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 March 31, 2004

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: 41,892,010 shares as of April 30,
2004.

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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 March 31, 2004, and the
related consolidated statements of income (loss), comprehensive income (loss),
cash flows and changes in shareholders' equity for the three-month periods ended
March 31, 2004 and 2003. These interim financial statements are the
responsibility of Tenneco Automotive Inc.'s management.

We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures 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 review, 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, 2003,
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 March 9, 2004, we expressed an
unqualified opinion on those consolidated financial statements (such report
includes explanatory paragraphs relating to (i) a change in accounting for
goodwill and intangible assets upon the adoption of Statement of Financial
Accounting Standards No. 142, and (ii) the application of procedures relating to
certain disclosures and reclassifications of financial statement amounts related
to the 2001 financial statements that were audited by other auditors who have
ceased operations and for which we have expressed no opinion or other form of
assurance other than with respect to such disclosures and reclassifications). In
our opinion, the information set forth in the accompanying consolidated balance
sheet as of December 31, 2003 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
May 3, 2004

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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.
6

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, 2003.

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 2004 presentations.

(2) In June 2003, we issued $350 million of 10 1/4 percent senior secured
notes in a private placement. 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. In October 2003, we completed an offer to exchange all
of the notes issued in the June 2003 private placement for a like amount of the
10 1/4 percent senior secured notes, with substantially identical terms, which
had been registered under the Securities Act of 1933.

We received net proceeds in the second quarter of 2003 from the offering of
the notes, after deducting underwriting discounts and commissions and our
expenses, of $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.

In connection with issuing $350 million of 10 1/4 percent senior secured
notes due July 15, 2013, we amended the senior credit facility effective May 29,
2003. This 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 then-applicable $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 costs
related to the amendment process of $1 million. These costs were included in the
capitalized debt issuance costs.

In December 2003, we amended and restated our senior credit facility and in
connection therewith, we issued an additional $125 million of 10 1/4 percent
senior secured notes in a private placement. We received $136 million of net
proceeds from the offering of the additional $125 million of 10 1/4 percent
senior secured notes, after deducting underwriting discounts and commissions and
other expenses and including a 13 percent price premium over par. We also
received $391 million in net proceeds from the new term loan B borrowings under
the amended and restated senior credit facility, after deducting fees and other
expenses. We used the combined net proceeds of $527 million to prepay the $514
million outstanding under term loans A, B and C under the senior credit facility
immediately prior to the completion of the transaction. The remaining $13
million of net proceeds were used for general corporate purposes. In addition,
we received $6 million of accrued interest on the new notes for the period from
June 19 through December 12, 2003 that investors paid

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

us and that we subsequently used to pay, on January 15, 2004, the accrued
interest on the notes from June 19, 2003.

We incurred $27 million in fees associated with the issuance of the
aggregate $475 million of 10 1/4 percent senior secured notes and the amendment
and restatement of our senior credit facility which will be amortized over the
term of the senior secured notes and the amended and restated senior credit
facility.

After giving effect to the use of the net proceeds from both the June and
December transactions, we expect these transactions would have increased our
annual interest expense by approximately $9 million for 2003. This does not give
effect to (1) our proposed common stock offering, issuance of new senior
subordinated notes and purchase of our outstanding senior subordinated notes,
described in Note 3, or (2) the fixed-to-floating interest rate swaps we
completed in April 2004, described below. In addition, we expensed in the second
and fourth quarters of 2003 a total of approximately $12 million of existing
deferred debt issuance costs as a result of retiring the term loans under the
senior credit facility.

In April 2004, we entered into three separate fixed-to-floating interest
rate swaps with two separate financial institutions. These agreements swapped an
aggregate of $150 million of fixed interest rate debt at a per annum rate of
10 1/4 percent to floating interest rate debt at a per annum rate of LIBOR plus
a spread of 5.68 percent. Each agreement requires semi-annual settlements
through July 15, 2013. Based on a LIBOR rate of 1.24 percent, these swaps would
reduce our annual interest expense by approximately $5 million.

(3) In April 2004, we filed a registration statement on Form S-3 with the
Securities and Exchange Commission relating to our proposed public offering of
approximately $150 million of our common stock, representing approximately 11.8
million shares based on the market price of our common stock on the filing date.
In addition, we intend to grant the underwriters an option to purchase
additional shares to cover over allotments in an amount up to approximately
$22.5 million, or approximately 1.8 million, of our shares based upon the market
price of our common stock on the date of filing.

The offering is one component of a transaction designed to reduce our
leverage and annual interest expense. The second component is an anticipated
private placement of approximately $400 million principal amount of new senior
subordinated notes.

We plan to use the net proceeds of the offering and the private placement
to make and complete an offer to purchase for cash our outstanding $500 million
of 11 5/8 percent senior subordinated notes due 2009. We commenced that offer on
April 30, 2004. The offer is subject to some conditions, including a consent of
our senior credit facility lenders described below. We expect that completion of
the offer will cost approximately $557 million, including accrued and unpaid
interest on the notes, assuming 100 percent of the notes are tendered and
purchased.

We expect to incur pre-tax charges of approximately $55 million in the
second quarter related to these transactions. The charges will be recorded as
interest expense.

The terms of, and our ability to complete these transactions will depend
upon prevailing market conditions and other factors. In connection with the
offer to purchase the outstanding 11 5/8 percent senior subordinated notes, we
are seeking the consent of the lenders under our senior credit facility. That
consent will allow us to amend the senior subordinated note indenture to
eliminate substantially all of the restrictive covenants and certain events of
default in that indenture. The consent will also allow us to be relieved of the
indenture, provided we deposit funds with the trustee, when the notes are within
one year of being redeemable or due and will expand from 60 to 180 the maximum
number of days prior to a redemption date on which we could give notice of
redemption. These amendments would apply to any notes that remain outstanding
upon completion of the transaction. The consent will also enhance our
flexibility to refinance, at any time on or prior

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

to December 31, 2004, any notes that remain outstanding upon completion of the
transaction by eliminating the requirement of a substantially concurrent
refinancing transaction.

(4) Over the past several years we have adopted plans to restructure
portions of our operations. These plans were approved by the Board of Directors
and were designed to reduce operational and administrative overhead costs
throughout the business. Prior to the change in accounting required for exit or
disposal activities, we recorded charges to income related to these plans for
costs that 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, a project known as Project Genesis, designed to lower our
fixed costs, improve efficiency and utilization, and better optimize our global
footprint. 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 included an emission 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 emission 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 of 2001 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 December 31, 2003, we have eliminated 974 positions in connection with
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. In the fourth quarter of 2003 we reclassified $2 million of
severance reserve to the asset impairment reserve. This reclassification became
necessary as actual asset impairments along with the sale of our closed
facilities were different than the original estimates. We expect to complete all
remaining restructuring activities related to Project Genesis in the second
quarter of 2004.

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. This charge was primarily recorded in cost
of sales.

In October of 2003, we announced the closure of an emission control
manufacturing facility in Birmingham, U.K. Approximately 130 employees will be
eligible for severance benefits in accordance with union contracts and U.K.
legal requirements. We incurred approximately $1 million in charges related to
this action in the first quarter of 2004.

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

In addition to the above charge, we incurred $4 million in restructuring
and restructuring related costs in the first quarter of 2004. These costs are
primarily related to the continuation of the optimization of our manufacturing
footprint that was started with Project Genesis in 2001.

