- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter ended September 30, 1997
Commission file number: 1-12162
BORG-WARNER AUTOMOTIVE, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3404508
State or other jurisdiction of (I.R.S. Employer
Incorporation or organization Identification No.)
200 South Michigan Avenue, Chicago, Illinois 60604
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 322-8500
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 ----
On October 31, 1997 the registrant had 23,751,865 shares of Common Stock and
1,500 shares of Series I Non-Voting Common Stock outstanding.
<PAGE>
BORG-WARNER AUTOMOTIVE, INC.
FORM 10-Q
NINE MONTHS ENDED SEPTEMBER 30, 1997
INDEX
Page No.
PART I. Financial Information
Item 1. Financial Statements
Introduction 2
Condensed Consolidated Balance Sheets at
September 30, 1997 and December 31, 1996 3
Consolidated Statements of Income for the three
months ended September 30, 1997 and 1996 4
Consolidated Statements of Income for the nine
months ended September 30, 1997 and 1996 5
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and 1996 6
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 15
PART II. Other Information
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of
Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
<PAGE>
BORG-WARNER AUTOMOTIVE, INC.
FORM 10-Q
NINE MONTHS ENDED SEPTEMBER 30, 1997
PART I.
ITEM 1.
A. Borg-Warner Automotive, Inc. and Consolidated Subsidiaries'
Financial Statements
The financial statements of Borg-Warner Automotive, Inc. and Consolidated
Subsidiaries ("Company") have been prepared in accordance with the instructions
to Form 10-Q under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The statements are unaudited but include all adjustments,
consisting only of recurring items, except as noted, which the Company considers
necessary for a fair presentation of the information set forth herein. The
results of operations for the nine months ended September 30, 1997 are not
necessarily indicative of the results to be expected for the entire year. The
following financial statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations should be read in conjunction with
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1996.
<PAGE>
BORG-WARNER AUTOMOTIVE, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(millions of dollars except share data)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1997 1996
------------- -------------
<S> <C> <C>
A S S E T S
- -------------
Cash and cash equivalents $ 19.4 $ 11.5
Receivables 138.6 124.6
Inventories 111.8 91.1
Prepayments 16.6 8.1
Deferred income tax asset 17.8 17.8
------------- --------------
Total current assets 304.2 253.1
Property, plant, and equipment at cost 921.3 863.1
Less accumulated depreciation 362.6 328.9
------------- --------------
Net property, plant and equipment 558.7 534.2
Investments and advances 136.0 135.9
Goodwill 543.1 555.7
Deferred income tax asset 34.2 35.4
Other noncurrent assets 120.2 109.3
------------- --------------
Total other assets 833.5 836.3
------------- --------------
$ 1,696.4 $ 1,623.6
============= ==============
LIABILITIES & STOCKHOLDERS' EQUITY
- ----------------------------------
Notes payable $ 48.8 $ 38.0
Accounts payable and accrued expenses 289.5 269.3
Income taxes payable 50.0 30.6
============= ==============
Total current liabilities 388.3 337.9
Long-term debt 244.8 279.3
Long-term retirement-related liabilities 325.3 326.8
Other long-term liabilities 50.4 50.8
------------- --------------
Total long-term liabilities 375.7 377.6
Capital stock:
Preferred stock, $.01 par value; authorized
5,000,000 shares; none issued -- --
Common stock, $.01 par value; authorized
50,000,000 shares; issued and outstanding
shares of 23,663,225 in 1997 0.2 0.2
Non-voting common stock, $.01 par value;
authorized 25,000,000 shares; issued shares
of 2,520,000 in 1997 and outstanding shares
of 46,000 in 1997 -- --
Capital in excess of par value 566.0 563.9
Retained earnings 127.1 61.8
Currency translation adjustment 1.7 10.3
Minimum pension liability adjustment (7.4) (7.4)
-------------- -------------
Total stockholders' equity 687.6 628.8
-------------- -------------
$ 1,696.4 $ 1,623.6
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
BORG-WARNER AUTOMOTIVE, INC.
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(millions of dollars except share data)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------
1997 1996
--------- -----------
<S> <C> <C>
Net sales $ 406.8 $ 387.7
Cost of sales 323.7 308.1
Depreciation 17.0 17.8
Selling, general and administrative expenses 25.5 27.1
Minority interest 0.6 0.7
Goodwill amortization 4.2 4.0
Equity in affiliate earnings and other income (3.1) (3.6)
---------- -----------
Earnings before interest and finance
charges and income taxes 38.9 33.6
Interest expense and finance charges 6.2 7.0
---------- -----------
Earnings before income taxes 32.7 26.6
Provision for income taxes 11.1 7.8
--------- -----------
Net earnings $ 21.6 $ 18.8
========== ===========
Net earnings per share $ 0.91 $ 0.80
========== ===========
Average shares outstanding (thousands) 23,692 23,543
========== ===========
Dividends declared per share $ 0.15 $ 0.15
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
BORG-WARNER AUTOMOTIVE, INC.
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(millions of dollars except share data)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------
1997 1996
------ ------
<S> <C> <C>
Net sales $ 1,300.0 $ 1,118.4
Cost of sales 1,016.3 883.1
Depreciation 51.5 53.7
Selling, general and administrative expenses 95.5 87.1
Minority interest 1.8 1.9
Goodwill amortization 12.4 9.4
Equity in affiliate earnings and other income (11.7) (10.5)
------- --------
Earnings before interest and finance
charges and income taxes 134.2 93.7
Interest expense and finance charges 19.0 14.0
------- -------
Earnings before income taxes 115.2 79.7
Provision for income taxes 39.2 26.8
--------- ---------
Net earnings $ 76.0 $ 52.9
========= ==========
Net earnings per share $ 3.21 $ 2.25
========= ==========
Average shares outstanding (thousands) 23,692 23,543
========= ==========
Dividends declared per share $ 0.45 $ 0.45
========= ==========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
BORG-WARNER AUTOMOTIVE, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(millions of dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1997 1996
------- ---------
<S> <C> <C>
Operating
Net earnings $ 76.0 $ 52.9
Adjustments to reconcile net earnings to net cash flows
from operating activities:
Non-cash charges (credits) to operations:
Depreciation 51.5 53.7
Goodwill amortization 12.4 9.4
Other, principally equity in affiliate earnings(11.3) (11.2)
Changes in assets and liabilities:
Increase in receivables (18.0) (14.0)
Increase in inventories (22.9) (7.5)
(Increase)decrease in prepayments (8.7) 3.9
Increase in accounts payable and accrued
expenses 23.8 6.3
Increase in income taxes payable 19.6 5.2
Net change in other long-term assets and liabilities(8.2) (25.1)
--------- ---------
Net cash provided by operating activities 114.2 73.6
Investing
Capital expenditures (88.5) (57.8)
Investment in affiliates -- 2.5
Payments for business acquired -- (287.8)
Proceeds from other assets 9.0 7.3
--------- --------
Net cash used for investing activities (79.5) (335.8)
Financing
Net increase in notes payable 12.6 10.6
Additions to long-term debt 0.8 300.1
Reduction in long-term debt (31.1) (30.0)
Proceeds from options exercised 2.1 2.3
Dividends paid (10.7) (10.6)
--------- --------
Net cash provided by (used for)
financing activities (26.3) 272.4
Effect of exchange rate changes on cash and cash
equivalents (0.5) (0.2)
--------- --------
Net increase in cash and cash equivalents 7.9 10.0
Cash and cash equivalents at beginning of year 11.5 12.1
--------- --------
Cash and cash equivalents at end of period $ 19.4 $ 22.1
========== =========
Supplemental Cash Flow Information
Net cash paid during the period for:
Interest expense $ 18.0 $ 12.0
Income taxes 21.3 25.3
</TABLE>
See accompanying notes to financial statements
<PAGE>
Borg-Warner Automotive, Inc. and Consolidated Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
(1) Research and development costs charged to expense for the three and nine
months ended September 30, 1997 were $13.7 million and $41.0 million,
respectively. Costs charged to expense for the three and nine months ended
September 30, 1996 were $14.4 million and $37.7 million, respectively.
