1,537        $ 4,808        $ 2,016            $ 3,499        $ 5,330   

Capital expenditures(7)

    1,908        1,680        2,385        1,088            239        2,765        1,603            1,796        3,721   
   

Consolidated Balance Sheets Data at Period End:

                         

Cash, cash equivalents and marketable securities

    $ 9,454        8,260        $ 7,347        $ 5,877            $ 1,845        $ 1,898        $ 9,531            $ 850        $ 4,689   

Restricted cash

    386        187        671        730            1,133        1,355        2,484            219          

Total assets

    37,250        36,890        35,449        35,423            33,577        39,336        66,538            51,435        51,435   

Current maturities of financial liabilities

    236        440        2,758        1,092            2,694        11,308        2,446            7,363        1,517   

Long-term financial liabilities

    12,148        12,443        10,973        8,459            1,900        2,599        11,457            4,196        8,813   

Members’ Interest (deficit)

    (3,068     (3,763     (4,489     (4,230         (16,562     (15,897     1,713            (8,335     (6,470
   

Other Statistical Information (unaudited):

                         

Worldwide factory shipments (in thousands)(8)

    1,468        1,220        1,602        670            381        1,987        1,045            1,565        2,655   

Number of employees at period end(9)

    54,818        51,333        51,623        47,326            48,237        52,191        73,286            76,624        80,267   

 

(1) Balance sheet data as of August 3, 2007 was derived from unaudited information.

 

(2) In 2007, Old Carco announced a three year Recovery and Transformation Plan (“RTP”), or RTP I Plan, which was aimed at restructuring its business. In conjunction with the Cerberus transaction in 2007, Old Carco initiated the RTP II Plan. Then, in 2008 and 2009, the RTP III Plan and RTP IV Plan were initiated, respectively. For additional information refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Results of Operations.”

 

(3) Old Carco recorded indefinite-lived intangible asset impairment charges of $844 million and $2,857 million in the period from January 1, 2009 to June 9, 2009 and the year ended December 31, 2008, respectively, related to its brand names. The impairments were primarily a result of the significant deterioration in Old Carco’s revenues, the ongoing volatility in the U.S. economy, in general, and in the automotive industry in particular, and a significant decline in its projected production volumes and revenues considering the market conditions at that time.

 

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(4) In 2008, Old Carco recorded a goodwill impairment charge of $7,507 million, primarily as a result of significant declines in its projected financial results considering the deteriorating economic conditions and the weakening U.S. automotive market at that time.

 

(5) In connection with Old Carco’s bankruptcy filings, Old Carco recognized $843 million of net losses from the settlement of pre-petition liabilities, provisions for losses resulting from the reorganization and restructuring of the business, as well as professional fees directly related to the process of reorganizing Old Carco and its principal domestic subsidiaries under Chapter 11 of the U.S. Bankruptcy Code. These losses were partially off-set by a gain on extinguishment of certain financial liabilities and accrued interest.

 

(6) Interest expense for the period from January 1, 2009 to June 9, 2009 excludes $57 million of contractual interest expense on debt subject to compromise. Refer to Note 4, Interest Expense, of Old Carco’s accompanying audited consolidated financial statements for additional information.

 

(7) Capital expenditures represent the purchase of property, plant and equipment and intangibles.

 

(8) Represents vehicle sales to our dealers, distributors and fleet customers. For additional information refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Worldwide Factory Shipments.”

 

(9) The number provided for August 3, 2007 is as of July 31, 2007. The number provided for June 9, 2009 is as of June 30, 2009.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations together with the information included under “Business,” “Selected Historical Consolidated Financial Data” and our condensed consolidated financial statements and related notes thereto, our consolidated financial statements and related notes thereto and Old Carco’s consolidated financial statements and notes thereto included elsewhere in this prospectus. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described under “Disclosure Regarding Forward-Looking Statements” and “Risk Factors.” Actual results may differ materially from those contained in any forward-looking statements.

Overview of our Operations and Formation

We generate revenue, income and cash primarily from our sales of Chrysler, Jeep, Dodge and Ram vehicles and Mopar service parts and automotive accessories to dealers and distributors for sale to retail and fleet customers. The majority of our operations, employees, independent dealers and vehicle sales are in North America, principally in the United States. Approximately 10 percent of our vehicle sales are outside North America, mostly in South America, Asia Pacific and Europe. We also generate revenue, income and cash from the sale of separately-priced extended warranty service contracts to consumers and from providing contract manufacturing services to other vehicle manufacturers, including Fiat.

Our dealers enter into wholesale financing arrangements to purchase vehicles to hold in inventory which are available for sale to retail customers. Our retail customers use a variety of finance and lease programs to acquire vehicles from our dealers. The availability of financing on reasonable terms is a significant factor influencing our vehicle sales and revenues. Insufficient availability of financing to Old Carco’s dealers and retail customers contributed to declines in Old Carco’s vehicle sales and lease volumes beginning in 2008, which in turn affected its cash flows and liquidity. These impacts were among the key factors leading to Old Carco’s bankruptcy filing.

We began operations on June 10, 2009, following our purchase of the principal operating assets of Old Carco in connection with the U.S. Bankruptcy Court-approved 363 Transaction. As a key part of that transaction, we entered into an industrial alliance with Fiat that provides for collaboration in a number of areas, including product platform sharing and development, global distribution, procurement, information technology infrastructure and process improvement. In December 2010, we began production of the Fiat 500, and we are now the exclusive distributor of Fiat brand vehicles and service parts in North America. In 2010, Fiat assumed the management of our distribution and sales operations in select European countries and, in June 2011, became general distributor of our vehicles and service parts in Europe, where it sells our products through a network of newly appointed dealers. See “Business—Chrysler Group Overview” for a description of the circumstances surrounding our formation and the Fiat alliance.

For comparative purposes, we present certain information below regarding the financial condition and operating performance for 2009 based on our results for the period from June 10, 2009 to December 31, 2009 and those of Old Carco for the period from January 1, 2009 to June 9, 2009. Information presented for periods prior to 2009 represents the results of Old Carco or Chrysler Automotive, as indicated. Refer to the discussion of the lack of comparability of our and Old Carco’s financial information under the caption “–Results of Operations.”

Strategic Business Plan

Following completion of the 363 Transaction, our management team spent several months analyzing our business, products, operations and financial performance and condition in order to develop a business plan with clearly defined financial and operational performance targets.

In November 2009, we announced our business plan and related performance targets for the 2010 through 2014 period. Our business plan focuses on a number of initiatives designed to bring significant changes to our business, including investing in our brands and new product development, leveraging our alliance with Fiat,

 

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improving supply chain management, optimizing our dealer networks and building a workforce culture of high performance. Our business plan includes targets for vehicle sales and market share growth, profitability improvements and increased liquidity.

Since we began operations in June 2009, we have made progress toward the following business and operational objectives included in our business plan:

 

   

Products and Product Development. We have completed an extensive renewal of our product lineup, which began in the fourth quarter of 2009. Since that time, we have launched several new vehicles, including the new Ram 2500 and 3500 Heavy Duty pick-up trucks, the Ram Chassis Cab commercial truck, the Jeep Grand Cherokee SUV, the Chrysler 300 and Dodge Charger sedans, the Dodge Durango crossover vehicle, and the Fiat 500. We have also launched 10 other significantly refreshed vehicles. All of these vehicles were in production by the end of 2010, but as is typical in the automotive industry, many of them first became available for retail sale several months later, in the first quarter of 2011. We introduced our new Pentastar V-6 engine in 2010 in the 2011 model year Jeep Grand Cherokee and we have since incorporated this engine into eleven other vehicles. We also began the manufacture of the 1.4L Fiat Fully Integrated Robotised Engine (FIRE) for use in the Fiat 500 that we are building in Toluca, Mexico.

 

   

Optimizing our U.S. Dealer Network. A stable network of profitable dealers is important to our plan to increase vehicle sales. As part of the 363 Transaction, Old Carco had reduced the total number of its U.S. dealers by 789. This represented a 24 percent decrease in the number of dealers, but the terminated dealers accounted for only 13 percent of Old Carco’s vehicle sales during the year ended December 31, 2008. As of December 31, 2010, we had approximately 2,311 dealers in the U.S., compared to over 3,000 dealers in the U.S. at June 9, 2009. As of September 30, 2011, we had approximately 2,335 dealers in the U.S. We believe that the overall financial strength of our dealer network improved significantly during 2010, with approximately 82 percent of our U.S. dealers reporting to us that they were profitable by the end of 2010, as compared to approximately 70 percent in 2009 and 49 percent in 2008. Nearly all of our current dealers have access to wholesale financing through Ally or through other lenders. In addition, our U.S. dealers have committed to invest an aggregate of more than $500 million in new construction and major renovations in their dealerships since we began operations in June 2009.

 

   

Enhancing Our Brands. We believe that we can increase sales of our vehicles and service parts while reducing our reliance on sales incentives by building the value of our brands. We have begun a multi-year campaign to strengthen our Chrysler, Jeep, Dodge and Mopar brands, to develop Ram as a separate brand, and to reintroduce the Fiat brand in the U.S. and Canadian markets. We separated the Ram truck lineup from the Dodge brand and established a new Ram brand within the fourth quarter of 2009 in order to more effectively develop and market the distinct attributes of the vehicles in each brand’s product portfolio. In 2011, we created the new SRT brand for our specialty performance vehicles. We also began selecting dealers for the sale of Fiat brand vehicles and service parts in the U.S. and Canada during the fourth quarter of 2010. As of December 1, 2011, we had 134 Fiat brand dealers in the U.S., of which 123 are current Chrysler, Jeep, Dodge and Ram brand dealers. We intend to develop a U.S. network of 179 Fiat brand dealers in approximately 121 metropolitan areas in 37 states, as well as 3 Fiat brand dealers in Puerto Rico. In Canada, we anticipate establishing 67 Fiat dealerships, of which 58 were selected in 2010.

