TENNECO AUTOMOTIVE INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-12387
TENNECO AUTOMOTIVE INC.
(Exact name of registrant as specified in its charter)

DELAWARE 76-0515284
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)

500 NORTH FIELD DRIVE, LAKE FOREST, ILLINOIS 60045
(Address of principal executive offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (847) 482-5000

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]

Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.

Common Stock, par value $.01 per share: 40,058,837 shares as of July 31,
2002.

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TABLE OF CONTENTS

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* No response to this item is included herein for the reason that it is
inapplicable or the answer to such item is negative.

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Quarterly Report on Form 10-Q contains forward-looking statements
regarding, among other things, our prospects and business strategies. The words
"may," "will," "believes," "should," "could," "plans," "expects," "anticipate,"
"intends," "estimates," and similar expressions (and variations thereof),
identify these forward-looking statements. Although we believe that the
expectations reflected in these forward-looking statements are based on
reasonable assumptions, these expectations may not prove to be correct. Because
these forward-looking statements are also subject to risks and uncertainties,
actual results may differ materially from the expectations expressed in the
forward-looking statements. Important factors that could cause actual results to
differ materially from the expectations reflected in the forward-looking
statements include:

- general economic, business and market conditions;

- the impact of consolidation among automotive parts suppliers and
customers on our ability to compete;

- operating hazards associated with our business;

- changes in consumer demand and preferences for automobiles and automotive
parts, as well as changes in automobile manufacturers' actual and
forecasted requirements for our products;

- changes in distribution channels or competitive conditions in the markets
and countries where we operate, including the impact of changes in
distribution channels for aftermarket products on our ability to increase
or maintain aftermarket sales;

- cyclicality of automotive production and sales;

- material substitution;

2

- labor disruptions at our facilities or at any of our significant
customers or suppliers;

- economic, exchange rate and political conditions in the foreign countries
where we operate or sell our products;

- customer acceptance of new products;

- new technologies that reduce the demand for certain of our products or
otherwise render them obsolete;

- our ability to realize our business strategy of improving operating
performance;

- capital availability or costs, including changes in interest rates,
market perceptions of the industries in which we operate or ratings of
securities;

- changes by the Financial Accounting Standards Board or the Securities and
Exchange Commission of authoritative generally accepted accounting
principles or policies;

- the impact of changes in and compliance with laws and regulations,
including environmental laws and regulations, and environmental
liabilities in excess of the amount reserved;

- the impact of product warranty claims and liabilities in respect thereof
in excess of the amount reserved;

- terrorism, acts of war and similar events, and their resultant impact on
economic and political conditions; and

- the occurrence or non-occurrence of other circumstances beyond our
control.

3

PART I.

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

INDEPENDENT ACCOUNTANTS' REPORT

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
TENNECO AUTOMOTIVE INC.

We have reviewed the accompanying consolidated balance sheet of Tenneco
Automotive Inc. and consolidated subsidiaries as of June 30, 2002, and the
related consolidated statements of income (loss) and comprehensive income (loss)
for the three-month and six-month periods then ended, and the consolidated
statements of cash flows and changes in shareholders' equity for the six-month
period ended June 30, 2002. These financial statements are the responsibility of
Tenneco Automotive Inc.'s management.

We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.

Based on our review, we are not aware of any material modifications that
should be made to such consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.

DELOITTE & TOUCHE LLP
Chicago, Illinois
July 22, 2002

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

STATEMENTS OF INCOME (LOSS)
(UNAUDITED)

The accompanying notes to financial statements are an integral part of these
statements of income (loss).
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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

BALANCE SHEETS
(UNAUDITED)

The accompanying notes to financial statements are an integral part of
these balance sheets.

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

STATEMENTS OF CASH FLOWS
(UNAUDITED)

NOTE: Cash and temporary cash investments include highly liquid investments with
a maturity of three months or less at the date of purchase.

The accompanying notes to financial statements are an integral part of
these statements of cash flows.
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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)

The accompanying notes to financial statements are an integral part of
these statements of changes in shareholders' equity.
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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)

The accompanying notes to financial statements are an integral part
of these statements of comprehensive income (loss).
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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)

(1) As you read the accompanying financial statements and Management's
Discussion and Analysis you should also read our Annual Report on Form 10-K for
the year ended December 31, 2001.

In our opinion, the accompanying unaudited financial statements contain all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly Tenneco's financial position, results of operations, cash flows, changes
in shareholders' equity, and comprehensive income for the periods indicated. The
unaudited interim consolidated financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles.

Our consolidated financial statements include all majority-owned
subsidiaries. We carry investments in 20 percent to 50 percent owned companies
at cost plus equity in undistributed earnings and cumulative translation
adjustments from date of acquisition since we have the ability to exert
significant influence over operating and financial policies.

We have reclassified prior year's financial statements where appropriate to
conform to 2002 presentations.

(2) Over the past several years we have adopted plans to restructure
portions of our operations. These plans were approved by the Board of Directors
and were designed to reduce operational and administrative overhead costs
throughout the business. We recorded charges to income for costs related to
these plans that do not benefit future activities in the period in which the
plans are finalized and approved, while actions necessary to affect these
restructuring plans occur over future periods in accordance with established
plans.

In the fourth quarter of 2000, our Board of Directors approved a
restructuring plan to reduce administrative and operational overhead costs. We
recorded, in the fourth quarter of 2000, a pre-tax charge related to the plan of
$46 million, $32 million after tax, or $.92 per diluted common share. Within the
statement of income, $13 million of the pre-tax charge is reflected in cost of
sales, while $33 million is included in selling, general, and administrative
expenses. The charge is comprised of $24 million of severance and related costs
for salaried employment reductions worldwide and $22 million for the reduction
of manufacturing and distribution capacity in response to long-term market
trends. The 2000 plan involved closing a North American aftermarket exhaust
distribution facility and a ride control manufacturing plant in our Asian
market, as well as the consolidation of some exhaust manufacturing facilities in
Europe. In addition, the plan involves the elimination of 700 positions,
including temporary employees. We wrote down the assets at the locations to be
closed to their estimated fair value, less costs to sell. We estimated the
market value of buildings using external real estate appraisals. As a result of
the single purpose nature of the machinery and equipment to be disposed of, fair
value was estimated to be scrap value less costs to dispose in most cases. We do
not expect that cash proceeds on the sale of these assets will be significant.
As of June 30, 2002, 610 employees have been terminated under the 2000 plan
primarily in North America and Europe. Additionally, 57 temporary employees have
been terminated. All restructuring actions are being completed in accordance
with our established plan. We expect to complete all restructuring activities
related to this plan by the end of the third quarter of 2002. We are conducting
all workforce reductions in compliance with all legal and contractual
requirements including obligations to consult with worker committees, union
representatives and others.

Also in the fourth quarter of 2000, we recorded other charges of $15
million, $10 million after tax, or $.29 per diluted common share. These charges
related to a strategic decision to reduce some of the aftermarket parts we offer
and to relocation expenses incurred associated with the restructuring plans. The
aftermarket parts were written down to their estimated scrap value less costs to
sell.

In the first quarter of 2001, our Board of Directors approved a
restructuring plan in response to increasingly difficult industry conditions. On
January 31, 2001, we announced plans to eliminate 405 salaried positions
worldwide. We recorded pre-tax charges related to this restructuring of $11
million, $8 million after

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

tax, or $.21 per diluted common share. Within the statement of income, $2
million of the pre-tax charge is reflected in cost of sales, while $9 million is
included in selling, general, and administrative expenses. These charges are
comprised of $8 million for severance and related costs for salaried employment
reductions worldwide and $3 million for costs related to closing a testing
facility in North America. As of June 30, 2002, we have eliminated 329 positions
in connection with the first quarter 2001 plan. We expect to complete these
restructuring activities in the third quarter of 2002. We are conducting all
workforce reductions in compliance with all legal and contractual requirements
including obligations to consult with worker committees, union representatives
and others.

In the second quarter of 2001, our Board of Directors approved a separate
restructuring plan related to closing a North American ride control production
line. We recorded pre-tax charges related to the plan of $8 million, $6 million
after tax, or $.16 per diluted common share. Within the statement of income, the
$8 million charge is included in cost of sales. We wrote down the assets to
their fair market value, less costs to sell. As a result of the single purpose
nature of the machinery and equipment to be disposed of, fair value was
estimated to be scrap value less costs to dispose. Cash proceeds from the sale
of these assets were not significant. All restructuring activities related to
this plan have been completed.