(2) Inventories consisted of the following (millions of dollars):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
----------- --------------
<S> <C> <C>
Raw materials $ 44.6 $ 43.5
Work in progress 50.7 30.9
Finished goods 16.5 16.7
------- --------
Total inventories $111.8 $ 91.1
======= ========
</TABLE>
(3) The Company has a 50% interest in NSK-Warner K.K. ("NSK-Warner"), a joint
venture based in Japan that manufactures automatic transmission components. The
Company's share of the earnings or losses reported by NSK-Warner is accounted
for using the equity method of accounting. NSK-Warner has a fiscal year-end of
March 31.
The Company's investment in NSK-Warner was $126.4 million at September 30,
1997 and $127.1 million at December 31, 1996.
Following are summarized financial data for NSK-Warner. Balance sheet data
is presented as of September 30, 1997 and March 31, 1997 and statement of income
data is presented for the three and six months ended September 30, 1997 and
1996. The Company's results include its share of NSK-Warner's results for the
three and nine months ended August 31, 1997 and 1996.
<TABLE>
<CAPTION>
September 30, March 31,
1997 1997
------------- -----------
<S> <C> <C>
Balance Sheet (in millions)
Current assets $145.4 $145.7
Noncurrent assets 126.4 124.7
Current liabilities(excluding debt) 69.5 74.1
Noncurrent liabilitiesexcluding debt) 8.3 8.1
Total debt 7.5 7.4
</TABLE>
<TABLE>
<CAPTION> Three Months Ended
September,30,
--------------------
1997 1996
--------- ----------
<S> <C> <C>
Statement of Income (in millions)
Net Sales $ 67.4 $ 74.5
Gross Profit 15.3 19.4
Net income 5.5 7.1
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
September, 30,
------------------
1997 1996
-------- --------
<S> <C> <C>
Statement of Income (in millions)
Net sales $134.8 $144.1
Gross profit 33.0 36.6
Net income 12.3 13.3
</TABLE>
(4) The Company's provisions for income taxes for the three and nine months
ended September 30, 1997 and 1996 are based upon estimated annual tax rates for
the year applied to federal, state and foreign income. The effective rate
differed from the U.S. statutory rate primarily due to a)state income taxes,
b)foreign rates which differ from those in the U.S. and c) realization of
certain business tax credits, including foreign tax credits and research and
development credits.
<PAGE>
(5) Following is a summary of notes payable and long-term debt:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
Current Long-Term Current Long-Term
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
DEBT (millions of dollars)
Bank borrowings $ 18.3 $ 56.8 $ 17.9 $ 56.5
Bank term loans due through 2001
(at an average rate of 5.0% at
Sept.1997 and 5.1% at December
1996) 30.2 33.1 20.0 67.2
7% Senior Notes due 2006, net of
unamortized discount -- 149.6 -- 149.6
Capital lease liability 0.3 5.3 0.1 6.0
------- ------- ------ -------
Total notes payable and
long-term debt $ 48.8 $ 244.8 $ 38.0 $ 279.3
======= ======== ========= ========
/TABLE
<PAGE>
The Company maintains a $350 million revolving credit facility. The
facility was unused at December 31, 1996. At September 30, 1997, there was $25
million outstanding. The facility is available through September 30, 2001.
The credit agreement contains numerous financial and operating covenants
including, among others, covenants requiring the Company to maintain certain
financial ratios and restricting its ability to incur additional foreign
indebtedness.
(6) The Company and certain of its current and former direct and indirect
corporate predecessors, subsidiaries and divisions have been identified by the
United States Environmental Protection Agency and certain state environmental
agencies and private parties as potentially responsible parties ("PRPs") at 29
hazardous waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act ("Superfund") and equivalent state laws and, as
such, may presently be liable for the cost of clean-up and other remedial
activities at these sites. Responsibility for clean-up and other remedial
activities at a Superfund site is typically shared among PRPs based on an
allocation formula.
Based on information available to the Company, which, in most cases,
includes: an estimate of allocation of liability among PRPs; the probability
that other PRPs, many of whom are large, solvent public companies, will fully
pay the costs apportioned to them; currently available information from PRPs
and/or federal or state environmental agencies concerning the scope of
contamination and estimated remediation costs; estimated legal fees; and other
factors, the Company has established a reserve in its financial statements for
indicated environmental liabilities with a balance at September 30, 1997 of
approximately $7.5 million. The Company expects this amount to be expended over
the next three to five years.
The Company was a wholly-owned subsidiary of Borg-Warner Security
Corporation ("BW-Security") until January 27, 1993, at which time it was
distributed to the stockholders of BW-Security in a tax-free distribution (the
"Spin-Off"). In connection with the Spin-Off, the Company and BW-Security
entered into a Distribution and Indemnity Agreement (the "Indemnity Agreement")
which provided for, among other matters, certain cross-indemnities designed
principally to place financial responsibility for the liabilities of businesses
conducted by BW-Security and its subsidiaries with BW-Security and financial
responsibility for liabilities of the Company or related to its automotive
businesses with the Company. BW-Security has claimed that, under the Indemnity
Agreement, the Company must indemnify it for certain liabilities relating to
environmental matters retained by BW-Security at the time of the Spin-Off.
BW-Security has requested indemnification from the Company for past costs of
approximately $2.5 million and for future costs related to these environmental
matters. At the time of the Spin-Off, BW-Security maintained a letter of credit
for approximately $9 million (the "Letter of Credit") with respect to the
principal portion of such environmental matters. The parties agreed to submit
this matter to binding arbitration. On November 4, 1997, the Arbitrator ruled
that the Company is contractually obligated to indemnify BW-Security for past
and future losses and costs relating to such environmental matters and for costs
associated with the Letter of Credit. The Company does not currently have
information sufficient to determine the extent of its liability to BW-Security
for indemnification of such liabilities. The Company intends to appeal the
Arbitrator's ruling, although success on appeal within the arbitration system is
rare.
