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 September 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: 41,359,017 shares as of October 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," "goal," 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;

2

- material substitution;

- 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 September 30, 2002, and the
related consolidated statements of income (loss) and comprehensive income (loss)
for the three-month and nine-month periods then ended, and the consolidated
statements of cash flows and changes in shareholders' equity for the nine-month
period ended September 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.

The accompanying financial information as of December 31, 2001, and for the
three- and nine-month periods ended September 30, 2001, were not audited or
reviewed by us and, accordingly, we do not express an opinion or any other form
of assurance on them.

DELOITTE & TOUCHE LLP
Chicago, Illinois
October 21, 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 cash equivalents 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 CONSOLIDATED 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 Automotive's financial position, results of operations, cash
flows, changes in shareholders' equity, and comprehensive income(loss) for the
periods indicated. We have prepared the unaudited interim consolidated financial
statements 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 for annual
financial statements.

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. 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 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 September 30, 2002, 614 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 2002.

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

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

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 September 30,
2002, we have eliminated 329 positions in connection with the first quarter 2001
plan. We expect to complete these restructuring activities in the fourth quarter
of 2002.

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 emissions control aftermarket plant and an aftermarket
distribution operation in Europe, a ride control plant 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 September 30, 2002, we have eliminated 660 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 in 2003.

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. During the first
nine months of 2002, we have incurred $6 million for these activities. We
estimate these costs will be about $3 million in the fourth quarter of 2002, and
they are being expensed as they are incurred.

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

Amounts related to activities that are part of all the restructuring plans
discussed above 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.

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

As of September 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 $14 million. For both the Superfund sites
and the current and former facilities, we have established reserves that we
believe

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

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.

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 available facts and data at the time, 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 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
ourselves 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.

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

(4) 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 third quarter of 2002, the balance of
unamortized goodwill was $410 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 fourth 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.

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 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. We will be required
to apply the new standard prospectively to new exit or disposal activities
initiated after December 31, 2002. The new statement will generally require that
these costs be recognized at a later date and over time, rather than in a single
charge.

(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.
Receivables become eligible for the program on a daily basis, at which time the
receivables are sold to the third party, net of a factoring discount, through a
wholly owned subsidiary. Under this agreement, as well as individual agreements
with third parties in Europe, we have sold accounts

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

receivable of $121 million and $144 million at September 30, 2002 and 2001,
respectively. We recognized a loss of $2 million and $4 million in the
nine-month periods ended September 30, 2002 and 2001, respectively, 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. The
retained interest represents a credit enhancement for the program. We value the
retained interest based upon the amount we expect to collect from our customers,
which approximates book value.

(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 CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

The following table summarizes certain Tenneco segment information:

The following table shows information relating to our external customer
revenues for each product or each group of similar products:

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

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

Basis of Presentation

We issued senior subordinated notes due 2009 in 1999. 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 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.

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

STATEMENT OF INCOME (LOSS)

18

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

STATEMENT OF INCOME (LOSS)

19

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

STATEMENT OF INCOME (LOSS)

20

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

STATEMENT OF INCOME (LOSS)

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

BALANCE SHEET

22

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

BALANCE SHEET

23

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

STATEMENT OF CASH FLOWS

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

24

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

STATEMENT OF CASH FLOWS

NOTE: Cash and cash equivalents 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.)
25

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

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001

NET SALES AND OPERATING REVENUES

Revenues from our North American operations increased $26 million in the
third quarter of 2002 compared to last year's third quarter reflecting higher
sales generated from the original equipment (OE) business. Total North American
OE revenues increased 15 percent to $337 million in the third quarter of this
year due to increased production of both light vehicles and heavy-duty vehicles
by OE manufacturers and higher 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 13 percent in the
quarter. OE ride control revenues increased 20 percent, driven by increased
volumes in both the light vehicle and heavy-duty market. Total OE revenues,
excluding $74 million of pass-through sales, increased 16 percent in the third
quarter, while North American light vehicle production increased approximately
11 percent from the third quarter a year ago. Our revenue increase was greater
than the build rate increase as a result of the introduction of new platforms,
on which we are a supplier, ramping up and outpacing the overall build rate.
Aftermarket revenues for North America were $129 million in the third quarter of
2002, representing a decrease of 11 percent compared to the same period in the
prior year. Aftermarket ride control revenues decreased 11 percent in the
quarter, primarily related to the impact of a large initial order in the third
quarter of last year from a significant new aftermarket customer. Aftermarket
exhaust revenues were down $6 million from the prior year. We continue to see a
decline in the exhaust aftermarket and this quarter we also saw notable softness
in the ride control aftermarket. Price increases implemented in the U.S. and
Canada and a shift toward premium aftermarket products, positively impacted
revenues in the quarter by $1 million.