Including the costs incurred in 2002 and 2003 of $18 million, we have
incurred a total of $23 million for activities related to our restructuring
actions initiated in prior periods that could not be accrued as part of the
restructuring charges for these actions.

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

Under the terms of our amended and restated senior credit agreement that
took effect on December 12, 2003, 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 2002-2006 period from the calculation of the
financial covenant ratios we are required to maintain under our senior credit
agreement. As of March 31, 2004, we have excluded $24 million of the $60 million
available under the terms of the senior credit facility. In addition to the
announced actions, we continue to evaluate additional opportunities 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
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.

(5) 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.

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

As of March 31, 2004, we are designated as a potentially responsible party
in two Superfund sites. We have estimated our share of the remediation costs for
these sites to be less than $1 million in the aggregate. In addition to the
Superfund sites, we may have the obligation to remediate current or former
facilities, and we estimate our share of remediation costs at these facilities
to be approximately $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, 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 are involved in litigation over medical benefits
provided to some of our former employees. As another example, we are involved in
litigation with the minority owner of one of our Indian joint ventures over
various operational issues which involves a court-mandated bidding process. We
vigorously defend ourselves against all of these claims. In future periods, we
could be subjected to cash costs or non-cash charges to earnings if we are
required to sell our interest in the joint venture on unfavorable terms.
However, although the ultimate outcome of any legal matter cannot be predicted
with certainty, based on present information, including our assessment of the
merits of the particular claim, we do not expect that these legal proceedings or
claims will have any material adverse impact on our future consolidated
financial position or results of operations. In addition, we are subject to a
number of lawsuits initiated by a significant number of claimants alleging
health problems as a result of exposure to asbestos. 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.

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

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:

(6) In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46, "Consolidation of Variable Interest Entities"
("FIN 46"), which was revised in December 2003. 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 as revised is effective January 1, 2004. The adoption of FIN 46
did not have a material impact on our consolidated financial statements.

In April 2003, the FASB issued Statement of Financial Accounting Standards
("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 December 2003, the FASB revised SFAS No. 132, "Employer's Disclosures
About Pensions and Other Postretirement Benefits." The revised SFAS No. 132
changes employers' disclosures about pension plans and other postretirement
benefits and requires additional disclosures about assets, obligations, cash
flows and net periodic benefit cost. The revised statement is effective for
annual and interim periods ended after December 15, 2003. We adopted the revised
disclosures as of December 31, 2003, in our consolidated financial statements.

In January 2004, the FASB issued FASB Staff Position ("FSP") No. 106-1,
"Accounting Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003." FSP No. 106-1 permits a sponsor to
make a one-time election to defer accounting for the effects of the Medicare
Prescription Drug, Improvement and Modernization Act of 2002 (the "Act"). The
Act, signed into

15

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

law in December 2003, establishes a prescription drug benefit under Medicare
("Medicare Part D") and a federal subsidy to sponsors of retiree health care
benefit plans that provide a benefit that is at least actuarially equivalent to
Medicare Part D. FSP No. 106-1 does not provide specific guidance as to how a
sponsor should recognize the effects of the Act in its financial statements. The
Act introduces two new features to Medicare that must be considered when
measuring accumulated postretirement benefit costs. The new features include a
subsidy to the plan sponsors that is based on 28 percent of an individual
beneficiary's annual prescription drug costs between $250 and $5,000, and an
opportunity for a retiree to obtain a prescription drug benefit under Medicare.

We have elected to defer the adoption of FSP No. 106-1 due to lack of
specific guidance. Therefore, the net postretirement benefit costs disclosed in
the consolidated financial statements do not reflect the impact of the Act on
the plans. Our deferral will continue until specific authoritative accounting
guidance for the federal subsidy is issued. Authoritative guidance on the
accounting for the federal subsidy is pending and, when issued, could require
information previously reported in our consolidated financial statements to
change. We are currently investigating the impacts of FSP No. 106-1's initial
recognition, measurement and disclosure provisions on our consolidated financial
statements.

(7) We entered into an agreement during the third quarter of 2000 to sell
an interest in some of our U.S. trade accounts receivable to a third party.
Receivables become eligible for the program on a daily basis, at which time the
receivables are sold to the third party, net of a factoring discount, through a
wholly-owned subsidiary. Under this agreement, as well as individual agreements
with third parties in Europe, we have sold accounts receivable of $144 million
and $122 million at March 31, 2004 and 2003, respectively. We recognized a loss
of less than $1 million in each of the three months ended March 31, 2004 and
2003, respectively, on these sales of trade accounts, representing the discount
from book values at which these receivables were sold to the third party. The
discount rate varies based on funding cost incurred by the third party, and it
averaged approximately three percent during the time period in 2004 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.

(8) 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." 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 requirements only of SFAS No. 123.
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)

The fair value of each option granted during the first three months of 2004
and 2003 is estimated on the date of grant using the Black-Scholes option
pricing model using the following weighted-average assumptions for grants in the
first three months of 2004 and 2003, respectively: (i) risk-free interest rates
of 4.1 percent and 4.0 percent; (ii) expected lives of 10.0 years and 10.0
years; (iii) expected volatility of 43.6 percent and 43.4 percent; and (iv)
dividend yield of 0.0 percentage and 0.0 percentage.

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

Options to purchase 738,652 and 4,774,284 shares of common stock were
outstanding at March 31, 2004 and 2003, 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.

(10) Net periodic pension costs (income) and postretirement benefit costs
(income) consist of the following components:

17

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

For the three months ended March 31, 2004, we made pension contributions of
approximately $1 million. Based on current actuarial estimates, we believe we
will be required to make approximately $27 million to $34 million in
contributions for the remainder of 2004.

We made postretirement contributions of approximately $2 million during the
first three months of 2004. Based on current actuarial estimates, we believe we
will be required to make approximately $4 million in contributions for the
remainder of 2004.

(11) 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 $4 million and $5 million March 31, 2004 and 2003,
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 $800 million senior secured credit facility, the $475 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 $475 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 arrangement is not secured by any pledges of
stock or assets of our foreign subsidiaries. You should also read Note 13 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 $42 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.

(12) 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.

18

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

The following table summarizes certain Tenneco segment information:

(13) 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 are referred 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,
the Guarantor Subsidiaries are combined in the presentation below.

These condensed consolidating financial statements are presented on the
equity method. Under this method, our investments are recorded at cost and
adjusted for our ownership share of a subsidiary's cumulative results of
operations, capital contributions and distributions, and other equity changes.
You should read the condensed consolidating financial statements of the
Guarantor Subsidiaries in connection with our consolidated financial statements
and related notes of which this note is an integral part.

Distributions

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

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)

BALANCE SHEET

22

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

BALANCE SHEET

23

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

STATEMENT OF CASH FLOWS

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

24

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

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

STATEMENT OF CASH FLOWS

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

(The preceding notes are an integral part of the foregoing financial
statements.)
25

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

EXECUTIVE SUMMARY

We are one of the world's leading manufacturers of automotive emission
control and ride control products and systems. We completed the separation of
our packaging business in a series of transactions during 1999, culminating in
the spin-off to our shareholders of the common stock of Pactiv Corporation
(formerly known as Tenneco Packaging Inc.) on November 4, 1999. We serve both
original equipment (OE) vehicle manufacturers and the repair and replacement
markets, or aftermarket, globally through leading brands, including Monroe(R),
Rancho(R), Clevite(R) Elastomers and Fric Rot(TM) ride control products and
Walker(R), Fonos(TM), and Gillet(TM) emission control products. Worldwide we
serve more than 30 different original equipment manufacturers, and our products
or systems are included on six of the top 10 passenger car models produced in
North American and Western Europe and all of the top 10 light truck models
produced in North America for 2003. During 2003, our aftermarket customers were
comprised of full-line and specialty warehouse distributors, retailers, jobbers,
installer chains and car dealers. We operate more than 70 manufacturing
facilities worldwide and employ approximately 19,100 people to service our
customer's demands.