The Company believes that none of these matters, individually or in the
aggregate, will have a material adverse effect on its financial position or
future operating results, generally either because estimates of the maximum
potential liability at a site are not large or because liability will be shared
with other PRPs, although no assurance can be given with respect to the ultimate
outcome of any such matter.
As of September 30, 1997, the Company had sold $100 million of receivables
under a $102 million Receivables Transfer Agreement for face value without
recourse. The Company had sold receivables under facilities aggregating $100
million at December 31, 1996.
(7) In April 1997, the Company announced that it plans to seek a buyer for its
powder metal engine connecting rod business and that Lehman Brothers has been
retained to solicit proposals. The connecting rod business does not offer a
strategic fit with the Company's core business and, although the business is
experiencing rapid growth and is a solid process-oriented business, management
has determined that the Company's resources are better spent on the Company's
core technologies in highly-engineered products and systems. For the three and
nine months ended September 30, 1997, this business reported net sales of $7.6
million and $22.9 million, respectively.
(8) Effective October 31, 1997, the Company purchased a 63% interest in Kuhnle,
Kopp & Kausch A.G. from Penske Corporation following notification from the
German regulatory authority that it would not prohibit the transaction. Kuhnle,
Kopp & Kausch is a German manufacturer of automotive and industrial
turbochargers and turbomachinery supplying most European engine manufacturers
with turbochargers for the light and commercial vehicle markets, and
turbomachinery for industrial applications. Sales for 1996 totaled DM314
million of which DM210 million was from the turbocharger business and DM104
million from the turbomachinery business.
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Borg-Warner Automotive, Inc. (the "Company") operates as a leading, global
supplier primarily to original equipment manufacturers ("OEMs) of passenger
cars, sport utility vehicles and light trucks serving the North American,
European and Asian automotive markets. The Company is a product leader in
highly engineered components and systems primarily for automotive drivetrain
applications. Examples include "shift quality" automatic transmission
components and systems, four-wheel drive ("4WD") transfer cases, automotive
chain and chain systems, engine timing components and systems, and a variety of
air and fluid control components and systems for engine and fuel systems
control.
The following discussion covers the results of operations for the three and nine
months ended September 30, 1997 and 1996 and financial condition as of September
30, 1997 and December 31, 1996.
RESULTS OF OPERATIONS
The Company's products fall into four operating groups: Powertrain Systems,
Automatic Transmission Systems, Morse TEC and Air/Fluid Systems. Net sales by
product grouping for the three and nine months ended September 30, 1997 and 1996
are as follows (in millions of dollars):
<PAGE>
<TABLE>
<CAPTION> Three Months Nine Months
Ended Ended
September 30, September 30,
--------------- --------------
1997 1996 1997 1996
------ ------ ------- -------
<S> <C> <C> <C> <C>
Powertrain Systems $140.2 $127.3 $ 450.8 $ 413.4
Automatic Transmission Systems 124.6 116.9 387.0 365.1
Morse TEC 78.0 68.1 239.3 204.8
Air/Fluid Systems 80.7 84.8 270.6 163.0
------- ------- -------- --------
423.5 397.1 1,347.6 1,146.3
Intergroup eliminations (16.7) (9.4) (47.7) (27.9)
------- -------- --------- ---------
Net sales $406.8 $387.7 $1,300.0 $1,118.4
======= ======== ========= =========
/TABLE
<PAGE>
Sales for the quarter ended September 30, 1997 were up 5% from the same period
in the prior year despite a 3% decline in North American automotive production.
Adjusted for the effects of the manual transmission sale in December 1996, sales
increased 11%. Strong sales of 4WD transfer cases, engine timing chain systems,
transmission chain, and automatic transmission components drove the increase for
the quarter. Revenue growth continued from the Company's presence on sport-
utility vehicles and light trucks, which continue to outpace the overall growth
in the automotive marketplace with truck production representing a higher
percentage of total production compared to the prior year.
Powertrain Systems realized a $12.9 million increase in sales over the same
period of 1996, a 10% improvement despite the loss of manual transmission
revenues ($21 million for the third quarter of 1996) due to the sale of the
manual transmission business on December 31, 1996. Excluding 1996 manual
transmission revenues, the sales gain was 32%, driven by an increase in volume
of transfer case sales. Automatic Transmission Systems sales increased 7%,
principally from volume increases by the Company's OEM customers. Morse TEC
sales rose 15%, reflecting increased sales of engine timing systems, 4WD
transfer case applications, and MORSE GEMINI(TM)Chain Systems to GM which
commenced during the third quarter of 1996. Additionally, the group continued
to benefit from engine timing chain system sales for Ford's new 4-liter overhead
cam engine which commenced in late 1996. Air/Fluid Systems sales decreased 5%
compared to the prior quarter primarily due to delays in model changeovers at
Chrysler and slow new product launches.
Sales increased 16% (14% for comparable sales) in the first nine months of 1997
to $1,300 million from $1,118 million in the first nine months of 1996,
continuing the Company's trend of growth exceeding that of world automobile
production. Comparatively, North American production was flat, Japanese
production increased by 9% and the European market increased by 1%. The
Company's sales increase was fueled by significant volume increases in transfer
case, engine timing system and transmission chain sales. Large transfer case
unit sales increased 49% due to sales of new large transfer cases for the Ford
Expedition and F-150 pickups introduced during 1996. Small transfer case unit
sales increased 15% due to a higher percentage of total Ford Explorer production
incorporating 4WD. Foreign exchange negatively impacted sales for the first
nine months of 1997 by approximately $18 million particularly due to the
strength of the dollar against the German mark and Japanese yen.
Research and development spending continued at approximately 3.0% of sales.
Total expense for the three and nine months ended September 30, 1997 was $13.7
million and $41.0 million respectively, compared to $14.4 million and $37.7
million for the same periods of 1996. The increase of $3.3 million for the nine
months ended September 30, 1997 is primarily due to additional spending related
to the acquisition of the Holley Automotive, Coltec Automotive and Performance
Friction Products businesses ("Coltec") in June 1996.
For the three months ended September 30, 1997 and 1996, the Company's portion of
NSK-Warner's earnings was $2.6 million and $3.4 million, respectively. The
Company's portion of such earnings was flat at $10.0 million for each of the
nine month periods ended September 30, 1997 and 1996 despite an increase in yen
denominated operating results. Earnings for both periods were negatively
impacted by a weaker yen against the dollar and a decline in sales prices
compared to the same periods of the prior year.
The Company's income taxes are based upon estimated annual tax rates for the
year. The third quarter and nine months of 1997 reflect certain tax credits
related to research and development programs and foreign operations. These
realized credits resulted in the effective income tax rate for the third quarter
and nine months of 1997 being lower than the standard federal and state tax
rates. The Company's effective rate was also lower than the standard federal
and state rates in 1996 as the Company also benefited from such tax credits in
1996 as well.
Net income for the quarter ended September 30, 1997 rose 15% to $21.6 million
compared with $18.8 million for the third quarter ended September 30, 1996. The
increase was primarily the result of increased sales volume and decreased
selling, general and administrative expenses primarily due to favorable post-
retirement benefit cost experience. The improvement was tempered by price
reductions from customers.