In the fourth quarter of 2001, our Board of Directors approved a
restructuring plan, the first phase of a project known as Project Genesis,
designed to lower our fixed costs, improve efficiency and utilization, and
better optimize our global footprint. The first phase of Project Genesis
involves closing eight facilities, improving the process flow and efficiency
through value mapping and plant arrangement at 20 facilities, relocating
production among facilities, and centralizing some functional areas. The
facilities include an aftermarket plant and an aftermarket distribution
operation in Europe, an engineering center in Europe, one building at an
emissions control plant complex in North America, a technology facility in North
America, an exhaust manufacturing facility in North America, and our
London-based treasury office. We expect to eliminate 900 employees as a result
of these actions. In the fourth quarter of 2001, we recorded pre-tax charges
related to Project Genesis of $27 million. Within the statement of income, $23
million of the pre-tax charge is reflected in cost of sales, while $4 million is
included in selling, general and administrative expenses. These charges are
comprised of $18 million in severance and $9 million for equipment lease
cancellation, asset impairment, and other restructuring costs to close the eight
facilities. We wrote down the assets at locations to be closed to their
estimated fair value, less costs to sell. We estimated the market value of
buildings using external real estate appraisals. As a result of the single
purpose nature of the machinery and equipment to be disposed of, fair value was
estimated to be scrap value less costs to dispose in most cases. We also
recorded a pre-tax charge of $4 million in cost of sales related to a strategic
decision to adjust some product offerings and our customer supply strategy in
the European aftermarket. The aftermarket parts were written down to their
estimated scrap value, less cost to sell. Finally, we also incurred $1 million
in other restructuring related costs during the fourth quarter for the value
mapping and rearrangement of one of our emissions control plants in North
America. Since these costs relate to ongoing operations, they could not be
accrued as part of the restructuring charge. The total of all these
restructuring and other costs recorded in the fourth quarter of 2001 was $32
million before tax, $31 million after tax, or $.81 per diluted common share. As
of June 30, 2002, we have eliminated 87 positions in connection with the first
phase of Project Genesis. We expect to complete all restructuring activities
related to the first phase of Project Genesis by early 2003. We are conducting
all workforce reductions in compliance with all legal and contractual
requirements including obligations to consult with worker committees, union
representatives and others. In addition to the fourth quarter 2001 charges, we
are incurring other costs during 2002 for moving and rearrangement costs related
to Project Genesis that could not be accrued as part of the restructuring
charge. We estimate these costs will be about $15 million in aggregate, and they
are being expensed as they are incurred.

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

During the first six months of 2002, we incurred $3 million for other
restructuring related costs and expenses such as rearrangement and moving costs
that could not be accrued as part of our earlier restructuring reserves.

When complete, we expect that the series of restructuring actions initiated
in the fourth quarter of 2001 will generate annualized savings of $30 million.

Amounts related to activities that are part of the restructuring plans are
as follows:

In the second quarter of 2002, we sold a manufacturing facility in the U.K.
that we closed in an earlier restructuring plan. Included in Charged to Asset
Accounts in the preceding table is an adjustment to the assumptions made in the
recording of the U.K. facility's restructuring reserve. The proceeds of $17
million exceeded our original estimates of the market value of the property.
Consequently, after the adjustment, we recorded a pre-tax gain of $11 million on
the sale in the second quarter. This gain is shown in the income statement as a
gain on sale of assets.

Under the terms of an amendment to our senior credit agreement that took
effect on March 13, 2002, we are allowed to exclude up to $60 million of cash
charges and expenses, before taxes, related to potential future cost reduction
initiatives over the 2002-2004 period from the calculation of the financial
covenant ratios we are required to maintain under our senior credit agreement.
In addition to the announced actions, we continue to evaluate additional
opportunities, including additional phases of Project Genesis, to initiate
actions that will reduce our costs through implementing the most appropriate and
efficient logistics, distribution, and manufacturing footprint for the future.
There can be no assurances however, that we will undertake additional phases of
Project Genesis or other additional restructuring actions. Actions that we take,
if any, will require the approval of our Board of Directors and, if the costs of
the plans exceed the amount previously approved by our senior lenders, could
require approval by our senior lenders. See "Liquidity and Capital Resources."
We plan to conduct any workforce reductions that result in compliance with all
legal and contractual requirements including obligations to consult with worker
committees, union representatives and others.

(3) We are subject to a variety of environmental and pollution control laws
and regulations in all jurisdictions in which we operate. We expense or
capitalize, as appropriate, expenditures for ongoing compliance with
environmental regulations that relate to current operations. We expense
expenditures that relate to an existing condition caused by past operations and
that do not contribute to current or future revenue generation. We record
liabilities when environmental assessments indicate that remedial efforts are
probable and the costs can be reasonably estimated. Estimates of the liability
are based upon currently available facts, existing technology, and presently
enacted laws and regulations taking into consideration the likely effects of
inflation and other societal and economic factors. We consider all available
evidence including prior experience in remediation of contaminated sites, other
companies' cleanup experiences and data released by the United States
Environmental Protection Agency or other organizations. These estimated
liabilities are subject to revision in future periods based on actual costs or
new information. Where future cash flows are fixed or reliably determinable, we
have discounted the liabilities. All other environmental liabilities are
recorded at their undiscounted amounts. We evaluate recoveries separately from
the liability and, when they

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

are assured, recoveries are recorded and reported separately from the associated
liability in our financial statements.

As of June 30, 2002, we continue to be designated as a potentially
responsible party in two Superfund sites. We have estimated our share of the
remediation costs for these sites to be less than $1 million in the aggregate.
In addition to the Superfund sites, we may have the obligation to remediate
current or former facilities, and we estimate our share of remediation costs at
these facilities to be approximately $15 million. For both the Superfund sites
and the current and former facilities, we have established reserves that we
believe are adequate for these costs. Although we believe our estimates of
remediation costs are reasonable and are based on the latest available
information, the cleanup costs are estimates and are subject to revision, as
more information becomes available about the extent of remediation required. At
some sites, we expect that other parties will contribute to the remediation
costs. In addition, at the Superfund sites, the Comprehensive Environmental
Response, Compensation and Liability Act provides that our liability could be
joint and several, meaning that we could be required to pay in excess of our
share of remediation costs. Our understanding of the financial strength of other
potentially responsible parties at the Superfund sites, and of other liable
parties at our current and former facilities, has been considered, where
appropriate, in our determination of our estimated liability.

As we previously disclosed, we undertook a third-party evaluation of
estimated environmental remediation costs at one of our facilities beginning in
2000. The evaluation was initiated as a result of testing that indicated the
potential underground migration of some contaminants beyond our facility
property. We completed and analyzed the results of our evaluation of
contamination and migration from that facility. We initially increased the
reserve by $3 million in the fourth quarter of 2000 related to on-site
remediation activities and $5 million in the first quarter of 2001 following
evaluation of needed off-site remediation activities. However, after further
investigation of alternative remediation technologies, we were able to identify
a more efficient technology and thereby reduce the reserve by $4 million in the
fourth quarter of 2001.

We believe that any potential costs associated with our current status as a
potentially responsible party in the Superfund sites, or as a liable party at
our current or former facilities, will not be material to our results of
operations or consolidated financial position.

As previously disclosed, from time to time we are subject to product
warranty claims whereby we are required to bear costs of repair or replacement
of certain of our products. Warranty claims may range from individual customer
claims to full recalls of all products in the field. In the second quarter 2002,
based on currently available facts and data, we increased our warranty reserve
in the amount of $1 million for recently identified warranty issues. We are
continuing to investigate and pursue commercial and other resolutions of these
issues. We presently believe that it is reasonably possible that we could incur
additional costs and charges related to these issues after the second quarter in
amounts that could be material to our income statement in the periods when we
are required to record the costs and charges. We cannot predict with certainty
the ultimate amount or timing of any such future costs or charges. However, we
believe that these amounts will not be material to our consolidated financial
position or impact our ability to meet our debt covenants.

We also from time to time are involved in legal proceedings or claims that
are incidental to the operation of our businesses. Some of these proceedings or
claims allege damages against us relating to environmental liabilities
(including toxic tort, property damage and remediation), intellectual property
matters (including patent, trademark and copyright infringement, and licensing
disputes), personal injury claims (including injuries due to product failure,
design or warnings issues, asbestos exposure, or other product liability related
matters), employment matters, and commercial or contractual disputes, sometimes
related to acquisitions or divestitures. We will continue to vigorously defend
ourself against all of these claims. Although the ultimate outcome of any legal
matter cannot be predicted with certainty, based on present information,
including our
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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

assessment of the merits of the particular claim, we do not expect that these
legal proceedings or claims will have any material adverse impact on our
consolidated financial condition or results of operations.

During the second quarter of 2002, we reached an agreement with an OE
customer to recover our investment in development costs and related equipment,
as well as amounts owed to some of our suppliers, for a platform cancelled by
the customer. We collected $30 million, net of the amounts we owed to suppliers,
during the second quarter pursuant to this agreement. The agreement had no
effect on our results of operations.

(4) In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes new
accounting and reporting standards requiring that all derivative instruments,
including derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at their fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting treatment. This statement cannot
be applied retroactively and is effective for all fiscal years beginning after
June 15, 2000. We adopted this standard, as amended by SFAS No. 138, effective
January 1, 2001 and it did not have a significant impact on our financial
position or results of operations.