Our European segment's revenues increased $3 million or 1 percent in the
third quarter of 2002 compared to last year's third quarter. Overall European OE
industry production levels were estimated to be down by one to three percent
from last year. Our total OE revenues were $219 million for the quarter. OE
exhaust revenues declined 6 percent to $173 million from $184 million the prior
year. Excluding a $4 million decrease in pass-through sales and a $17 million
benefit from currency appreciation, OE exhaust revenues declined 20 percent due
primarily to timing issues between several expiring programs and the launch of
their successors. OE ride control revenues increased 25 percent to $46 million,
from $37 million a year ago. Excluding a $4 million benefit from currency
appreciation, OE ride control revenues increased 14 percent. This increase was
the result of new platform launches and stronger sales on existing platforms.
European aftermarket sales were $86 million in the third quarter of this year
compared to $81 million in last year's third quarter. Excluding a $6 million
benefit from currency appreciation, aftermarket sales were down one 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 Monroe Reflex(TM) shocks and struts, 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 $10 million to $85 million in the third
quarter of 2002 as compared to $75 million in the prior year. The continued poor
economic conditions in South America led to $9 million decrease in revenues year
over

26

year. Australia's revenues increased $4 million driven by stronger OE volumes
and strengthening currency. Asia revenues increased by $14 million primarily
driven by pass-through sales to OE customers and higher OE exhaust volumes.

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

The EBIT results shown in the preceding table include the following items,
discussed below, which are of an unusual or non-recurring nature and have an
effect on the comparability of EBIT results between periods:

EBIT for North American operations increased to $36 million in the third
quarter 2002 from $23 million one year ago driven by higher OE sales volume and
volume related manufacturing efficiencies in our OE and aftermarket operations.
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 OE profitability. Partially offsetting these increases
were $1 million of non-accruable spending that could not be accrued as a part of
our Project Genesis restructuring efforts. The North American aftermarket
profitability was primarily driven by lower year over year selling, general, and
administrative expense. Changeover costs in the current quarter were lower as
prior year's results included the changeover of a large, new aftermarket
customer. Additionally, lower advertising and promotional spending increased
profitability. Price increases implemented in the U.S. and Canada and a shift
toward premium products increased EBIT by $1 million. These increases were
partially offset by lower volumes in both aftermarket product lines.

Our European segment's EBIT declined to a loss of $1 million in the third
quarter of 2002 down $10 million from the previous year. Volume decreases and
related operating inefficiencies in both the OE and aftermarket emission control
operations negatively impacted EBIT by approximately $9 million. European EBIT
for the third quarter was also reduced by $2 million due to non-accruable
restructuring spending that could not be accrued as a part of our Project
Genesis restructuring efforts. The elimination of goodwill amortization,
strengthening currency and slightly stronger OE ride control volumes partially
offset these decreases.

EBIT for the company's operations in the rest of the world remained flat
with the same quarter a year ago. Manufacturing related inefficiencies offset
stronger OE volumes in Asia and Australia.

27

EBIT AS A PERCENTAGE OF REVENUE

In North America, EBIT as a percentage of revenue increased by 3 percent.
This increase was driven by stronger OE 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
third quarter due primarily to significant decreases in both OE and aftermarket
exhaust volumes and volume related manufacturing inefficiencies. Also
contributing to the decline were increased expenses related to Project Genesis.
EBIT as a percentage of revenue for the rest of the world decreased one percent
in the third quarter of this year as a result of the fact that increased
revenues for these operations were driven primarily by higher pass-through sales
which typically carry only a small handling charge.

INTEREST EXPENSE, NET OF INTEREST CAPITALIZED

We reported interest expense of $36 million during the third quarter of
2002 compared to $42 million during the same period in 2001. The decrease in
total interest expense, compared with the year earlier, is due primarily to
lower average debt levels and, to a lesser extent, lower interest rates.
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.

Included in our current interest expense are the three-year
floating-to-fixed rate swaps we put in place in early 2000 on $300 million of
our senior term loans, as required by our senior credit agreement. Based on
current short-term interest rates, these swaps are adding approximately $16
million annually to our interest expense, of which we recorded $4 million in the
third quarter of 2002. These swaps expire on February 3, 2003.

