TENNECO AUTOMOTIVE INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended June 30, 2003

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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]

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

Common Stock, par value $.01 per share: 40,661,873 shares as of July 31,
2003.

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TABLE OF CONTENTS

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

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

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

- general economic, business and market conditions;

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

- operating hazards associated with our business;

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

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

- cyclicality of automotive production and sales;

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;

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

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

3

PART I.

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

INDEPENDENT ACCOUNTANTS' REPORT

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

We have reviewed the accompanying consolidated balance sheet of Tenneco
Automotive Inc. and consolidated subsidiaries as of June 30, 2003, and the
related consolidated statements of income (loss) and comprehensive income (loss)
for the three-month and six-month periods ended June 30, 2003 and 2002, and of
cash flows and changes in shareholders' equity for the six-month periods ended
June 30, 2003 and 2002. These interim financial statements are the
responsibility of Tenneco Automotive Inc.'s management.

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

We previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Tenneco Automotive Inc. and consolidated subsidiaries as of December 31, 2002,
and the related consolidated statements of income (loss), cash flows, changes in
shareholders' equity and comprehensive income (loss) for the year then ended
(not presented herein); and in our report dated February 3, 2003, we expressed
an unqualified opinion on those consolidated financial statements (such report
includes an explanatory paragraph relating to the adoption of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets").
In our opinion, the information set forth in the accompanying consolidated
balance sheet as of December 31, 2002 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.

DELOITTE & TOUCHE LLP

Chicago, Illinois
July 21, 2003

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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, 2002.

In our opinion, the accompanying unaudited financial statements contain all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly Tenneco Automotive Inc.'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 accounting principles generally accepted in the United
States 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 the 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 2003 presentations.

(2) In June 2003, we issued $350 million of 10 1/4 percent senior secured
notes. The notes have a final maturity date of July 15, 2013. The notes accrue
interest from June 19, 2003 with a first interest payment date of January 15,
2004. The notes are senior secured obligations and rank equally in right of
payment with our existing and future senior debt and rank senior in right of
payment to all of our existing and future subordinated debt. The notes are
jointly and severally guaranteed by all of our domestic subsidiaries that also
guarantee our senior credit facility. These guarantees are senior obligations of
our subsidiary guarantors. The notes and guarantees are secured by second
priority liens, subject to specified exceptions, on all of our and our
subsidiary guarantors' assets that secure obligations under our senior credit
facility, except that only a portion of the capital stock of our and our
subsidiary guarantor's domestic subsidiaries is provided as collateral and no
assets or capital stock of our direct or indirect foreign subsidiaries will
secure the notes or guarantees.

We can redeem some or all of the notes at any time after July 15, 2008. We
can also redeem up to 35 percent aggregate principal amount of the notes using
the proceeds of certain equity offerings completed before July 15, 2006. If we
sell certain of our assets or experience specific kinds of changes in control,
we must offer to repurchase the notes.

The net proceeds of the offering of the notes, after deducting underwriting
discounts and commissions and our expenses, were $338 million. We used the net
proceeds of the offering to repay outstanding amounts under our senior credit
facility as follows: (i) first, to prepay $199 million on the term loan A due
November 4, 2005, (ii) second, to prepay $52 million on the term loans B and C
due November 4, 2007 and May 4, 2008, respectively, and (iii) third, to prepay
outstanding borrowings of $87 million under the revolving credit portion of our
senior credit facility without reducing the commitments from $450 million.

(3) Over the past several years we have adopted plans to restructure
portions of our operations. These plans were approved by the Board of Directors
and were designed to reduce operational and administrative overhead costs
throughout the business. Prior to the change in accounting required for exit or
disposal activities described in Note 5 below, we recorded charges to income
related to these plans for costs that do not benefit future activities in the
period in which the plans were finalized and approved, while actions necessary
to affect these restructuring plans occurred over future periods in accordance
with established plans.

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
involved 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 closed
facilities include an
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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

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. In the fourth quarter of 2001, we recorded
pre-tax charges related to Project Genesis of $27 million. Within the statement
of income (loss), $23 million of the pre-tax charge was reflected in cost of
sales, while $4 million was included in selling, general and administrative
expenses. These charges were 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 costs 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 emission 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 $0.81 per diluted common share. As
of June 30, 2003, we have eliminated 965 positions in connection with the first
phase of Project Genesis. Additionally, we are executing this plan more
efficiently than originally anticipated and as a result in the fourth quarter of
2002 reduced our reserves related to this restructuring activity by $6 million
which was recorded in cost of sales. We expect to complete all remaining
restructuring activities related to the first phase of Project Genesis in 2003.

We incurred other costs in the first six months of 2003 of $5 million for
moving and rearrangement activities related to our restructuring actions
initiated in prior periods that could not be accrued as part of the
restructuring charges for those actions.

Including the costs incurred in 2002 of $11 million, we have incurred a
total of $16 million for moving and rearrangement activities related to our
restructuring actions initiated in prior periods that could not be accrued as
part of the restructuring charges for these actions.

In the first quarter of 2003, we incurred severance costs of $1 million
associated with eliminating 17 salaried positions through selective layoffs and
an early retirement program. Additionally, 93 hourly positions were eliminated
through selective layoffs in the quarter. These reductions were done to reduce
ongoing labor costs in North America. All of this charge was recorded in cost of
sales.

Amounts related to the reserves we have established regarding activities
that are part of our restructuring plans are as follows:

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

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

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. As of June 30, 2003, we have excluded $16 million of the $60 million
available under the terms of the amendment. 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, or its authorized committee, and if the costs of the
plans exceed the amount previously approved by our senior lenders, could require
approval by our senior lenders. We plan to conduct any workforce reductions that
result in compliance with all legal and contractual requirements including
obligations to consult with workers' councils, union representatives and others.

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

As of June 30, 2003, we are designated as a potentially responsible party
in three 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 $12 million. For each of 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 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.

We also from time to time are involved in legal proceedings or claims that
are incidental to the conduct of our business. Some of these proceedings allege
damages against us relating to environmental liabilities (including toxic tort,
property damage and remediation), intellectual property matters (including
patent,

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

trademark and copyright infringement, and licensing disputes), personal injury
claims (including injuries due to product failure, design or warnings issues,
and other product liability related matters), employment matters, and commercial
or contractual disputes, sometimes related to acquisitions or divestitures. For
example, we have recently responded to a request from the Federal Trade
Commission to substantiate certain of our product claims. As another example, we
are involved in litigation with the minority owner of one of our Indian joint
ventures over various operational issues. This dispute involves a court-mandated
bidding process, which could result in a non-cash charge to earnings if we are
required to sell our interest in the joint venture on unfavorable terms. 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 future consolidated financial position
or results of operations. In addition, we are subject to a number of lawsuits
initiated by a significant number of claimants alleging health problems as a
result of exposure to asbestos. Many of these cases involve significant numbers
of individual claimants. However, only a small percentage of these claimants
allege that they were automobile mechanics who were allegedly exposed to our
former muffler products and a significant number appear to involve workers in
other industries or otherwise do not include sufficient information to determine
whether there is any basis for a claim against us. We believe, based on
scientific and other evidence, it is unlikely that mechanics were exposed to
asbestos by our former muffler products and that, in any event, they would not
be at increased risk of asbestos-related disease based on their work with these
products. Further, many of these cases involve numerous defendants, with the
number of each in some cases exceeding 200 defendants from a variety of
industries. Additionally, the plaintiffs either do not specify any, or specify
the jurisdictional minimum, dollar amount for damages. On the other hand, we are
experiencing an increasing number of these claims, likely due to bankruptcies of
major asbestos manufacturers. We vigorously defend ourselves against these
claims as part of our ordinary course of business. To date, with respect to
claims that have proceeded sufficiently through the judicial process, we have
regularly achieved favorable resolution in the form of a dismissal of the claim
or a judgment in our favor. Accordingly, we presently believe that these
asbestos-related claims will not have a material adverse impact on our future
financial condition or results of operations.