For the first nine months of 1997, the Company reported an increase in net
earnings of 44% to $76.0 million, compared to $52.9 million for the same period
of 1996. The increase is attributed to the same conditions as those related to
the third quarter improvement discussed above and to an improvement in year-to-
date gross profit margin resulting from ongoing cost reduction efforts and the
positive effect from the sale of the manual transmission business. The
improvement was offset by increased year-to-date interest expense and goodwill
amortization related to the Coltec acquisition.
FINANCIAL CONDITION AND LIQUIDITY
Cash generated from operations for the six months ended September 30, 1997
totaled $114.2 million primarily from net earnings of $76.0 million, a net
reduction in operating assets and liabilities of $14.4 million and non-cash
items, including $51.5 million of depreciation and $12.4 million of goodwill
amortization. The increase in goodwill amortization is a result of the Coltec
acquisition.
The operating cash was used to fund $88.5 million in capital expenditures for
the nine months ended September 30, 1997. The increase in capital spending of
$30.7 million over the prior year period is due to increased spending to
increase capacities and continued funding of existing and new programs. The
Company anticipates that capital spending for full-year 1997 will be higher than
full-year 1996 due to a full year of spending on the Coltec businesses acquired
and to continue to fund existing and new programs. The remainder of operating
cash was used to reduce the Company's debt. The Company believes that the
combination of cash from its operations and available credit facilities will be
sufficient to satisfy cash needs for the remainder of 1997.
The majority of the changes in the September 30, 1997 balance sheet as compared
to December 31, 1996 were due to the increase in level of business. Increases
in receivables, inventories and accounts payable and accrued expenses were
commensurate with the increase in volume of business. Net working capital,
excluding notes payable, increased by $11.5 million. Investments and advances
was essentially flat compared to December 31, 1996 as current year affiliate
earnings were offset by dividends and the currency exchange effect of a weaker
yen against the dollar.
As of September 30, 1997 and December 31, 1996, the Company had sold $100
million of receivables under a $102 million Receivables Transfer Agreement for
face value without recourse.
OTHER
Effective October 31, 1997, the Company purchased a 63% interest in Kuhnle, Kopp
& Kausch A.G. from Penske Corporation following notification from the German
regulatory authority that it would not prohibit the transaction. Kuhnle, Kopp &
Kausch is a German manufacturer of automotive and industrial turbochargers and
turbomachinery supplying most European engine manufacturers with turbochargers
for the light and commercial vehicle markets, and turbomachinery for industrial
applications. Sales for 1996 totaled DM314 million of which DM210 million was
from the turbocharger business and DM104 million from the turbomachinery
business.
In April 1997, the Company announced that it plans to seek a buyer for its
powder metal engine connecting rod business and that Lehman Brothers has been
retained to solicit proposals. The connecting rod product line was acquired as
part of the Company's purchase of the Precision Forged Products Division from
Federal-Mogul Corporation in 1995. The connecting rod business does not offer a
strategic fit with the Company's core business and, although the business is
experiencing rapid growth and is a solid process-oriented business, management
has determined that the Company's resources are better spent on the Company's
core technologies in highly-engineered products and systems. For the three and
nine months ended September 30, 1997, this business reported net sales of $7.6
million and $22.9 million, respectively.
As discussed more fully in Note 6 of the Notes to the Consolidated Financial
Statements, various claims and suits arising in the ordinary course of business
and seeking money damages have been filed against the Company. In each of these
cases, the Company believes that it has a defendable position or has made
adequate provisions to protect the Company from material losses. The Company
believes that it has established adequate provisions for litigation liabilities
in its financial statements in accordance with generally accepted accounting
principles. These provisions include both legal fees and possible outcomes of
legal proceedings.
The Company was a wholly-owned subsidiary of Borg-Warner Security Corporation
("BW-Security") until January 27, 1993, at which time it was distributed to the
stockholders of BW-Security in a tax-free distribution (the "Spin-Off"). In
connection with the Spin-Off, the Company and BW-Security entered into a
Distribution and Indemnity Agreement (the "Indemnity Agreement") which provided
for, among other matters, certain cross-indemnities designed principally to
place financial responsibility for the liabilities of businesses conducted by
BW-Security and its subsidiaries with BW-Security and financial responsibility
for liabilities of the Company or related to its automotive businesses with the
Company. BW-Security has claimed that, under the Indemnity Agreement, the
Company must indemnify it for certain liabilities relating to environmental
matters retained by BW-Security at the time of the Spin-Off. BW-Security has
requested indemnification from the Company for past costs of approximately $2.5
million and for future costs related to these environmental matters. At the
time of the Spin-Off, BW-Security maintained a letter of credit for
approximately $9 million (the "Letter of Credit") with respect to the principal
portion of such environmental matters. The parties agreed to submit this matter
to binding arbitration. On November 4, 1997, the Arbitrator ruled that the
Company is contractually obligated to indemnify BW-Security for past and future
losses and costs relating to such environmental matters and for costs associated
with the Letter of Credit. The Company does not currently have information
sufficient to determine the extent of its liability to BW-Security for
indemnification of such liabilities. The Company intends to appeal the
Arbitrator's ruling, although success on appeal within the arbitration system is
rare.
The Company believes that none of these matters, individually or in the aggre-
gate, will have a material adverse effect on its financial position or future
operating results, generally either because estimates of the maximum potential
liability at a site are not large or because liability will be shared with
other PRPs, although no assurance can be given with respect to the ultimate
outcome of any such matter.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Statements contained in this Form 10-Q which are not historical facts are
"forward-looking" statements as contemplated by the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
risks and uncertainties, which could cause actual results to differ materially
from those projected or implied in the forward-looking statements. Such risks
and uncertainties include fluctuations in domestic and foreign automotive
production, the continued use of outside suppliers by original equipment
manufacturers, and general economic conditions, as well as other risks detailed
in the Company's filings with the Securities and Exchange Commission, including
the Cautionary Statements filed as Exhibit 99.1 to the Form 10-K for the fiscal
year ended December 31, 1996.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Inapplicable.
<PAGE>
PART II
Item 1. Legal Proceedings
The Company was a wholly-owned subsidiary of Borg-Warner Security
Corporation ("BW-Security") until January 27, 1993, at which time it was
distributed to the stockholders of BW-Security in a tax-free distribution (the
"Spin-Off"). In connection with the Spin-Off, the Company and BW-Security
entered into a Distribution and Indemnity Agreement (the "Indemnity Agreement")
which provided for, among other matters, certain cross-indemnities designed
principally to place financial responsibility for the liabilities of businesses
conducted by BW-Security and its subsidiaries with BW-Security and financial
responsibility for liabilities of the Company or related to its automotive
businesses with the Company. BW-Security has claimed that, under the Indemnity
Agreement, the Company must indemnify it for certain liabilities relating to
environmental matters retained by BW-Security at the time of the Spin-Off.