Factors that are critical to our success include new business awards,
managing our overall global manufacturing footprint to ensure proper placement
and workforce levels in line with business needs, maintaining competitive wages
and benefits, maximizing efficiencies in manufacturing processes, fixing or
eliminating unprofitable businesses and reducing overall costs. In addition, our
ability to adapt to key industry trends, such as the consolidation of OE
customers, increasing technologically sophisticated content, changing
aftermarket distribution channels, increasing environmental standards and
extended product life of automotive parts, also plays a critical role in our
success.

We have a substantial amount of indebtedness, with total debt, net of cash
balances, of $1.277 billion as of March 31, 2004. As such, our ability to
generate cash--both to fund operations and service our debt--is also a
significant area of focus for our company. See "Liquidity and Capital Resources"
below for further discussion of cash flows.

In April 2004, we filed a registration statement with the Securities and
Exchange Commission relating to a proposed public offering of approximately $150
million of our common stock, representing approximately 11.8 million shares
based on the market price of our common stock on the filing date. In addition,
we intend to grant underwriters an option to purchase additional shares to cover
over allotments in an amount up to approximately $22.5 million, or approximately
1.8 million, of our shares based on the market price of our common stock on the
filing date. This offering is one component of a transaction designed to reduce
our leverage and annual interest expense. The second component is an anticipated
private placement of approximately $400 million principal amount of new senior
subordinated notes. We plan to use the net proceeds of the offering and the
private placement to make and complete an offer to purchase for cash our
outstanding $500 million of 11 5/8 percent senior subordinated notes due in
2009. We commenced that offer on April 30, 2004. See "--Liquidity and Capital
Resources--Senior Secured and Subordinated Notes." The net effect of this
offering and the related refinancing of our outstanding senior subordinated
notes together, with our 2003 refinancing of our senior credit facility, would
have been to decrease our annual interest expense approximately $16 million for
2003. We expect this offering and the related refinancing of our senior secured
notes would have reduced our interest expense for the first quarter of 2004 by
approximately $6 million. These amounts do not give effect to the interest rate
swaps we effected in April 2004. See "--Liquidity and Capital Resources." We
expect to incur pre-tax charges of approximately $55 million in the second
quarter related to these transactions. The charges will be recorded as interest
expense. The terms of, and our ability to complete these transactions will
depend upon prevailing market conditions and other factors.

Total revenues for the first three months of 2004 were $1.0 billion, a 12
percent increase over the first three months of 2003. Higher global OE volumes,
strengthening currencies and improved North American aftermarket revenues drove
this increase. Gross margin for the first quarter of 2004 was 19.7 percent up
two percent from 19.3 percent in the first quarter of 2003. Higher aftermarket
revenues, the recent launch of higher-margin OE platforms and a favorable ride
control product mix coupled with cost reduction programs
26

are helping improve margin. We reported selling, general, administrative and
engineering expenses for the first quarter of 2004 of 12.2 percent of revenues,
as compared to 11.6 percent of revenues for the first quarter of 2003. The
increase is attributable primarily to higher overhead, increased aftermarket
new-customer changeover costs, restructuring and certain consulting fees that
related to a 1999 agreement that provided that a portion of the consultant's
compensation would be in stock appreciation rights that were priced above the
market price of our stock at the grant date. EBIT was $33 million for the first
quarter of 2004 up $2 million from the $31 million reported in the first quarter
of 2003. Stronger operational performances in North America and the rest of the
world were partially offset by European operations.

RESULTS FROM OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003

NET SALES AND OPERATING REVENUES

The following tables reflect our revenues for the first quarter of 2004 and
2003. 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 2003 table since this is the base
period for measuring the effects of currency during 2004 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 increased $22 million in the
first quarter of 2004 compared to the same period last year reflecting higher
sales from both the OE and aftermarket businesses. Total North American OE
revenues were up $8 million to $381 million in the first quarter of 2004 driven
by higher emission control volumes. OE emission control revenues were up $6
million to $263 million in the first quarter of 2004, from $257 million in the
prior year. Adjusted for pass-through sales, which increased one percent, and
currency, OE emission control sales were flat compared to the prior year. OE
ride control revenues for the first quarter of 2004 increased two percent from
the prior year. Total OE revenues, excluding pass-through sales and currency,
increased one percent in the first quarter of 2004, while North American light
vehicle production decreased approximately one percent from one year ago. We
experienced this improvement despite 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 $122 million in the first quarter of
2004, representing an increase of 13 percent compared to the prior year.
Aftermarket ride control revenues increased $13 million or 19 percent in the
first quarter of 2004, as a result of the initial order from a new customer and
to a lesser degree, introductory sales of recently launched DuPont car care
appearance products. Aftermarket emission control revenues increased two percent
in the first quarter of 2004 compared to 2003. We are optimistic that this could
reflect the bottom of the market decline in the emission control business due to
the OE's use of stainless steel, which reduces aftermarket replacement rates.

Our European segment's revenues increased $63 million or 18 percent in the
first quarter of 2004 compared to last year. Total OE revenues were $328 million
in the first quarter of 2004, up 22 percent from last year. OE emission control
revenues increased 14 percent to $243 million in the first quarter of 2004, from
$212 million in the prior year. Excluding a $3 million increase in pass-through
sales and a $21 million increase

28

due to strengthening currency, OE emission control revenues increased four
percent over 2003, while European light vehicle production levels decreased
approximately one percent from one year ago. Our increase of four percent was
greater than the market decline of one percent, as a result of successful
platforms with Volvo, Mercedes and PSA, along with new launches on Ford and
Peugeot models. These helped to offset pricing pressures as well as lower
volumes associated with certain Porsche, Volkswagen and General Motors models.
OE ride control revenues increased to $85 million in the first quarter of 2004
or up 51 percent from $57 million a year ago. Excluding a $10 million benefit
from currency appreciation, OE ride control revenues increased 34 percent. We
experienced this revenue increase, despite the decline in the European build
rate, due to stronger sales on new platforms with Volkswagen, Renault and Ford.
European aftermarket sales were $80 million in the first quarter of 2004
compared to $76 million last year. Excluding $10 million attributable to
currency appreciation, European aftermarket revenues declined eight percent in
the first quarter of 2004 compared to last year. Ride control aftermarket
revenues, excluding the impact of currency, were down five percent compared to
the prior year with most of the decline occurring early in the quarter.
Additionally, aftermarket emission control revenues were lower as a result of
the now standard use of longer lasting stainless steel by OE manufacturers,
continued competition from short liners and customers managing their inventories
much more closely. Excluding the impact of currency, European aftermarket
emission control revenues declined nine percent from the prior year.

Revenues from our Other operations, which include South America, Australia
and Asia, increased $28 million to $123 million in the first quarter of 2004 as
compared to $95 million in the prior year. Higher OE exhaust volumes drove
increased revenues of $3 million at our Asian operations. In Australia, stronger
OE volumes and strengthening currency increased revenues by 50 percent.
Excluding the impact of currency, Australian revenues increased 14 percent.
South American revenues were up $9 million primarily as a result of increased OE
volumes, higher pass through sales and a stabilizing currency.