We provide warranties on some of our products. The warranty terms vary but
range from one year up to limited lifetime warranties on some of our premium
aftermarket products. Provisions for estimated expenses related to product
warranty are made at the time products are sold or when specific warranty issues
are identified on OE products. These estimates are established using historical
information about the nature, frequency, and average cost of warranty claims. We
actively study trends of warranty claims and take action to improve product
quality and minimize warranty claims. We believe that the warranty reserve is
appropriate; however, actual claims incurred could differ from the original
estimates, requiring adjustments to the reserve. The reserve is included in both
long-term and short-term liabilities on the balance sheet.

Below is a table that shows the activity in the warranty accrual accounts:

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

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.

(5) In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 changed 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. Under the provisions of SFAS No. 142,
we were required to perform an impairment analysis on the balance of goodwill at
January 1, 2002. The fair value of our reporting units used in determining the
goodwill impairment was computed using the present value of expected future cash
flows. As a result of this analysis, we determined that goodwill associated with
our North American original equipment ride control and European aftermarket
operations was impaired. As a result, a charge of $218 million, net of taxes of
$6 million, was recorded in the first quarter of 2002 as a cumulative effect of
a change in accounting principle. The balance of unamortized goodwill was $191
million at June 30, 2003. We are required to test this balance for impairment on
an annual basis.

The changes in the carrying amount of goodwill for the six months ended
June 30, 2003, are as follows:

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 was effective for fiscal years beginning
after June 15, 2002. The adoption of SFAS No. 143 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 changed 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 are required to
apply the new standard prospectively to new exit or disposal activities
initiated after December 31, 2002. SFAS No. 146 generally requires that these
costs be recognized at a later date and over time, rather than in a single
charge. The adoption of SFAS No. 146 did not have a material impact on our
financial position or results of operations.

In November 2002, the FASB issued Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"), which expanded previously
issued accounting guidance and disclosure requirements for certain guarantees.
FIN 45 provides that issuing a guarantee imposes a non-contingent obligation to
stand ready to perform in the event that the conditions specified in the
guarantee occur, and that a liability representing the fair value of such a

14

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

guarantee must be recognized when the guarantee is issued. We are required to
apply these initial recognition and measurement provisions to guarantees issued
or modified after December 31, 2002. The adoption of FIN 45 has not had a
material impact on our financial position or results of operations. You should
also read Note 9 to the financial statements.

In December 2002, the FASB issued SFAS No. 148 which provided alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation and amended the disclosure
requirements to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. See Note 7
to our financial statements for this information for the second quarter.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires that the assets,
liabilities and results of the activity of variable interest entities be
consolidated into the financial statements of the entity that has the
controlling financial interest. FIN 46 also provides the framework for
determining whether a variable interest entity should be consolidated based on
voting interest or significant financial support provided to it. This
interpretation was effective immediately for variable interest entities created
after January 31, 2003 and effective July 1, 2003 for variable interest entities
created before February 1, 2003. The adoption of FIN 46 did not have any impact
on our consolidated financial statements.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amended and
clarified financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did
not have a material impact on our financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 established standards for classification of certain financial
instruments that have characteristics of both liabilities and equity but have
been presented entirely as equity or between the liabilities and equity section
of the statement of financial position. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003. The adoption of SFAS
No. 150 did not have a material impact on our financial position.

In May 2003, the FASB's Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 01-08, "Determining Whether an Arrangement Contains a
Lease." This issue addressed reporting revenue as rental or leasing income that
would otherwise be reported as part of product sales or service revenue. This
requires the parties to the arrangement to determine whether a service contract
or similar arrangement is or includes a lease within the scope of SFAS No. 13,
"Accounting for Leases." The consensus should be applied prospectively to
arrangements agreed to, modified, or acquired in a business combination in the
fiscal periods beginning after May 28, 2003. We are currently evaluating the
effect that this consensus may have on our financial position or results of
operations.

(6) We have an agreement to periodically sell an interest in some of our
U.S. trade accounts receivable to a third party. Receivables become eligible for
the program on a daily basis, at which time the receivables are sold to the
third party, net of a factoring discount, through a wholly-owned subsidiary.
Under this agreement, as well as individual agreements with third parties in
Europe, we have sold accounts receivable of $128 million and $140 million at
June 30, 2003 and 2002, respectively. We recognized a loss of approximately $1
million for both the six months ended June 30, 2003 and 2002, 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

15

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

based on funding cost incurred by the third party, and it averaged three percent
during the time period in 2003 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.

(7) We account for our stock-based employee compensation plans under the
recognition and measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees." No stock-based employee compensation cost is
reflected in net income (loss) for stock options, as all options granted under
those plans had an exercise price equal to the market value of the stock at the
date of grant. We also granted restricted shares, restricted units and stock
equivalent units to certain key employees. After-tax stock based compensation
expense relating to restricted shares and stock equivalent units for the first
six months of 2003 was less than $1 million compared to approximately $3 million
for the same period in the prior year relating to restricted shares, performance
shares, and stock equivalent units. As permitted by SFAS No. 123, "Accounting
for Stock-Based Compensation," and amended by SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure, an amendment of FASB
Statement No. 123," we follow the disclosure only requirements of SFAS No. 123.
We estimate that our net income (loss) for the first six months of 2003 and 2002
would have been lower by approximately $1 million had we applied the fair value
method of accounting for stock options. The following table illustrates the
effect on net income (loss) and earnings (loss) per share if we had applied the
fair value recognition provisions of SFAS No. 123:

16

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

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

Options to purchase 4,656,081 and 3,314,024 shares of common stock were
outstanding at June 30, 2003 and 2002, respectively, but were not included in
the computation of diluted EPS because the options' exercise prices were greater
than the average market price of the common shares on such dates.

(9) We occasionally provide guarantees that could require us to make future
payments in the event that the third party primary obligor does not make its
required payments. We have not recorded a liability for any of these guarantees.
The only third party guarantee we have made is the performance of lease
obligations by a former affiliate. Our maximum liability under this guarantee
was approximately $5 million and $6 million at June 30, 2003 and 2002,
respectively. We have no recourse in the event of default by the former
affiliate. However, we have not been required to make any payments under this
guarantee.

Additionally, we have from time to time issued guarantees for the
performance of obligations by some of our subsidiaries, and some of our
subsidiaries have guaranteed our debt. All of our then existing and future
material domestic wholly-owned subsidiaries fully and unconditionally guarantee
the $964 million senior secured credit facility, the $350 million senior secured
notes and the $500 million senior subordinated notes on a joint and several
basis. The arrangement for the senior secured credit facility is also secured by
first-priority liens on substantially all our domestic assets and pledges of 66
percent of the stock of certain first-tier foreign subsidiaries. The arrangement
for the $350 million senior secured notes is also secured by second-priority
liens on substantially all our domestic assets, excluding some of the stock of
our domestic subsidiaries. This

17

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

arrangement is not secured by any pledges of stock or assets of our foreign
subsidiaries. You should also read Note 11 where we present the Supplemental
Guarantor Condensed Consolidating Financial Statements.

We have issued guarantees through letters of credit in connection with some
obligations of our affiliates. We have guaranteed through letters of credit
support for local credit facilities, travel and procurement card programs, and
cash management requirements for some of our subsidiaries totaling $41 million.
We have also issued $18 million in letters of credit to support some of our
subsidiaries' insurance arrangements. In addition, we have issued $3 million in
guarantees through letters of credit to guarantee other obligations of
subsidiaries primarily related to environmental remediation activities.

(10) 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.

The following table summarizes certain segment information:

18

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

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

Basis of Presentation

Subject to limited exceptions, all of our existing and future material
domestic wholly owned subsidiaries (which we refer to as the Guarantor
Subsidiaries) fully and unconditionally guarantee our senior subordinated notes
due 2009 and our senior secured notes due 2013 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,
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.

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)

21

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

STATEMENT OF INCOME (LOSS)

22

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

STATEMENT OF INCOME (LOSS)

23

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

BALANCE SHEET

24

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

BALANCE SHEET

25

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.