BW-Security has requested indemnification from the Company for past costs of
approximately $2.5 million and for future costs related to these environmental
matters. At the time of the Spin-Off, BW-Security maintained a letter of credit
for approximately $9 million (the "Letter of Credit") with respect to the
principal portion of such environmental matters. The parties agreed to submit
this matter to binding arbitration. On November 4, 1997, the Arbitrator ruled
that the Company is contractually obligated to indemnify BW-Security for past
and future losses and costs relating to such environmental matters and for costs
associated with the Letter of Credit. The Company does not currently have
information sufficient to determine the extent of its liability to BW-Security
for indemnification of such liabilities. The Company intends to appeal the
Arbitrator's ruling, although success on appeal within the arbitration system is
rare.
Item 2. Changes in Securities
Inapplicable.
Item 3. Defaults Upon Senior Securities
Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders
Inapplicable.
Item 5. Other Information
Inapplicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Form of Change of Control Employment Agreement for
Executive Officers
27.1 Financial data schedule
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the period.<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
BORG-WARNER AUTOMOTIVE, INC.
(Registrant)
By /s/ William C. Cline
---------------------------
(Signature)
William C. Cline
Vice President and Controller
(Principal Accounting Officer)
Date: November 12, 1997
SCHEDULE
TO FORM OF
CHANGE OF CONTROL
EMPLOYMENT AGREEMENT
The Company has entered into the attached Form of Change of Control
Employment Agreement dated as of July 24, 1997 with the following individuals:
NAME TITLE
John F. Fiedler Chairman of the Board and Chief Executive Officer
Gary P. Fukayama Executive Vice President
Fred M. Kovalik Executive Vice President
Ronald M. Ruzic Executive Vice President
Robert D. Welding Vice President
Robin J. Adams Vice President and Treasurer
William C. Cline Vice President and Controller
Laurene H. Horiszny Vice President, General Counsel and Secretary
Christopher A. Gebelein Vice President - Business Development
Geraldine Kinsella Vice President - Human Resources
<PAGE>
CHANGE OF CONTROL
EMPLOYMENT AGREEMENT
AGREEMENT by and between Borg-Warner Automotive, Inc., a Delaware
corporation (the "Company") and ---------(the "Executive"), dated as of the
- --------day of ------, 1997.
The Board of Directors of the Company (the "Board"), has determined
that it is in the best interests of the Company and its shareholders to assure
that the Company will have the continued dedication of the Executive,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined below) of the Company. The Board believes it is imperative to diminish
the inevitable distraction of the Executive by virtue of the personal
uncertainties and risks created by a pending or threatened Change of Control and
to encourage the Executive's full attention and dedication to the Company
currently and in the event of any threatened or pending Change of Control, and
to provide the Executive with compensation and benefits arrangements upon a
Change of Control which ensure that the compensation and benefits expectations
of the Executive will be satisfied and which are competitive with those of other
corporations. Therefore, in order to accomplish these objectives, the Board has
caused the Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions. (a) The "Effective Date" shall mean the first date
during the Change of Control Period (as defined in Section 1(b)) on which a
Change of Control (as defined in Section 2) occurs. Anything in this Agreement
to the contrary notwithstanding, if a Change of Control occurs and if the
Executive's employment with the Company is terminated prior to the date on which
the Change of Control occurs, and if it is reasonably demonstrated by the
Executive that such termination of employment (i) was at the request of a third
party who has taken steps reasonably calculated to effect a Change of Control or
(ii) otherwise arose in connection with or anticipation of a Change of Control,
then for all purposes of this Agreement the "Effective Date" shall mean the date
immediately prior to the date of such termination of employment.
(b) The "Change of Control Period" shall mean the period commencing on the date
hereof and ending on the third anniversary of the date hereof; provided,
however, that commencing on the date one year after the date hereof, and on each
annual anniversary of such date (such date and each annual anniversary thereof
shall be hereinafter referred to as the "Renewal Date"), unless previously
terminated, the Change of Control Period shall be automatically extended so as
to terminate three years from such Renewal Date, unless at least 60 days prior
to the Renewal Date the Company shall give notice to the Executive that the
Change of Control Period shall not be so extended.
2. Change of Control. For the purpose of this Agreement, a "Change of
Control" shall mean:
a. The acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change of Control: (w) any acquisition
directly from the Company, (X) any acquisition by the Company, (Y) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company, (Z) any
acquisition by any corporation pursuant to a transaction which complies with
clauses (i), (ii) and (iii) of subsection (c) of this Section 2.
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(c) Consummation by the Company of a reorganization, merger or consolidation or
sale or other disposition of all or substantially all of the assets of the
Company or the acquisition of assets of another corporation (each of the
foregoing, a "Business Combination"), in each case, unless, following such
Business Combination, (i) all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the Outstanding
Company Common Stock and Outstanding Company Voting Securities immediately prior
to such Business Combination beneficially own, directly or indirectly, more than
60% of, respectively, the then outstanding shares of common stock and the
combined voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be, (ii) no
Person (excluding any employee benefit plan (or related trust) of the Company or
such corporation resulting from such Business Combination) beneficially owns,
directly or indirectly, 20% or more of, respectively, the then outstanding
shares of common stock of the corporation resulting from such Business
Combination or the combined voting power of the then outstanding voting
securities of such corporation except to the extent that such ownership existed
prior to the Business Combination and (iii) at least a majority of the members
of the board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the execution of
the initial agreement, or of the action of the Board, providing for such
Business Combination; or
(d) Approval by the shareholders of the Company of a complete liquidation or
dissolution of the Company.
3. Employment Period. The Company hereby agrees to continue the Executive
in its employ, and the Executive hereby agrees to remain in the employ of the
Company subject to the terms and conditions of this Agreement, for the period
commencing on the Effective Date and ending on the third anniversary of such
date (the "Employment Period").
4. Terms of Employment. (a)Position and Duties. (i)During the Employment
Period, (A) the Executive's position (including status, offices, titles and
reporting requirements), authority, duties and responsibilities shall be at
least commensurate in all material respects with the most significant of those
held, exercised and assigned to the Executive at any time during the 120-day
period immediately preceding the Effective Date and (B) the Executive's services
shall be performed at the location where the Executive was employed immediately
preceding the Effective Date or any office or location less than 35 miles from
such location.
(ii) During the Employment Period, and excluding any periods of vacation
and sick leave to which the Executive is entitled, the Executive agrees to
devote reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to discharge
the responsibilities assigned to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct of activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company.
(b) Compensation. (i)Base Salary. During the Employment Period, the
Executive shall receive an annual base salary ("Annual Base Salary"), which
shall be paid at a monthly rate, at least equal to twelve times the highest
monthly base salary paid or payable, including any base salary which has been
earned but deferred, to the Executive by the Company and its affiliated
companies in respect of the twelve-month period immediately preceding the month
in which the Effective Date occurs. During the Employment Period, the Annual
Base Salary shall be reviewed no more than 12 months after the last salary
increase awarded to the Executive prior to the Effective Date and thereafter at
least annually. Any increase in Annual Base Salary shall not serve to limit or
reduce any other obligation to the Executive under this Agreement. Annual Base
Salary shall not be reduced after any such increase and the term Annual Base
Salary as utilized in this Agreement shall refer to Annual Base Salary as so
increased. As used in this Agreement, the term "affiliated companies" shall
include any company controlled by, controlling or under common control with the
Company.
(ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall be
awarded, for each fiscal year ending during the Employment Period, an annual
bonus (the "Annual Bonus") in cash at least equal to the Executive's average of
the bonuses paid or payable under the Company's Management Incentive Bonus Plan,
or any comparable annual bonus under any predecessor or successor plan, in
respect of the last three full fiscal years prior to the Effective Date (or, if
the Executive was first employed by the Company after the beginning of the
earliest of such three fiscal years, the average of the bonuses paid or payable
under such plan(s) in respect of the fiscal years ending before the Effective
Date during which the Executive was employed by the Company, with such bonus
being annualized with respect to any such fiscal year if the Executive was not
employed by the Company for the whole of such fiscal year) (the "Recent Average
Bonus"). Each such Annual Bonus shall be paid no later than the end of the
third month of the fiscal year next following the fiscal year for which the
Annual Bonus is awarded, unless the Executive shall elect to defer the receipt
of such Annual Bonus.
(iii) Incentive, Savings and Retirement Plans. During the Employment
Period, the Executive shall be entitled to participate in all incentive, savings
and retirement plans, practices, policies and programs applicable generally to
other peer executives of the Company and its affiliated companies, but in no
event shall such plans, practices, policies and programs provide the Executive
with incentive opportunities (measured with respect to both regular and special
incentive opportunities, to the extent, if any, that such distinction is
applicable), savings opportunities and retirement benefit opportunities, in each
case, less favorable, in the aggregate, than the most favorable of those
provided by the Company and its affiliated companies for the Executive under
such plans, practices, policies and programs as in effect at any time during the
120-day period immediately preceding the Effective Date or if more favorable to
the Executive, those provided generally at any time after the Effective Date to
other peer executives of the Company and its affiliated companies.
(iv) Welfare Benefit Plans. During the Employment Period, the Executive and/or
the Executive's family, as the case may be, shall be eligible for participation
in and shall receive all benefits under welfare benefit plans, practices,
policies and programs provided by the Company and its affiliated companies
(including, without limitation, medical, prescription, dental, disability,
salary continuance, employee life, group life, accidental death and travel
accident insurance plans and programs) ("Company Welfare Benefit Plans") to the
extent applicable generally to other peer executives of the Company and its
affiliated companies, but if the Company Welfare Benefit Plans provide the
Executive with benefits which are less favorable, in the aggregate, than the
most favorable of such plans, practices, policies and programs in effect for the
Executive at any time during the 120-day period immediately preceding the
Effective Date (the "Former Company Welfare Benefit Plans"), the Company shall
provide the Executive with supplemental arrangements (such as individual
insurance coverage purchased by the Company for the Executive) such that the
Company Welfare Benefit Plans together with such supplemental arrangements
provide the Executive with benefits which are at least as favorable, in the
aggregate, as those provided by the Former Company Welfare Benefit Plans.
(v) Expenses. During the Employment Period, the Executive shall be
entitled to receive prompt reimbursement for all reasonable expenses incurred by
the Executive in accordance with the most favorable policies, practices and
procedures of the Company and its affiliated companies in effect for the
Executive at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive, as in effect generally at
any time thereafter with respect to other peer executives of the Company and its
affiliated companies.
(vi) Fringe Benefits. During the Employment Period, the Executive shall be
entitled to fringe benefits, including, without limitation, tax and financial
planning services, payment of club dues, and, if applicable, use of an
automobile and payment of related expenses, in accordance with the most
favorable plans, practices, programs and policies of the Company and its
affiliated companies in effect for the Executive at any time during the 120-day
period immediately preceding the Effective Date or, if more favorable to the
Executive, as in effect generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies; provided, that such
fringe benefits may be provided in cash or in kind, so long as the after-tax
benefits to the Executive of such fringe benefits are not diminished in the
aggregate.
(vii) Office and Support Staff. During the Employment Period, the Executive
shall be entitled to an office or offices of a size and with furnishings and
other appointments, and to personal secretarial and other assistance, at least
equal to the most favorable of the foregoing provided to the Executive by the
Company and its affiliated companies at any time during the 120-day period
immediately preceding the Effective Date or, if more favorable to the Executive,
as provided generally at any time thereafter with respect to other peer
executives of the Company and its affiliated companies.
(viii) Vacation. During the Employment Period, the Executive shall be
entitled to paid vacation as well as paid days off for the period between
Christmas and January 1, in each case in accordance with the most favorable
plans, policies, programs and practices of the Company and its affiliated
companies as in effect for the Executive at any time during the 365-day period
immediately preceding the Effective Date or, if more favorable to the Executive,
as in effect generally at any time thereafter with respect to other peer
executives of the Company and its affiliated companies.
(a) Termination of Employment. Death or Disability. The Executive's
employment shall terminate automatically upon the Executive's death during the
Employment Period. If the Company determines in good faith that the Disability
of the Executive has occurred during the Employment Period (pursuant to the
definition of Disability set forth below), it may give to the Executive written
notice in accordance with Section 12(b) of this Agreement of its intention to
terminate the Executive's employment. In such event, the Executive's employment
with the Company shall terminate effective on the 30th day after receipt of such
notice by the Executive (the "Disability Effective Date"), provided that, within
the 30 days after such receipt, the Executive shall not have returned to
full-time performance of the Executive's duties. For purposes of this
Agreement, "Disability" shall mean the absence of the Executive from the
Executive's duties with the Company on a full-time basis for 180 consecutive
business days (or for 180 business days in any consecutive 365 days) as a result
of incapacity due to mental or physical illness which is determined to be total
and permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or the Executive's legal representative.
(b) Cause. The Company may terminate the Executive's employment during
the Employment Period for Cause. For purposes of this Agreement, "Cause" shall
mean:
(i) the willful and continued failure of the Executive to perform
substantially the Executive's duties with the Company or one of its affiliates
(other than any such failure resulting from incapacity due to physical or mental
illness), after a written demand for substantial performance is delivered to
the Executive by the Board or the Chief Executive Officer of the Company which
specifically identifies the manner in which the Board or Chief Executive Officer
believes that the Executive has not substantially performed the Executive's
duties, or
(ii) the willful engaging by the Executive in illegal conduct or gross
misconduct which is materially and demonstrably injurious to the Company.
For purposes of this provision, no act or failure to act, on the part
of the Executive, shall be considered "willful" unless it is done, or omitted to
be done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or upon the instructions of the Chief Executive Officer or
a senior officer of the Company or based upon the advice of counsel for the
Company shall be conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Company. The cessation
of employment of the Executive shall not be deemed to be for Cause unless and
until there shall have been delivered to the Executive a copy of a resolution
duly adopted by the affirmative vote of not less than three-quarters of the
entire membership of the Board at a meeting of the Board called and held for
such purpose (after reasonable notice is provided to the Executive and the
Executive is given an opportunity, together with counsel, to be heard before the
Board), finding that, in the good faith opinion of the Board, the Executive is
guilty of the conduct described in subparagraph (i) or (ii) above, and
specifying the particulars thereof in detail.