In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS No. 142 changes the accounting for purchased
goodwill from an amortization method to an impairment-only approach. Therefore
amortization of all purchased goodwill, including amortization of goodwill
recorded in past business combinations, ceased upon adoption of SFAS No. 142 in
January 2002. SFAS No. 142 was effective for fiscal years beginning after
December 15, 2001. At the end of the second quarter of 2002, the balance of
unamortized goodwill was $411 million. Goodwill was amortized at the rate of
approximately $17 million each year prior to adopting the new standard. Under
the transitional provisions of SFAS No. 142 we have performed step one of a
two-step impairment analysis. The fair value of our reporting units used in
determining any potential goodwill impairment was computed using the present
value of expected future cash flows. As a result of this analysis, we have
determined that we will be required to record a charge to reflect an impairment
of goodwill associated with certain of these reporting units. The second step of
the impairment analysis requires us to allocate the fair value of these
reporting units to the assets and liabilities of the reporting units in order to
determine if there has been an impairment of the goodwill. Based upon the
results of the second step of the analysis, which we expect to complete during
the third quarter of 2002, we expect to record an impairment charge of
approximately $175 million to $220 million, net of tax. Any impairment loss that
results from the analysis will be recorded as a cumulative effect of a change in
accounting principles. We will also be required to reflect this charge in our
results for the first quarter of 2002.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. We will be required to adopt the new standard by January 1,
2003. We are currently evaluating the effect that this statement may have on our
financial position and results of operations, but do not believe it will have a
material impact.

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses
recognition, presentation and disclosure of impairment or disposal of long-lived
assets. SFAS No. 144 supersedes SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Assets to be Disposed of" and Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations--Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and
Infrequently Occurring Events and Transactions, for the Disposal of a Segment of
a Business." SFAS No. 144 was effective for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years, with early
adoption encouraged. The impact of adopting SFAS No. 144 did not have a material
impact on our financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections." SFAS No. 145 makes changes to several areas, including the
classification of gains and losses from extinguishment of debt and accounting
for certain lease modifications. The statement is effective for fiscal years
beginning after May 15, 2002. We will be required to adopt the new statement by
January 1, 2003. We do not believe that this statement will have a material
impact on our financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 changes the
definition of the date at which a liability exists for exit or disposal
activities also referred to as restructuring activities. Previously, we
recognized a liability for restructuring activities when we committed to a plan
of restructuring and announced this plan to the employees. The new statement
will generally require that these costs be recognized at a later date and over
time, rather than in a single charge. We will be required to apply the new
standard prospectively to new exit or disposal activities initiated after
December 31, 2002. We are currently evaluating the impact that this new
statement may have on our financial position and results of operations.

(5) We entered into an agreement during the third quarter of 2000 to sell
an interest in some of our trade accounts receivable to a third party. Under
this agreement, as well as individual agreements with third parties in Europe,
we had sold accounts receivable of $140 million and $149 million at June 30,
2002 and 2001, respectively. We recognized a loss of $1 million in the six
months ended June 30, 2002, on these sales of trade accounts, representing the
discount from book values at which these receivables were sold to the third
party. The discount rate varies based on funding cost incurred by the third
party, and it averaged 3.3 percent during the time period in 2002 when we sold
receivables. We retained ownership of the remaining interest in the pool of
receivables not sold to the third party. We valued this retained interest based
on the recoverable value of the receivable pool, which approximated book value.

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

(6) Earnings (loss) per share of common stock outstanding were computed as
follows:

(7) We are a global manufacturer with two geographic reportable segments:
North America and Europe. Each segment manufactures and distributes ride control
and emission control products primarily for the automotive industry. We have not
aggregated individual operating segments within these reportable segments. We
evaluate segment performance based primarily on income before interest expense,
income taxes, and minority interest. Products are transferred between segments
and geographic areas on a basis intended to reflect as nearly as possible the
"market value" of the products.

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

The following table summarizes certain Tenneco segment information:

(8) Supplemental guarantor condensed financial statements are presented
below:

Basis of Presentation

We issued senior subordinated notes due 2009 as a component of a plan to
realign our debt prior to the spin-off. All of our existing and future material
domestic wholly owned subsidiaries (which comprise the Guarantor Subsidiaries)
fully and unconditionally guarantee the notes on a joint and several basis. We
have not presented separate financial statements and other disclosures
concerning each of the Guarantor Subsidiaries because management has determined
that such information is not material to the holders of the notes. Therefore,
the Guarantor Subsidiaries are combined in the presentation below.

These condensed consolidating financial statements are presented on the
equity method. Under this method our investments are recorded at cost and
adjusted for our ownership share of a subsidiary's cumulative results of
operations, capital contributions and distributions, and other equity changes.
You should read the

17

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

condensed consolidating financial statements of the Guarantor Subsidiaries in
connection with our consolidated financial statements and related notes of which
this note is an integral part.

Distributions

There are no significant restrictions on the ability of the Guarantor
Subsidiaries to make distributions to us.

18

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

STATEMENT OF INCOME (LOSS)

19

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

STATEMENT OF INCOME (LOSS)

20

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

STATEMENT OF INCOME (LOSS)

21

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

STATEMENT OF INCOME (LOSS)

22

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

BALANCE SHEET

23

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

BALANCE SHEET

24

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

STATEMENT OF CASH FLOWS

NOTE: Cash and temporary cash investments include highly liquid investments with
a maturity of three months or less at the date of purchase.

25

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

STATEMENT OF CASH FLOWS

NOTE: Cash and temporary cash investments include highly liquid investments with
a maturity of three months or less at the date of purchase.

(The preceding notes are an integral part of the foregoing financial
statements.)
26

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS FROM OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001

NET SALES AND OPERATING REVENUES

Revenues from our North American operations increased $46 million in the
second quarter of 2002 compared to last year's second quarter reflecting higher
sales generated from both the original equipment and aftermarket businesses.
Total North American OE revenues increased 12 percent to $391 million in the
second quarter of this year due primarily to increased volumes and catalytic
converter revenues that are passed through to our customers. These
"pass-through" catalytic converter sales occur when, at the direction of our OE
customers, we purchase catalytic converters or components from suppliers, use
them in our manufacturing process, and sell them as part of the completed
system. OE exhaust revenues were up 12 percent in the quarter. OE ride control
revenues increased 11 percent, driven by increased volumes in both the light
vehicle and heavy-duty market. Total OE revenues, excluding $90 million of pass
through sales, increased 9 percent in the second quarter, while the North
American light vehicle production increased approximately 8 percent from the
second quarter a year ago. Our revenue increase was greater than the build rate
as a result of new platform production, on which we are a supplier, and which
was delayed in the first quarter, ramping up and outpacing the overall build
rate. Aftermarket revenues for North America were $148 million in the second
quarter of 2002, representing an increase of 4 percent compared to the same
period in the prior year. Aftermarket ride control revenues increased $5 million
in the second quarter, primarily as a result of new customer additions in the
second half of last year and the first quarter of 2002. Aftermarket exhaust
revenues remained relatively flat with the prior year. We still see a continued
market decline in the exhaust business. Price increases implemented in 2001 and
a shift toward premium products, primarily in ride control, positively impacted
revenues in the second quarter by $3 million. We expect to maintain our majority
share of the North American ride control aftermarket, which was 58 percent at
the end of the first quarter of 2002.

Our European segment's revenues decreased $26 million or 7 percent in the
second quarter of 2002 compared to last year's second quarter. Overall European
OE industry production levels were flat from last year. Our total OE revenues
were $231 million for the quarter. OE exhaust revenues declined 14 percent to
$182 million from $212 million the prior year. Excluding a $25 million decrease
in pass-through sales and a $12 million benefit from currency appreciation, OE
exhaust revenues declined 13 percent due primarily to timing issues between
several expiring programs and the launch of their successors. OE ride control
revenues increased 4 percent to $49 million, from $47 million a year ago.
Excluding a $4 million benefit from currency appreciation, OE ride control
revenues declined 4 percent. European aftermarket sales were $90 million in the
second quarter of this year compared to $88 million in last year's second
quarter. Excluding a $7 million benefit from currency appreciation, aftermarket
sales were down 6 percent. This decline resulted from the continued decline in
exhaust replacement rates due primarily to the increasing use of stainless
steel. This decline was partially offset by the launch of Reflex(TM), our
premium ride control product, in the second quarter.

Revenues from our operations in the rest of the world, specifically South
America, Australia and Asia, increased $3 million to $88 million in the second
quarter of 2002 as compared to $85 million in the prior year. Asia revenues
increased by $8 million primarily driven by pass-through sales to OE customers.
The continued poor economic conditions in South America led to $9 million
decrease in revenues year over year. The net currency impact to our rest of
world operations was a $6 million decrease.

27

EARNINGS BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST ("EBIT")

We reported EBIT of $71 million for the second quarter of 2002, compared to
$47 million for the same quarter last year. Reported results include
restructuring and other charges and gains that have an effect on comparability
of EBIT results between the years. To provide enhanced comparability, we have
separately identified these costs, charges and gains by segment in the following
table.