26

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.)
27

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

RESULTS FROM OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002

NET SALES AND OPERATING REVENUES

The following tables reflect our revenues for the second quarter of 2003
and 2002. We present these reconciliations of revenues in order to reflect the
trend in our sales in various product lines and geographic regions separately
from the effects of doing business in currencies other than the U.S. dollar.
Additionally, "pass-through" catalytic converter sales include precious metals
pricing, which may be volatile. 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. While our original equipment
customers assume the risk of this volatility, it impacts our reported revenue.
Excluding pass-through catalytic converter sales removes this impact. We have
not reflected any currency impact in the 2002 table since this is the base
period for measuring the effects of currency during 2003 on our operations. We
use this information to analyze the trend in our revenues before these factors.
We believe investors find this information useful in understanding period to
period comparisons in our revenues.

Revenues from our North American operations decreased $38 million in the
second quarter of 2003 compared to last year's second quarter reflecting lower
sales generated from both the original equipment business and aftermarket
business. Total North American OE revenues decreased seven percent to $365
million in the second quarter of this year due to decreased volumes and
pass-through sales in the emission control product line. Pass-through emission
control sales decreased 17 percent to $75 million in the current quarter. OE
emission control revenues were down 11 percent in the quarter, while OE ride
control revenues increased four percent. Total OE revenues, excluding
pass-through sales, decreased four percent in the second quarter, while North
American light vehicle production decreased approximately nine percent from the
second quarter a year ago. Our revenue decline was less than the build rate
decline primarily due to our strong position on top-selling platforms with
General Motors and Ford. Aftermarket revenues for North America were $136
million in the second quarter of 2003, representing a decrease of eight percent
compared to the same period in the prior year. Aftermarket ride control revenues
decreased $2 million or two percent in the second quarter, as a result of a weak
economy and, to a lesser extent, lower initial orders related to new customer
additions in 2003 compared to the prior year. Aftermarket emission control
revenues declined 17 percent in the second quarter reflecting the continued
overall market decline in the emission control business and the longer lives of
exhaust components due to the use of stainless steel, which reduces aftermarket
replacement rates.

Our European segment's revenues increased $67 million or 21 percent in the
second quarter of 2003 compared to last year's second quarter. Total OE revenues
were $286 million, up 24 percent from the second quarter of last year. OE
emission control revenues increased 22 percent to $222 million from $182 million
the prior year. Excluding a $1 million decrease in pass-through sales and a $37
million increase due to strengthening currency, OE emission control revenues
increased three percent. This was a significant

29

improvement from the change in European production levels, which decreased
approximately four percent from the second quarter a year ago. Strong volumes on
PSA, Volkswagen, General Motors and Volvo platforms more than offset the general
market decline. OE ride control revenues increased to $64 million or up 31
percent from $49 million a year ago. Excluding an $11 million benefit from
currency appreciation, OE ride control revenues increased eight percent. Our
revenue increase was greater than the build rate due to stronger sales on
existing platforms with Volkswagen, Ford and PSA. European aftermarket sales
were $102 million in the second quarter of this year compared to $90 million in
last year's second quarter. Excluding $18 million attributable to currency
appreciation, European aftermarket revenues declined seven percent. Ride control
aftermarket revenues, excluding the impact of currency, decreased only two
percent reflecting the continued positive impact of the Monroe Reflex(R)
introduction in the second quarter of last year. Additionally, aftermarket
emission control revenues were lower as a result of the now standard use of
longer lasting stainless steel by OE manufacturers. Excluding the impact of
currency, European aftermarket emission control revenues declined 11 percent
from the prior year.

Revenues from our Other operations, which include South America, Australia
and Asia, increased $21 million to $109 million in the second quarter of 2003 as
compared to $88 million in the prior year. Higher volumes and increased
pass-through sales drove increased revenues of $11 million at our Asian
operations. In Australia, stronger OE volumes and strengthening currency
increased revenues by 32 percent. South American revenues were essentially flat
year over year as increased OE volumes were offset by unfavorable currency
exchange rate changes.

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

The EBIT results shown in the preceding table include the following items,
discussed below under "Restructuring Charges" and "Liquidity and Capital
Resources--Capitalization", which have an effect on the comparability of EBIT
results between periods:

EBIT for North American operations decreased to $49 million in the second
quarter of 2003 from $53 million one year ago driven by lower sales volumes in
both our OE and aftermarket segments. Lower OE emission control volumes reduced
EBIT by $4 million. This decrease was partially offset by increased ride control
volumes and lower restructuring and restructuring-related spending. The North
American aftermarket EBIT was $2 million lower quarter over quarter as volume
decreases were offset by lower changeover and advertising expenses. Included in
2002's second quarter EBIT was $1 million in restructuring-related expenses.

30

Our European segment's EBIT was flat at $11 million quarter over quarter.
However, included in 2002's second quarter EBIT was an $11 million gain on the
sale of our York UK facility and $1 million in restructuring and
restructuring-related expenses. Included in 2003's second quarter EBIT was $1
million of restructuring related expenses. Higher OE volumes in both product
lines contributed $2 million to EBIT. Also contributing to EBIT in the current
quarter were $5 million in manufacturing efficiencies primarily in OE emission
control and currency appreciation of $4 million. Additionally, benefits we are
realizing from Project Genesis, which is described further in "Restructuring
Charges" later in this Management's Discussion and Analysis, added $4 million to
EBIT. These increases were partially offset by lower aftermarket volumes that
reduced EBIT by $2 million. In addition, EBIT, as a result of our inventory
reduction programs, was reduced by $2 million, as fewer fixed overhead costs
were absorbed into inventory.

EBIT for our Other operations remained flat at $7 million in the second
three months of 2003 compared to the same three months one year ago. Higher OE
revenues are being offset by inflation, a weak global aftermarket and increases
in raw materials costs.

EBIT AS A PERCENTAGE OF REVENUE

In North America, EBIT as a percentage of revenue remained flat as lower OE
and aftermarket volumes were partially offset by lower changeover costs and
decreased selling, general and administrative spending. In Europe, EBIT margins
also remained flat in the second quarter as OE volume increases, manufacturing
efficiencies, restructuring savings and currency appreciation in the current
quarter replaced an asset sale gain from the prior year. EBIT as a percentage of
revenue for our other operations decreased two percent. The decrease is
primarily driven by higher pass-through sales year over year and to a lesser
extent a weaker global aftermarket.

INTEREST EXPENSE, NET OF INTEREST CAPITALIZED

We reported interest expense of $38 million during the second quarter of
2003 compared to $36 million during the same period in 2002. The current
quarter's interest expense includes $5 million for the write-off of senior debt
issuance costs that were deferred on the senior debt that we partially paid with
the proceeds of our $350 million bond offering in June of 2003. Partially
offsetting this increase were lower interest rates on our variable rate debt and
the termination of our three-year floating to fixed interest rate swap agreement
that expired on February 3, 2003. See more detailed explanations on our debt
structure, including the $350 million bond offering in June 2003 and its
anticipated impact on our interest expense, in "Liquidity and Capital
Resources--Capitalization" later in this Management's Discussion and Analysis.

INCOME TAXES

Income taxes were a $3 million expense for the quarter ended June 30, 2003,
compared to a $16 million expense for the quarter ended June 30, 2002. The
second quarter 2003 included a benefit of $8 million, which occurred as we have
continued to settle prior year tax issues on a more favorable basis than
originally anticipated. The effective tax rate including the $8 million benefit
was 14 percent. Excluding the $8 million benefit our effective tax rate was 40
percent. The effective tax rate for the second quarter of 2002 was 45 percent.

31

EARNINGS PER SHARE

We reported earnings per diluted common share before cumulative effect of
change in accounting principle of $0.58 for the second quarter of 2003, compared
to $0.45 per diluted share for the second quarter of 2002. Included in the
results for the second quarter of 2003 are the negative impacts from expenses
related to our restructuring activities, the write-off of debt issuance costs
relating to the bond transaction in June of 2003 and a tax benefit for the
resolution of several audit issues. The net impact of these items increased
earnings per diluted share by $0.09. Included in the results for the second
quarter 2002 are the negative impacts from expenses related to our restructuring
activities and the gain on the sale of our York UK facility. In total, these
items improved earnings per diluted common share by $0.11. You should also read
Note 8 to the 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. Prior to the change in accounting required for exit or disposal
activities described under "Changes in Accounting Principles" below, we recorded
charges to income related to these plans for costs that do not benefit future
activities in the period in which the plans were finalized and approved, while
actions necessary to affect these restructuring plans occurred over future
periods in accordance with established plans.