(c) Good Reason. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean:
(i) the assignment to the Executive of any duties inconsistent in any
respect with the Executive's position (including status, offices, titles and
reporting requirements), authority, duties or responsibilities as contemplated
by Section 4(a) of this Agreement, or any other action by the Company which
results in a diminution in such position, authority, duties or responsibilities,
excluding for this purpose an isolated, insubstantial and inadvertent action not
taken in bad faith and which is remedied by the Company promptly after receipt
of notice thereof given by the Executive;
(ii) any failure by the Company to comply with any of the provisions of
Section 4(b) of this Agreement, other than an isolated, insubstantial and
inadvertent failure not occurring in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Executive;
(iii)the Company's requiring the Executive to be based at any office
or location other than as provided in Section 4(a)(i)(B) hereof or the Company's
requiring the Executive to travel on Company business to a substantially greater
extent than required immediately prior to the Effective Date;
(iv) any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement; or
(v) any failure by the Company to comply with and satisfy Section
11(c) of this Agreement.
For purposes of this Section 5(c), any good faith determination of "Good Reason"
made by the Executive shall be conclusive.
(d) anything in this Agreement to the contrary not withstanding, a
termination by the Executive for any reason during the 30 day period immediately
following the first anniversary of the Effective Date shall be deemed to be a
termination for Good Reason for all purposes of this Agreement.
(e) Notice of Termination. Any termination by the Company for
Cause, or by the Executive for Good Reason, shall be communicated by Notice of
Termination to the other party hereto given in accordance with Section 12(b) of
this Agreement. For purposes of this Agreement, a "Notice of Termination" means
a written notice which (i) indicates the specific termination provision in this
Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable
detail the facts and circumstances claimed to provide a basis for termination of
the Executive's employment under the provision so indicated and (iii) if the
Date of Termination (as defined below) is other than the date of receipt of such
notice, specifies the termination date (which date shall be not more than thirty
days after the giving of such notice). The failure by the Executive or the
Company to set forth in the Notice of Termination any fact or circumstance which
contributes to a showing of Good Reason or Cause shall not waive any right of
the Executive or the Company, respectively, hereunder or preclude the Executive
or the Company, respectively, from asserting such fact or circumstance in
enforcing the Executive's or the Company's rights hereunder.
(f) Date of Termination. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be, (ii) if the Executive's
employment is terminated by the Company other than for Cause or Disability, the
date on which the Company notifies the Executive of such termination and (iii)
if the Executive's employment is terminated by reason of death or Disability,
the date of death of the Executive or the Disability Effective Date, as the case
may be.
6. Obligations of the Company upon Termination. (a)Good Reason; Other Than
for Cause, Death or Disability. If, during the Employment Period, the Company
shall terminate the Executive's employment other than for Cause or Disability or
the Executive shall terminate employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash within 30
days after the Date of Termination the aggregate of the following amounts:
A. the sum of (1) the Executive's Annual Base Salary through the Date of
Termination to the extent not theretofore paid, (2) the product of the Recent
Average Bonus and (y) a fraction, the numerator of which is the number of days
in the current fiscal year through the Date of Termination, and the denominator
of which is 365 and (3) any compensation previously deferred by the Executive
(together with any accrued interest or earnings thereon) and any accrued
vacation pay, in each case to the extent not theretofore paid (the sum of the
amounts described in clauses (1), (2), and (3) shall be hereinafter referred to
as the "Accrued Obligations"); and
B. the amount equal to the product of (1) three and (2) the sum of (x) the
Executive's Annual Base Salary and (y) the Recent Average Bonus; and
C. an amount equal to the product of (1) three and (2) the sum of (a)the
Company Retirement Contributions (as defined in the Borg-Warner Automotive, Inc.
Retirement Savings Plan ("RSP")) that would have been made under the RSP for the
first Plan Year (as defined in the RSP) ending after the Date of Termination if
there had been no Limitations (as defined below) on such Company Retirement
Contributions (as defined in the RSP) and (b) an amount equal to the Company
Matching Contributions (as defined in the RSP) that would have been made under
the RSP in a Plan Year if there had been no Limitations on such Company Matching
Contributions, and assuming for these purposes that the Executive had elected to
defer the maximum amount of Compensation permitted by the RSP (without regard to
any Limitations on such deferral), and assuming for purposes of calculating the
amounts in clauses (a) and (b) that the Executive had remained employed by the
Company through the end of such Plan Year with compensation equal to that
required by Section 4(b)(i) and Section 4(b)(ii) ("Limitations" meaning
limitations contained in the RSP, the Employee Retirement Income Security Act
("ERISA") or the Internal Revenue Code of 1986, as amended (the "Code")
(including without limitation the $150,000 cap on Compensation (as defined in
the RSP);
(ii) for three years after the Executive's Date of Termination, or such
longer period as may be provided by the terms of the appropriate plan, program,
practice or policy, the Company shall continue benefits to the Executive and/or
the Executive's family at least equal to those which would have been provided to
them in accordance with the plans, programs, practices and policies described in
Section 4(b)(iv) of this Agreement if the Executive's employment had not been
terminated or, if more favorable to the Executive, as in effect generally at any
time thereafter with respect to other peer executives of the Company and its
affiliated companies and their families, provided, however, that if the
Executive becomes reemployed with another employer and is eligible to receive
medical or other welfare benefits under another employer-provided plan, the
medical and other welfare benefits described herein shall be secondary to those
provided under such other plan during such applicable period of eligibility, and
for purposes of determining eligibility (but not the time of commencement of
benefits) of the Executive for retiree benefits pursuant to such plans,
practices, programs and policies, the Executive shall be considered to have
remained employed until three years after the Date of Termination and to have
retired on the last day of such period;
(iii) the Company shall, at its sole expense as incurred, provide the Executive
with outplacement services the scope and provider of which shall be selected by
the Executive in the Executive's sole discretion, but the cost thereof shall not
exceed $40,000 in any nine-month period; and
(iv) to the extent not theretofore paid or provided, the Company shall timely
pay or provide to the Executive any other amounts or benefits required to be
paid or provided or which the Executive is eligible to receive under any plan,
program, policy or practice or contract or agreement of the Company and its
affiliated companies (such other amounts and benefits shall be hereinafter
referred to as the "Other Benefits").