 

   

World Class Manufacturing (WCM). In 2010, we invested approximately $155 million in our manufacturing plants to improve the infrastructure, efficiency and quality of our production systems. This investment, which was incremental to the investments we made for the purposes of our 2010 production launches, is part of a larger effort to introduce WCM principles to our manufacturing operations. We continue to invest heavily in infrastructure to support WCM, with approximately $160 million of additional investment in 2011. WCM principles were developed by the WCM Association, a London-based non-profit organization dedicated to developing superior manufacturing standards. Fiat is

 

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the only automobile manufacturer that belongs to the WCM Association, and Fiat’s membership provides us access to WCM processes. WCM fosters a manufacturing culture that targets improved performance, safety and efficiency as well as the elimination of all types of waste. Unlike some other advanced manufacturing programs, WCM is designed to prioritize issues to focus on those believed likely to yield the most significant savings, and then directs resources at those limited issues. In preparation for our 2010 production launches, we invested $34 million in state-of-the-art metrology (precision measuring) centers at three of our assembly plants. We also installed a proprietary advanced statistical software system across all of our facilities that identifies emerging variation patterns during the assembly process that can be linked to worn tools or other root causes, thereby leading to prompt resolution of fit and finish discrepancies. In December 2010, we broadened the capability of our plant in Toluca, Mexico to a multi-platform facility. That plant is now capable of manufacturing our Fiat 500 and Dodge Journey models interchangeably. Our progress toward achieving goals under WCM is externally verified by certified WCM consultants, who measure our plants’ performance against 20 categories of pre-determined WCM metrics. WCM consultants conducted 9 external reviews in 2010, and 8 additional external reviews will be concluded by the end of 2011. In 2010, as a result of our WCM activities overall, we achieved a 25 percent reduction in reported injuries, a 39 percent reduction in lost days due to injury, a 10 percent improvement in manufacturing cost productivity, and a 13 percent improvement in first time quality in our vehicle assembly plant operations.

 

   

Procurement. We have established joint purchasing programs with Fiat that are designed to yield preferred pricing and logistics terms. Our objective is to achieve cumulative savings from 2009 levels of approximately $3 billion by 2014, net of estimated raw material price increases, primarily through the use of shared parts and components and common suppliers, and obtaining better pricing by using Chrysler’s and Fiat’s combined annual purchasing power (approximately $60 billion in 2010, based on the average of the daily EUR/USD exchange rate during 2010). We also expect to achieve cost savings as we integrate our procurement activities with Fiat.

 

   

Supply Chain Management. Our supply chain management function coordinates efforts to accurately forecast demand, manage the materials and vehicle ordering processes, track plant capacity, schedule production, allocate product inventory and arrange transportation logistics. Supply chain management is important in preventing potentially costly oversupply or undersupply conditions. Our supply chain management also monitors our dealers’ vehicle inventory levels to maintain availability of vehicles to facilitate sales, while at the same time preventing excess dealer stock to avoid the need for dealer and retail incentives. We improved the accuracy of our production forecasts in 2010 as compared to 2009, which led to decreased waste and lowered costs by reducing both underproduction and overproduction. We brought U.S. dealer vehicle inventory levels more in line with market demand and finished the year with 63 days supply (number of units in dealer inventory divided by the daily selling rate for December 31, 2010). This is up slightly from 58 days supply as of December 31, 2009, reflecting an increase in inventory levels associated with the launch of new and refreshed models. These inventory levels represent a significant improvement over Old Carco’s 115 days supply as of December 31, 2008. We have continued to maintain appropriate levels in 2011, with 54 days supply as of September 30, 2011.

 

   

Global Distribution. We plan to increase our sales of vehicles and service parts outside of North America principally by leveraging the Fiat alliance to provide better access to key markets in Europe and South America. In June 2011, Fiat became the general distributor of our vehicles and service parts in Europe, where it sells our products through a network of newly appointed dealers. As contemplated by that plan, we are producing and selling several of our vehicle models and related service parts to Fiat for significantly expanded distribution throughout Europe, including European versions of our Chrysler 300, Chrysler Grand Voyager and a range of Jeep models. The Chrysler brand vehicle models are distributed by Fiat in certain countries in Europe under its Lancia brand. In addition, in July 2011, we began producing the Fiat Freemont, a utility vehicle based on the Dodge Journey, which Fiat distributes for us in Europe. We are also implementing strategies by which we are benefitting from Fiat’s

 

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longstanding presence in Brazil, the largest automotive market in South America. In that regard, Fiat is also distributing the Fiat Freemont in Brazil, and is selling a portion of the Fiat 500 vehicles that we manufacture in Mexico through its dealer network in Brazil and Argentina. Further, we are exploring opportunities for the production and expansion of the sale of Chrysler Group vehicles and service parts in growing and emerging markets, such as China and Russia, in connection with Fiat’s efforts to establish or expand manufacturing and distribution activities in those markets. To that end, Fiat is selling a portion of the Fiat 500 vehicles we manufacture in Mexico through its dealers in China, and Fiat plans to begin selling the Fiat Freemont in China in 2012. In January 2012, we will begin to distribute Fiat vehicles and service parts through our own dealer network in Russia.

 

   

Management Structure. We implemented a flatter management structure so that each functional area of our business reports directly to the Chief Executive Officer. To facilitate collaboration and enhance speed of decision making, two management committees chaired by our Chief Executive Officer meet regularly to consider significant operational matters. Our Product Committee oversees capital investment, engineering and product development, while our Commercial Committee oversees matters related to sales and marketing.

See “Business–Chrysler Group Overview–Chrysler Group Transformation” and “Business–Chrysler Group Overview–Alliance with Fiat,” for additional information regarding our progress in implementing our business plan.

Trends, Uncertainties and Opportunities

Rate of U.S. Economic Recovery. The U.S. economy is recovering slowly from a recession that began in late 2007 and became increasingly severe with the global credit crisis in 2008 and 2009. The weaker economic conditions led to a substantial industry-wide decline in vehicle sales in the U.S., from 16.5 million vehicles in 2007 to 13.5 million vehicles in 2008 with SAAR falling to less than ten million vehicles in the first quarter of 2009. Events contributing to the recession, including severely constrained credit markets, interrupted Old Carco’s development and launch of new or significantly refreshed vehicles in 2008 and 2009, which has had a continuing adverse effect on our vehicle sales and market share. Unemployment remains relatively high in the U.S. and U.S. SAAR estimates for 2011 remain significantly below 2007 levels. We conservatively assumed a U.S. SAAR level of 12.7 million vehicles for 2011 for our business plan. Sales through November 2011 indicate a 2011 annual U.S. SAAR level of 13.0 million vehicles.

Product Development and Launches. Many of the models in our product lineup in 2011 were new or significantly refreshed, including the new Jeep Grand Cherokee, which had a successful retail launch in 2010 and has now garnered a significant number of industry awards. We expect that by the end of 2014, all of the models in our vehicle lineup that we carried over from the 2009 model year will be all-new. This challenging product development and launch schedule depends heavily on continued successful collaboration with Fiat, particularly in terms of sharing vehicle platforms. Our ability to continue to make the necessary investments in product development to achieve these plans depends in part on the market acceptance and success of the new and significantly refreshed vehicles we introduce early in the process.

A key component of our strategic plan is to create a compelling portfolio of products that will appeal to a wide range of customers. In order to optimize the mix of products we design, manufacture and sell, we consider a number of factors, including:

 

   

consumer taste, trends and preferences;

 

   

demographic trends, such as age of population and rate of family formation;

 

   

economic factors which affect preferences for luxury, affordability and fuel-efficiency;

 

   

competitive environment, in terms of quantity and quality of competitors’ vehicles offered within a particular segment;

 

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our brand portfolio, as each of our brands target a different group of customers;

 

   

consumer preferences for certain vehicle types based on geographic region; and

 

   

technology, manufacturing capacity and other factors that impact our product development.

We also consider these factors in developing a mix of vehicles within each brand, with an additional focus on ensuring that the vehicles we develop further our brand strategy.

Over time, we seek to balance our portfolio to appeal to a broader, more global customer base. Because efforts to affect our product mix meaningfully can take several years in light of typical industry development timelines and the vehicle life cycle, we have undertaken several short-term steps toward our goal. Since June 2009, we have significantly refreshed or launched new versions of the majority of our existing models to offer improved content and performance at a greater value. We leveraged the Jeep Grand Cherokee platform to develop and launch the seven-passenger Dodge Durango crossover vehicle to better accommodate families. As another example of balancing our product portfolio, we also expanded our reach to include smaller vehicles with the launch of the eco-friendly Fiat 500.

Pricing. Our profitability depends in part on our ability to increase or maintain margins on the sale of vehicles, while operating in an automotive industry that has intense price competition resulting from the wide variety of available competitive vehicles and manufacturing overcapacity. Historically, manufacturers have competed for vehicle sales by offering dealer, retail and fleet incentives, including cash rebates, option package discounts, guaranteed depreciation programs, and subsidized financing or leasing programs, all of which constrain margins on vehicle sales. Although we will continue to use such incentives to generate sales for particular models in particular geographic regions during specific time periods, we intend to focus our efforts to achieve higher sales volumes by building brand value, balancing our product portfolio by offering smaller vehicle models, and improving the content, quality and performance of our vehicles. Our U.S. retail average net transaction price increased and our average incentive per unit decreased from the first quarter of 2010 to the fourth quarter of 2010, in each case as adjusted for changes in model mix over the period, as a result of favorable content mix and net price discipline. We have continued this positive trend into 2011, as our average net transaction price for the nine months ended September 30, 2011 exceeded our 2010 average net transaction price, while our incentive per unit has largely remained stable, as adjusted for changes in model mix, over the nine month period. We expect that our average net transaction price may decline over the next few years as we introduce several smaller and less expensive vehicles in our lineup, but we intend to apply the same net pricing discipline going forward, and to reduce incentives per unit proportionately.