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
involved 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 closed
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. In the fourth
quarter of 2001, we recorded pre-tax charges related to Project Genesis of $27
million. Within the statement of income (loss), $23 million of the pre-tax
charge was reflected in cost of sales, while $4 million was included in selling,
general and administrative expenses. These charges were 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 costs
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 emission 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
$0.81 per diluted common share. As of June 30, 2003, we have eliminated 965
positions in connection with the first phase of Project Genesis. Additionally,
we are executing this plan more efficiently than originally anticipated and as a
result in the fourth quarter of 2002 reduced our reserves related to this
restructuring activity by $6 million which was recorded in cost of sales. We
expect to complete all remaining restructuring activities related to the first
phase of Project Genesis in 2003.

We incurred other costs in the first six months of 2003 of $5 million for
moving and rearrangement activities related to our restructuring actions
initiated in prior periods that could not be accrued as part of the
restructuring charges for those actions.

32

Including the costs incurred in 2002 of $11 million, we have incurred a
total of $16 million for moving and rearrangement activities related to our
restructuring actions initiated in prior periods that could not be accrued as
part of the restructuring charges for these actions.

In the first quarter of 2003, we incurred severance costs of $1 million
associated with eliminating 17 salaried positions through selective layoffs and
an early retirement program. Additionally, 93 hourly positions were eliminated
through selective layoffs in the quarter. These reductions were done to reduce
ongoing labor costs in North America. All of this charge was recorded in cost of
sales.

To date we have generated about $24 million of savings from Project
Genesis. About $5 million of savings was related to closing the eight
facilities, about $13 million of savings was related to value mapping and plant
arrangement and about $6 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. About $7 million of the
expected savings should be generated by closing the eight facilities, about $13
million of the expected savings should be generated by improving process flow
and efficiency through value mapping and plant arrangement and about $10 million
of the expected savings will be generated by relocating production among
facilities and centralizing some functional areas.

Amounts related to the reserves we have established regarding activities
that are part of our restructuring plans are as follows:

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.
As of June 30, 2003, we have excluded $16 million of the $60 million available
under the terms of the amendment. 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, or its authorized committee, and if the costs of the
plans exceed the amount previously approved by our senior lenders, could require
approval by our senior lenders. We plan to conduct any workforce reductions that
result in compliance with all legal and contractual requirements including
obligations to consult with workers' councils, union representatives and others.

CRITICAL ACCOUNTING POLICES

We prepare our financial statements in accordance with accounting
principles generally accepted in the United States. Preparing our financial
statements in accordance with generally accepted accounting principles requires
us to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. The following paragraphs include a discussion of
some critical areas where estimates are required.

We recognize revenue for sales to our original equipment and aftermarket
customers under the terms of our arrangements with those customers, generally at
the time of shipment from our plants or distribution

33

centers. For our aftermarket customers, we provide for promotional incentives
and returns at the time of sale. Estimates are based upon the terms of the
incentives and historical experience with returns. Where we have offered product
warranty, we also provide for warranty costs. Those estimates are based upon
historical experience and upon specific warranty issues as they arise. While we
have not experienced any material differences between these estimates and our
actual costs, it is reasonably possible that future warranty issues could arise
that could have a significant impact on our financial statements.

We expense pre-production design and development costs incurred for our
original equipment customers unless we have a contractual guarantee for
reimbursement of those costs from the customer. At June 30, 2003, we had $13
million recorded as a long-term receivable from original equipment customers for
guaranteed pre-production design and development arrangements. While we believe
that the vehicle programs behind these arrangements will enter production, these
arrangements allow us to recover our pre-production design and development costs
in the event that the programs are cancelled or do not reach expected production
levels. We have not experienced any material losses on arrangements where we
have a contractual guarantee of reimbursement from our customers.

We have a U.S. Federal tax net operating loss ("NOL") carryforward at June
30, 2003, of $516 million, which will expire in varying amounts from 2018 to
2023. The federal tax effect of that NOL is $176 million, and is recorded as an
asset on our balance sheet at June 30, 2003. We estimate, based on available
evidence, that it is more likely than not that we will utilize the NOL within
the prescribed carryforward period. That estimate is based upon our expectations
regarding future taxable income of our U.S. operations and upon strategies
available to accelerate usage of the NOL. Circumstances that could change that
estimate include future U.S. earnings at lower than expected levels or a
majority ownership change as defined in the rules of the U.S. tax law. If that
estimate changed, we would be required to cease recognizing an income tax
benefit for any new NOL and could be required to record a reserve for some or
all of the asset currently recorded on our balance sheet. As of June 30, 2003,
we believe that there has been a significant change in our ownership, but not a
majority change, since the 1999 spin-off of Pactiv.

We utilize the intrinsic value method to account for our stock-based
compensation plans in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees." If our compensation costs for
our stock-based compensation plans were determined using the fair value method
of accounting as provided in Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," we estimate that
our pro-forma net income (loss) and earnings per share for the six months ended
June 30, 2003 and 2002 would be lower by approximately $1 million or $.01 per
diluted share. You should also read Note 7 to the financial statements.

CHANGES IN ACCOUNTING PRINCIPLES

In July 2001, the Financial Accounting Standards Board ("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 changed 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. Under the provisions of
SFAS No. 142, we were required to perform an impairment analysis on the balance
of goodwill at January 1, 2002. The fair value of our reporting units used in
determining the goodwill impairment was computed using the present value of
expected future cash flows. As a result of this analysis, we determined that
goodwill associated with our North American original equipment ride control and
European aftermarket operations was impaired. As a result, a charge of $218
million, net of taxes of $6 million, was recorded in the first quarter of 2002
as a cumulative effect of a change in accounting principle. The balance of
unamortized goodwill was $191 million at June 30, 2003. We are required to test
this balance for impairment on an annual basis.

34

The changes in the carrying amount of goodwill for the six months ended
June 30, 2003, are as follows:

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 was effective for fiscal years beginning
after June 15, 2002. The adoption of SFAS No. 143 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 changed 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 are required to
apply the new standard prospectively to new exit or disposal activities
initiated after December 31, 2002. SFAS No. 146 generally requires that these
costs be recognized at a later date and over time, rather than in a single
charge. The adoption of SFAS No. 146 did not have a material impact on our
financial position or results of operations.

In November 2002, the FASB issued Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"), which expanded previously
issued accounting guidance and disclosure requirements for certain guarantees.
FIN 45 provides that issuing a guarantee imposes a non-contingent obligation to
stand ready to perform in the event that the conditions specified in the
guarantee occur, and that a liability representing the fair value of such a
guarantee must be recognized when the guarantee is issued. We are required to
apply these initial recognition and measurement provisions to guarantees issued
or modified after December 31, 2002. The adoption of FIN 45 has not had a
material impact on our financial position or results of operations. You should
also read Note 9 to the financial statements.

In December 2002, the FASB issued SFAS No. 148 which provided alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation and amended the disclosure
requirements to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. See Note 7
to our financial statements for this information for the second quarter.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires that the assets,
liabilities and results of the activity of variable interest entities be
consolidated into the financial statements of the entity that has the
controlling financial interest. FIN 46 also provides the framework for
determining whether a variable interest entity should be consolidated based on
voting interest or significant financial support provided to it. This
interpretation was effective immediately for variable interest entities created
after January 31, 2003 and effective July 1, 2003 for variable interest entities
created before February 1, 2003. The adoption of FIN 46 did not have any impact
on our consolidated financial statements.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amended and
clarified financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did
not have a material impact on our financial position or results of operations.