In the preceding table, amounts reported as restructuring and other charges
for 2002 include $2 million for other restructuring related costs and expenses,
such as relocation and moving costs, that could not be accrued as part of our
restructuring reserve. Amounts reported as restructuring and other charges for
2001 include $8 million related to the second quarter 2001 restructuring plan
and $2 million for other restructuring related costs and expenses, such as
relocation and moving costs, that could not be accrued as part of our
restructuring reserve. For further details of these costs and the gain on the
sale of our York, U.K. facility shown above, see the sections listed as
"Restructuring Charges" and "Liquidity and Capital Resources -- Cash Flows",
later in this Management's Discussion and Analysis. The following discussion of
EBIT results compares the columns titled "Operating Unit Results" in the table
above.

EBIT for North American operations increased to $54 million in the second
quarter 2002 from $30 million one year ago as higher sales volumes in both our
OE and aftermarket segments improved our earnings in the second quarter of the
year. The elimination of goodwill amortization, discussed later in this
Management's Discussion and Analysis under the section "Changes in Accounting
Principles", contributed $3 million to the EBIT increase additionally,
manufacturing efficiencies and lower spending in selling, general and
administrative costs year over year also contributed to OE profitability. The
North American aftermarket was primarily driven by strong ride control volumes
from both new and existing customers that generated approximately $3 million in
increased EBIT in the quarter. Pricing increases instituted in 2001 increased
EBIT by $3 million. Manufacturing efficiencies as a result of increased volumes
increased also increased EBIT. Increased promotional spending and higher
changeover costs to convert new customers recorded as selling, general and
administrative expense partially offset these increases.

Our European segment's EBIT declined to $1 million in the second quarter of
2002 down from $22 million the previous year. Volume decreases and related
operating inefficiencies in both the OE and aftermarket operations negatively
impacted EBIT by $18 million. European EBIT for the second quarter was also
reduced by $1 million due to an increase in reserves for recently identified
warranty issues. See "Environmental and Other Matters". The elimination of
goodwill amortization partially offset these decreases by $1 million. Currency
was not a significant EBIT driver because the positive impact of the
strengthening

28

Euro was offset by negative currency movements relating to our supply chain
activity between South Africa and Germany.

EBIT for the company's operations in the rest of the world increased by $2
million in the second quarter of 2002 compared to the same quarter a year ago.
Improved operating performance in South America more than offset the impact of a
labor dispute at our Australian emission control facility in late April of 2002.

EBIT AS A PERCENTAGE OF REVENUE

The following table shows EBIT as a percentage of revenue by segment. The
EBIT percentage is calculated after excluding the "restructuring and other
charges" and gain on the sale of our York, U.K. facility described previously.

In North America, EBIT as a percentage of revenue increased by 4 percent.
This increase was driven by stronger OE and aftermarket volumes and price
increases in the aftermarket. Additionally, manufacturing efficiencies and the
elimination of goodwill contributed to the increase. In Europe, EBIT margins
declined in the second quarter due primarily to significant decreases in both OE
and aftermarket volumes and volume related manufacturing inefficiencies. EBIT as
a percentage of revenue for the rest of the world increased two percent in the
second quarter of this year as a result of improved operating performance.

INTEREST EXPENSE, NET OF INTEREST CAPITALIZED

We reported interest expense of $36 million during the second quarter of
2002 compared to $43 million during the same period in 2001. The decrease in
total interest expense is due to lower interest rates on our variable interest
debt and overall lower debt balances. Capitalized interest for the quarter was
$1 million in both 2002 and 2001. See more detailed explanations on our debt
structure in "Liquidity and Capital Resources--Capitalization" later in this
Management's Discussion and Analysis.

INCOME TAXES

Income taxes were a $16 million expense for the quarter ended June 30,
2002, compared to a $1 million expense for the quarter ended June 30, 2001. The
effective tax rate was 45 percent for the second quarter of 2002 compared to 25
percent for the second quarter 2001. In 2001, we had a pre-tax book loss.
Consequently, non-tax deductible book expenses, primarily goodwill amortization,
reduced the overall effective tax rate. In 2002, that goodwill amortization has
been eliminated.

EARNINGS PER SHARE

We reported earnings per diluted common share of $.45 for the quarter ended
June 30, 2002, compared to $.06 for the same period of 2001. Included in results
for the second quarter 2002 are the negative impacts from expenses related to
our restructuring plans of $.02 per share, offset by the gain on the sale of our
York, U.K. facility which added $.13 per share. Net, these items increased
earnings per diluted common share by $.11. Included in results for the second
quarter 2001 are the impacts of a restructuring charge and other restructuring
related costs. These items reduced earnings per diluted common share by $.20.
You should also read Note 6 in the "Notes to Financial Statements" for more
detailed information on earnings per share.

29

RESTRUCTURING CHARGES

Over the past several years we have adopted plans to restructure portions
of our operations. These plans were approved by the Board of Directors and were
designed to reduce operational and administrative overhead costs throughout the
business. We recorded charges to income for costs related to these plans that do
not benefit future activities in the period in which the plans are finalized and
approved, while actions necessary to affect these restructuring plans occur over
future periods in accordance with established plans.

In the fourth quarter of 2000, our Board of Directors approved a
restructuring plan to reduce administrative and operational overhead costs. We
recorded, in the fourth quarter of 2000, a pre-tax charge related to the plan of
$46 million, $32 million after tax, or $.92 per diluted common share. Within the
statement of income, $13 million of the pre-tax charge is reflected in cost of
sales, while $33 million is included in selling, general, and administrative
expenses. The charge is comprised of $24 million of severance and related costs
for salaried employment reductions worldwide and $22 million for the reduction
of manufacturing and distribution capacity in response to long-term market
trends. The 2000 plan involved closing a North American aftermarket exhaust
distribution facility and a ride control manufacturing plant in our Asian
market, as well as the consolidation of some exhaust manufacturing facilities in
Europe. In addition, the plan involves the elimination of 700 positions,
including temporary employees. We wrote down the assets at the locations to be
closed to their estimated fair value, less costs to sell. We estimated the
market value of buildings using external real estate appraisals. As a result of
the single purpose nature of the machinery and equipment to be disposed of, fair
value was estimated to be scrap value less costs to dispose in most cases. We do
not expect that cash proceeds on the sale of these assets will be significant.
As of June 30, 2002, 610 employees have been terminated under the 2000 plan
primarily in North America and Europe. Additionally, 57 temporary employees have
been terminated. All restructuring actions are being completed in accordance
with our established plan. We expect to complete all restructuring activities
related to this plan by the end of the third quarter of 2002. We are conducting
all workforce reductions in compliance with all legal and contractual
requirements including obligations to consult with worker committees, union
representatives and others.

Also in the fourth quarter of 2000, we recorded other charges of $15
million, $10 million after tax, or $.29 per diluted common share. These charges
related to a strategic decision to reduce some of the aftermarket parts we offer
and to relocation expenses incurred associated with the restructuring plans. The
aftermarket parts were written down to their estimated scrap value less costs to
sell.

In the first quarter of 2001, our Board of Directors approved a
restructuring plan in response to increasingly difficult industry conditions. On
January 31, 2001, we announced plans to eliminate 405 salaried positions
worldwide. We recorded pre-tax charges related to this restructuring of $11
million, $8 million after tax, or $.21 per diluted common share. Within the
statement of income, $2 million of the pre-tax charge is reflected in cost of
sales, while $9 million is included in selling, general, and administrative
expenses. These charges are comprised of $8 million for severance and related
costs for salaried employment reductions worldwide and $3 million for costs
related to closing a testing facility in North America. As of June 30, 2002, we
have eliminated 329 positions in connection with the first quarter 2001 plan. We
expect to complete these restructuring activities in the third quarter of 2002.
We are conducting all workforce reductions in compliance with all legal and
contractual requirements including obligations to consult with worker
committees, union representatives and others.

In the second quarter of 2001, our Board of Directors approved a separate
restructuring plan related to closing a North American ride control production
line. We recorded pre-tax charges related to the plan of $8 million, $6 million
after tax, or $.16 per diluted common share. Within the statement of income, the
$8 million charge is included in cost of sales. We wrote down the assets to
their fair market value, less costs to sell. As a result of the single purpose
nature of the machinery and equipment to be disposed of, fair value was
estimated to be scrap value less costs to dispose. Cash proceeds from the sale
of these assets were not significant. All restructuring activities related to
this plan have been completed.