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 and Other Charges" which have an effect on
the comparability of EBIT results between periods:

29

EBIT for North American operations increased to $30 million in the first
quarter of 2004 from $28 million one year ago. Higher volumes in both OE ride
control and emission control segments increased EBIT by $4 million, and OE
manufacturing efficiencies added $5 million to EBIT in the first quarter of 2004
compared to the prior year. The North American aftermarket volume increases in
both product lines but primarily in ride control increased EBIT by $8 million.
Offsetting these increases were higher aftermarket promotional costs of $3
million primarily attributable to the specialty car care product launch and $6
million in higher selling, general and administrative overhead costs. Included
in North America's first quarter 2004 EBIT were $2 million in restructuring and
restructuring-related expenses, $6 million of changeover costs for a major new
aftermarket customer and $1 million in consulting fees indexed to stock price.
The customer changeover costs include the cost of acquiring and disposing of
competitor inventory when we supply aftermarket parts to a new customer. These
costs were substantial in the first quarter as we replaced a competitor at a
significant customer. The consulting fees relate to a 1999 agreement that
provided that a portion of the consultant's compensation would be in stock
appreciation rights that were priced above the market price of our stock at the
grant date. These rights expire in November 2004. Included in 2003's first
quarter EBIT was $3 million in restructuring-related expenses.

Our European segment's EBIT was a loss of $3 million for the first quarter
of 2004, down $2 million from a loss of $1 million in 2003. However, included in
2004's first quarter EBIT were $3 million in restructuring related expenses and
$1 million in consulting fees indexed to stock price. Included in 2003's first
quarter EBIT was $2 million of restructuring-related expenses. Higher OE volumes
primarily in ride control contributed $5 million to EBIT in the first quarter.
Also contributing to EBIT were manufacturing efficiencies of $3 million and
currency appreciation of $1 million. Offsetting these increases were lower
aftermarket volumes that reduced EBIT by $2 million in the first quarter, OE
pricing concessions of $3 million and higher selling, general and administrative
expenses of $4 million.

EBIT for our Other operations increased $2 million to $6 million in the
first quarter of 2004 compared to $4 million one year ago. Higher OE revenues in
all regions drove this improvement. Additionally, favorable currency exchange
rates in Australia increased EBIT by $1 million. Included in the first quarter
of 2004's EBIT was $1 million in consulting fees indexed to stock price.

EBIT AS A PERCENTAGE OF REVENUE

In North America, EBIT as a percentage of revenue for the first quarter of
2004 remained flat compared to the prior year. Higher volumes in both the OE and
aftermarket segments and manufacturing efficiencies were offset by higher
selling, general and administrative costs, including promotional spending and
changeover costs. In Europe, EBIT margins for the first quarter of 2004 declined
one percent compared to the prior year. A weak aftermarket, OE price concessions
and higher selling, general and administrative expenses, offset OE volume
increases, manufacturing efficiencies and currency appreciation. EBIT as a
percentage of revenue for our Other operations increased one percent in the
first quarter of 2004 from the prior year. Higher OE volumes in all regions and
currency appreciation in Australia drove the increase.

INTEREST EXPENSE, NET OF INTEREST CAPITALIZED

We reported interest expense of $35 million in the first quarter of 2004
compared to $31 million in the prior year. The increase is due to the higher
expense on the 10 1/4 bonds that we issued in June and December of 2003. These
transactions provided greater liquidity for the near term, and positioned us
more favorably over

30

the longer term to manage debt reduction. See more detailed explanations on our
debt structure, including the $350 million bond offering in June 2003, the $125
million bond offering in December 2003 and the senior debt refinancing in
December 2003 and their anticipated impact on our interest expense, in
"Liquidity and Capital Resources--Capitalization" later in this Management's
Discussion and Analysis.

In April 2004, we entered into three separate fixed-to-floating interest
rate swaps with two separate financial institutions. These agreements swapped an
aggregate of $150 million of fixed rate debt at a per annum rate of 10 1/4
percent to floating interest rate debt at a per annum rate of LIBOR plus a
spread of 5.68 percent. Annualized interest expense savings of the swaps based
on a LIBOR rate of 1.24 percent would be approximately $5 million.

INCOME TAXES

Income taxes were a benefit of $1 million in the first quarter of 2004,
compared to a benefit of $2 million in the prior year. Included in the first
quarter of 2003 was a benefit of $3 million related to the resolution of
outstanding tax issues. The effective tax rate for the first quarter of 2004 was
40 percent. The effective tax rate for 2003 including the $3 million benefit was
a negative 232 percent. Excluding the $3 million benefit our effective tax rate
was 40 percent.

EARNINGS PER SHARE

We reported a loss of $2 million or $0.05 per common share for the first
quarter of 2004, compared to income of $1 million or $0.02 per diluted common
share for 2003. Included in the results for the first quarter of 2004 were the
negative impacts from expenses related to our restructuring activities, customer
changeover costs for a major new aftermarket customer and consulting fees
indexed to stock price. The net impact of these items decreased earnings per
diluted share by $0.20. Included in the results for the first quarter of 2003
are the negative impacts from expenses related to our restructuring activities
and a tax benefit for the resolution of outstanding tax issues. The net impact
of these items increased earnings per diluted share by $0.01. You should also
read Note 9 to the consolidated financial statements for more detailed
information on earnings per share.

RESTRUCTURING AND OTHER CHARGES

Over the past several years we have adopted plans to restructure portions
of our operations. These plans were approved by the Board of Directors and were
designed to reduce operational and administrative overhead costs throughout the
business. Prior to the change in accounting required for exit or disposal
activities, we recorded charges to income related to these plans for costs that
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, a project known as Project Genesis, designed to lower our
fixed costs, improve efficiency and utilization, and better optimize our global
footprint. 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 included an emission 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 emission 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

31

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 of 2001 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 December 31, 2003, we have eliminated 974
positions in connection with 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. In the fourth
quarter of 2003, we reclassified $2 million of severance reserve to the asset
impairment reserve. This reclassification became necessary as actual asset
impairments along with the sale of our closed facilities were different than the
original estimates. We expect to complete all remaining restructuring activities
related to Project Genesis in the second quarter of 2004.

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. This charge was primarily recorded in cost
of sales.

In October of 2003 we announced the closure of an emission control
manufacturing facility in Birmingham, U.K. Approximately 130 employees will be
eligible for severance benefits in accordance with union contracts and U.K.
legal requirements. We incurred approximately $1 million in charges related to
this action in the first quarter of 2004. Charges related to this closing are
not expected to exceed $5 million and will be recorded during 2004. This action
is in addition to the plant closures announced in Project Genesis in the fourth
quarter of 2001.

In addition to the above charge, we incurred $4 million in restructuring
and restructuring related costs in the first quarter of 2004. These costs are
primarily related to the continuation of the optimization of our manufacturing
footprint that was started with Project Genesis in 2001.

Including the costs incurred in 2002 and 2003 of $18 million, we have
incurred a total of $23 million for activities related to our restructuring
actions initiated in prior periods that could not be accrued as part of the
restructuring charges for these actions.

To date we have generated about $31 million of annual savings from Project
Genesis. About $7 million of savings was related to closing the eight
facilities, about $16 million of savings was related to value mapping and plant
arrangement and about $8 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. All actions for Project
Genesis have been completed with the exception of $1 million of severance which
will be paid in the second quarter of 2004.