35

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 established standards for classification of certain financial
instruments that have characteristics of both liabilities and equity but have
been presented entirely as equity or between the liabilities and equity section
of the statement of financial position. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003. The adoption of SFAS
No. 150 did not have a material impact on our financial position.

In May 2003, the FASB's Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 01-08, "Determining Whether an Arrangement Contains a
Lease." This issue addressed reporting revenue as rental or leasing income that
would otherwise be reported as part of product sales or service revenue. This
requires the parties to the arrangement to determine whether a service contract
or similar arrangement is or includes a lease within the scope of SFAS No. 13,
"Accounting for Leases." The consensus should be applied prospectively to
arrangements agreed to, modified, or acquired in a business combination in the
fiscal periods beginning after May 28, 2003. We are currently evaluating the
effect that this consensus may have on our financial position or results of
operations.

RESULTS FROM OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002

NET SALES AND OPERATING REVENUES

The following tables reflect our revenues for the first six months of 2003
and 2002, including the same reconciliations as are presented above for the
first three months of 2003 and 2002. See "Results from Operations for the Three
Months Ended June 30, 2003 and 2002" for a description of why we present, and
how we use, these reconciliations.

Revenues from our North American operations decreased $24 million in the
first six months of 2003 compared to last year's first six months reflecting
lower sales generated from the aftermarket business. Total North American OE
revenues increased one percent to $738 million in the first six months of this
year as higher ride control volumes were partially offset by lower emission
control volumes. Pass-through emission control sales decreased seven percent to
$162 million in the first six months of 2003. OE emission control revenues were
down three percent in the first six months of 2003 as compared to the prior
year. Adjusted for pass-through sales OE emission control sales were flat with
the prior year. OE ride control revenues increased nine percent from the prior
year. Total OE revenues, excluding pass-through sales, increased three percent
in the first six months of 2003, while North American light vehicle production
decreased approximately four percent from the first six months a year ago. Our
revenue improvement was greater than the build rate decline primarily due to our
strong position on top-selling platforms with General Motors, Ford and Honda.
Aftermarket revenues for North America were $244 million in the first six months
of 2003, representing a decrease of 11 percent compared to the same period in
the prior year. Aftermarket ride control revenues decreased $14 million or eight
percent in the first six months of 2003, as a result of a weak economy and lower
initial orders related to new customer additions in 2003 compared to the prior
year. Aftermarket emission control revenues declined 16 percent in the first six
months of 2003 compared to 2002 reflecting the continued overall market decline
in the emission control business and the longer lives of exhaust components due
to the use of stainless steel, which reduces aftermarket replacement rates.

Our European segment's revenues increased $140 million or 24 percent in the
first six months of 2003 compared to last year's first six months. Total OE
revenues were $555 million, up 27 percent from the first six months of last
year. OE emission control revenues in the first six months increased 25 percent
to $434 million from $348 million in the prior year. Excluding a $10 million
increase in pass-through sales and a $71 million increase due to strengthening
currency, OE emissions control revenues increased two percent over the first six
37

months of 2002. This was a significant improvement from the change in European
production levels, which decreased approximately two percent from the first six
months a year ago. Strong volumes on PSA, Volkswagen, General Motors and Volvo
platforms are more than offsetting the general market decline. OE ride control
revenues in the first six months increased to $121 million or up 34 percent from
$90 million a year ago. Excluding a $20 million benefit from currency
appreciation, OE ride control revenues increased 12 percent. Our revenue
increase was greater than the build rate due to stronger sales on existing
platforms with Volkswagen, Ford and PSA. European aftermarket sales were $178
million in the first six months of this year compared to $155 million in last
year's first six months. Excluding $32 million attributable to currency
appreciation, European aftermarket revenues declined six percent in the first
six months compared to last year's first six months. Ride control aftermarket
revenues, excluding the impact of currency, were flat with the prior year
reflecting the continued positive impact of the Monroe Reflex(R) introduction in
the second quarter of last year. Additionally, aftermarket emission control
revenues were lower as a result of the now standard use of longer lasting
stainless steel by OE manufacturers. Excluding the impact of currency, European
aftermarket emission control revenues declined 11 percent from the prior year.

Revenues from our Other operations, which include South America, Australia
and Asia, increased $46 million to $204 million in the first six months of 2003
as compared to $158 million in the first six months of the prior year. Higher
volumes and increased pass-through sales drove increased revenues of $29 million
at our Asian operations. In Australia, stronger OE volumes and strengthening
currency increased revenues by 30 percent. South American revenues were
essentially flat year over year as increased OE volumes were offset by
unfavorable currency exchange rate changes.

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

The EBIT results shown in the preceding table include the following items,
discussed above under "Restructuring Charges" and below under "Liquidity and
Capital Resources--Capitalization", which have an effect on the comparability of
EBIT results between periods:

EBIT for North American operations increased to $77 million in the first
six months of 2003 from $72 million one year ago driven by higher volumes in our
OE ride control segment. Higher OE ride control volumes increased EBIT by $3
million. Additionally, OE manufacturing efficiencies added $3 million to EBIT in
the first six months of 2003 compared to the prior year. The North American
aftermarket volume decreases in both product lines reduced EBIT by $14 million,
but were substantially offset by lower selling, general and

38

administrative costs including changeover and advertising expenses. Included in
2003's EBIT for the first six months was $3 million in restructuring and
restructuring-related expenses. Included in 2002's EBIT for the first six months
was $2 million in restructuring-related expenses and $1 million related to
amending the senior credit facility.

Our European segment's EBIT was $10 million for the first six months of
2003, down $6 million from $16 million in the first six months of 2002. However,
included in 2002's first six months EBIT was an $11 million gain on the sale of
our York UK facility, $1 million in restructuring and restructuring-related
expenses and $1 million related to amending the senior credit facility. Included
in the first six months of 2003's EBIT was $3 million of restructuring-related
expenses. Higher OE volumes in both product lines contributed $4 million to
EBIT. Also contributing to EBIT were manufacturing efficiencies primarily in OE
emission control and currency appreciation of $5 million. Additionally, benefits
we are realizing from Project Genesis, which is described further in
"Restructuring Charges" in this Management's Discussion and Analysis, added $4
million to EBIT. These increases were partially offset by lower aftermarket
volumes that reduced EBIT by $3 million. In addition, EBIT, as a result of our
inventory reduction programs, was reduced by $2 million, as fewer fixed overhead
costs were absorbed into inventory.

EBIT for our Other operations increased $1 million to $11 million in the
first six months of 2003 compared to the same six months one year ago. Higher OE
revenues are being partially offset by inflation, a weak global aftermarket and
increases in raw materials costs.

EBIT AS A PERCENTAGE OF REVENUE

In North America, EBIT as a percentage of revenue for the first six months
of 2003 increased one percent compared to the prior year. Higher OE ride control
volumes and manufacturing efficiencies more than offset lower aftermarket
volumes. In Europe, EBIT margins for the first six months decreased two percent
compared to the prior year. OE volume increases, manufacturing efficiencies,
restructuring savings and currency appreciation in the current quarter partially
replaced a one-time gain from the prior year. EBIT as a percentage of revenue
for our Other operations decreased one percent in the first six months as
compared to the prior year. The decrease is primarily driven by higher
pass-through sales year over year and to a lesser extent a weaker global
aftermarket.

INTEREST EXPENSE, NET OF INTEREST CAPITALIZED

We reported interest expense of $69 million during the first six months of
2003 compared to $72 million during the same period in 2002. The current year's
interest expense includes $5 million for the write-off of senior debt issuance
costs that were deferred on the senior debt that we partially paid with the
proceeds of our $350 million bond offering in June of 2003. Offsetting this
increase was lower interest rates on our variable rate debt and the termination
of our three-year floating to fixed interest rate swap agreement that expired on
February 3, 2003. See more detailed explanations on our debt structure,
including the $350 million bond offering in June 2003 and its anticipated impact
on our interest expense, in "Liquidity and Capital Resources--Capitalization"
later in this Management's Discussion and Analysis.