In the fourth quarter of 2001, our Board of Directors approved a
restructuring plan, the first phase of a project known as Project Genesis,
designed to lower our fixed costs, improve efficiency and utilization, and
30

better optimize our global footprint. The first phase of Project Genesis
involves closing eight facilities, improving the process flow and efficiency
through value mapping and plant arrangement at 20 facilities, relocating
production among facilities, and centralizing some functional areas. The
facilities include an aftermarket plant and an aftermarket distribution
operation in Europe, an engineering center in Europe, one building at an
emissions control plant complex in North America, a technology facility in North
America, an exhaust manufacturing facility in North America, and our
London-based treasury office. We expect to eliminate 900 employees as a result
of these actions. In the fourth quarter of 2001, we recorded pre-tax charges
related to Project Genesis of $27 million. Within the statement of income, $23
million of the pre-tax charge is reflected in cost of sales, while $4 million is
included in selling, general and administrative expenses. These charges are
comprised of $18 million in severance and $9 million for equipment lease
cancellation, asset impairment, and other restructuring costs to close the eight
facilities. We wrote down the assets at locations to be closed to their
estimated fair value, less costs to sell. We estimated the market value of
buildings using external real estate appraisals. As a result of the single
purpose nature of the machinery and equipment to be disposed of, fair value was
estimated to be scrap value less costs to dispose in most cases. We also
recorded a pre-tax charge of $4 million in cost of sales related to a strategic
decision to adjust some product offerings and our customer supply strategy in
the European aftermarket. The aftermarket parts were written down to their
estimated scrap value, less cost to sell. Finally, we also incurred $1 million
in other restructuring related costs during the fourth quarter for the value
mapping and rearrangement of one of our emissions control plants in North
America. Since these costs relate to ongoing operations, they could not be
accrued as part of the restructuring charge. The total of all these
restructuring and other costs recorded in the fourth quarter of 2001 was $32
million before tax, $31 million after tax, or $.81 per diluted common share. As
of June 30, 2002, we have eliminated 87 positions in connection with the first
phase of Project Genesis. We expect to complete all restructuring activities
related to the first phase of Project Genesis by early 2003. We are conducting
all workforce reductions in compliance with all legal and contractual
requirements including obligations to consult with worker committees, union
representatives and others. In addition to the fourth quarter 2001 charges, we
are incurring other costs during 2002 for moving and rearrangement costs related
to Project Genesis that could not be accrued as part of the restructuring
charge. We estimate these costs will be about $15 million in aggregate, and they
are being expensed as they are incurred.

During the first six months of 2002, we incurred $3 million for other
restructuring related costs and expenses such as rearrangement and moving costs
that could not be accrued as part of our earlier restructuring reserves.

When complete, we expect that the series of restructuring actions initiated
in the fourth quarter of 2001 will generate annualized savings of $30 million.

Amounts related to activities that are part of the restructuring plans are
as follows:

Revenues from our North American operations increased $78 million in the
first six months of 2002 compared to the same period last year reflecting higher
sales generated from both the original equipment and aftermarket businesses.
Total North American OE revenues increased 9 percent to $732 million in the
first six months of the year due primarily to increased catalytic converter
revenues that are passed through to our customers. OE exhaust revenues were up 9
percent in the first six months primarily due to increased volumes and high
pass-through sales. OE ride control revenues, for the first six months,
increased 7 percent, driven by increased volumes in both the light vehicle and
heavy-duty market. Total OE revenues, excluding $175 million of pass-through
sales, increased 4 percent in the first six months of the year, while North
American light vehicle production increased approximately 6 percent from the
same period a year ago. In the first quarter our OE revenue was lower than the
overall build rate due to timing associated with the retirement of various
platforms that were scheduled to be replaced by new platform production that was
delayed. In the second quarter our OE revenues were greater than the overall
build rate as delayed new platform production ramped up and outpaced the overall
build rate. Aftermarket revenues for North America were $274 million in the
first six months of 2002, representing an increase of 8 percent compared to the
same period in the prior year. Aftermarket ride control revenues increased $23
million in the first six months of the year, primarily as a result of new
customer additions in the second half of last year and the first quarter of
2002. Aftermarket exhaust revenues declined 4 percent in the first six months of
the year reflecting an overall market decline in the exhaust business. Price
increases implemented in 2001 and a shift toward premium products, primarily in
ride control, positively impacted revenues by $8 million in the first six months
of 2002.

Our European segment's revenues decreased $103 million or 15 percent in the
first six months of 2002 compared to the same period last year. Total OE
revenues were $438 million for the first six months of 2002. OE exhaust revenues
declined 20 percent to $348 million from $436 million the prior year. Excluding
a $66 million decrease in pass-through sales and a $1 million net decrease due
to currency devaluation, OE exhaust revenues declined 8 percent. OE ride control
revenues decreased to $90 million or 8 percent from $98 million for the first
six months of 2002. Excluding a $2 million net benefit from currency
appreciation, OE ride control revenues declined 10 percent. Light vehicle
production by European OE's was down about 4 percent for the first six months.
Our decline was greater than the market primarily due to launch delays and
platform retirements. European aftermarket sales were $155 million in the first
six months of 2002 compared to $162 million in the same period last year.
Excluding a $4 million currency appreciation, aftermarket revenues declined 7
percent. This decline results from the continued decline in exhaust replacement
rates due primarily to the increasing use of stainless steel.

Revenues from our operations in the rest of the world decreased $7 million
to $158 million in the first six months of 2002 as compared to $165 million in
the prior year. The primary reason for the decrease was

34

currency devaluation in South America of $16 million. This was partially offset
by strengthening currency in Australia of $3 million. Additionally, lower
aftermarket ride control volumes in our South American operations due to poor
economic conditions contributed to the overall decrease. Offsetting these
decreases were increased OE revenues at our Asian operations primarily driven by
pass-through sales to OE customers.

EARNINGS BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST ("EBIT")

We reported EBIT of $98 million for the first six months of 2002, compared
to $53 million for the same period last year. Reported results include
restructuring and other charges and gains that have an effect on comparability
of EBIT results between the years. To provide enhanced comparability, we have
separately identified these costs, charges and gains by segment in the following
table.

In the preceding table, amounts reported as restructuring and other charges
for 2002 include $3 million for other restructuring related costs and expenses,
such as relocation and moving costs, that could not be accrued as part of our
restructuring reserve, and $2 million related to costs associated with the
amendment of certain terms of our senior credit facility. Amounts reported as
restructuring and other charges for 2001 include $19 million related to the
first and second quarter 2001 restructuring plans, $3 million for other
restructuring related costs and expenses, such as relocation and moving costs,
that could not be accrued as part of our restructuring reserve, $6 million for
environmental remediation activities, principally in Europe, and $2 million
related to costs associated with the amendment of certain terms of our senior
credit facility. For further details of these costs and the gain on the sale of
our York, U.K. facility see the section listed as "Restructuring Charges" and
"Liquidity and Capital Resources -- Cash Flows", later in this Management's
Discussion and Analysis. The following discussion of EBIT results compares the
columns titled "Operating Unit Results" in the table above.

EBIT for North American operations increased to $75 million in the first
six months of 2002 from $36 million one year ago as higher sales volumes in both
our OE and aftermarket segments improved our earnings in the first six months of
the year. The elimination of goodwill amortization, discussed later in this
Management's Discussion and Analysis under the section "Changes in Accounting
Principles", contributed $6 million to the EBIT increase. Additionally,
manufacturing efficiencies and lower spending in selling, general and
administrative costs year over year contributed to OE profitability. The North
American aftermarket was primarily driven by strong ride control volumes from
both new and existing customers that generated approximately $12 million in
increased EBIT in the first six months. Aftermarket pricing increases instituted
in 2001 increased EBIT by $8 million. Manufacturing efficiencies as a result of
higher volumes contributed $3 million in EBIT. Increased promotional spending
and higher changeover costs to convert new customers recorded as selling,
general and administrative expense partially offset these increases by $8
million.
35

Our European segment's EBIT declined to $7 million in the first six months
of 2002 down from $38 million the previous year. Volume decreases and related
operating inefficiencies in both the OE and aftermarket operations negatively
impacted EBIT by $22 million. European EBIT was also reduced by $1 million due
to an increase in reserves for recently identified warranty issues. See
"Environmental and Other Matters". Partially offsetting these decreases was the
elimination of goodwill amortization and lower selling, general and
administrative overhead costs.

EBIT for the company's operations in the rest of the world increased by $1
million in the first half of 2002 compared to the same period one year ago.
Improved operating performance in South America was the primary reason for the
increase. EBIT for our Asian and Australian operations remained flat year over
year.

EBIT AS A PERCENTAGE OF REVENUE

The following table shows EBIT as a percentage of revenue by segment. The
EBIT percentage is calculated after excluding the "restructuring and other
charges" and gain on the sale of our York, U.K. facility described previously.

In North America, EBIT as a percentage of revenue increased by 3 percent
for the first six months of 2002. Stronger volumes in both OE and aftermarket
drove this increase. Price increases in the aftermarket also contributed to the
increase. Additionally, manufacturing efficiencies and the elimination of
goodwill contributed to the increase. In Europe, EBIT margins declined in the
first six months due to significant decreases in both OE and aftermarket
volumes. Also contributing to the decline were volume related manufacturing
inefficiencies. EBIT as a percentage of revenue for the rest of the world
increased one percent in the first half of 2002 as a result of improved
operating performance.