Vehicle Profitability. Our results of operations depend on the profitability of the vehicles we sell, which tends to vary by vehicle segment. Vehicle profitability depends on a number of factors, including sales prices, net of sales incentives, costs of materials and components, as well as transportation and warranty costs. Typically, larger vehicles, which tend to have higher unit selling prices, have been more profitable on a per unit basis. Therefore, our minivans, larger utility vehicles and pick-up trucks have generally been more profitable than our passenger cars. Our minivans, larger utility vehicles and pick-up trucks accounted for approximately 53 percent of our total U.S. vehicle sales in 2010 and the vehicle profitability of this portion of our portfolio is approximately 130 percent of our overall portfolio on a weighted-average basis. While more profitable on a per unit basis, these larger vehicles have relatively low fuel economy and over the past several years, consumer preferences have shifted away from these vehicles, particularly in periods of relatively high fuel prices. A shift in consumer preferences away from minivans, larger utility vehicles and pick-up trucks and towards passenger cars could adversely affect our profitability. For example, a shift in demand such that industry market share for minivans, larger utility vehicles and pick-up trucks deteriorated by 10 percentage points and industry market share for cars and smaller utility vehicles increased by 10 percentage points, holding other variables constant, would have reduced our gross margin by approximately 5 percent and our modified operating profit by approximately 36 percent for 2010. This estimate does not take into account any other changes in market conditions or actions that the Company may take in response to shifting consumer preferences, including production and pricing changes.

 

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As part of the Fiat alliance, we continue to work toward a more balanced product portfolio that we believe would alleviate the impact on us of a shift in consumer demand. In order to ensure that our portfolio of vehicles appropriately addresses the range of vehicles that may appeal to consumers over time, we have renewed our focus on the design, manufacturing, marketing and sale of our passenger cars, including mini, compact and subcompact cars, notwithstanding the lower per unit profitability. Our success in selling these smaller vehicles will provide us not only with a degree of insulation from the effects of changing consumer preferences, but will also be an important part of our efforts to comply with tightening environmental and fuel economy standards and to achieve corporate sustainability goals.

In addition, our vehicle sales through dealers to retail customers are normally more profitable than our fleet sales. Our fleet customers increasingly tend to purchase a higher proportion of our smaller, more fuel-efficient vehicles, which have historically had a lower profitability per unit. Nevertheless, our fleet sales have been an important source of revenue and can also be an effective means for marketing our vehicles. Our fleet sales also help to normalize our plant production because they typically involve the delivery of a large, pre-determined quantity of vehicles over several months. Our U.S. fleet sales accounted for approximately 36 percent of our total U.S. vehicle sales in 2010. The combined 2009 U.S. fleet sales for Old Carco and us accounted for approximately 26 percent of the total combined U.S. vehicles sales for Old Carco and us in 2009. The combined 2009 U.S. fleet sales for Old Carco and us were abnormally low due to reduced fleet sales to rental car companies as a result of the overall credit market crisis and Old Carco’s bankruptcy in April 2009.

International Distribution of our Vehicles. In connection with the implementation of our new distribution strategy for certain markets in Europe, we gave termination notices to our dealers and distributors in Europe. Fiat became the general distributor of our vehicles and service parts in Europe in June 2011, and we have largely completed the integration of our European sales operations into Fiat’s organization. We are also implementing strategies by which we are benefitting from Fiat’s longstanding presence in Brazil, the largest automotive market in South America. Further, we are working with Fiat to develop opportunities for the production and expansion of the sale of Chrysler Group products in emerging markets such as China and Russia.

Our Distribution of Fiat Vehicles. We are the exclusive distributor for Fiat and Alfa Romeo brand vehicles and service parts in North America. We began to generate incremental revenue and profits from the distribution of Fiat brand vehicles and service parts in Mexico in October 2010, and in the U.S. and Canada in the first quarter of 2011. In 2011, we also began distributing Alfa Romeo brand vehicles and service parts in Mexico. We are currently developing a plan to reintroduce Alfa Romeo brand vehicles and service parts in the U.S. and Canada. In addition, we have a right of first refusal to serve as distributor for Lancia brand vehicles in North America.

Cost of Sales. Our cost of sales is comprised of a number of elements. The most significant element of our cost of sales is the cost of materials and components, which makes up the majority of our cost of sales, typically around 70 percent of the total. The remaining costs principally include labor costs, consisting of direct and indirect wages and fringe benefits, depreciation and amortization, and transportation costs. A large portion of our materials and component costs are affected directly or indirectly by raw materials prices, particularly prices for steel, aluminum, lead, resin and copper, as well as precious metals. The prices for these raw materials fluctuate, and in recent years, the prices have increased significantly in response to changing market conditions. These market conditions affect, to a significant extent, our ability to manage our cost of sales over the long term. To the extent raw material price fluctuations may affect our cost of sales, we typically seek to manage these costs and minimize the impact on cost of sales through the use of fixed price purchase contracts and the use of commercial negotiations and technical efficiencies. As a result, for the periods reported, changes in raw material costs generally have not had a material effect on the period to period comparisons of our cost of sales.

Engineering, Design & Development Costs. In the past, suppliers often incurred the initial cost of engineering, designing and developing automotive component parts, and recovered their investments over time by including a cost recovery component in the price of each part based on expected volumes. Due in part to liquidity constraints faced by key suppliers, many of them have negotiated for cost recovery payments independent of volumes. This

 

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trend places increased demands on our liquidity and increases our economic risk, if new vehicles incorporating these components are not successful in the market. See “—Commercial Trends.”

Impact of Labor Cost Modifications. Our collective bargaining agreements with the UAW and the CAW have introduced lower wage and benefit structures for entry-level new hires, eliminated the employment security system (commonly known as the “Jobs Bank”), and reduced other compensation programs for terminated or laid-off represented employees, other than traditional severance pay. Over time, these and other modifications are intended to help us achieve hourly labor costs that are comparable to those of the transplant automotive manufacturers with which we compete while continuing to offer competitive compensation packages. We expect to realize the benefit of the new hire wage and benefit structure as our production increases and as a result of natural attrition. As planned, we renegotiated our collective bargaining agreement with the UAW, and it was ratified in October 2011. Although we made some concessions in wages and benefits during negotiations, particularly with respect to expanded profit sharing opportunities, we still expect to realize a significant portion of the savings negotiated in our prior agreement. Our collective bargaining agreement with the CAW expires in September 2012, and we therefore face some uncertainty as to future labor costs for our operations in Canada.

Fiat Ownership Interest

In January 2011, we delivered an irrevocable commitment letter to the U.S. Treasury stating that we had received the appropriate governmental approvals to begin commercial production of our Fully Integrated Robotised Engine in our Dundee, Michigan facility, which represented our achievement of the first of three Class B Events as outlined in our LLC Operating Agreement. In April 2011, we achieved our second Class B Event and delivered a notice to the U.S. Treasury confirming that we had achieved the Non-NAFTA Distribution Event as outlined in our LLC Operating Agreement. As a result of the achievement of these Class B Events, Fiat’s ownership interest increased from 20.0 percent to 30.0 percent, in increments of 5 percent.

On May 24, 2011, and concurrent with our repayment of the U.S. Treasury and EDC credit facilities, Fiat exercised its incremental equity call option and acquired an additional 16 percent fully-diluted ownership interest in the Company pursuant to the terms of our LLC Operating Agreement. We received the entire exercise price of $1,268 million in cash, increasing our contributed capital by the proceeds received, and we issued new Class A Membership Interests to Fiat. Refer to – Liquidity and Capital Resources, Liquidity Overview, for additional information related to our refinancing transaction and the repayment of our U.S. Treasury and EDC credit facilities.

On July 21, 2011, Fiat acquired beneficial ownership of the membership interests in the Company held by the U.S. Treasury and Canada CH Investment Corporation, or Canada CH, a wholly-owned subsidiary of the Canada Development Investment Corporation, a Canadian federal Crown Corporation, or the Canadian Government. Fiat acquired 98,461 Class A Membership Interests in the Company from the U.S. Treasury, representing approximately 6 percent of the fully-diluted ownership interest in the Company for cash consideration of $500 million. Pursuant to a separate agreement, Fiat paid $125 million in cash to acquire 24,615 Class A Membership Interests in the Company from the Canadian Government, representing approximately 1.5 percent of the fully-diluted ownership interest in the Company. As a result of these transactions, Fiat became the owner of a majority of the membership interests in the Company. Fiat now holds a 53.5 percent ownership interest in us on a fully diluted basis.

On July 21, 2011, Fiat also agreed to acquire the U.S. Treasury’s rights under the equity recapture agreement between the U.S. Treasury and the VEBA Trust for $75 million, of which $15 million was paid to the Canadian Government pursuant to a separate arrangement between the U.S. Treasury and the Canadian Government. The equity recapture agreement provides rights to the economic benefit associated with the membership interests held by the VEBA Trust in excess of a threshold amount of $4.25 billion plus 9 percent per annum from January 1, 2010. Once the VEBA Trust receives proceeds in such amount, any additional proceeds payable to the VEBA Trust and any membership interests retained by the VEBA Trust are to be transferred to Fiat for no further consideration.

 

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Fiat’s ownership interest will increase by an additional 5 percent (on a fully diluted basis) upon our achievement of the Ecological Event, the last of the Class B Events, which requires the development and regulatory approval of a vehicle based on Fiat technology that has a combined unadjusted fuel efficiency rating of at least 40 miles per gallon to be produced in the U.S. Taking into account the effects of dilution from the Ecological Event, Fiat will then own 58.5 percent of our outstanding equity. Under the terms of our LLC Operating Agreement, if we do not achieve the Ecological Event by December 31, 2012, Fiat may exercise an option to purchase ownership interests to replace those that were contingent upon the Ecological Event; following the repayment of the U.S. Treasury and EDC credit facilities, Fiat may now exercise this option in lieu of the interests associated with the Ecological Event at any time.

Critical Accounting Estimates

The condensed consolidated financial statements and the audited consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, or U.S. GAAP, which require the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses in the periods presented. We believe that the accounting estimates employed are appropriate and resulting balances are reasonable; however, due to inherent uncertainties in making estimates, actual results could differ from the original estimates, requiring adjustments to these balances in future periods.

The critical accounting estimates that affect the condensed consolidated financial statements and the audited consolidated financial statements and that use judgments and assumptions are listed below. In addition, the likelihood that materially different amounts could be reported under varied conditions and assumptions is discussed.