INCOME TAXES

Income taxes were a $1 million expense for the first six months of 2003,
compared to a $8 million expense for the first six months of 2002. The first six
months of 2003 included benefits of $11 million, which occurred

39

as we have continued to settle prior year tax issues on a more favorable basis
than originally anticipated. The effective tax rate for the first six months of
2003 including the $11 million benefits was five percent. Excluding the $11
million benefits our effective tax rate was 40 percent. The first six months of
2002 included a benefit of $4 million related to lower-than-expected costs for
withholding taxes related to foreign operations. The lower cost of tax
withholding for the first quarter 2002 tax repatriation transaction resulted
from an amendment to our bank agreement allowing a more tax efficient
transaction to be completed. The effective tax rate for the first six months of
2002 including the $4 million benefit was 29 percent. Excluding the $4 million
benefit our effective tax rate was 49 percent.

EARNINGS PER SHARE

We reported earnings before cumulative effect of change in accounting
principle per diluted common share of $0.60 for the first six months of 2003,
compared to $0.41 per diluted share for the first six months of 2002. Included
in the results for the first six months of 2003 are the negative impacts from
expenses related to our restructuring activities, the write-off of debt issuance
costs relating to the bond transaction in June of 2003 and tax benefits for the
resolution of several audit issues. The net impact of these items increased
earnings per diluted share by $0.10. Included in the results for the first six
months of 2002 are the negative impacts from expenses related to our
restructuring activities, costs related to amending the senior credit facility,
a tax benefit for lower withholding on foreign repatriation of earnings and the
gain on the sale of our York UK facility. In total, these items improved
earnings per diluted common share by $0.16. You should also read Note 8 to the
financial statements for more detailed information on earnings per share.

LIQUIDITY AND CAPITAL RESOURCES

CAPITALIZATION

The year-to-date increase in shareholders' equity primarily results from a
$4 million increase in the fair market value of our interest rate swaps, which
expired in February 2003, and $69 million related to the translation of foreign
balances into U.S. dollars. In addition, net income and premium on common stock
issued pursuant to benefit plans contributed $27 million to the increase in
shareholders' equity. Although our book equity balance was near zero at June 30,
2003, it should not affect our business operations. We have no debt covenant
ratios that are based upon our book equity and there are no other agreements
that are adversely impacted by our relatively low book equity.

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 $117 million during the first six months of 2003.
Of the $117 million, $92 million is the result of a $94 million decrease in the
current portion of long-term obligations resulting from the restructuring our
long-term obligations offset by smaller increases in short-term debt on foreign
subsidiaries. In addition, we decreased our borrowings by approximately $25
million during the first six months of 2003 under our revolving credit facility.
The borrowings outstanding under our revolving credit facility as of June 30,
2003 were $96 million and were $1 million as of June 30, 2002. The overall
increase in long-term debt resulted from the issuance of new long-term debt as
described below, offset by payments made on outstanding long-term debt.

40

Our financing arrangements are primarily provided by a committed senior
secured financing arrangement with a syndicate of banks and other financial
institutions, which was $964 million at June 30, 2003. The arrangement is
secured by substantially all our domestic assets and pledges of 66 percent of
the stock of certain first-tier foreign subsidiaries, as well as guarantees by
our material domestic subsidiaries. We entered into an agreement to amend this
facility on October 20, 2000 to (i) relax the financial covenant ratios
beginning in the fourth quarter of 2000, (ii) exclude up to $80 million of cash
charges and expenses related to cost reduction initiatives from the calculation
of consolidated earnings before interest, taxes, depreciation and amortization
("EBITDA") used in our financial covenant ratios through 2001 and (iii) make
certain other technical changes. In exchange for these amendments, we agreed to
certain interest rate increases, lowered our capital expenditure limits and paid
an aggregate fee of about $3 million.

As a result of significant reductions in North American vehicle production
levels announced in 2000 by our original equipment customers, as well as an
accelerated weakening of the global aftermarket, we entered into a second
amendment of our senior credit facility on March 22, 2001. The second amendment
revised the financial covenant ratios we were required to maintain as of the end
of each of the quarters ending in 2001. The second amendment also reduced the
limitation on 2001 capital expenditures from $225 million to $150 million, and
required that net cash proceeds from all significant, non-ordinary course asset
sales be used to prepay the senior term loans. In exchange for these amendments,
we agreed to a 25 basis point increase in interest rates on the senior term
loans and borrowings under our revolving credit facility and paid an aggregate
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 extended the limitation
on annual capital expenditures of $150 million through this three-year period.
The amendment further provided us with the option to enter into sale and
leaseback arrangements on up to $200 million of our assets. The proceeds from
these arrangements would have to be used to prepay the term loans under the
senior credit agreement. The amendment also allows us to exclude up to $60
million of cash charges and expenses, before taxes, related to any 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.

In June 2003, we issued $350 million of 10 1/4 percent senior secured
notes. The notes have a final maturity date of July 15, 2013. The notes accrue
interest from June 19, 2003 with a first interest payment date of January 15,
2004. The notes are senior secured obligations and rank equally in right of
payment with our existing and future senior debt and rank senior in right of
payment to all of our existing and future subordinated debt. The notes are
jointly and severally guaranteed by all of our domestic subsidiaries that also
guarantee our senior credit facility. These guarantees are senior obligations of
our subsidiary guarantors. The notes and guarantees are secured by second
priority liens, subject to specified exceptions, on all of our and our
subsidiary guarantors' assets that secure obligations under our senior credit
facility, except that only a portion of the capital stock of our and our
subsidiary guarantor's domestic subsidiaries is provided as collateral and no
assets or capital stock of our direct or indirect foreign subsidiaries will
secure the notes or guarantees.

We can redeem some or all of the notes at any time after July 15, 2008. We
can also redeem up to 35 percent aggregate principal amount of the notes using
the proceeds of certain equity offerings completed before July 15, 2006. If we
sell certain of our assets or experience specific kinds of changes in control,
we must offer to repurchase the notes.
41

The net proceeds of the offering of the notes, after deducting underwriting
discounts and commissions and our expenses, were $338 million. We used the net
proceeds of the offering to repay outstanding amounts under our senior credit
facility as follows: (i) first, to prepay $199 million on the term loan A due
November 4, 2005, (ii) second, to prepay $52 million on the term loans B and C
due November 4, 2007 and May 4, 2008, respectively, and (iii) third, to prepay
outstanding borrowings of $87 million under the revolving credit portion of our
senior credit facility without reducing the commitments from $450 million.

We incurred $12 million in fees associated with the transaction which will
be amortized into income over the term of the senior secured notes. After giving
effect to the use of proceeds we expect the offering will increase annual
interest expense by approximately $19 million. In addition, we expensed
approximately $5 million of existing deferred debt issuance costs as a result of
retiring a portion of the term loans under the senior credit facility.

In connection with issuing $350 million of 10 1/4 percent senior secured
notes due July 15, 2013, we amended the senior credit facility for the fourth
time effective May 29, 2003. The fourth amendment allowed us to incur debt
secured by a second lien on our U.S. assets and to have that debt guaranteed by
our major U.S. subsidiaries. The amendment also allowed us to use a portion of
the proceeds from the new senior secured notes to repay outstanding borrowings
under the revolving credit facility, without having to reduce the $450 million
size of the revolving credit facility, and to prepay the term loans under the
senior credit facility on a non pro-rata basis with the remaining net proceeds
from the notes. In exchange for these amendments, we agreed to pay an aggregate
sum of $1 million to consenting lenders. We also incurred legal, advisory and
other cost related to the amendment process of $1 million. These costs were
included in the capitalized debt issuance costs.

The senior secured credit facility, as amended effective May 29, 2003 (and
after giving effect to the use of proceeds from the bond offering described
above on June 19, 2003), consists of: (i) a $450 million revolving credit
facility with a final maturity date of November 4, 2005; (ii) a $44 million term
loan with a final maturity date of November 4, 2005; (iii) a $235 million term
loan with a final maturity date of November 4, 2007; and (iv) a $235 million
term loan with a final maturity date of May 4, 2008. Quarterly principal
repayment installments on each term loan began October 1, 2001. As of June 30,
2003, 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 rose above 4.50 as of June 30, 2003; therefore, the interest
margins for borrowings under our revolving credit facility and on our term loan
maturing November 4, 2005, and fees paid on letters of credit issued under our
revolving credit facility, will increase by 25 basis points beginning in the
third quarter of 2003. Our senior secured credit facility does not contain any
terms that could accelerate the payment of the facility as a result of a credit
rating agency downgrade.