INTEREST EXPENSE, NET OF INTEREST CAPITALIZED

We reported interest expense of $72 million during the six months ended
June 30, 2002, compared to $90 million during the same period in 2001. The
decrease in total interest expense is due to lower interest rates on our
variable debt and overall lower debt balances. Capitalized interest for the
first six months was $2 million in both 2002 and 2001. See more detailed
explanations on our debt structure in "Liquidity and Capital
Resources--Capitalization" later in this Management's Discussion and Analysis.

INCOME TAXES

Income taxes were an $8 million expense for the first six months of 2002,
compared to a $9 million benefit for the same period in 2001. The first six
months benefit included a $4 million tax benefit related to lower-than-expected
costs for withholding taxes related to our foreign operations. The lower cost of
tax withholding for the first half of 2002 tax repatriation transaction resulted
from an amendment to our bank agreement allowing a more tax efficient
transaction to be completed. The effective tax rate before this adjustment was
43 percent for the first six months of 2002 compared to 25 percent for the same
period in 2001. In 2001, we had a pre-tax book loss. Consequently, non-tax
deductible book expenses, primarily goodwill amortization reduced the overall
effective tax rate. In 2002, that goodwill amortization has been eliminated.

EARNINGS PER SHARE

We reported earnings per diluted common share of $.41 for the first six
months of 2002, compared to a loss of $.77 for the same period in 2001. Included
in results for the first half of 2002 are the negative impacts

36

from expenses related to our restructuring plans and the costs related to the
amendment of certain terms of the senior credit facility, offset by the gain on
the sale of our York, U.K. facility and the tax benefit related to
lower-than-expected costs for withholding taxes. Net, these items improved
earnings per diluted common share by $.16. Included in results for the first
half of 2001 are the impacts from charges related to our restructuring plans,
environmental remediation activities and the costs related to the amendment of
certain terms of the senior credit facility. These items reduced earnings per
diluted common share by $.60. You should also read Note 6 in the "Notes to
Financial Statements" for more detailed information on earnings per share.

LIQUIDITY AND CAPITAL RESOURCES

CAPITALIZATION

The year-to-date increase in shareholders' equity results from the
translation of foreign balance sheets into U.S. dollars, where the dollar
decline resulted in translation adjustments of $13 million, an increase in the
fair market value of interest rate swaps of $5 million and our recorded net
income of $17 million. The $13 million translation adjustment included $43
million from the strengthening of European currencies against the dollar offset
by a $30 million decrease from the continued devaluation of the Argentine Peso.

Short-term debt, which includes the current portion of long-term
obligations and borrowings by foreign subsidiaries as well as our revolving
credit facility, decreased by $31 million during the first six months of 2002.
This decrease resulted from a decrease in borrowings of $67 million during the
first six months of 2002 under our revolving credit facility and a $5 million
decrease in our foreign subsidiaries' borrowings. The decrease was partially
offset by a $40 million increase in the amount of long-term debt that will
mature in one year or less. The borrowings outstanding under our revolving
credit facility as of June 30, 2002 were $1 million and were $68 million as of
December 31, 2001. The decline in long-term debt represents amounts due during
the next year. We did not issue any long-term debt during 2002.

Our financing arrangements are primarily provided by a $1.325 billion at
June 30, 2002, committed senior secured financing arrangement with a syndicate
of banks and other financial institutions. We entered into an agreement to amend
this facility on October 20, 2000 to (i) relax the financial covenant ratios
beginning in the fourth quarter of 2000, (ii) exclude up to $80 million of cash
charges and expenses related to cost reduction initiatives from the calculation
of consolidated earnings before interest, taxes, depreciation and amortization
("EBITDA") used in our financial covenant ratios through 2001 and (iii) make
certain other technical changes. In exchange for these amendments, we agreed to
certain interest rate increases, lowered our capital expenditure limits and paid
an aggregate fee of about $3 million.

As a result of significant reductions in North American vehicle production
levels announced in 2000 by our original equipment customers, as well as an
accelerated weakening of the global aftermarket, we entered into a second
amendment of our senior credit facility on March 22, 2001. The second amendment
revised the financial covenant ratios we were required to maintain as of the end
of each of the quarters ending in 2001. The second amendment also reduced the
limitation on 2001 capital expenditures from $225 million to $150 million, and
required that net cash proceeds from all significant, non-ordinary course asset
sales be used to prepay the senior term loans. In exchange for these amendments,
we agreed to a 25 basis point increase in interest rates on the senior term
loans and borrowings under our revolving credit facility and paid an aggregate

37

fee of $3 million to consenting lenders. We incurred legal, advisory and other
costs related to the amendment process of $2 million.

At the time of the second amendment, we expected that we would meet with
the senior lenders during the first quarter of 2002 to negotiate further
amendments to the senior credit facility. Consequently, we amended the senior
credit facility for a third time on March 13, 2002. The third amendment revised
the financial covenant ratios we are required to maintain as of the end of each
of the quarters ending in 2002, 2003 and 2004. It also extends the limitation on
annual capital expenditures of $150 million through this three-year period. The
amendment further provides us with the option to enter into sale and leaseback
arrangements on up to $200 million of our assets. The proceeds from these
arrangements must be used to reduce senior debt. These senior debt prepayments
would reduce the next scheduled principal amortization payments. Because the
payments on senior debt from sale and leaseback transactions would be made on a
pro-rata basis based on the remaining principal amounts outstanding on our
Tranche A, B, and C senior term loans, but principal amortization payments are
not pro-rata, about 35 percent of any sale and leaseback transactions we enter
into during 2002 would reduce our scheduled principal amortization. The
amendment also allows us to exclude up to $60 million of cash charges and
expenses, before taxes, related to potential future cost reduction initiatives
over the 2002-2004 period from the calculation of the financial covenant ratios
we are required to maintain under our senior credit agreement. It also permits
us to execute exchanges of our senior subordinated bonds for shares of common
stock. We have not currently identified any sale and leaseback transactions that
we plan to complete. However, we may enter into sale and leaseback transactions
during 2002. We do not have any current plans to enter into any debt-for-stock
exchanges. Any significant debt-for-stock exchange would require approval of our
stockholders. In exchange for these amendments, we agreed to a $50 million
reduction in our revolving credit facility, a 25 basis point increase in
interest rates on the senior term loans and borrowings under our revolving
credit facility, and paid an aggregate fee of $3 million to consenting lenders.
We also incurred legal, advisory, and other costs related to the amendment
process of $2 million. The 25 basis point increase in interest rates is expected
to increase our interest cost by about $3 million annually.

The senior secured credit facility, as amended on March 13, 2002, consists
of: (i) a $450 million revolving credit facility with a final maturity date of
November 4, 2005; (ii) a $338 million term loan with a final maturity date of
November 4, 2005; (iii) a $269 million term loan with a final maturity date of
November 4, 2007; and (iv) a $269 million term loan with a final maturity date
of May 4, 2008. Quarterly principal repayment installments on each term loan
began October 1, 2001. Borrowings under the facility bear interest at an annual
rate equal to, at our option, either (i) the London Interbank Offering Rate plus
a margin of 350 basis points for the revolving credit facility and the term loan
maturing November 4, 2005, 400 basis points for the term loan maturing November
4, 2007 and 425 basis points for the term loan maturing May 4, 2008; or (ii) a
rate consisting of the greater of the JP Morgan Chase prime rate or the Federal
Funds rate plus 75 basis points, plus a margin of 250 basis points for the
revolving credit facility and the term loan maturing November 4, 2005, 300 basis
points for the term loan maturing November 4, 2007 and 325 basis points for the
term loan maturing May 4, 2008. We also pay a commitment fee of 50 basis points
on the unused portion of the revolving credit facility. Under the provisions of
the senior credit facility agreement, the interest margins for borrowings under
the revolving credit facility and the term loan maturing November 4, 2005 and
fees paid on letters of credit issued under our revolving credit facility are
subject to adjustment based on the consolidated leverage ratio (consolidated
indebtedness divided by consolidated EBITDA as defined in the senior credit
facility agreement) measured at the end of each quarter. Our consolidated
leverage ratio fell below 4.50 as of June 30, 2002; therefore, the interest
margins for borrowings under our revolving credit facility and on our term loan
maturing November 4, 2005, and fees paid on letters of credit issued under our
revolving credit facility will be reduced by 25 basis points in the third
quarter. As a result, interest expense is expected to decrease by approximately
$1 million annually before taxes. Our senior secured credit facility does not
contain any terms that could accelerate the payment of the facility as a result
of a credit rating agency downgrade.

The amended senior credit facility requires that we maintain financial
ratios equal to or better than the following consolidated leverage ratios
(consolidated indebtedness divided by consolidated EBITDA), consolidated
interest coverage ratios (consolidated EBITDA divided by consolidated cash
interest paid), and fixed

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charge coverage ratios (consolidated EBITDA less consolidated capital
expenditures, divided by consolidated cash interest paid) at the end of each
period indicated:

For the quarter ended June 30, 2002, the consolidated leverage ratio was
4.24, the interest coverage ratio was 2.14, and the fixed charge coverage ratio
was 1.30. For the quarter ended March 31, 2002, the consolidated leverage ratio
was 4.72, the interest coverage ratio was 1.94, and the fixed charge coverage
ratio was 1.17.