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

32

Under the terms of our amended and restated senior credit agreement that
took effect on December 12, 2003, 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 2002-2006 period from the calculation of the
financial covenant ratios we are required to maintain under our senior credit
agreement. As of March 31, 2004, we have excluded $24 million of the $60 million
available under the terms of the senior credit facility. In addition to the
announced actions, we continue to evaluate additional opportunities 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
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 of America. 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.

Revenue Recognition

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 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.

Long-term Receivables

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 March 31, 2004, we had $15
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.

Income Taxes

We have a U.S. Federal tax net operating loss ("NOL") carryforward at March
31, 2004, of $536 million, which will expire in varying amounts from 2018 to
2024. The federal tax effect of that NOL is $188 million, and is recorded as an
asset on our balance sheet at March 31, 2004. 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
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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 March
31, 2004, we believe that there has been a significant change in our ownership,
but not a majority change, in the last three years. In addition, giving effect
to our proposed common stock offering, we do not believe the transaction will
create a majority change in ownership.

Stock-based Compensation

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 (loss) per share would be lower by
less than $1 million or $0.01 per diluted share for both the first quarter of
2004 and 2003.

Goodwill and Other Intangible Assets

We utilize an impairment-only approach to value our purchased goodwill in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." Each year
in the fourth quarter, we perform an impairment analysis on the balance of
goodwill. Inherent in this calculation is the use of estimates as the fair value
of our designated reporting units is based upon the present value of our
expected future cash flows. In addition, our calculation includes our best
estimate of our weighted average cost of capital and growth rate. If the
calculation results in a fair value of goodwill which is less than the book
value of goodwill, an impairment charge would be recorded in the operating
results of the impaired reporting unit.

Pension and Other Postretirement Benefits

We have various defined benefit pension plans that cover substantially all
of our employees. We also have postretirement health care and life insurance
plans that cover a majority of our domestic employees. Our pension and
postretirement health care and life insurance expenses and valuations are
dependent on management's assumptions used by our actuaries in calculating such
amounts. These assumptions include discount rates, health care cost trend rates,
long-term return on plan assets, retirement rates, mortality rates and other
factors. Health care cost trend rate assumptions are developed based on
historical cost data and an assessment of likely long-term trends. Retirement
and mortality rates are based primarily on actual plan experience.

Our approach to establishing the discount rate assumption starts with the
Moody's AA Corporate Bond Index adjusted for an incremental yield based on
actual historical performance. This incremental yield adjustment is the result
of selecting securities whose yields are higher than the "normal" bonds that
comprise the index. Based on this approach, at September 30, 2003 the discount
rate for pension plans was 6.1 percent. The discount rate for postretirement
benefits was 6.5 percent at September 30, 2003.

Our approach to determining expected return on plan asset assumptions
evaluates both historical returns as well as estimates of future returns, and is
adjusted for any expected changes in the long-term outlook for the equity and
fixed income markets. As a result, our estimate of the long-term rate of return
on plan assets for our pension plans was 8.4 percent for 2003 and is 8.75
percent for 2004.

CHANGES IN ACCOUNTING PRINCIPLES

In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"),
which was revised in December 2003. 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 as revised is effective
January 1, 2004. The adoption of FIN 46 did not have a material impact on our
consolidated financial statements.

34

In April 2003, the FASB issued Statement of Financial Accounting Standards
("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 December 2003, the FASB revised SFAS No. 132, "Employer's Disclosures
About Pensions and Other Postretirement Benefits." The revised SFAS No. 132
changes employers' disclosures about pension plans and other postretirement
benefits and requires additional disclosures about assets, obligations, cash
flows and net periodic benefit cost. The revised statement is effective for
annual and interim periods ended after December 15, 2003. We adopted the revised
disclosures as of December 31, 2003, in our consolidated financial statements.

In January 2004, the FASB issued FASB Staff Position ("FSP") No. 106-1,
"Accounting Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003." FSP No. 106-1 permits a sponsor to
make a one-time election to defer accounting for the effects of the Medicare
Prescription Drug, Improvement and Modernization Act of 2002 (the "Act"). The
Act, signed into law in December 2003, establishes a prescription drug benefit
under Medicare ("Medicare Part D") and a federal subsidy to sponsors of retiree
health care benefit plans that provide a benefit that is at least actuarially
equivalent to Medicare Part D. FSP No. 106-1 does not provide specific guidance
as to how a sponsor should recognize the effects of the Act in its financial
statements. The Act introduces two new features to Medicare that must be
considered when measuring accumulated postretirement benefit costs. The new
features include a subsidy to the plan sponsors that is based on 28 percent of
an individual beneficiary's annual prescription drug costs between $250 and
$5,000, and an opportunity for a retiree to obtain a prescription drug benefit
under Medicare.

We have elected to defer the adoption of FSP No. 106-1 due to lack of
specific guidance. Therefore, the net postretirement benefit costs disclosed in
the consolidated financial statements do not reflect the impact of the Act on
the plans. Our deferral will continue until specific authoritative accounting
guidance for the federal subsidy is issued. Authoritative guidance on the
accounting for the federal subsidy is pending and, when issued, could require
information previously reported in our consolidated financial statements to
change. We are currently investigating the impacts of FSP No. 106-1's initial
recognition, measurement and disclosure provisions on our consolidated financial
statements.

LIQUIDITY AND CAPITAL RESOURCES

CAPITALIZATION

35

General. The decrease in shareholders' equity primarily results from the
net loss of $2 million reported in the first quarter and a decrease of $6
million related to the translation of foreign balances into U.S. dollars. This
amount was partially offset by an increase in premium on common stock issued
pursuant to benefit plans and other transactions. Although our book equity
balance was small at March 31, 2004, it should not affect our business
operations. We have no debt covenants that are based upon our book equity, and
there are no other agreements that are adversely impacted by our relatively low
book equity.

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 $2 million during the first quarter of 2004. The
decrease is the result of a $2 million decrease in short-term debt on our
foreign subsidiaries. There were no borrowings outstanding under our revolving
credit facility as of March 31, 2004. Borrowings outstanding under our revolving
credit facility were $141 million as of March 31, 2003. The overall decrease in
long-term debt resulted from payments made on our outstanding long-term debt and
capital leases.

Senior Credit Facility. Our financing arrangements are primarily provided
by a committed senior secured financing arrangement with a syndicate of banks
and other financial institutions, which was $800 million at March 31, 2004. 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 originally entered into
this facility in 1999 and since that time have periodically requested and
received amendments to the facility for various purposes. In 2003, we engaged in
a series of transactions that resulted in the full refinancing of the facility,
through an amendment and restatement, in December.

In June 2003, we issued $350 million of 10 1/4 percent senior secured notes
in a private placement. 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. In October 2003, we completed an offer to exchange all of
the notes issued in the June 2003 private placement for a like amount of the
10 1/4 percent senior secured notes, with substantially identical terms, which
had been registered under the Securities Act of 1933. These notes are described
in more detail below under "--Senior and Subordinated Notes."

We received net proceeds in the second quarter of 2003 from the offering of
the notes, after deducting underwriting discounts and commissions and our
expenses, of $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.

In connection with issuing $350 million of 10 1/4 percent senior secured
notes due July 15, 2013, we amended the senior credit facility effective May 29,
2003. This 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 then-applicable $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 costs
related to the amendment process of $1 million. These costs were included in the
capitalized debt issuance costs.