The amended senior credit facility requires that we maintain financial
ratios equal to or better than the following consolidated leverage ratios
(consolidated indebtedness divided by consolidated EBITDA), consolidated
interest coverage ratios (consolidated EBITDA divided by consolidated cash
interest paid), and fixed charge coverage ratios (consolidated EBITDA less
consolidated capital expenditures, divided by consolidated cash interest paid)
at the end of each period indicated. The financial ratios required under the
amended senior

42

credit facility and, in the case of the first and second quarters of 2003, the
actual ratios we 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 June 30, 2003, we were in compliance with both the
financial covenants (as indicated above) and operational restrictions of the
facility.

Our outstanding debt also includes $500 million of 11 5/8 percent senior
subordinated notes due October 15, 2009 and the $350 million of 10 1/4 percent
senior secured notes due July 15, 2013 described above. The senior subordinated
debt and senior secured debt indentures both require 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 of the
types of indebtedness not otherwise permitted by the indentures. The indentures
also contain restrictions on our operations, including limitations on: (i)
incurring additional indebtedness or liens; (ii) dividends; (iii) distributions
and stock repurchases; (iv) investments; and (v) mergers and consolidations.
Subject to limited exceptions, all of our existing and future material domestic
wholly owned subsidiaries fully and unconditionally guarantee these notes on a
joint and several basis. In addition, the senior secured notes and related
guarantees are secured by second priority liens, subject to specified
exceptions, on all of our and our subsidiary guarantors' assets that secure
obligations under our senior credit facility, except that only a portion of the
capital stock of our and our subsidiary guarantor's domestic subsidiaries is
provided as collateral and no assets or capital stock of our direct or indirect
foreign subsidiaries will secure the notes or guarantees. There are no
significant restrictions on the ability of the subsidiaries that have guaranteed
these notes to make distributions to us. As of June 30, 2003, we were in
compliance with the covenants and restrictions of these indentures.

In addition to our senior credit facility, senior secured notes and senior
subordinated notes, we also sell some of our accounts receivable. 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

43

program. We had sold accounts receivable under this program of $50 million and
$85 million at June 30, 2003 and 2002, respectively. This program is subject to
cancellation prior to its maturity date if we were to (i) fail to pay interest
or principal payments on an amount of indebtedness exceeding $50 million, (ii)
default on the financial covenant ratios under the senior credit facility, or
(iii) fail to maintain certain financial ratios in connection with the accounts
receivable securitization program. In January 2003, this program was amended to
extend its term to January 31, 2005 and reduce the size of the program to $50
million. The program has since been amended to increase its size to $75 million
with its termination date unchanged at January 31, 2005. We also sell some
receivables in our European operations to regional banks in Europe. At June 30,
2003, we had sold $78 million of accounts receivable in Europe up from $55
million at June 30, 2002. 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. These
accounts receivable securitization programs provide us with access to cash at
costs that are generally favorable to alternative sources of financing, and
allow us to reduce borrowings under our revolving credit agreement.

We believe that cash flows from operations, combined with available
borrowing capacity described above, assuming that we maintain compliance with
the financial covenants and other requirements of our loan agreement, will be
sufficient to meet our future capital requirements for the following year,
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 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 common stock, or other alternatives to enhance our financial and
operating position. Should we be required to implement any of these actions to
meet our cash flow needs, we believe we can do so in a reasonable time frame.

CONTRACTUAL OBLIGATIONS

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

We principally use a revolving credit facility to finance our short-term
capital requirements. As a result, we classify the outstanding balance of the
revolving credit facility within our short-term debt even though the

44

revolving credit facility has a termination date of November 4, 2005. The
revolving credit facility balance included in short-term debt is $96 million at
June 30, 2003 and $121 million at December 31, 2002.

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

We occasionally provide guarantees that could require us to make future
payments in the event that the third party primary obligor does not make its
required payments. We have not recorded a liability for any of these guarantees.
The only third party guarantee we have made is the performance of lease
obligations by a former affiliate. Our maximum liability under this guarantee
was approximately $5 million and $6 million at June 30, 2003 and 2002,
respectively. We have no recourse in the event of default by the former
affiliate. However, we have not been required to make any payments under this
guarantee.

Additionally, we have from time to time issued guarantees for the
performance of obligations by some of our subsidiaries, and some of our
subsidiaries have guaranteed our debt. All of our then existing and future
material domestic wholly-owned subsidiaries fully and unconditionally guarantee
the $964 million senior secured credit facility, the $350 million senior secured
notes and the $500 million senior subordinated notes on a joint and several
basis. The arrangement for the senior secured credit facility is also secured by
substantially all our domestic assets and pledges of 66 percent of the stock of
certain first-tier foreign subsidiaries. The arrangement for the senior secured
notes is secured by second priority liens, subject to specified exceptions, on
all of our domestic assets that secure obligations under our senior credit
facility, except that only a portion of the capital stock of our domestic
subsidiaries is provided as collateral. No assets or capital stock of our direct
or indirect foreign subsidiaries secure these notes. You should also read Note
11 where we present the Supplemental Guarantor Condensed Consolidating Financial
Statements.

We have issued guarantees through letters of credit in connection with some
obligations of our affiliates. We have guaranteed through letters of credit
support for local credit facilities, travel and procurement card programs, and
cash management requirements for some of our subsidiaries totaling $41 million.
We have also issued $18 million in letters of credit to support some of our
subsidiaries' insurance arrangements. In addition, we have issued $3 million in
guarantees through letters of credit to guarantee other obligations of
subsidiaries primarily related to environmental remediation activities.

CASH FLOWS

OPERATING ACTIVITIES

For the six months ended, cash flows provided from operating activities
were $28 million as compared to $124 million in the prior six months. The
decrease was primarily attributable to reduced year over year working capital
improvements. For the first six months of 2003 working capital was a use of $77
million as compared to an inflow of $59 million for the first six months of
2002. Lower collections of receivables, including factoring balances, higher
cash tax payments and the timing of accounts versus payments in the current year
as compared to the prior year, are primary drivers to the decrease.
Additionally, in the first

45

quarter of 2003, we took steps to more aggressively manage payables to offset
the heavier cash use and to help preserve liquidity given the uncertainties in
the market. In the second quarter of 2003, while continuing to monitor payable
levels, we moderately relaxed our earlier aggressive stance and as a result used
cash related to payables. Finally, we generated cash from our inventory
reduction programs which increased cash flow from working capital by $15
million. Partially offsetting the working capital decrease were higher earnings
in the current year.

In June 2001, we entered into arrangements with two major OE customers in
North America under which, in exchange for a discount, payments for product
sales are made earlier than otherwise required under existing payment terms.
These arrangements reduced accounts receivable by $52 million and $50 million as
of June 30, 2003 and 2002, respectively. These arrangements reduced accounts
receivable by $40 million at December 31, 2002. In June 2003, we entered into a
similar arrangement with a third major OE customer in North America. This
arrangement did not effect accounts receivable at June 30, 2003. These
arrangements can be cancelled at any time.

INVESTING ACTIVITIES

Cash used for investing activities was $32 million higher in the first six
months of 2003 compared to the same period a year ago. In the first six months
of 2002, we received $17 million in cash from the sale of our York UK facility
and also recorded $19 million from a settlement with an OE customer for
reimbursement of expenses related to a cancelled platform. Capital expenditures
were $54 million in the first six months of 2003, slightly up from $52 million
in the first six months of last year.

FINANCING ACTIVITIES

Cash flow from financing activities was a $37 million inflow in the first
six months of 2003 compared to a use of $96 million in the same period of 2002.
The primary reason for the change is attributable to higher short-term
borrowings during the first six months of 2003 as compared to the prior year.