Capitalization

We acquired the principal operating assets and assumed certain liabilities of Old Carco and its principal domestic subsidiaries, as well as acquired the equity of Old Carco’s principal foreign subsidiaries. We issued membership interests to our members in exchange for their contributions, which we valued as follows:

Fiat. We recorded the intellectual property contributed by Fiat at its fair value of $320 million, which was determined using the relief from royalty method. The significant assumptions used in this method included the following:

 

   

Forecasts of revenues for vehicles expected to be manufactured in the future utilizing Fiat intellectual property;

 

   

A royalty rate based on licensing arrangements for the use of technology in the automotive industry and related industries;

 

   

Estimated costs expected to be incurred to allow the Fiat intellectual property to be used on vehicles sold in North America;

 

   

Estimated tax expense a market participant would incur on the net royalties; and

 

   

An after-tax discount rate of 18 percent commensurate with the perceived business risks related to the cash flows attributable to the Fiat intellectual property. This discount rate is lower than the after-tax estimated weighted average cost of capital, or WACC, of 19.5 percent used to value the membership interests issued to the other members. Management believes this is appropriate because the intellectual property represents proven technology that had already been utilized by Fiat in its products.

We determined that a useful life of 10 years for the intellectual property was appropriate and consistent with our intended use of the asset, as well as the average life cycle of the products and platforms that the intellectual property will be used in.

 

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VEBA Trust. In connection with the 363 Transaction, we entered into the VEBA Settlement Agreement with the UAW whereby the VEBA Trust agreed to assume responsibility for certain health care claims incurred by certain of our retirees. The terms of the VEBA Settlement Agreement are discussed in “—Other Postretirement Benefits” below. In accordance with the terms of the VEBA Settlement Agreement, we issued to the VEBA Trust the VEBA Trust Note with a face value of $4,587 million as well as membership interests representing an initial 67.7 percent ownership interest in the Company. The recognition and valuation of the VEBA Trust Note and VEBA Membership Interests are discussed in Note 18, Employee Retirement and Other Benefits, of our accompanying audited consolidated financial statements.

United States Department of the Treasury and the Canada CH Investment Corporation. On June 10, 2009, we issued membership interests to the U.S. Treasury and Canada CH in consideration for the credit facilities and financing provided by the U.S. and Canadian governments. We recorded their membership interests at their fair values of $72 million and $17 million, respectively, which were determined using a discounted cash flow model as discussed below. We recognized these contributions at their fair value as a deferred charge representing the fair value of the undrawn credit facilities and as a discount to the face value of the financing. Deferred charges of $65 million, of which $48 million related to U.S. Treasury and $17 million related to Canada CH, were recognized in prepaid expenses and other assets for the undrawn credit facilities, which will be amortized on a straight-line basis over the term of the credit facilities. Additionally, $24 million was recognized as a discount to the financing received from the U.S. Treasury, which will be accreted over the term of the loans utilizing the effective interest method.

The fair value of the U.S. Treasury’s and Canada CH’s membership interests was determined by subtracting the face value of the Company’s debt from an enterprise value established using a discounted cash flow model. The key inputs to the model included:

 

   

Annual projections through 2014 prepared by management that reflect the estimated after-tax cash flows a market participant would expect to generate from operating the business;

 

   

A terminal value, which was determined using a growth model that applied a 2.0 percent long-term growth rate to our projected after-tax cash flows beyond 2014. The long-term growth rate was based on our internal projections as well as industry growth prospects;

 

   

An estimated after-tax WACC of 19.5 percent; and

 

   

Projected worldwide factory shipments ranging from 1.6 million vehicles in 2010 to 2.8 million vehicles in 2014.

The fair value of the undrawn credit facilities was estimated considering the probability the facilities would be drawn and the difference between their contractual interest rates and the estimated market rates at June 10, 2009, taking in to account the Company’s estimated creditworthiness.

Business Combination Accounting

We accounted for the 363 Transaction utilizing the acquisition method of accounting in accordance with the accounting guidance related to business combinations. Chrysler Group was formed on April 29, 2009 for the purpose of acquiring the principal operating assets and assuming certain liabilities of Old Carco. We paid $2 billion in cash consideration to Old Carco in connection with the 363 Transaction. This consideration was funded by proceeds from our U.S. Treasury first lien credit agreement. Goodwill of $1,361 million was calculated as the excess of the consideration transferred to the creditors of Old Carco in the 363 Transaction over the June 10, 2009 values recognized for the identifiable assets acquired and the liabilities assumed. Goodwill represents the future economic benefits arising from other assets acquired as part of the 363 Transaction that do not meet the separability criteria of the business combination accounting guidance.

 

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The following summarizes the estimated values of the assets acquired and liabilities assumed on June 10, 2009 (in millions of dollars):

 

Consideration transferred

       $         2,000   

Cash and cash equivalents

     1,694     

Restricted cash

     1,079     

Marketable securities

     16     

Trade receivables

     1,731     

Inventories

     3,040     

Property, plant and equipment

     14,242     

Equipment on operating leases

     3,415     

Prepaid expenses and other assets

     3,278     

Advances to related parties and other financial assets

     185     

Deferred taxes

     120     

Other intangible assets

     3,219     
  

 

 

   

Total assets acquired

     32,019     
  

 

 

   

Trade liabilities

     3,782     

Accrued expenses and other liabilities

     20,557     

Financial liabilities

     5,659     

Deferred revenue

     1,262     

Deferred taxes

     120     
  

 

 

   

Total liabilities assumed

     31,380     
  

 

 

   
     Value of net assets acquired        639   
    

 

 

 

Goodwill (excess of consideration transferred over value of net assets)

  

    $ 1,361   
    

 

 

 

In applying the accounting guidance related to business combinations, we recorded the assets acquired and the liabilities assumed from Old Carco at fair value, except for certain pre-acquisition contingent liabilities for which fair value was not determinable, deferred income taxes and certain liabilities associated with employee benefits, which were recorded according to other accounting guidance. These adjustments are final and no determinations of fair value are considered provisional as of June 10, 2009. The significant assumptions related to the valuation of our assets and liabilities recorded in connection with the 363 Transaction are discussed below.

Trade Receivables. We recorded trade receivables with a fair value of $1,731 million, which takes into account the risk that not all contractual amounts owed us will be collected. Contractual amounts due to us for acquired trade receivables amounted to $1,827 million. Due to the short-term nature of the acquired trade receivables, management did not expect cash collections for trade receivables to differ materially from the fair value recognized

Inventories. We recorded inventories at a fair value of $3,040 million, which was determined as follows:

 

   

Finished products were determined based on the estimated selling price of finished products on hand less costs to sell, including disposal and holding period costs, as well as a reasonable profit margin on the selling and disposal effort for each specific category of finished products being evaluated;

 

   

Work in process was determined based on the estimated selling price once completed less total costs to complete the manufacturing process, costs to sell including disposal and holding period costs, as well as a reasonable profit margin on the remaining manufacturing, selling and disposal effort; and

 

   

Raw materials were determined based on current replacement cost.

 

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Property, Plant and Equipment. We recorded property, plant and equipment, which includes land, buildings, leasehold improvements, machinery, equipment, construction in progress and special tooling, at a fair value of $14,242 million. The fair value was based on the premise of highest and best use.

The cost approach was applied in determining fair value for certain assets related to buildings, leasehold improvements and the majority of our machinery, equipment and special tooling. This method considers the amount required to construct or purchase a new asset of equal utility at current prices, with adjustments in value for physical deterioration, as well as functional and economic obsolescence. Economic obsolescence represents a loss in value due to unfavorable external conditions, such as the economics of the automotive industry as of June 10, 2009. Economic obsolescence was estimated based on expectations of the highest and best use of the property, plant and equipment, which generally contemplated an in use valuation premise. Land was valued using the comparable sales method, which is a market approach that uses recent transactions for similar types of real property as a basis for estimating the fair value of the land acquired.

Equipment on Operating Leases. We recorded equipment on operating leases for which we are the lessor at a fair value of $3,415 million, which was based on the market value of comparable assets.

Intangible Assets. We recorded intangible assets at a fair value of $3,219 million. The following is a summary of the methods used to determine the fair value of our significant intangible assets:

 

   

The relief from royalty method was used to calculate the fair value of brand names of $2,210 million. The significant assumptions used in this method included:

 

   

Forecasted revenue for each brand name (Chrysler, Jeep, Dodge, Ram and Mopar);

 

   

Royalty rates based on licensing arrangements for the use of brands and trademarks in the automotive industry and related industries;

 

   

Estimated tax expense a market participant would incur on the net royalties;

 

   

After-tax discount rates ranging from 19 percent to 26 percent based on an estimated WACC and adjusted for perceived business risks related to these intangible assets; and

 

   

Indefinite economic lives for the acquired brands.

 

   

The cost approach was used to calculate the fair value of the acquired dealer networks of $384 million. The fair value of the acquired dealer networks was determined based on our estimated costs to re-create the dealer networks, which took into consideration an estimate of an optimal number of dealers.

 

   

The relief from royalty method was used to calculate the fair value of patented and unpatented technology of $208 million. The significant assumptions used included:

 

   

Forecasted revenue for each technology category;

 

   

Royalty rates based on licensing arrangements for similar technologies and obsolescence factors by technology category;

 

   

Estimated tax expense a market participant would incur on the net royalties;

 

   

After-tax discount rates ranging from 18 percent to 21 percent based on an estimated WACC and adjusted for perceived business risks related to these developed technologies; and

 

   

Estimated economic lives, which ranged from 4 to 10 years.

 

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We recorded other intangible assets of $417 million, which included $192 million related to operating lease contracts that were favorable relative to available market terms.