The senior credit facility agreement also contains restrictions on our
operations that are customary for similar facilities, including limitations on:
(i) incurring additional liens; (ii) sale and leaseback transactions (except for
the permitted transactions described above); (iii) liquidations and
dissolutions; (iv) incurring additional indebtedness or guarantees; (v) capital
expenditures; (vi) dividends; (vii) mergers and consolidations; and (viii)
prepayments and modifications of subordinated and other debt instruments.
Compliance with these requirements and restrictions is a condition for any
incremental borrowings under the senior credit facility agreement and failure to
meet these requirements enables the lenders to require repayment of any
outstanding loans. As of June 30, 2002, we were in compliance with the financial
covenants and operational restrictions.

Our outstanding debt also includes $500 million of 11 5/8 percent Senior
Subordinated Notes due October 15, 2009. The senior subordinated debt indenture
requires that we, as a condition to incurring certain types of indebtedness not
otherwise permitted, maintain an interest coverage ratio of not less than 2.25.
The indenture also contains restrictions on our operations, including
limitations on: (i) incurring additional indebtedness or liens; (ii) dividends;
(iii) distributions and stock repurchases; (iv) investments; and (v) mergers and
consolidations. All of our existing and future material domestic wholly owned
subsidiaries fully and unconditionally guarantee these notes on a joint and
several basis. There are no significant restrictions on the ability of the
subsidiaries that have guaranteed these notes to make distributions to us.

In addition to our senior credit facility and senior subordinated notes, we
also sell some of our account receivables. In North America, we have a $100
million accounts receivable securitization program with a commercial bank. We
sell original equipment and aftermarket receivables on a daily basis under this
program. At June 30, 2002, we had sold $85 million of account receivables under
this program. This program is subject to cancellation prior to its maturity date
if we were to (i) fail to pay interest or principal payments on an amount of
indebtedness exceeding $50 million, (ii) default on the financial covenant
ratios under the senior credit facility, or (iii) fail to maintain certain
financial ratios in connection with the accounts receivable securitization
program. This program carries a one-year renewable term ending in October 2002.
We previously renewed the program in October 2001. We also sell some receivables
in our European operations to

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regional banks in Europe. At June 30, 2002, we had sold $55 million of accounts
receivable in Europe. The arrangements to sell receivables in Europe are not
committed and can be cancelled at any time. If we were not able to sell
receivables under either the North American or European securitization programs,
our borrowings under our revolving credit agreement would increase.

We believe that cash flows from operations, combined with available
borrowing capacity described above and, assuming that we maintain compliance
with the financial covenants and other requirements of our loan agreement,
supplemented, if necessary, by proceeds from the sale and leaseback transactions
described above, will be sufficient to meet our future capital requirements for
the following year, including scheduled debt principal amortization payments.
Our ability to meet the financial covenants in 2002 depends upon a number of
operational and economic factors, many of which are beyond our control. Factors
that could impact our ability to comply with the financial covenants include the
rate at which consumers continue to buy new vehicles and the rate at which they
continue to repair vehicles already in service, as well as our ability to
successfully implement our restructuring plans. Lower North American vehicle
production levels, weakening in the global aftermarket, or a reduction in
vehicle production levels in Europe, beyond our expectations, could impact our
ability to meet our financial covenant ratios. In the event that we are unable
to meet these revised financial covenants, we would consider several options to
meet our cash flow needs. These options could include further renegotiations
with our senior credit lenders, additional cost reduction or restructuring
initiatives, sales of assets or capital stock, or other alternatives to enhance
our financial and operating position. Should we be required to implement any of
these actions to meet our cash flow needs, we believe we can do so in a
reasonable time frame and at a reasonable cost.

CONTRACTUAL OBLIGATIONS

Our remaining required debt principal amortization and payment obligations
under lease and certain other financial commitments are shown in the following
table:

If we do not maintain compliance with the terms of our senior credit
facility and senior subordinated debt indenture described above, all amounts
under those arrangements could, automatically or at the option of the lenders
become due. Additionally, each of those facilities contains provisions that
certain events of default under one facility will constitute default under the
other facility, allowing the acceleration of all amounts due. We currently
expect to maintain compliance with terms of all of our various credit agreements
for the foreseeable future.

We have also guaranteed payment and performance of approximately $11
million of obligations at June 30, 2002, compared to $9 million at June 30,
2001. These guarantees are primarily related to performance of lease obligations
by a former affiliate.

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DIVIDENDS ON COMMON STOCK

On January 10, 2001, we announced that our Board of Directors had
eliminated the quarterly dividend on our common stock. The board took the action
in response to current industry conditions, significantly greater than
anticipated production volume reductions by original equipment manufacturers,
and continued softness in the global light vehicle aftermarket.

CASH FLOWS

OPERATING ACTIVITIES

For the six months ended June 30, 2002, cash flows provided from operating
activities were $124 million compared to $6 million in the same period last
year. Higher earnings for the first six months of 2002 were a key driver to the
increase in cash provided. In addition, we generated $59 million in cash from
working capital during the first half of 2002, compared to the first half of
2001 when working capital required $29 million in cash as we prepared for our
peak selling period. This reflects our continued focus on improving working
capital balances. This $88 million improvement was primarily achieved through
better management of our payables. At the end of 2001, we reduced payables
balances by taking advantage of early payment discounts available from suppliers
in Europe. During 2002 we returned to paying on terms which increased payables
balances and also improved working capital. Additionally in June we received a
payment from an OE customer for the reimbursement of expenses related to a
cancelled platform. Of the total cash payment, $11 million was recorded in
operating activities and the remaining balance was recorded in investing
activities.

In June 2001, we entered into arrangements with two major OE customers in
North America under which, in exchange for a discount that is less than our
marginal borrowing cost, payments for product sales are made earlier than
otherwise required under existing payment terms. These arrangements reduced
accounts receivable by $50 million and $8 million as of June 30, 2002 and 2001,
respectfully. At December 31, 2001, these arrangements reduced accounts
receivable by $34 million. During the first six months of 2002, we received $16
million in cash from these arrangements. These arrangements can be cancelled at
any time.

INVESTING ACTIVITIES

Cash used for investing activities was $27 million lower in the first six
months of 2002 compared to the same period a year ago due primarily to $17
million proceeds from the sale of our York, U.K. facility. Also contributing was
a $19 million settlement from an OE customer for reimbursement of expenses
related to a cancelled platform. Capital expenditures were $52 million in the
first six months of 2002, up from $47 million in the same period last year.

FINANCING ACTIVITIES

Cash used for financing activities was $96 million in the first six months
of 2002 compared to $73 million of cash provided in the same period of 2001. The
decrease in the first six months of this year is attributable to lower
short-term borrowings during the period of $67 million. Additionally, we made
principal payments of $24 million on our senior credit facility during the first
six months of 2002.

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INTEREST RATE RISK

Our financial instruments that are sensitive to market risk for changes in
interest rates are our debt securities. We primarily use a revolving credit
facility to finance our short-term capital requirements. We pay a current market
rate of interest on these borrowings. We have financed our long-term capital
requirements with long-term debt with original maturity dates ranging from six
to ten years.

Under the terms of our senior credit facility agreement, we were required
to hedge our exposure to floating interest rates by April 2000 so that at least
50 percent of our long-term debt was fixed for a period of at least three years.
In February 2000, we hedged $250 million of our floating rate long-term debt
with three-year, floating to fixed interest rate swaps. In April 2000, we hedged
an additional $50 million of our floating rate long-term debt with three-year,
floating to fixed interest rate swaps. The hedges that we executed fully
satisfied the interest rate hedging requirement of the senior credit facility
agreement. On June 30, 2002, we had $505 million in long-term debt obligations
that have fixed interest rates until at least June 30, 2003, and $756 million in
long-term debt obligations that have interest rates subject to change prior to
June 30, 2003 based on prevailing market interest rates.

We estimate that the fair value of our long-term debt at June 30, 2002 was
about 92 percent of its book value. A one percentage point increase or decrease
in interest rates would increase or decrease the annual interest expense we
recognize in the income statement and the cash we pay for interest expense by
about $6 million after tax.