In December 2003, we amended and restated our senior credit facility and in
connection therewith, we issued an additional $125 million of 10 1/4 percent
senior secured notes in a private placement. We received $136 million of net
proceeds from the offering of the additional $125 million of 10 1/4 percent
senior secured notes, after deducting underwriting discounts and commissions and
other expenses and including a 13 percent price premium over par. We also
received $391 million in net proceeds from the new term loan B borrowings under
the amended and restated senior credit facility, after deducting fees and other
expenses. We used the combined net proceeds of $527 million to prepay the $514
million outstanding under term loans A, B and C under the senior credit facility
immediately prior to the completion of the transaction. The remaining
36

$13 million of net proceeds were used for general corporate purposes. In
addition, we received $6 million of accrued interest on the new notes for the
period from June 19 through December 12, 2003 that investors paid us and that we
subsequently used to pay, on January 15, 2004, the accrued interest on the notes
from June 19, 2003.

We incurred $27 million in fees associated with the issuance of the
aggregate $475 million of 10 1/4 percent senior secured notes and the amendment
and restatement of our senior credit facility which will be amortized over the
term of the senior secured notes and the amended and restated senior credit
facility.

After giving effect to the use of the net proceeds from both the June and
December transactions, we expect these transactions would have increased our
annual interest expense by approximately $9 million for 2003. This does not give
effect to (1) our proposed common stock offering, issuance of new senior
subordinated notes and purchase of our outstanding senior subordinated notes or
(2) the fixed-to-floating interest rate swaps we completed in April 2004,
described below. In addition, we expensed in the second and fourth quarters of
2003 a total of approximately $12 million of existing deferred debt issuance
costs as a result of retiring the term loans under the senior credit facility.

In April 2004, we entered into three separate fixed-to-floating interest
rate swaps with two separate financial institutions. These agreements swapped an
aggregate of $150 million of fixed interest rate debt at a per annum rate of
10 1/4 percent to floating interest rate debt at a per annum rate of LIBOR plus
a spread of 5.68 percent. Each agreement requires semi-annual settlements
through July 15, 2013. Based on a LIBOR rate of 1.24 percent, these swaps would
reduce our annual interest expense by approximately $5 million.

Our amended and restated senior credit facility consists of a seven-year,
$400 million term loan B facility maturing in December 2010; a five-year, $220
million revolving credit facility maturing in December 2008; and a seven-year,
$180 million tranche B letter of credit/revolving loan facility maturing in
December 2010. Although the term loan facility and the tranche B letter of
credit/revolving loan facility mature in 2010, the two facilities are subject to
mandatory prepayment in full, and any letters of credit issued under the term
loan B/revolving loan facility are subject to full cash collateralization, (a)
on April 15, 2009, if by that date our senior subordinated notes are not
refinanced or extended with a maturity not earlier than April 15, 2011, and (b)
on the date which is six months prior to the date to which the senior
subordinated notes have been refinanced or had their maturity extended, if our
senior subordinated notes have been refinanced or had their maturity extended to
a date prior to April 15, 2011. Quarterly principal repayment installments of $1
million on the term loan B facility will begin on March 31, 2004 and continue
until December 31, 2009, then rise to $94 million each on March 31, June 30, and
September 30 of 2010, with the remaining $94 million final principal repayment
due on December 12, 2010. As of March 31, 2004, borrowings under the term loan B
facility and the revolving credit 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; or (ii) a rate consisting of the greater of the JP Morgan
Chase prime rate or the Federal Funds rate plus 50 basis points, plus a margin
of 225 basis points. 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 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 beginning with the fourth quarter of 2004. The interest margins for
borrowings under the term loan B facility will reduce by 25 basis points
following the end of each fiscal quarter for which the consolidated leverage
ratio is less than 4.0. 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 new $180 million tranche B letter of credit/revolving loan facility is
available for borrowings of revolving loans and to support letters of credit
issued from time to time under the senior credit facility. On December 12, 2003,
the tranche B letter of credit/revolving loan facility lenders deposited $180
million with the administrative agent, who will invest that amount in time
deposits. Revolving loans can be drawn, repaid and reborrowed thereunder. Such
revolving loans will be funded from such deposits and such repayments will be
redeposited with the administrative agent. If a letter of credit is paid under
this facility and not reimbursed

37

in full by us, each participating lender's ratable share of the deposit will be
applied automatically in satisfaction of the reimbursement obligation. We will
not have an interest in any such funds on deposit, and we will not account for
such funds as our indebtedness when deposited with the administrative agent
until drawn by us as described below. Revolving loans borrowed under such
facility will be funded with the funds on deposit in such accounts and accrue
interest at a rate per annum equal to LIBOR plus 325 basis points. Letters of
credit issued thereunder will accrue a letter of credit fee at a per annum rate
of 325 basis points for the pro rata account of the lenders under such facility
and a fronting fee for the ratable account of the issuers thereof at a per annum
rate in an amount to be agreed upon payable monthly in arrears. The
administrative agent will pay on a monthly basis to the lenders under the
facility a return on their funds actually on deposit in such accounts in an
amount equal to a per annum rate of monthly LIBOR (reset every business day
during such monthly period) minus 10 basis points. We will be obligated to pay
such lenders on a monthly basis a fee equal to the excess of (x) a per annum
rate equal to monthly LIBOR (reset at the start of the applicable month) plus
325 basis points on the size of such facility (i.e., $180 million initially)
over (y) the sum of (1) the amount of such return for such month, (2) the amount
of interest accrued on such loans under such facility for such month and (3) the
letter of credit fees (but not the fronting fees) accrued on such letters of
credit under such facility for such month; provided, that except in certain
circumstances, the aggregate amount of such interest and fees shall not exceed
the amount determined pursuant to clause (x) above minus such return. The
interest margins paid on revolving loans and the fees paid on letters of credit
issued under the tranche B letter of credit/revolving loan facility will reduce
by 25 basis points following the end of each fiscal quarter for which the
consolidated leverage ratio is less than 4.0.

The tranche B letter of credit/revolving loan facility will be reflected as
debt on our balance sheet only if we have outstanding thereunder revolving loans
or payments by the facility in respect of letters of credit. We will not be
liable for any losses to or misappropriation of any (i) return due to the
administrative agent's failure to achieve the return described above or to pay
all or any portion of such return to any lender under such facility or (ii)
funds on deposit in such account by such lender (other than the obligation to
repay funds released from such accounts and provided to us as revolving loans
under such facility).

The amended and restated 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 credit facility and, in the case of the year ended March 31,
2004, the actual ratios we achieved are shown in the following tables:

As part of the amendment and restatement, the terms of our senior credit
facility were also revised to: (i) extend the period of time during which we can
exclude up to $60 million of cash charges and expenses, before taxes, related to
any cost reduction initiatives from the calculation of the financial covenant
ratios by another two years through 2006; (ii) permit the refinancing of our
senior subordinated notes and/or our 10 1/4 percent senior secured notes using
the net cash proceeds from the issuance of similarly structured debt; (iii)
permit the repurchase of our senior subordinated notes and/or our 10 1/4 percent
senior secured notes using the net cash proceeds from the issuance of shares of
common stock of Tenneco Automotive Inc.; and (iv) delete the mandatory
prepayment of term loans from excess cash flow in 2003 and reduced the
percentage of excess cash flow that must be used to prepay term loans in
subsequent years from 75 percent to 50 percent.