Accrued Expenses and Other Liabilities. We recorded accrued expenses and other liabilities of $20,557 million, which included the following:

 

   

Pension and other post retirement benefit obligations, or OPEB, liabilities of $3,333 million and $6,506 million, respectively, measured in accordance with the accounting guidance for employee benefits discussed in Note 18, Employee Retirement and Other Benefits, of our accompanying audited consolidated financial statements;

 

   

Other employee benefit and nonretirement post-employment benefits, including workers’ compensation and supplemental unemployment benefit obligations totaling $959 million, measured in accordance with the accounting guidance for employee benefits;

 

   

Warranty obligations of $2,310 million measured at fair value. Fair value was determined based on the expected future cash flows to satisfy the obligations, adjusted for a profit margin that would be required by a market participant to assume the obligations and discounted to a single present value using a discount rate that considers the timing of the expected cash flows and the non-performance risk of the obligations ranging from 3.0 percent in 2009 to 18.5 percent in 2012 and later based on the timing of the claims and their relationship to other secured and unsecured obligations of the Company. We used Old Carco’s historical data regarding profit margins on its service contract business as a basis for estimating the profit margin a market participant would expect to earn on the assumed warranty obligations;

 

   

Various accrued expenses, including accrued sales incentives of $1,820 million; accrued income, property, excise, state, local and other taxes payable of $841 million and other items totaling $3,055 million measured at fair value; and

 

   

Various pre-acquisition contingencies totaling $1,733 million for which fair value was not determinable, which were measured in accordance with the accounting guidance related to contingencies as discussed below.

Deferred Revenue. We recorded deferred revenue with a fair value of $1,262 million, which primarily related to obligations assumed to fulfill service contracts. Fair value was determined based on the expected future cash flows to satisfy the obligations, adjusted for a profit margin that would be required by a market participant to assume the obligations and discounted to a present value using a discount rate that considers the timing of the expected cash flows and the non-performance risk of the obligations ranging from 3.0 percent in 2009 to 19.0 percent in 2012 and later based on the timing of the claims and their relationship to other secured and unsecured obligations of the Company. We used Old Carco’s historical data regarding profit margins on its service contract business as a basis for estimating the profit margin a market participant would expect to earn on the obligations assumed to fulfill service contracts.

Financial Liabilities. We recorded financial liabilities, including debt and capital leases, at a total fair value of $5,659 million. The fair value was calculated using a discounted cash flow methodology utilizing a synthetic credit rating to estimate the non-performance risk associated with our debt instruments, adjusted where appropriate for any security interests. Market observable data for discount rates reflecting the non-performance risk of the obligations was not available at the measurement dates. Appropriate discount rates were estimated by extrapolating market-observable debt yields at the measurement dates. Financial liabilities included the following:

 

   

Assumed obligations to the U.S. Treasury primarily relating to loans originally provided to Old Carco’s parent company, Chrysler Holding, with an acquisition date fair value of $716 million. Refer to Note 12, Financial Liabilities, of our accompanying audited consolidated financial statements for additional information related to the nature, terms, and amounts of the U.S. Treasury financial liabilities;

 

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Notes payable to EDC with an acquisition date fair value of $695 million. Refer to Note 12, Financial Liabilities, of our accompanying audited consolidated financial statements for additional information related to the nature, terms, and amounts of the EDC financial liabilities;

 

   

Asset-backed securitization facilities for the Gold Key Lease portfolio with an acquisition date fair value of $3,197 million. Refer to Note 12, Financial Liabilities, of our accompanying audited consolidated financial statements for additional information related to the nature, terms, and amounts of the Gold Key Lease asset-backed securitization facilities;

 

   

Auburn Hills Headquarters Loan with a fair value of $207 million. Refer to Note 12, Financial Liabilities, of our accompanying audited consolidated financial statements for additional information related to the nature, terms, and amounts of the Auburn Hills Headquarters Loan; and

 

   

Other various financial liabilities and capital lease obligations with fair values totaling $844 million.

Pre-acquisition Contingencies for which Fair Value was not Determinable. We recorded $1,733 million relating to certain pre-acquisition contingent liabilities assumed from Old Carco in the 363 Transaction for which fair value was not determinable due to uncertainty in the timing and amount of the liability and the number of variables and assumptions in assessing the possible outcomes. Pre-acquisition contingencies for which fair value was not determinable included $1,203 million for certain warranty obligations and $530 million relating to product liabilities, including various pending legal actions and proceedings arising in connection with Old Carco’s activities as an automotive manufacturer.

Warranty obligations for which fair value was not determinable related to voluntary service actions and recall actions to address various customer satisfaction, safety and emissions issues on past vehicle sales. Estimates of the future costs of these actions are inevitably imprecise due to numerous uncertainties, including the enactment of new laws and regulations, the number of vehicles affected by a service or recall action and the nature of the corrective actions. The estimated future costs of these actions are based primarily on historical claims experience for our vehicles.

Fair value was also not determinable for product liabilities and various pending legal actions and proceedings arising from Old Carco’s activities as an automotive manufacturer. These contingencies included various legal proceedings, claims and governmental investigations which were pending on a wide range of topics, including: vehicle safety; emissions and fuel economy; dealer, supplier and other contractual relationships; intellectual property rights; product warranties; and environmental matters. Some of these proceedings allege defects in specific component parts or systems (including airbags, seats, seat belts, brakes, ball joints transmissions, engines and fuel systems) in various vehicle models or allege general design defects relating to vehicle handling and stability, sudden unintended movement or crashworthiness. These proceedings seek recovery for damage to property, personal injuries or wrongful death and in some cases include a claim for exemplary or punitive damages. Adverse decisions in one or more of these proceedings could require us to pay substantial damages, or undertake service actions, recall campaigns or other costly actions.

As the fair value of these liabilities was not determinable, they have been measured in accordance with the accounting guidance related to contingencies.

We also assessed pre-acquisition contingencies for which we did not record an accrual to determine whether it was reasonably possible that the exposure relating to an individual matter could be material to our consolidated financial statements, thus requiring disclosure. On June 10, 2009, there were no such individual matters where we believed it was reasonably possible that our exposure to loss would be material to our consolidated financial statements.

Refer to Note 14, Commitments, Contingencies and Concentrations, of our accompanying audited consolidated financial statements for additional information related to these contingencies.

 

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Pension

We sponsor both noncontributory and contributory defined benefit pension plans. The majority of the plans are funded plans. The noncontributory pension plans cover certain of our hourly and salaried employees. Benefits are based on a fixed rate for each year of service. Additionally, contributory benefits are provided to certain of our salaried employees under the salaried employees’ retirement plans. These plans provide benefits based on the employee’s cumulative contributions, years of service during which the employee contributions were made and the employee’s average salary during the five consecutive years in which the employee’s salary was highest in the fifteen years preceding retirement.

Our defined benefit pension plans are accounted for on an actuarial basis, which requires that we make use of estimates of the present value of the projected future payments to all participants, taking into consideration the likelihood of potential future events such as demographic experience. These assumptions may have an effect on the amount and timing of future contributions.

The assumptions used in developing the required estimates include the following key factors:

 

   

Discount rates. Our discount rates are based on yields of high-quality (AA-rated or better) fixed income investments for which the timing and amounts of payments match the timing and amounts of the projected pension payments.

 

   

Expected return on plan assets. Our expected long-term rate of return on plan assets assumption is developed using a consistent approach across all plans. This approach primarily considers various inputs from a range of advisors for long-term capital market returns, inflation, bond yields and other variables, adjusted for specific aspects of our investments strategy.

 

   

Salary growth. Our salary growth assumption reflects our long-term actual experience, outlook and assumed inflation.

 

   

Inflation. Our inflation assumption is based on an evaluation of external market indicators.

 

   

Expected contributions. Our expected amount and timing of contributions is based on an assessment of minimum funding requirements. From time to time contributions are made beyond those that are legally required.

 

   

Retirement rates. Retirement rates are developed to reflect actual and projected plan experience.

 

   

Mortality rates. Mortality rates are developed to reflect actual and projected plan experience.

Plan Assets Measured at Net Asset Value. Plan assets are recognized and measured at fair value in accordance with the accounting guidance related to fair value measurements, which specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques (Level 1, 2 and 3). Level 3 pricing inputs include significant inputs that are generally less observable from objective sources. At December 31, 2010, substantially all of our investments classified as Level 3 in the fair value hierarchy are valued at the net asset value, or NAV. These plan assets are classified as Level 3 as we are not able to redeem our investments at their respective measurement dates. NAV is provided by the investment manager or a third-party administrator.

Our investments classified as Level 3 include private equity, real estate and hedge fund investments. Private equity investments include those in limited partnerships that invest primarily in operating companies that are not publicly traded on a stock exchange. Our private equity investment strategies include leveraged buyouts, venture capital, mezzanine and distressed investments. Real estate investments include those in limited partnerships that invest in various commercial and residential real estate projects both domestically and internationally. Hedge

 

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fund investments include those seeking to maximize absolute returns using a broad range of strategies to enhance returns and provide additional diversification. Investments in limited partnerships are valued at the NAV, which is based on audited financial statements of the funds when available, with adjustments to account for partnership activity and other applicable valuation adjustments.

Refer to Note 3, Summary of Significant Accounting Policies and Note 18, Employee Retirement and Other Benefits, of our accompanying audited consolidated financial statements for a discussion of the fair value hierarchy measurement.

Plan obligations and costs are based on existing retirement plan provisions. No assumption is made regarding any potential future changes to benefit provisions beyond those to which we are presently committed, such as in existing labor contracts.

The effects of actual results differing from our assumptions and the effects of changing assumptions are included in unamortized net gains and losses in accumulated other comprehensive income. Gains and losses are amortized over future periods and, therefore, generally affect our recognized expense in future periods. These net gains and losses are only amortized to the extent they exceed 10 percent of the higher of the market-related value of assets or the projected benefit obligation of the respective plan and these amounts are recognized as a component of net expense over the plan participants’ expected future years of service. For our defined benefit pension plans, these losses do not exceed this threshold. During 2010, the actual return on plan assets was $2,929 million, which was higher than the expected return of $1,741 million. The weighted average discount rate used to determine the benefit obligation for defined benefit pension plans was 5.33 percent at December 31, 2010 versus 5.54 percent at December 31, 2009, resulting in an unamortized loss of $635 million.

The December 31, 2010 pension funded status and 2011 expense are affected by year-end 2010 assumptions. These sensitivities may be asymmetric and are specific to the time periods noted. They also may not be additive, so the impact of changing multiple factors simultaneously cannot be calculated by combining the individual sensitivities shown. The effect of the indicated increase (decrease) in selected factors, holding all other assumptions constant, is shown below:

 

     Pension Plans  
     Effect on 2011
Pension Expense
    Effect on
December 31, 2010
Projected Benefit
Obligation
 
     (in millions of dollars)  

10 basis point decrease in discount rate

   $ (6   $ 317   

10 basis point increase in discount rate

     6        (308

50 basis point decrease in expected return on assets

     121          

50 basis point increase in expected return on assets

     (121       

Refer to Note 18, Employee Retirement and Other Benefits, of our accompanying audited consolidated financial statements for a detailed discussion of our pension plans.