OUTLOOK

North America light vehicle production has continued at a relatively strong
pace for the first half of 2002. Manufacturer incentives have kept consumer
purchases higher than estimates at the beginning of the year, lowering vehicle
inventories. Consequently, current estimates for the 2002 North America light
vehicle build rate range from 16.1 million units to 16.3 million units. However,
we remain cautious regarding second half volumes due to continuing uncertain
economic conditions in the U.S. and uncertainty about the willingness of the
original equipment manufacturers to continue to support consumer automobile
sales through incentives. Production of heavy duty trucks has also been strong
during the first half of 2002. We believe, however, that the pending
implementation of new emissions standards in October 2002 has caused operators
to pull forward their truck purchases into the first three quarters of 2002. We
believe these advance purchases will reduce sales of heavy duty trucks in the
fourth quarter of this year and potentially into 2003, as well. In Europe,
uncertain economic conditions have contributed to declining car sales, reducing
first half production. Additionally, several platforms for which we provide
parts have reached the end of their production, and replacement platforms have
been slow to launch. These issues combined have significantly reduced our
volumes in Europe, particularly in the emissions control business. While we
expect that product launches will ramp up, offsetting part of this decline, we
expect production to be below last year in Europe. Further, the economic
problems in Argentina and uncertainty in Brazil are likely to result in lower
sales in that region of the world.

EURO CONVERSION

The European Monetary Union resulted in the adoption of a common currency,
the "euro," among eleven European nations. The euro has been adopted over a
three-year transition period beginning January 1, 1999. In October 1997, we
established a cross-functional Euro Committee, comprised of representatives of
our operational divisions as well as our corporate offices. That Committee had
two principal objectives: (1) to determine the impact of the euro on our
business operations, and (2) to recommend and facilitate implementation of those
steps necessary to ensure that we would be fully prepared for the euro's
introduction. As of January 1, 1999, we implemented those euro conversion
procedures that we had determined to be necessary and prudent to adopt by that
date, and we were fully "euro ready" by the end of the three year transition
period. The costs associated with transitioning to the euro were not material to
our consolidated financial position or the results of our operations.

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ENVIRONMENTAL AND OTHER MATTERS

We are subject to a variety of environmental and pollution control laws and
regulations in all jurisdictions in which we operate. We expense or capitalize,
as appropriate, expenditures for ongoing compliance with environmental
regulations that relate to current operations. We expense expenditures that
relate to an existing condition caused by past operations and that do not
contribute to current or future revenue generation. We record liabilities when
environmental assessments indicate that remedial efforts are probable and the
costs can be reasonably estimated. Estimates of the liability are based upon
currently available facts, existing technology, and presently enacted laws and
regulations taking into consideration the likely effects of inflation and other
societal and economic factors. We consider all available evidence including
prior experience in remediation of contaminated sites, other companies' cleanup
experiences and data released by the United States Environmental Protection
Agency or other organizations. These estimated liabilities are subject to
revision in future periods based on actual costs or new information. Where
future cash flows are fixed or reliably determinable, we have discounted the
liabilities. All other environmental liabilities are recorded at their
undiscounted amounts. We evaluate recoveries separately from the liability and,
when they are assured, recoveries are recorded and reported separately from the
associated liability in our financial statements.

As of June 30, 2002, we continue to be designated as a potentially
responsible party in two Superfund sites. We have estimated our share of the
remediation costs for these sites to be less than $1 million in the aggregate.
In addition to the Superfund sites, we may have the obligation to remediate
current or former facilities, and we estimate our share of remediation costs at
these facilities to be approximately $15 million. For both the Superfund sites
and the current and former facilities, we have established reserves that we
believe are adequate for these costs. Although we believe our estimates of
remediation costs are reasonable and are based on the latest available
information, the cleanup costs are estimates and are subject to revision, as
more information becomes available about the extent of remediation required. At
some sites, we expect that other parties will contribute to the remediation
costs. In addition, at the Superfund sites, the Comprehensive Environmental
Response, Compensation and Liability Act provides that our liability could be
joint and several, meaning that we could be required to pay in excess of our
share of remediation costs. Our understanding of the financial strength of other
potentially responsible parties at the Superfund sites, and of other liable
parties at our current and former facilities, has been considered, where
appropriate, in our determination of our estimated liability.

As we previously disclosed, we undertook a third-party evaluation of
estimated environmental remediation costs at one of our facilities beginning in
2000. The evaluation was initiated as a result of testing that indicated the
potential underground migration of some contaminants beyond our facility
property. We completed and analyzed the results of our evaluation of
contamination and migration from that facility. We initially increased the
reserve by $3 million in the fourth quarter of 2000 related to on-site
remediation activities and $5 million in the first quarter of 2001 following
evaluation of needed off-site remediation activities. However, after further
investigation of alternative remediation technologies, we were able to identify
a more efficient technology and thereby reduce the reserve by $4 million in the
fourth quarter of 2001.

We believe that any potential costs associated with our current status as a
potentially responsible party in the Superfund sites, or as a liable party at
our current or former facilities, will not be material to our results of
operations or consolidated financial position.

As previously discussed, from time to time we are subject to product
warranty claims whereby we are required to bear costs of repair or replacement
of certain of our products. Warranty claims may range from individual customer
claims to full recalls of all products in the field. In the second quarter 2002,
based on currently available facts and data, we increased our warranty reserve
in the amount of $1 million for recently identified warranty issues. We are
continuing to investigate, and pursue commercial and other resolutions of these
issues. We presently believe that it is reasonably possible that we could incur
additional costs and charges related to these issues after the second quarter in
amounts that could be material to our income statement in the periods when we
are required to record the costs and charges. We cannot predict with certainty
the ultimate amount or timing of any such future costs or charges. However, we
believe that these

43

amounts will not be material to our consolidated financial position or impact
our ability to meet our debt covenants.

We also from time to time are involved in legal proceedings or claims that
are incidental to the operation of our businesses. Some of these proceedings or
claims allege damages against us relating to environmental liabilities
(including toxic tort, property damage and remediation), intellectual property
matters (including patent, trademark and copyright infringement, and licensing
disputes), personal injury claims (including injuries due to product failure,
design or warnings issues, asbestos exposure, or other product liability related
matters), employment matters, and commercial or contractual disputes, sometimes
related to acquisitions or divestitures. We will continue to vigorously defend
ourself against all of these claims. Although the ultimate outcome of any legal
matter cannot be predicted with certainty, based on present information,
including our assessment of the merits of the particular claim, we do not expect
that these legal proceedings or claims will have any material adverse impact on
our consolidated financial condition or results of operations.

During the second quarter of 2002, we reached an agreement with an OE
customer to recover our investment in development costs and related equipment,
as well as amounts owed to some of our suppliers, for a platform cancelled by
the customer. We collected $30 million, net of the amounts we owed to suppliers,
during the second quarter pursuant to this agreement. The agreement had no
effect on our results of operations.

EMPLOYEE STOCK OWNERSHIP PLANS

We have established Employee Stock Ownership Plans for the benefit of our
employees. Under the plans, participants may elect to defer up to 16 percent of
their salary each year through contributions to the plan, which are invested in
selected mutual funds or used to buy our common stock. Through December 31,
2001, we matched qualified contributions with a contribution of 75 percent of
each employee's contribution up to 8 percent of the employee's salary. Beginning
January 1, 2002, this match was reduced to 50 percent of each employee's
contribution up to 8 percent of the employee's salary. These matching
contributions were made in company stock through December 31, 2001 and in cash
starting January 1, 2002. All contributions vest immediately. We recorded
expense for these matching contributions of approximately $3 million and $5
million for the three months ended June 30, 2002 and 2001 respectively.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For information regarding our exposure to interest rate risk, see the
caption entitled "Interest Rate Risk" in "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations," which is
incorporated herein by reference.

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PART II

OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

We held our annual stockholders' meeting on May 14, 2002, to consider and
vote on two separate proposals: (i) a proposal to elect M. Kathryn Eickhoff,
Mark P. Frissora, Frank Macher, Sir David Plastow, Roger Porter, David B. Price,
Jr., Dennis Severance and Paul Stecko as directors of our company for a term
expiring at our next annual stockholders' meeting, and (ii) a proposal to
approve the Tenneco Automotive Inc. 2002 Long-Term Incentive Plan. The meeting
proceeded and all proposals were approved by the requisite vote of the holders
of our outstanding common stock. The following sets forth the vote results with
respect to these proposals at the meeting:

Election of Directors

Approval of Tenneco Automotive Inc. 2002 Long-Term Incentive Plan

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits. The exhibits filed with this report are listed on the
Exhibit Index following the signature page of this report, which is incorporated
herein by reference.

(b) Reports on Form 8-K. We filed the following Current Reports on Form
8-K during the quarter ended June 30, 2002:

Current Report on Form 8-K dated April 23, 2002, including pursuant to Item 5
certain information pertaining to the results of our operations for the first
quarter 2002.

Current Report on Form 8-K dated May 16, 2002, as amended, including pursuant to
Item 5 certain information pertaining to the change in our certifying public
accountants, from Arthur Andersen LLP to Deloitte & Touche LLP.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934,
Tenneco Automotive Inc. has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.

TENNECO AUTOMOTIVE INC.

By: /s/ MARK A. MCCOLLUM
------------------------------------
Mark A. McCollum
Senior Vice President and
Chief Financial Officer

Dated: August 14, 2002

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INDEX TO EXHIBITS
TO
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED JUNE 30, 2002

- ---------------
* Filed herewith

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