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 as described in the amendment); (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 March 31, 2004, we were in compliance with both the
financial covenants (as indicated above) and operational restrictions of the
facility.

In connection with the offer to purchase the outstanding 11 5/8 percent
senior subordinated notes, we are seeking the consent of the lenders under our
senior credit facility. That consent will allow us to amend the senior
subordinated note indenture to eliminate substantially all of the restrictive
covenants and certain events of default in that indenture. The consent will also
allow us to be relieved of the indenture, provided we deposit funds with the
trustee, when the notes are within one year of being redeemable or due and will
expand from 60 to 180 the maximum number of days prior to a redemption date on
which we could give notice of redemption. These amendments would apply to any
notes that remain outstanding upon completion of the transaction. The consent
will also enhance our flexibility to refinance, at any time on or prior to
December 31, 2004, any notes that remain outstanding upon completion of the
transaction by eliminating the requirement of a substantially concurrent
refinancing transaction.

Senior Secured and Subordinated Notes. Our outstanding debt also includes
$500 million of 11 5/8 percent senior subordinated notes due October 15, 2009 in
addition to the $475 million of 10 1/4 percent senior secured notes due July 15,
2013 described above. We can redeem some or all of the notes at any time after
July 15, 2008, in the case of the senior secured notes, and October 15, 2004, in
the case of the senior subordinated notes. If we sell certain of our assets or
experience specified kinds of changes in control, we must offer to repurchase
the notes. We are permitted to redeem up to 35 percent of the senior secured
notes with the proceeds of certain equity offerings completed before July 15,
2006.

As described above under "Executive Summary," in April 2004 we filed a
registration statement with the SEC relating to a proposed offering of our
common stock. We plan to use the net proceeds of that offering, together with
the net proceeds of a private placement of approximately $400 million of new
senior

39

subordinated notes, to make and complete an offer to purchase our outstanding
senior subordinated notes. We commenced that offer on April 30, 2004. The offer
is subject to various conditions, including receipt of the consent of our senior
credit facility lenders described above. We expect that completion of the offer
will cost approximately $557 million, including accrued and unpaid interest on
the notes, assuming 100 percent of the notes are tendered and purchased. We
expect that the new senior subordinated notes will have terms that are
substantially similar to our outstanding senior subordinated notes (prior to
giving effect to the amendments proposed in connection with our offer to
purchase those notes), except that we expect them to bear interest at an annual
rate of approximately 8 percent as compared to the current 11 5/8 percent. The
terms of, and our ability to complete, these transactions will depend on
prevailing market conditions and other factors.

Assuming we complete these transactions, we expect that we will continue to
evaluate opportunities to refinance our senior secured notes and any of our
existing senior subordinated notes that remain outstanding. For example, the
11 5/8 percent senior subordinated notes are callable beginning in October 2004.
We could refinance the notes with the cash proceeds of sales of new debt, debt
securities or preferred stock convertible into common equity, or common stock,
or through any combination thereof. The existing terms of our financing
arrangements contemplate these types of refinancings and, accordingly, we could
effect appropriate transactions without any further consent of our lenders. As
described above, we are seeking a consent from our senior credit facility
lenders that will further enhance our flexibility to refinance, at any time on
or prior to December 31, 2004, any of our existing senior subordinated notes
that remain outstanding upon completion of our offer to purchase by eliminating
the requirement of a substantially concurrent refinancing transaction. Any
further decision to refinance our current debt will be based upon the current
economic conditions and the benefits to our company.

The senior indentures for our senior secured notes and existing senior
subordinated notes 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
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 March 31, 2004, we were in compliance with the
covenants and restrictions of these indentures.

Accounts Receivable Securitization. In addition to our senior credit
facility, senior secured notes 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 program. We had sold
accounts receivable under this program of $54 million and $50 million at March
31, 2004 and 2003, 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 March 31, 2004, we had
sold $90 million of accounts receivable in Europe up from $72 million at March
31, 2003. The arrangements to sell receivables in Europe are not committed and
can be cancelled at any time. If we were not able to sell receivables under
either the North American or European securitization programs, our borrowings
under our revolving credit agreements would increase. These accounts receivable
securitization programs provide us with access to cash at costs that are

40

generally favorable to alternative sources of financing, and allow us to reduce
borrowings under our revolving credit agreements.

Capital Requirements. We believe that cash flows from operations, combined
with available borrowing capacity described above, assuming that we maintain
compliance with the financial covenants and other requirements of our loan
agreement, will be sufficient to meet our future capital requirements for the
following year, 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 as of March 31, 2004, are
shown in the following table:

We principally use our revolving credit facilities to finance our
short-term capital requirements. As a result, we classify the outstanding
balances of the revolving credit facilities within our short-term debt even
though the revolving credit facility has a termination date of December 13, 2008
and the tranche B letter of credit facility/revolving loan facility has a
termination date of December 13, 2010.

If we do not maintain compliance with the terms of our senior credit
facility or the indentures governing our senior secured notes or senior
subordinated notes 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.

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Included in our contractual obligations is the amount of interest to be
paid on our long-term debt. As our debt structure contains both fixed and
variable rate interest debt, we have made assumptions in calculating the amount
of the future interest payments. Interest on our senior secured notes is
calculated using the fixed rates of 10 1/4 percent. Interest on our senior
subordinated notes is calculated using the fixed rate of 11 5/8 percent.
Interest on our variable rate debt is calculated as 350 basis point plus LIBOR
of 1.5 percent which is the current rate at March 31, 2004. We have assumed that
LIBOR will remain unchanged for the outlying years. The amounts in the table
above do not give effect to our proposed common stock offering, and the related
private placement of new senior subordinated notes and purchase of our
outstanding senior subordinated notes. See "--Capitalization--Senior Secured and
Subordinated Notes." In addition, we have not included the impact of interest
rate swaps completed in April 2004. See "Interest Rate Risk" below.

We have also included an estimate of expenditures required after March 31,
2004 to complete the facilities and projects authorized at December 31, 2003, in
which we have made substantial commitments in connections with facilities. In
addition, we have included an estimate of our obligation to a consulting firm
who received stock appreciation rights ("SAR") as partial payment for services
rendered in the year 2000. The SAR's expire in November 2004.

We have not included purchase obligations as part of our contractual
obligations as we generally do not enter into long-term agreements with our
suppliers. In addition, the agreements we currently have do not specify the
volumes we are required to purchase. If any commitment is provided, in many
cases the agreements state only the minimum percentage of our purchase
requirements we must buy from the supplier. As a result, these purchase
obligations fluctuate from year to year and we are not able to quantify the
amount of our future obligation.

We have also not included material cash requirements for taxes and funding
requirements for pension and postretirement benefits. We have not included cash
requirements for taxes as we are a taxpayer in certain foreign jurisdictions but
not in domestic locations. Additionally, it is difficult to estimate taxes to be
paid as shifts in where we generate income can have a significant impact on
future tax payments. We have not included cash requirements for funding pension
and postretirement costs, as based upon current estimates we believe we will be
required to make contributions between $34 million to $41 million to those plans
in 2004 of which approximately $3 million has been contributed as of March 31,
2004. Pension and postretirement contributions beyond 2004 will be required but
those amounts will vary based upon many factors, including the performance of
our pension fund investments during 2004.