Other Postretirement Benefits

We provide health care, legal and life insurance benefits to certain of our hourly and salaried employees. Upon retirement from the Company, these employees may become eligible for continuation of certain benefits. Benefits and eligibility rules may be modified periodically.

Other OPEB plans are accounted for on an actuarial basis, which requires the selection of various assumptions. The estimation of our obligations, costs and liabilities associated with OPEB, primarily retiree health care and life insurance, requires that we make use of estimates of the present value of the projected future payments to all

 

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participants, taking into consideration the likelihood of potential future events such as health care cost increases and demographic experience, which may have an effect on the amount and timing of future payments.

The assumptions used in developing the required estimates include the following key factors:

 

   

Discount rates. Our discount rates are based on yields of high-quality (AA-rated or better) fixed income investments for which the timing and amounts of payments match the timing and amounts of the projected benefit payments.

 

   

Health care cost trends. Our health care cost trend assumptions are developed based on historical cost data, the near-term outlook, and an assessment of likely long-term trends.

 

   

Salary growth. Our salary growth assumptions reflect our long-term actual experience, outlook and assumed inflation.

 

   

Retirement rates. Retirement rates are developed to reflect actual and projected plan experience.

 

   

Mortality rates. Mortality rates are developed to reflect actual and projected plan experience.

Plan assets are recognized and measured at fair value in accordance with the accounting guidance related to fair value measurements, which specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. A variety of inputs are used, including independent pricing vendors, third party appraisals, and fund net asset value provided by the investment manager or a third party administrator. Refer to Note 3, Summary of Significant Accounting Policies and Note 18, Employee Retirement and Other Benefits, of our accompanying audited consolidated financial statements for a discussion of the fair value hierarchy measurement.

Plan obligations and costs are based on existing retirement plan provisions. No assumption is made regarding any potential future changes to benefit provisions beyond those to which we are presently committed, such as in existing labor contracts.

The effects of actual results differing from our assumptions and the effects of changing assumptions are included in unamortized net gains and losses in accumulated other comprehensive income (loss). We immediately recognize actuarial gains or losses for OPEB plans that are short-term in nature and under which our obligation is capped. For all other plans, our accounting policy is to recognize gains or losses to the extent they exceed 10 percent of the higher of the market-related value of assets or the projected benefit obligation of the respective plan and these amounts are recognized as a component of the net expense over the plan participants’ expected future years of service. The weighted average discount rate used to determine the benefit obligation for OPEB plans was 5.57 percent and 5.38 percent at December 31, 2010 and 2009, respectively. Excluding the plans that provided postretirement health care benefits to UAW vested retirees and to CAW represented employees, retirees and dependents and for which we have been discharged of further obligation, the weighted average discount rate for December 31, 2009 was 5.52 percent. As a result, during the year ended December 31, 2010, the impact of the change in discount rate for continuing plans was minimal.

Refer to Note 18, Employee Retirement and Other Benefits, of our accompanying audited consolidated financial statements for more information regarding costs and assumptions for OPEB plans.

 

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The effect of the indicated increase (decrease) in the assumed discount rate, holding all other assumptions constant, is shown below:

 

     OPEB Plans  
     Effect on 2011  OPEB
Expense
    Effect on December 31, 2010
OPEB Obligation
 
     (in millions of dollars)  

10 basis point decrease in discount rate

     $        $ 29   

10 basis point increase in discount rate

            (29

Transfer of VEBA Trust Assets and Obligations to the VEBA Trust. On January 1, 2010, and in accordance with the terms of the VEBA Settlement Agreement, we transferred $1,972 million of plan assets to the VEBA Trust and thereby were discharged of $7,049 million of benefit obligations related to postretirement health care benefits for certain UAW retirees. As a result of this settlement, we derecognized the associated OPEB obligation of $5,077 million, which was included in accrued expenses and other liabilities as of December 31, 2009. Separately, we recognized a financial liability for the VEBA Trust Note at a fair value of $3,854 million, which included the $4,587 million VEBA Trust Note net of the related discount of $733 million, as well as accrued interest of $233 million. In addition, the contribution receivable for the VEBA Trust Membership Interests of $990 million was satisfied. Refer to Note 18, Employee Retirement and Other Benefits, of our accompanying audited consolidated financial statements for more information regarding the transfer of VEBA Trust assets and obligations to the VEBA Trust.

Canadian Health Care Trust Settlement Agreement. On August 13, 2010, Chrysler Canada Inc., or Chrysler Canada, entered into the Canadian Health Care Trust Settlement Agreement, which we refer to as the Canadian HCT Settlement Agreement, with the CAW to permanently transfer the responsibility for providing postretirement health care benefits to the CAW represented employees, retirees and dependents (“Covered Group”) to a new retiree plan. The new retiree plan will be funded by a new independent Health Care Trust, or HCT.

On December 31, 2010, and in accordance with the Canadian HCT Settlement Agreement, Chrysler Canada issued four unsecured promissory notes, or Canadian HCT Notes, to the HCT with a fair value of $1,087 million ($1,085 million CAD) and made a cash contribution of $104 million to the HCT in exchange for settling its retiree health care obligations for the Covered Group. In accordance with the Canadian HCT Settlement Agreement, the cash contribution was determined based on an initial payment of $175 million, which was adjusted for the following: (i) reduced by $53 million for benefit payments made by us for claims incurred by the Covered Group from January 1, 2010 through December 31, 2010, (ii) reduced by $22 million for required taxes associated with the transaction and administrative costs and (iii) increased by $4 million for interest charges and retiree contributions received by us during the same period. In addition, on December 31, 2010, we paid $3 million to the HCT for taxes incurred related to this transaction. As of December 31, 2010, $19 million of obligations associated with this transaction were outstanding and are scheduled to be paid in 2011. During the year ended December 31, 2010, we recognized a $46 million loss as a result of the Canadian HCT Settlement Agreement.

Refer to Note 18, Employee Retirement and Other Benefits, of our accompanying audited consolidated financial statements for more information regarding the Canadian HCT Settlement Agreement.

Stock-Based Compensation

We have various compensation plans that provide for the granting of stock-based compensation to certain employees and directors. Certain of our plans were subject to approval by the Special Master for TARP Executive Compensation. See “Executive Compensation – Compensation Discussion and Analysis – Overview.” Compensation expense for equity-classified awards is measured at the grant date based on the fair value of the award. Liability-classified awards are remeasured to fair value at each balance sheet date until the award is settled with compensation expense recognized over the employee service period.

 

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Since there is no publicly observable trading price for our membership interests, fair value was determined by subtracting the fair value of the Company’s interest-bearing debt from an enterprise value established using a discounted cash flow model. The significant assumptions used in the calculation of fair value at each issuance date and for each period are described below:

 

   

Annual projections through 2014 prepared by management that reflect the estimated after-tax cash flows a market participant would expect to generate from operating the business;

 

   

A terminal value that was determined using a growth model that applied a 2.0 percent long-term growth rate to our projected after-tax cash flows beyond 2014. The long-term growth rate was based on our internal projections as well as industry growth prospects;

 

   

An estimated after-tax WACC ranging from 15.3 percent to 15.0 percent in 2010 and ranging from 19.5 percent to 15.3 percent in 2009; and

 

   

Projected worldwide factory shipments ranging from 1.6 million vehicles in 2010 to 2.8 million vehicles in 2014.

Based on these calculations, we estimated that the per unit fair value of a Chrysler Group Unit was $7.95 and $2.98 as of December 31, 2010 and 2009, respectively. The increase in the per unit fair value was primarily attributable to continued improvement in our performance and achievement of the objectives outlined in our business plan.

If awards contain certain performance conditions in order to vest, we recognize the cost of the award when achievement of the performance condition is probable. For those awards with post-vesting contingencies, we apply an adjustment to account for the probability of meeting those contingencies. For additional information related to our stock-based compensation awards, refer to Note 17, Stock-Based Compensation, of our accompanying audited consolidated financial statements.

Impairment of Long-Lived Assets

Long-lived assets held and used (such as property, plant and equipment, and equipment on operating leases) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of an asset or asset group to be held and used is measured by a comparison of the carrying amount of an asset or asset group to the estimated undiscounted future cash flows expected to be generated by the asset or group of assets. If the carrying amount of an asset or asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset or group of assets exceeds the fair value of the asset or group of assets. When long-lived assets are considered held for sale, they are recorded at the lower of carrying amount or fair value less costs to sell, and depreciation ceases.

Goodwill and Other Intangible Assets

We account for goodwill in accordance with the accounting guidance related to intangibles and goodwill, which requires us to test goodwill for impairment at the reporting unit level at least annually and when significant events occur or there are changes in circumstances that indicate the fair value is less than the carrying value. Such events could include, among others, a significant adverse change in the business climate, an unanticipated change in the competitive environment and a decision to change the operations of the Company. We have one operating segment, which is also our only reporting unit.

Goodwill is evaluated for impairment annually as of October 1. In September 2011, the FASB issued updated guidance on annual goodwill impairment testing. The amendment allows an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If based on its qualitative assessment, an entity concludes it is more likely than not that the fair value of a reporting unit is less than its carrying amount, quantitative impairment testing is required. However, if

 

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an entity concludes otherwise, quantitative impairment testing is not required. The updated guidance is effective for annual and interim goodwill impairment tests performed for fiscal periods beginning after December 15, 2011, with early adoption permitted. We have elected to early adopt the updated guidance as of October 1, 2011.

When quantitative impairment testing is required, goodwill is reviewed for impairment utilizing a two-step process. The first step of the impairment test is to compare the fair value of our reporting unit to its carrying value. The fair value is determined by estimating the present value of expected future cash flows for the reporting unit. If the fair value of the reporting unit is greater than its carrying amount, no impairment exists and the second step of the test is not performed. If the carrying amount of the reporting unit is greater than the fair value, there is an indication that an impairment may exist and the second step of the test must be completed to measure the amount of the impairment. The second step of the test calculates the implied fair value of goodwill by assigning the fair value of a reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination. The implied fair value of goodwill is then compared to the carrying value. If the implied fair value of goodwill is less than the carrying value, an impairment loss is recognized equal to the difference.