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. The swaps expired in February 2003 and we are not required to renew
them. On June 30, 2003, we had $858 million in long-term debt obligations that
have fixed interest rates. Of that amount, $500 million is fixed until October
2009 and $350 million is fixed until July 2013, while the remainder is fixed
over periods of 2003 through 2025. There is also $528 million in long-term debt
obligations that have variable interest rates based on a current market rate of
interest.

We estimate that the fair value of our long-term debt at June 30, 2003 was
about 96 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 $4 million after
tax.

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OUTLOOK

North America light vehicle production continued at a relatively strong
pace in 2002. Manufacturer incentives kept consumer purchases higher than
estimates at the beginning of the year. Consequently, the 2002 North America
light vehicle build rate was an estimated 16.4 million units. Production rates
for the first six months of 2003 remained relatively strong at an annualized
rate of 16.0 million units or a two percent decline from the prior year.
However, we remain cautious regarding volumes for the remainder of 2003 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. Several major North American OE
manufacturers have announced reductions in their production rates for the third
and fourth quarter. These overall reductions are targeted at specific platforms,
however, and we have not yet seen a percentage reduction in many of the
platforms for which we provide parts in the range of those that have been
announced. Currently, industry estimates have heavy duty build rates down
approximately three percent compared to 2002. These estimates have slightly
improved from the expected decline following the implementation of new emissions
standards in October 2002 which caused operators to pull forward some of their
truck purchases into 2002. In Europe, new vehicle yearly production rates appear
to be down two to three percent from last year.

In July of 2003, we announced a change to our retiree medical benefits
program, which will provide participating retirees with continued access to
group health coverage while reducing our subsidization of the program. Based on
current estimates, we anticipate that this change will increase our net income
by approximately $7 million annually, beginning in the third quarter of 2003.

ENVIRONMENTAL AND OTHER MATTERS

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

As of June 30, 2003, we are designated as a potentially responsible party
in three 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 $12 million. For each of 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

47

other liable parties at our current and former facilities, has been considered,
where appropriate, in our determination of our estimated liability.

We believe that any potential costs associated with our current status as a
potentially responsible party in the Superfund 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.

We also from time to time are involved in legal proceedings or claims that
are incidental to the conduct of our business. Some of these proceedings allege
damages against us relating to environmental liabilities (including toxic tort,
property damage and remediation), intellectual property matters (including
patent, trademark and copyright infringement, and licensing disputes), personal
injury claims (including injuries due to product failure, design or warnings
issues, and other product liability related matters), employment matters, and
commercial or contractual disputes, sometimes related to acquisitions or
divestitures. For example, we have recently responded to a request from the
Federal Trade Commission to substantiate certain of our product claims. As
another example, we are involved in litigation with the minority owner of one of
our Indian joint ventures over various operational issues. This dispute involves
a court-mandated bidding process, which could result in a non-cash charge to
earnings if we are required to sell our interest in the joint venture on
unfavorable terms. 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 future
consolidated financial position or results of operations. In addition, we are
subject to a number of lawsuits initiated by a significant number of claimants
alleging health problems as a result of exposure to asbestos. Many of these
cases involve significant numbers of individual claimants. However, only a small
percentage of these claimants allege that they were automobile mechanics who
were allegedly exposed to our former muffler products and a significant number
appear to involve workers in other industries or otherwise do not include
sufficient information to determine whether there is any basis for a claim
against us. We believe, based on scientific and other evidence, it is unlikely
that mechanics were exposed to asbestos by our former muffler products and that,
in any event, they would not be at increased risk of asbestos-related disease
based on their work with these products. Further, many of these cases involve
numerous defendants, with the number of each in some cases exceeding 200
defendants from a variety of industries. Additionally, the plaintiffs either do
not specify any, or specify the jurisdictional minimum, dollar amount for
damages. On the other hand, we are experiencing an increasing number of these
claims, likely due to bankruptcies of major asbestos manufacturers. We
vigorously defend ourselves against these claims as part of our ordinary course
of business. To date, with respect to claims that have proceeded sufficiently
through the judicial process, we have regularly achieved favorable resolution in
the form of a dismissal of the claim or a judgment in our favor. Accordingly, we
presently believe that these asbestos-related claims will not have a material
adverse impact on our future financial condition or results of operations.

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 50 percent of
their salary through contributions to the plan, which are invested in selected
mutual funds or used to buy our common stock. We currently match in cash 50
percent of each employee's contribution up to 8 percent of the employee's
salary. We recorded expense for these matching contributions of approximately $3
million for each of the six months ended June 30, 2003 and 2002, respectively.
All contributions vest immediately.

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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

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(e) under the Securities Exchange Act of
1934) as of the end of the fiscal quarter covered by this report. Based on this
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. There were no changes in our internal control over
financial reporting that occurred during the period covered by this report that
have materially affected, or are likely to materially affect our internal
control over financial reporting.

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PART II

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

See Item 5, "Other Information," below.

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

We held our annual stockholders' meeting on May 13, 2003, to consider and
vote on three separate proposals: (i) a proposal to elect Charles W. Cramb, M.
Kathryn Eickhoff, Mark P. Frissora, Frank E. Macher, Sir David Plastow, Roger B.
Porter, David B. Price, Jr., Dennis G. Severance and Paul T. Stecko as directors
of our company for a term expiring at our next annual stockholders' meeting,
(ii) a proposal to ratify the appointment of Deloitte & Touche LLP as
independent public accountants for 2003 and (iii) a proposal to amend the
Tenneco Automotive Inc. 2002 Long-Term Incentive Plan. The meeting proceeded and
all proposals were approved by the requisite vote of the holders of our
outstanding common stock. The following sets forth the vote results with respect
to these proposals at the meeting:

Election of Directors

Ratification of Appointment of Deloitte & Touche LLP

Approval to Amend the Tenneco Automotive Inc. 2002 Long-Term Incentive Plan

ITEM 5. OTHER INFORMATION

In June 2003, we issued $350 million of 10 1/4 percent senior secured notes
due 2013. These notes are secured by a second priority lien on certain of our
consolidated assets and subject us to customary operating restrictions,
including dividend limitations. In connection with this, we entered into an
agreement with our senior lenders to amend certain provisions of our senior
credit facility. Information concerning the senior secured notes and the
amendments of the senior credit facility is included in this Quarterly Report
under Item 2, "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

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.

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(b) Reports on Form 8-K. We filed and/or furnished the following Current
Reports on Form 8-K during the quarter ended June 30, 2003:

Current Report on Form 8-K dated April 16, 2003, including pursuant to Item 5
certain information pertaining to the resignation of David G. Gabriel as senior
vice president and general manager of our North American Aftermarket business
unit.

Current Report on Form 8-K dated April 22, 2003, including pursuant to Items 5
and 12 certain information pertaining to the results of our operations for the
first quarter 2003.

Current Report on Form 8-K dated May 9, 2003, including pursuant to Item 5
certain information pertaining to the promotion of Neal Yanos as senior vice
president and general manager of both our North American Aftermarket and
Original Equipment Ride Control business units.

Current Report on Form 8-K dated May 14, 2003, including pursuant to Item 5
certain information pertaining to the results of our 2003 annual stockholder
meeting.

Current Report on Form 8-K dated May 30, 2003, including pursuant to Item 5
certain information pertaining to the commencement of our offering of $300
million of Senior Secured Notes.

Current Report on Form 8-K dated June 2, 2003, including pursuant to Item 5
certain information pertaining to our contemplation of our financing transaction
which could increase our annual interest expense.

Current Report on Form 8-K dated June 11, 2003, including pursuant to Item 5
certain information pertaining to the pricing of our private offering of $350
million of Senior Secured Notes.

Current Report on Form 8-K dated June 20, 2003, as amended, including pursuant
to Item 5 certain information pertaining to the settlement of a private offering
of $350 million of Senior Secured Notes.

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SIGNATURE

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

TENNECO AUTOMOTIVE INC.

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

Dated: August 14, 2003

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INDEX TO EXHIBITS
TO
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED JUNE 30, 2003

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

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