INCOME TAXES

Income taxes were a benefit of $2 million for the quarter ended September
30, 2002, compared to a benefit of $3 million for the previous year. The third
quarter of 2002 included a $2 million benefit related to a change in our
estimated effective tax rate for the year, while the third quarter of 2001
included a $1 million benefit for a similar issue. We also recorded a $2 million
benefit in the current quarter related to an accrual to return adjustment in a
foreign jurisdiction. As a result of the above adjustments the effective tax
rate was a negative 36 percent for the third quarter of 2002 compared to 65
percent for the third quarter 2001. Excluding the above adjustments our
effective tax rate was 40 percent for the quarter compared to 29 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 $.13 for the quarter ended
September 30, 2002, compared to a loss of $.06 for the same period of 2001.
Higher EBIT and lower interest expenses drove the increase in earnings quarter
over quarter. Included in our results for the third quarter 2002 are the
negative impacts from expenses related to our restructuring plans offset by a
accrual to return adjustment in a foreign jurisdiction and a tax benefit related
to a change in our estimated effective tax rate which had a net impact of
improving earnings per diluted common share by $.06. You should also read Note 6
in the "Notes to Financial Statements" for more detailed information on earnings
per share.

28

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001

NET SALES AND OPERATING REVENUES

Revenues from our North American operations increased $104 million in the
first nine 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 10 percent to $1,069
million in the first nine months of the year due to higher volumes and increased
catalytic converter revenues that are passed through to our customers. OE
exhaust revenues were up 10 percent in the first nine months primarily due to
increased volumes and higher pass-through sales. OE ride control revenues for
the first nine months increased 11 percent, driven by increased volumes in both
the light vehicle and heavy-duty market. Total OE revenues, excluding $249
million of pass-through sales, increased 7 percent in the first nine months of
the year, in line with North American light vehicle production which also
increased approximately 7 percent from the same period a year ago. Aftermarket
revenues for North America were $403 million in the first nine months of 2002,
representing an increase of one percent compared to the same period in the prior
year. Aftermarket ride control revenues increased 5 percent in the first nine
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 6 percent in the first nine months of the year reflecting an
overall market decline in the exhaust business. Price increases in both product
lines and a shift toward premium products positively impacted revenues by $9
million in the first nine months of 2002.

Our European segment's revenues decreased $100 million or 10 percent in the
first nine months of 2002 compared to the same period last year. Total OE
revenues were $657 million for the first nine months of 2002. OE exhaust
revenues declined 16 percent to $521 million from $620 million the prior year.
Excluding a $70 million decrease in pass-through sales and a $16 million net
increase due to strengthening currency, OE exhaust revenues declined 12 percent.
OE ride control revenues increased to $136 million or one percent from $135
million for the first nine months of 2002. Excluding a $6 million net benefit
from currency appreciation, OE ride control revenues declined 3 percent. Light
vehicle production by European OE's was down about 3 percent for the first nine
months. Our OE exhaust decline was greater than the market primarily due to
launch delays and platform retirements. European aftermarket sales were $241
million in the first nine months of 2002 compared to $243 million in the same
period last year. Excluding a $10 million currency appreciation, aftermarket
revenues declined 5 percent. This decline results 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 Monroe Reflex(TM)
shocks and struts, our premium ride control product, in the second quarter.

Revenues from our operations in the rest of the world increased $3 million
to $243 million in the first nine months of 2002 as compared to $240 million in
the prior year. Increased revenues at our Asian operations were driven by higher
volumes and increased pass-through sales to OE customers. Stronger volumes and
strengthening currency also increased Australian operations by $12 million.
These were partially offset by the weakened South American economy which
decreased revenues by $27 million.

29

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

EBIT for North American operations increased to $108 million in the first
nine months of 2002 from $40 million one year ago as higher sales volumes in
both our OE and aftermarket segments improved our earnings in the first nine
months of the year. Stronger volumes and manufacturing efficiencies contributed
$31 million to OE profitability. The elimination of goodwill amortization,
discussed later in this Management's Discussion and Analysis under the section
"Changes in Accounting Principles", contributed $9 million to the EBIT increase.
Partially offsetting these increases were price reductions, $3 million in
spending that could not be accrued for as a part of our Project Genesis
restructuring efforts and $1 million in costs associated with amending our
senior credit facility. The North American aftermarket was primarily driven by
strong ride control volumes from both new and existing customers that generated
approximately $7 million in increased EBIT in the first nine months. Aftermarket
pricing increases instituted in 2001 and 2002, and a shift toward premium
products, increased EBIT by $9 million. Manufacturing efficiencies as a result
of higher volumes contributed $4 million in EBIT. Partially offsetting these
increases were lower volumes in the aftermarket emission control product line.
Included in North America's prior year's results were charges related to our
2001 restructuring efforts and the establishment of an environmental reserve
that reduced EBIT by $19 million.