Intangible assets with a finite useful life are amortized over their respective estimated useful lives, which are reviewed by management each reporting period and whenever changes in circumstances indicate that the carrying value of the assets may not be recoverable. Other intangible assets determined to have an indefinite useful life are not amortized, but are instead tested for impairment annually. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. Management estimates fair value through various techniques including discounted cash flow models, which incorporate market-based inputs, and third party independent appraisals, as considered appropriate. Management also considers current and estimated economic trends and outlook.

Valuation of Deferred Tax Assets

A valuation allowance on deferred tax assets is required if, based on the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon our ability to generate sufficient taxable income during the carry back or carry forward periods applicable in each applicable tax jurisdiction. Our accounting for deferred tax assets represents our best estimate of those future events. Changes in our current estimates, due to unanticipated events or otherwise, could have a material impact on our financial condition and results of operations.

In assessing the realizability of deferred tax assets, we consider both positive and negative evidence. Concluding that a valuation allowance is not required is difficult when there is absence of positive evidence and significant negative evidence that is objective and verifiable, such as cumulative losses in recent years. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. As such, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses. U.S. GAAP states that a cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome in determining that a valuation allowance is not needed against deferred tax assets.

The assessment for the nature, timing and recognition of a valuation allowance takes into account a number of types of evidence, including the following:

 

   

Nature, frequency and severity of current and cumulative financial reporting losses. A pattern of objectively measured recent financial reporting losses is heavily weighted as a source of negative evidence. In certain circumstances, historical information may not be as relevant due to changed circumstances;

 

   

Sources of future taxable income. Future reversals of existing temporary differences are heavily-weighted sources of objectively verifiable positive evidence. Projections of future taxable income exclusive of reversing temporary differences are a source of positive evidence only when the projections are combined with a history of recent profits and can be reasonably estimated. Otherwise, these

 

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projections are considered inherently subjective and generally will not be sufficient to overcome negative evidence that includes relevant cumulative losses in recent years, particularly if the projected future taxable income is dependent on an anticipated turnaround to profitability that has not yet been achieved. In such cases, we generally give these projections of future taxable income no weight for the purposes of our valuation allowance assessment pursuant to U.S. GAAP; and

 

   

Tax planning strategies. If necessary and available, tax planning strategies would be implemented to accelerate taxable amounts to utilize expiring carryforwards. These strategies would be a source of additional positive evidence and, depending on their nature, could be heavily weighted.

We concluded that the lack of positive evidence in combination with the negative objective evidence of the uncertainty of the near-term outlook for the North American automotive industry, financial markets and projected future taxable income were significant and outweighed other factors. Accordingly, at December 31, 2010 and 2009, we have valuation allowances on deferred tax assets of $852 million and $801 million, respectively, related to our foreign operations, which are highly dependent on U.S. sourced taxable income.

If, in the future, we generate taxable income on a sustained basis in jurisdictions where we have recorded full valuation allowances, our conclusion regarding the need for full valuation allowances in these tax jurisdictions could change, resulting in the reversal of some or all of the valuation allowances. If our operations generate taxable income prior to reaching profitability on a sustained basis, we would reverse a portion of the valuation allowance related to the corresponding realized tax benefit for that period, without changing our conclusions on the need for a full valuation allowance against the remaining net deferred tax assets.

Sales Incentives

We record the estimated cost of sales incentive programs offered to dealers and retail customers as a reduction to revenue at the time of sale to the dealer. This estimated cost represents the incentive programs offered to dealers and retail customers, as well as the expected modifications to these programs in order to facilitate sales of the dealer inventory. Subsequent adjustments to incentive programs related to vehicles previously sold to dealers are recognized as an adjustment to revenue in the period the adjustment is determinable.

We use price discounts to adjust vehicle pricing in response to a number of market and product factors, including: pricing actions and incentives offered by competitors, economic conditions, the amount of excess industry production capacity, the intensity of market competition, consumer demand for the product and to support promotional campaigns. We may offer a variety of sales incentive programs at any given point in time, including: cash offers to dealers and retail customers and subvention programs offered to retail customers, or lease subsidies, which reduce the retail customer’s monthly lease payment. Incentive programs are generally brand, model and region specific for a defined period of time, which may be extended.

Multiple factors are used in estimating the future incentive expense by vehicle line including the current incentive programs in the market, planned promotional programs and the normal incentive escalation incurred as the model year ages. The estimated incentive rates are reviewed monthly and changes to the planned rates are adjusted accordingly, thus impacting revenues. As discussed previously, there are a multitude of inputs affecting the calculation of the estimate for sales incentives, and an increase or decrease of any of these variables could have a significant effect on recorded revenues.

Warranty and Product Recalls

We establish reserves for product warranties at the time the sale is recognized. We issue various types of contractual product warranties under which we generally guarantee the performance of products delivered for a certain period or term. The reserve for product warranties includes the expected costs of warranty obligations imposed by law or contract, as well as the expected costs for policy coverage, recall actions and buyback commitments. Estimates are principally based on historical claims experience for our vehicles and, where little or no claims experience may exist, assumptions regarding the lifetime warranty costs of each vehicle. In addition, the number and magnitude of additional service actions expected to be approved, and policies related to additional service actions, are taken into consideration. Due to the uncertainty and potential volatility of these estimated factors, changes in our assumptions could materially affect our results of operations.

 

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We periodically initiate voluntary service and recall actions to address various customer satisfaction, safety and emissions issues related to vehicles we sell. Included in the reserve is the estimated cost of these service and recall actions. The estimated future costs of these actions are based primarily on historical claims experience for our vehicles. Estimates of the future costs of these actions are inevitably imprecise due to numerous uncertainties, including the enactment of new laws and regulations, the number of vehicles affected by a service or recall action and the nature of the corrective action. It is reasonably possible that the ultimate cost of these service and recall actions may require us to make expenditures in excess of established reserves over an extended period of time and in a range of amounts that cannot be reasonably estimated. Our estimate of warranty and additional service and recall action obligations is re-evaluated on a quarterly basis. Experience has shown that initial data for any given model year can be volatile; therefore, our process relies upon long-term historical averages until actual data is available. As actual experience becomes available, it is used to modify the historical averages to ensure that the forecast is within the range of likely outcomes. Resulting accruals are then compared with current spending rates to ensure that the balances are adequate to meet expected future obligations.

Accounting Standards Not Yet Adopted

Accounting standards not yet adopted are discussed in Note 2, Basis of Presentation and Recent Accounting Pronouncement, of our accompanying condensed consolidated financial statements and Note 3, Summary of Significant Accounting Policies, of our accompanying audited consolidated financial statements.

Non-GAAP Financial Measures

We monitor our operations through the use of several non-GAAP financial measures: Adjusted Net Income (Loss); Modified Operating Profit (Loss); Modified Earnings Before Interest, Taxes, Depreciation and Amortization, which we refer to as Modified EBITDA; Gross and Net Industrial Debt; as well as Free Cash Flow. We believe that these non-GAAP financial measures provide useful information about our operating results and enhance the overall assessment of our financial performance. They provide us with comparable measures of our financial performance based on normalized operational factors which then facilitate management’s ability to identify operational trends as well as make decisions regarding future spending, resource allocations and other operational decisions. These and similar measures are widely used in the industry in which we operate.

These financial measures may not be comparable to other similarly titled measures of other companies and are not an alternative to net income (loss) or income (loss) from operations as calculated and presented in accordance with U.S. GAAP. These measures should not be used as a substitute for any U.S. GAAP financial measures.

Adjusted Net Income (Loss)

Adjusted Net Income (Loss) is defined as net income (loss) excluding the impact of infrequent charges, which includes losses on extinguishment of debt. We use Adjusted Net Income (Loss) as a key indicator of the trends in our overall financial performance, excluding the impact of such infrequent charges.

Modified Operating Profit (Loss)

We measure Modified Operating Profit (Loss) to assess the performance of our core operations, establish operational goals and forecasts that are used to allocate resources, and evaluate our performance period over period. Modified Operating Profit (Loss) is computed starting with net income (loss), and then adjusting the amount to (i) add back income tax expense and exclude income tax benefits, (ii) add back net interest expense (excluding interest expense related to financing activities associated with a vehicle lease portfolio we refer to as Gold Key Lease), (iii) add back all pension, OPEB and other employee benefit costs other than service costs, (iv) add back restructuring expense and exclude restructuring income, (v) add back other financial expense, (vi) add back losses and exclude gains due to cumulative change in accounting principles, and (vii) add back certain other costs, charges and expenses, which include the changes factored into the calculation of Adjusted Net Income (Loss). In accordance with the terms of the UAW’s new four-year national collective bargaining

 

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agreement ratified in October 2011, our UAW represented employees’ annual profit sharing payments will be calculated based on our reported Modified Operating Profit. In addition, we also use performance targets based on Modified Operating Profit as a factor in our incentive compensation calculations for our non-represented employees.

Modified EBITDA

We measure the performance of our business using Modified EBITDA to eliminate the impact of items that we do not consider indicative of our core operating performance. We compute Modified EBITDA starting with net income (loss) adjusted to Modified Operating Profit (Loss) as described above, and then add back depreciation and amortization expense (excluding depreciation and amortization expense for vehicles held for lease). We believe that Modified EBITDA is useful to determine the operational profitability of our business, which we use as a basis for making decisions regarding future spending, budgeting, resource allocations and other operational decisions.