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 $4 million and $5 million at March 31, 2004 and 2003,
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 $800 million senior secured credit facility, the $475 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 $475 million senior secured notes is also secured by second-priority
liens on substantially all of our domestic assets, excluding some of the stock
of our domestic subsidiaries. This arrangement is not secured by any pledges of
stock or assets of our foreign subsidiaries. You should also read Note 13 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 $42 million.
We have also issued $18 million in letters of credit to support some of our
subsidiaries' insurance arrangements. In addition,
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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 three months ended March 31, 2004, cash flows provided from
operating activities was $13 million as compared to $36 million in the prior
year. For the first three months of 2004 cash flow used from working capital was
$26 million as compared to zero for the first three months of 2003. This was
primarily the result of higher receivables related to sales volumes and higher
inventory levels due to new customers and seasonal inventory builds in
anticipation of the aftermarket summer selling period.

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 $89 million and $58 million as
of March 31, 2004 and 2003, respectively. In June 2003, we entered into a
similar arrangement with a third major OE customer in North America. This
arrangement further reduced accounts receivable by $16 million at March 31,
2004. In March 2004, we entered into another arrangement with a major OE
customer in Europe. This arrangement reduced accounts receivable by $8 million
at March 31, 2004. These arrangements can be cancelled at any time.

Investing Activities

Cash used for investing activities was $11 million lower in the first three
months of 2004 compared to the same period a year ago. In the current quarter we
received $11 million in cash from the sale of our Birmingham, U.K. facility.
Capital expenditures were $25 million in the first three months of 2004, down $1
million from the $26 million in the prior year.

Financing Activities

Cash flow from financing activities was flat for the first three months of
2004 compared to an outflow of $3 million in the same period of 2003. This is
primarily attributable to cash proceeds from the conversion of employee stock
options within the current quarter.

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.

On March 31, 2004, we had $994 million in long-term debt obligations that
have fixed interest rates. Of that amount, $500 million is fixed through October
2009, and $486 million through July 2013, while the remainder was fixed over
periods of 2004 through 2025. There were also $414 million in long-term debt
obligations that have variable interest rates based on a current market rate of
interest. In April 2004, we entered into three separate fixed-to-floating
interest rate swaps with two separate financial institutions. These

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agreements swapped an aggregate of $150 million of fixed interest rate debt at a
per annum rate of 10 1/4 percent to floating interest rate debt at a per annum
rate of LIBOR plus a spread of 5.68 percent. Each agreement requires semi-annual
settlements through July 15, 2013. Based on a LIBOR rate of 1.24 percent, these
swaps would reduce our annual interest expense by approximately $5 million.

We estimate that the fair value of our long-term debt at March 31, 2004 was
about 109 percent of its book value and 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 $3 million after tax, excluding the effect of the interest rate
swaps we completed in April 2004. A one percentage point increase or decrease in
interest rates on the swaps we completed in April 2004 would increase or
decrease the annual interest expense we recognize in the income statement and
the cash we pay for interest expense by approximately $1 million after tax.

OUTLOOK

North America light vehicle production rates for 2003 weakened slightly to
an annualized rate of 15.9 million units or a three percent decline from the
prior year. Additionally, North American heavy-duty truck production was down
three percent from the previous year. North American OE light vehicle production
was down one percent in the first quarter of 2004 as compared to the previous
year. We still expect North American OE light vehicle production to increase to
approximately 16 million units in 2004, however we remain cautious regarding
volumes due to continuing uncertain economic conditions in the U.S. and
uncertainty about the willingness of the original equipment manufacturers to
continue to support consumer automobile sales through incentives. We also saw an
increase in heavy-duty truck production rates of 46 percent in the first quarter
of 2004. We expect that the heavy-duty truck market could increase between 15 to
25 percent for all of 2004. In Europe, 2003 new light vehicle yearly production
rates were down one percent from 2002 levels. Expectations for 2004 European
vehicle production are to remain flat with 2003 levels. We still anticipate this
to hold even though European production levels were down approximately one
percent in the first quarter of 2004. We plan to build on the OE ride control
business launched in 2003 and the ramp up of OE exhaust replacement programs in
2004 along with new OE exhaust business expected to launch in 2004. In the
global aftermarket, issues that have impacted volumes over the last twelve
months will continue to challenge us for 2004. Customer consolidation, longer
product replacement cycles, a weaker economy and competition from short-liners
in the exhaust business will continue to impact our volumes. We saw continued
signs of improvement in the North American aftermarket in the fourth quarter of
2003 and the first quarter of 2004 and are optimistic that these conditions will
continue for the remainder of 2004. We expect that our presence on strong
selling light truck platforms and our content on Japanese platforms manufactured
in North America should continue to allow us to perform better than the overall
North America vehicle market. Additionally, we expect to continue to experience
strong growth in Asia, Latin America, and Australia.

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.

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As of March 31, 2004, 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.

From time to time we are subject to product warranty claims whereby we are
required to bear costs of repair or replacement of certain of our products.
Warranty claims may range from individual customer claims to full recalls of all
products in the field. See Note 5 to our consolidated financial statements
included under Item 1 for information regarding our warranty reserves.

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 are involved in litigation over medical benefits
provided to some of our former employees. As another example, we are involved in
litigation with the minority owner of one of our Indian joint ventures over
various operational issues which involves a court-mandated bidding process. We
vigorously defend ourselves against all of these claims. In future periods, we
could be subjected to cash costs or non-cash charges to earnings if we are
required to sell our interest in the joint venture on unfavorable terms.
However, although the ultimate outcome of any legal matter cannot be predicted
with certainty, based on present information, including our assessment of the
merits of the particular claim, we do not expect that these legal proceedings or
claims will have any material adverse impact on our future consolidated
financial position or results of operations. In addition, we are subject to a
number of lawsuits initiated by a significant number of claimants alleging
health problems as a result of exposure to asbestos. 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.

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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 eight percent of the employee's
salary. We recorded expense for these matching contributions of approximately $2
million for each of the three months ended March 31, 2004 and 2003,
respectively. All contributions vest immediately.

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-15(e) and Rule 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the quarter covered by this report. Based
on their evaluation, our Chief Executive Officer and Chief Financial Officer
have concluded that the company's disclosure controls and procedures are
effective to ensure that information required to be disclosed by our company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. There were no changes in the internal
control over financial reporting that occurred during the first quarter of 2004
that have materially affected, or are likely to materially affect, our internal
control over financial reporting.

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PART II

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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

(b) Reports on Form 8-K. We filed or furnished the following Current
Reports on Form 8-K during the quarter ended March 31, 2004:

Current Report on Form 8-K dated January 27, 2004, including pursuant to Item 5
and Item 12 certain information pertaining to the results of our operations for
the fourth quarter and full year 2003.

Current Report on Form 8-K dated February 17, 2004, including pursuant to Item 5
certain information pertaining to the appointment of James Perkins as Vice
President and Controller.

Current Report on Form 8-K dated March 10, 2004, including pursuant to Item 5
certain information pertaining to the Company's Board of Directors election of
Timothy R. Donovan to the Board.

Current Report on Form 8-K dated March 22, 2004, including pursuant to Item 5
certain information pertaining to the Company's participation in a webcast
presentation during the Lehman Brothers 2004 High Yield Bond & Syndicated Loan
Conference.

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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/ KENNETH R. TRAMMELL
------------------------------------
Kenneth R. Trammell
Senior Vice President and
Chief Financial Officer

Dated: May 3, 2004

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INDEX TO EXHIBITS
TO
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED MARCH 31, 2004

- ---------------

* Filed herewith.

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