Our European segment's EBIT declined to $15 million in the first nine
months of 2002 down from $39 million the previous year. Volume decreases and
related operating inefficiencies in both the OE and aftermarket operations
negatively impacted EBIT by $36 million. We also, in the current year, incurred
approximately $3 million in spending that could not be accrued for as a part of
our Project Genesis restructuring efforts and $1 million in costs associated
with amending our senior credit facility. European EBIT was also reduced by $1
million due to an increase in reserves for recently identified warranty issues.
See a more detailed discussion in "Environmental and Other Matters" later in
this Management's Discussion and

30

Analysis. Partially offsetting these decreases was the sale of our York U.K.
facility which increased EBIT by $11 million. Additionally, the elimination of
goodwill amortization and lower selling, general and administrative overhead
costs also offset some of the decrease. Included in Europe's prior year's
results were charges related to our 2001 restructuring efforts, the
establishment of an environmental reserve and costs associated with amending our
senior credit facility that reduced EBIT in aggregate by $8 million.

EBIT for the company's operations in the rest of the world increased by $4
million in the first nine months 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 operations remained flat year over year and for
our Australian operations declined slightly. Included in the rest of the world's
prior year's results were charges related to our restructuring efforts and costs
associated with amending our senior credit facility that reduced EBIT in
aggregate by $3 million.

EBIT AS A PERCENTAGE OF REVENUE

In North America, EBIT as a percentage of revenue increased by 4 percent
for the first nine 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. North American EBIT margins in 2001 were
significantly impacted by our restructuring activities. In Europe, EBIT margins
declined in the first nine months due to significant decreases in both OE and
aftermarket volumes. Also contributing to the decline were volume related
manufacturing inefficiencies. Partially offsetting these decreases was the gain
on the sale of our York U.K. facility. EBIT as a percentage of revenue for the
rest of the world increased one percent in the first nine months of 2002 as a
result of improved operating performance.

INTEREST EXPENSE, NET OF INTEREST CAPITALIZED

We reported interest expense of $108 million during the nine months ended
September 30, 2002, compared to $132 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 nine months was $3 million in 2002 and $2 million in 2001. See more
detailed explanations on our debt structure in "Liquidity and Capital
Resources--Capitalization" later in this Management's Discussion and Analysis.

Included in our current interest expense are the three-year
floating-to-fixed rate swaps we put in place in early 2000 on $300 million of
our senior term loans, as required by our senior credit agreement. Based on
current short-term interest rates, these swaps are adding approximately $16
million annually to our interest expense, of which we recorded $11 million in
the first nine months of 2002. These swaps expire on February 3, 2003.

INCOME TAXES

Income taxes were an expense of $6 million for the first nine months of
2002, compared to a $12 million benefit for the same period in 2001. The first
nine months expense 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. We also recorded a $2
million benefit in the current quarter related to an accrual to return
adjustment in a foreign jurisdiction. Including these

31

adjustments the effective tax rate was 18 percent for the first nine months of
2002 compared to 29 percent for the same period in 2001. Excluding the above
adjustments our effective tax rate was 40 percent for the first nine months of
2002 compared to 29 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 $.53 for the first nine
months of 2002, compared to a loss of $.83 for the same period in 2001. Included
in results for the first nine months of 2002 are the negative impacts 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 tax benefits related to
lower-than-expected costs for withholding taxes and a accrual to return
adjustment in a foreign jurisdiction. The net impact of these items improved
earnings per diluted common share by $.12. 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 $.56. You should also read Note 6 in the "Notes to
Financial Statements" for more detailed information on earnings per share.

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. 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 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 September 30, 2002, 614 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 2002.

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

32

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 September 30,
2002, we have eliminated 329 positions in connection with the first quarter 2001
plan. We expect to complete these restructuring activities in the fourth quarter
of 2002.

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 emissions control aftermarket plant and an aftermarket
distribution operation in Europe, a ride control plant 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 September 30, 2002, we have eliminated 660 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 in 2003.

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. During the first
nine months of 2002, we have incurred $6 million for these activities. We
estimate these costs will be about $3 million in the fourth quarter of 2002, and
they are being expensed as they are incurred.