The reconciliation of net loss to Adjusted Net Income (Loss), Modified Operating Profit (Loss) and Modified EBITDA is set forth below:

 

    Successor          Predecessor A  
    Nine Months
Ended

September  30,
2011
    Nine Months
Ended

September  30,
2010
    Year Ended
December 31,
2010
    Period from
June 10, 2009 to
December 31,
2009
         Period from
January 1, 2009
to June 9,

2009
    Year Ended
December 31,
2008
 
   

(in millions of dollars)

         (in millions of dollars)  

Net loss

  $ (42   $ (453     $ (652     $ (3,785         $ (4,425     $ (16,844

Plus:

               

Loss on extinguishment of debt

    551                                          
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Adjusted Net Income (Loss)

  $ 509      $ (453     $ (652     $ (3,785         $ (4,425     $ (16,884
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Plus:

               

Income tax expense (benefit)

    148        107        139        29            (317     790   

Net interest expense(1)

    927        899        1,228        359            584        796   

Pension, OPEB and other employee benefit costs other than service costs:

               

Remeasurement loss on VEBA Trust Note and Membership Interests (2)

                         2,051                     

Interest expense and accretion on VEBA Trust Note

                         270                     

Other employee benefit costs

    (132     (38     (52     136            236        423   

Loss on Canadian HCT Settlement(3)

                  46                            

Restructuring expenses (income), net(4)

    13        47        48        34            (230     1,306   

Other financial expense, net

    2        3        6        11            6        82   

Impairment of goodwill(5)

                                           7,507   

Impairment of brand name intangible assets(6)

                                    844        2,857   

Impairment of property, plant and equipment(7)

                                    391          

Reorganization expense, net(8)

                                    843          

Certain troubled supplier concessions

                                           106   

Less:

               

Gain on NSC settlement(9)

                                    (684       

Gain on Daimler pension contribution(10)

                                    (600       
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Modified Operating Profit (Loss)

  $ 1,467      $ 565        $ 763        $ (895         $ (3,352     $ (2,977
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Plus:

               

Depreciation and amortization expense

    2,170        2,312        3,051        1,587            1,537        4,808   

Less:

               

Depreciation and amortization expense for vehicles held for lease

    (54     (298     (353     (154         (354     (1,581
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Modified EBITDA

  $ 3,583      $ 2,579        $ 3,461        $ 538            $ (2,169     $ 250   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

 

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(1) Interest expense for the period from January 1, 2009 to June 9, 2009 excludes $57 million of contractual interest expense on debt subject to compromise. Refer to Note 4, Interest Expense, of Old Carco’s accompanying audited consolidated financial statements for additional information.

 

(2) As a result of the December 31, 2009 remeasurement, the OPEB obligation increased primarily due to a change in discount rate, resulting in a loss. Our policy is to immediately recognize actuarial gains or losses for OPEB plans that are short-term in nature and under which our obligation is capped. Therefore, we immediately recognized a loss of $2,051 million in OPEB net periodic benefit costs due to increases in the fair values of the VEBA Trust Note and Membership Interests issued to the VEBA Trust of $1,540 million and $511 million, respectively, from June 10, 2009 to December 31, 2009.

 

(3) In August 2010, Chrysler Canada entered into a settlement agreement with the CAW to permanently transfer the responsibility for providing postretirement health care benefits to the Covered Group to a new retiree plan. The new retiree plan will be funded by the HCT. During the year ended December 31, 2010, we recognized a $46 million loss as a result of the Canadian HCT Settlement Agreement.

 

(4) During 2008, Old Carco developed a multi-year plan, RTP III Plan, to further restructure its business in order to reduce its cost structure in response to continued deterioration of its business. Charges recorded for the RTP III Plan included costs related to workforce reductions, including a curtailment loss as a result of the salaried and hourly workforce reductions, as well as supplier contract cancellation costs and other costs. Restructuring income, net for the period from January 1, 2009 to June 9, 2009 was primarily due to refinements to existing supplier contract cancellation costs and workforce reduction reserves recorded in connection with Old Carco’s RTP I, II and III Plans.

 

(5) In 2008, Old Carco recorded a goodwill impairment charge of $7,507 million, primarily as a result of significant declines in its projected financial results considering the deteriorating economic conditions and the weakening U.S. automotive market at that time.

 

(6) Old Carco recorded indefinite-lived intangible asset impairment charges of $844 million and $2,857 million during the period from January 1, 2009 to June 9, 2009 and the year ended December 31, 2008, respectively, related to its brand names. The impairments were primarily a result of the significant deterioration in Old Carco’s revenues, the ongoing volatility in the U.S. economy, in general, and in the automotive industry in particular, and a significant decline in its projected production volumes and revenues considering the market conditions at that time.

 

(7) During the period from January 1, 2009 to June 9, 2009, Old Carco recorded a property, plant and equipment impairment charge of $391 million on the long-lived assets which were not acquired by us. The impairment was primarily the result of the Old Carco bankruptcy cases, continued deterioration of Old Carco’s revenues, ongoing volatility in the U.S. economy, in general, and in the automotive industry in particular, as well as taking into consideration the expected proceeds to be received upon liquidation of the assets.

 

(8) In connection with Old Carco’s bankruptcy filings, Old Carco recognized $843 million of net losses from the settlement of pre-petition liabilities, provisions for losses resulting from the reorganization and restructuring of the business, as well as professional fees directly related to the process of reorganizing Old Carco and its principal domestic subsidiaries under Chapter 11 of the U.S. Bankruptcy Code. These losses were partially off-set by a gain on extinguishment of certain financial liabilities and accrued interest. On April 30, 2010, Old Carco transferred its remaining assets and liabilities to a liquidating trust and was dissolved in accordance with a plan of liquidation approved by the bankruptcy court.

 

(9) On March 31, 2009, Daimler transferred its ownership of 23 national sales companies, or NSCs, to Chrysler Holding, which simultaneously transferred the NSCs to Old Carco. Old Carco paid Daimler $99 million in exchange for the settlement of obligations related to the NSCs and other international obligations, resulting in a net gain of $684 million.

 

(10) On June 5, 2009, Old Carco, Chrysler Holding, Cerberus, Daimler and the Pension Benefit Guaranty Corporation entered into a binding agreement settling various matters. Under the agreement, Daimler agreed to make three equal annual cash payments to Old Carco totaling $600 million, which were to be used to fund contributions into Old Carco’s U.S. pension plans in 2009, 2010 and 2011. This receivable and certain pension plans were subsequently transferred to us as a result of the 363 Transaction.

 

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The table below shows a reconciliation of Modified EBITDA as currently defined and reported to Modified EBITDA as previously defined and reported by Old Carco in its accompanying audited consolidated financial statements as of June 9, 2009 and December 31, 2008 and for the period from January 1, 2009 to June 9, 2009 and for the year ended December 31, 2008.

 

     Predecessor A  
     Period from
January 1, 2009 to
June 9, 2009
    Year Ended
December 31,
2008
 
     (in millions of dollars)  

Modified EBITDA

     $ (2,169     $ 250   

Adjustment to include:

    

Certain employee benefit costs

     (236     (423
  

 

 

   

 

 

 

Modified EBITDA as previously reported

     $ (2,405     $ (173
  

 

 

   

 

 

 

Gross and Net Industrial Debt

We compute Gross Industrial Debt as total financial liabilities less Gold Key Lease financing obligations. Gold Key Lease financing obligations are primarily satisfied out of collections from the underlying securitized assets and out of collections from operating leases and proceeds from the sale of leased vehicles.

We deduct our cash, cash equivalents and marketable securities from Gross Industrial Debt to compute Net Industrial Debt. We use Net Industrial Debt as a measure of our financial leverage and believe it is useful to others in evaluating our financial leverage.

As a result of the 363 Transaction, our capital structure is not comparable to Old Carco’s. As a result, the non-GAAP measures for our Gross and Net Industrial Debt are not comparable to Predecessor A.

The following is a reconciliation of financial liabilities to Gross and Net Industrial Debt:

 

     Successor  
    

September 30,
2011

     December 31,
2010
     December 31,
2009
 
    

(in millions of dollars)

 

Financial liabilities(1)

   $ 12,384         $ 13,731         $ 9,551   

Less: Gold Key Lease obligations

        

Short-term asset-backed notes payable

     62         130         922   

Long-term asset-backed notes payable

             43         291   

Gold Key Lease credit facility

             438         953   
  

 

 

    

 

 

    

 

 

 

Gross industrial debt

   $ 12,322         $ 13,120         $ 7,385   

Less: cash, cash equivalents and marketable securities

     9,454         7,347         5,877   
  

 

 

    

 

 

    

 

 

 

Net Industrial Debt

   $ 2,868         $ 5,773         $ 1,508   
  

 

 

    

 

 

    

 

 

 

 

(1) Refer to Note 8, Financial Liabilities, of our accompanying condensed consolidated financial statements and Note 12, Financial Liabilities, of our accompanying audited consolidated financial statements for additional information regarding our financial liabilities.

Free Cash Flow

Free Cash Flow is defined as cash flows from operating and investing activities, excluding any debt related investing activities, adjusted for financing activities related to Gold Key Lease financing. Free Cash Flow is

 

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presented because we believe that it is used by analysts and other parties in evaluating the Company. However, Free Cash Flow does not necessarily represent cash available for discretionary activities, as certain debt obligations and capital lease payments must be funded out of Free Cash Flow. We also use performance targets based on Free Cash Flow as a factor in our incentive compensation calculations for our non-represented employees. Free Cash Flow should not be considered as an alternative to, or substitute for, net change in cash and cash equivalents. We believe it is important to view Free Cash Flow as a complement to our entire consolidated statements of cash flows.

The following is a reconciliation of Net Cash Provided by (Used In) Operating and Investing Activities to Free Cash Flow:

 

    Successor  
    Nine Months
Ended
September 30,
2011
    Nine Months
Ended
September 30,
2010
    Year Ended
December 31,
2010
    Period from
June 10, 2009 to
December 31,
2009
 
   

(in millions of dollars)

 

Net cash provided by operating activities

  $ 3,537      $ 4,227        $ 4,195        $ 2,335   

Net cash (used in) provided by investing activities

    (874     (652     (1,167     250   

Investing activities excluded from Free Cash Flow:

       

Proceeds from USDART(1)

    (96                   (500

Change in loans and note receivables

    (4     (37     (36     (7

Financing activities included in Free Cash Flow:

       

Proceeds from Gold Key Lease
financing

           266        266          

Repayments of Gold Key Lease
financing

    (562     (1,633     (1,903     (1,248
 

 

 

   

 

 

   

 

 

   

 

 

 

Free Cash Flow