During the first nine months of 2002, we have generated approximately $7
million of savings from Project Genesis. Approximately $1 million of savings was
related to closing eight facilities, approximately $1 million of savings was
related to value mapping and plant arrangement and approximately $5 million of
savings was related to relocating production among facilities and centralizing
some functional areas. To date there have been no significant deviations from
planned savings. When complete, we expect that the series of restructuring
actions initiated in the fourth quarter of 2001 will generate annualized savings
of $30 million. Approximately $7 million of savings will be generated by closing
eight facilities, approximately $13 million of savings will be
33

generated by improving the process flow and efficiency through value mapping and
plant arrangement and approximately $10 million of savings will be generated by
relocating production among facilities and centralizing some functional areas.

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

The year-to-date increase in shareholders' equity primarily results from an
increase in the fair market value of interest rate swaps of $9 million and our
recorded net income of $22 million.

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 $23 million during the first nine months of 2002.
This decrease resulted from a decrease in borrowings of $17 million during the
first nine months of 2002 under our revolving credit facility and a $5 million
decrease in our foreign subsidiaries' borrowings. The borrowings outstanding
under our revolving credit facility as of September 30, 2002 were $51 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 committed senior
secured financing arrangement with a syndicate of banks and other financial
institutions, which was $1.262 billion at September 30, 2002. 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

36

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 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 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 $288 million term loan with a final maturity date of
November 4, 2005; (iii) a $262 million term loan with a final maturity date of
November 4, 2007; and (iv) a $262 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 325 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 225 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, were reduced by 25 basis points in the third quarter.
Our consolidated leverage ratio remained below 4.50 as of September 30, 2002. As
a result, assuming our consolidated leverage ratio remains at or near its level
as of September 30, 2002, interest expense will 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.

37

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 charge coverage ratios (consolidated EBITDA less
consolidated capital expenditures, divided by consolidated cash interest paid)
at the end of each period. The financial ratios required and actual ratios
achieved are shown in the following tables:

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 September 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.
We have not incurred any indebtedness not permitted by this indenture. 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 an accounts
receivable securitization program with a commercial bank. We sell original
equipment and aftermarket receivables on a daily basis under this program. At
September 30, 2002, we had sold $66 million of account receivables under this
program, down from $100 million at September 30, 2001, and $68 million at
December 31, 2001. 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

38

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 that ended in October
2002. We are working with the agent of the program to replace this program with
a five year term committed program, not subject to annual renewals. Our goal is
to have the longer-term factoring program in place before the end of the year.
The agent has extended the existing program through January 2003, in
anticipation of implementing the new program. Due to the decline in receivables
balances in the U.S. since last year and the lower level of receivables we
normally generate during the fourth and first quarters, we agreed with the agent
to reduce the size of the current program during the transition period from $100
million to $65 million. The reduced program size will lower commitment fees
payable on the available and unused portion of the committed facility amount. We
also sell some receivables in our European operations to regional banks in
Europe. At September 30, 2002, we had sold $54 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 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.

CONTRACTUAL OBLIGATIONS

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

39

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 September 30, 2002, compared to $9 million at
September 30, 2001. These guarantees are primarily related to performance of
lease obligations by a former affiliate.

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 nine months ended September 30, 2002, cash flows provided from
operating activities were $168 million compared to $149 million in the same
period last year. Higher earnings for the first nine months of 2002 were a key
driver to the increase in cash provided. In addition, we generated $69 million
in cash flow from working capital during the first nine months of 2002, compared
to the first nine months of 2001 when we generated $73 million in cash flow from
working capital. In the first nine months of this year, we generated $76 million
in cash flow through better management of our payables. At the end of 2001, we
reduced payables balances by taking advantage of discounts in Europe. During
2002 we returned to our customary payment schedule, which increased payables
balances and 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. Offsetting these cash inflows were increases in receivables and
other current asset balances which resulted in an outflow of cash of $45 million
for the first nine months.

Since 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 $57 million and $26 million as of September 30, 2002 and
2001, respectfully. At December 31, 2001, these arrangements reduced accounts
receivable by $34 million. These arrangements can be cancelled at any time.

Our current U.S. factoring program is subject to renewal each year on
October 31st. We are working with the agent of the program to replace that
existing arrangement with a five year term committed program, not subject to
annual renewals. Our goal is to have the longer-term factoring program in place
before the end of

40

the year. The agent has extended the existing program through January 2003, in
anticipation of implementing the new program.

INVESTING ACTIVITIES

Cash used for investing activities was $25 million lower in the first nine
months of 2002 compared to the same period a year ago due primarily to $17
million in net proceeds from the sale of our York, U.K. facility and a $19
million settlement from an OE customer for reimbursement of expenses related to
a cancelled platform. Capital expenditures were $86 million in the first nine
months of 2002, up from $74 million in the same period last year. The increase
is partially attributable to capital spending for our Genesis project, which has
been $4 million for the first nine months of the year.

FINANCING ACTIVITIES

Cash used for financing activities was $110 million in the first nine
months of 2002 compared to a use of $13 million in the same period of 2001. We
made three senior debt principal payments of $71 million on our senior credit
facility during the first nine months of 2002. We also made an additional
pre-payment on the senior term loans of $16 million in September using the net
cash proceeds we received in the second quarter from the sale of our York, U.K.
facility.

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 September 30, 2002, we had $505 million in long-term debt
obligations that have fixed interest rates until at least September 30, 2003,
and $734 million in long-term debt obligations that have interest rates subject
to change prior to September 30, 2003 based on prevailing market interest rates.

We estimate that the fair value of our long-term debt at September 30, 2002
was about 87 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 nine months of 2002. Manufacturer incentives have kept
consumer purchases higher than estimates at the beginning of the year, lowering
vehicle inventories. Consequently, current DRI-WEFA estimates for the 2002 North
America light vehicle build rate are 16.5 million units. However, we remain
cautious regarding rest of year 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. Our fourth quarter volumes typically fall, off reflecting the
seasonal slowdown in our global aftermarket and the shutdown in OE production in
late December. Production of heavy-duty trucks has also been strong during the
first nine months of 2002. We believe, however, that the 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
41

sales, reducing production in the first nine months of the year. 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.

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 September 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 $14 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.

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

42

available facts and data at the time, 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 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
ourselves 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 $5 million and $7
million for the nine months ended September 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.

ITEM 4. CONTROLS AND PROCEDURES

Within the 90-day period prior to the filing of this report, an evaluation
was carried out under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of our disclosure controls and procedures (as defined in
Rule 13a-14(c) under the Securities Exchange Act of 1934). Based on their
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that the company's disclosure controls and procedures are effective to
ensure that information required to be disclosed by our company in reports that
it files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission rules and forms. Subsequent to the date of their evaluation, there
were no significant changes in our internal controls or in other factors that
could significantly affect these controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.

43

PART II

OTHER INFORMATION

ITEM 5. OTHER INFORMATION

On September 10, 2002, the Audit Committee of our Board of Directors
approved the continuing provision of tax compliance services to our company by
Deloitte & Touche LLP, our independent public accountants. The personnel
performing these services have been engaged in that capacity by our company for
more than five years. The Audit Committee also approved engaging Deloitte &
Touche LLP to audit our benefit plans.

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 September 30, 2002:

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

Current Report on Form 8-K/A, filed on August 7, 2002 and amending the report
dated May 16, 2002 to provide additional information pursuant to Item 4
regarding the cessation of Arthur Andersen LLP's client-auditor relationship
with respect to the Tenneco Automotive Employee Stock Ownership Plan for
Salaried Employees and the Tenneco Automotive Employee Stock Ownership Plan for
Hourly Employees.

Current Report on Form 8-K, dated August 14, 2002, providing pursuant to Item 9
certain information regarding certifications provided by our Chief Executive
Officer and Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and as mandated by order of the SEC dated June 27,
2002.

Current Report on Form 8-K/A, filed on September 30, 2002 and further amending
the report dated May 16, 2002 to provide additional information pursuant to Item
4 regarding the engagement of Deloitte & Touche LLP as auditors for the Tenneco
Automotive Employee Stock Ownership Plan for Salaried Employees and the Tenneco
Automotive Employee Stock Ownership Plan for Hourly Employees.

44

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: November 14, 2002

45

CERTIFICATIONS

I, Mark P. Frissora, Chairman and Chief Executive Officer of Tenneco Automotive
Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Tenneco
Automotive Inc.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

/s/ MARK P. FRISSORA
--------------------------------------

Dated: November 14, 2002

46

I, Mark A. McCollum, Senior Vice President and Chief Financial Officer of
Tenneco Automotive Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Tenneco
Automotive Inc.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

/s/ MARK A. MCCOLLUM
--------------------------------------

Dated: November 14, 2002

47

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

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

53