(b)Death. If the Executive's employment is terminated by reason of the
Executive's death during the Employment Period, this Agreement shall terminate
without further obligations to the Executive's legal representatives under this
Agreement, other than for payment of Accrued Obligations and the timely payment
or provision of Other Benefits. Accrued Obligations shall be paid to the
Executive's estate or beneficiary, as applicable, in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 6(b) shall
include, without limitation, and the Executive's estate and/or beneficiaries
shall be entitled to receive, benefits (either pursuant to a plan, program,
practice or policy or an individual arrangement) at least equal to the most
favorable benefits provided by the Company and affiliated companies to the
estates and beneficiaries of peer executives of the Company and such affiliated
companies under such plans, programs, practices and policies relating to death
benefits, if any, as in effect with respect to other peer executives and their
beneficiaries at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive's estate and/or the
Executive's beneficiaries, as in effect on the date of the Executive's death
with respect to other peer executives of the Company and its affiliated
companies and their beneficiaries.
(c)Disability. If the Executive's employment is terminated by reason of the
Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to the Executive, other than for payment
of Accrued Obligations and the timely payment or provision of Other Benefits.
Accrued Obligations shall be paid to the Executive in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 6(c) shall
include, and the Executive shall be entitled after the Disability Effective Date
to receive, disability and other benefits (either pursuant to a plan, program,
practice or policy or an individual arrangement) at least equal to the most
favorable of those generally provided by the Company and its affiliated
companies to disabled executives and/or their families in accordance with such
plans, programs, practices and policies relating to disability, if any, as in
effect generally with respect to other peer executives and their families at any
time during the 120-day period immediately preceding the Effective Date or, if
more favorable to the Executive and/or the Executive's family, as in effect at
any time thereafter generally with respect to other peer executives of the
Company and its affiliated companies and their families.
(d)Cause; Other than for Good Reason. If the Executive's employment shall be
terminated for Cause during the Employment Period, this Agreement shall
terminate without further obligations to the Executive other than the obligation
to pay to the Executive (x) the Annual Base Salary through the Date of
Termination, (y) the amount of any compensation previously deferred by the
Executive, and (z) Other Benefits, in each case to the extent theretofore
unpaid. If the Executive voluntarily terminates employment during the
Employment Period, excluding a termination for Good Reason, this Agreement shall
terminate without further obligations to the Executive, other than for Accrued
Obligations and the timely payment or provision of Other Benefits. In such
case, all Accrued Obligations shall be paid to the Executive in a lump sum in
cash within 30 days of the Date of Termination.
7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any plan, program,
policy or practice provided by the Company or any of its affiliated companies
and for which the Executive may qualify, nor, subject to Section 12(f), shall
anything herein limit or otherwise affect such rights as the Executive may have
under any contract or agreement with the Company or any of its affiliated
companies. Amounts which are vested benefits or which the Executive is
otherwise entitled to receive under any plan, policy, practice or program of or
any contract or agreement with the Company or any of its affiliated companies at
or subsequent to the Date of Termination shall be payable in accordance with
such plan, policy, practice or program or contract or agreement except as
explicitly modified by this Agreement.
8. Full Settlement; Legal Fees. The Company's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others. In no event shall the Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to the Executive under any of the provisions of this Agreement and except as
specifically provided in Section 6(a)(ii), such amounts shall not be reduced
whether or not the Executive obtains other employment. The Company agrees to
pay as incurred, to the full extent permitted by law, all legal fees and
expenses which the Executive may reasonably incur as a result of any contest
(regardless of the outcome thereof) by the Company, the Executive or others of
the validity or enforceability of, or liability under, any provision of this
Agreement or any guarantee of performance thereof whether such contest is
between the Company and the Executive or between either of them and any third
party, and (including as a result of any contest by the Executive about the
amount of any payment pursuant to this Agreement), plus in each case interest on
any delayed payment at the applicable Federal rate provided for in Section
7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code").
9. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that any payment or distribution by the Company to
or for the benefit of the Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this Section
9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of
the Code or any interest or penalties are incurred by the Executive with
respect to such excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), then
the Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments.
(b)Subject to the provisions of Section 9(c), all determinations required
to be made under this Section 9, including whether and when a Gross-Up Payment
is required and the amount of such Gross-Up Payment and the assumptions to be
utilized in arriving at such determination, shall be made by Deloitte & Touche
L.L.P. or such other certified public accounting firm as may be designated by
the Executive (the "Accounting Firm"), which shall provide detailed supporting
calculations both to the Company and the Executive within 15 business days of
the receipt of notice from the Executive that there has been a Payment, or such
earlier time as is requested by the Company. In the event that the Accounting
Firm is serving as accountant or auditor for the individual, entity or group
effecting the Change of Control, the Executive shall appoint another nationally
recognized accounting firm to make the determinations required hereunder (which
accounting firm shall then be referred to as the Accounting Firm hereunder).
All fees and expenses of the Accounting Firm shall be borne solely by the
Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall
be paid by the Company to the Executive within five days of the receipt of the
Accounting Firm's determination. Any determination by the Accounting Firm shall
be binding upon the Company and the Executive. As a result of the uncertainty
in the application of Section 4999 of the Code at the time of the initial
determination by the Accounting Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by the Company should have been made
("Underpayment"), consistent with the calculations required to be made
hereunder. In the event that the Company exhausts its remedies pursuant to
Section 9(c) and the Executive thereafter is required to make a payment of any
Excise Tax, the Accounting Firm shall determine the amount of the Underpayment
that has occurred and any such Underpayment shall be promptly paid by the
Company to or for the benefit of the Executive.
(c) The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten business days after the Executive is informed
in writing of such claim and shall apprise the Company of the nature of such
claim and the date on which such claim is requested to be paid. The Executive
shall not pay such claim prior to the expiration of the 30-day period following
the date on which it gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim isdue).
If the Company notifies the Executive in writing prior to the expiration of such
period that it desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by the Company
relating to such claim,
(ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by
an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order effectively to
contest such claim, and
(iv) permit the Company to participate in any proceedings relating to such
claim; provided, however, that the Company shall bear and pay directly all costs
and expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold the Executive
harmless, on an after-tax basis, for any Excise Tax or income tax (including
interest and penalties with respect thereto) imposed as a result of such
representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this Section 9(c), the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forgo any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct the Executive to pay the tax claimed and sue for a
refund or contest the claim in any permissible manner, and the Executive agrees
to prosecute such contest to a determination before any administrative tribunal,
in a court of initial jurisdiction and in one or more appellate courts, as the
Company shall determine; provided, however, that if the Company directs the
Executive to pay such claim and sue for a refund, the Company shall advance the
amount of such payment to the Executive, on an interest-free basis and shall
indemnify and hold the Executive harmless, on an after-tax basis, from any
Excise Tax or income tax (including interest or penalties with respect thereto)
imposed with respect to such advance or with respect to any imputed income with
respect to such advance; and further provided that any extension of the statute
of limitations relating to payment of taxes for the taxable year of the
Executive with respect to which such contested amount is claimed to be due is
limited solely to such contested amount. Furthermore, the Company's control of
the contest shall be limited to issues with respect to which a Gross-Up Payment
would be payable hereunder and the Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 9(c), the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements of Section 9(c)) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 9(c), a determination is made that
the Executive shall not be entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to contest
such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
10. Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the Company,
the Executive shall not, without the prior written consent of the Company or as
may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than the Company and those
designated by it. In no event shall an asserted violation of the provisions of
this Section 10 constitute a basis for deferring or withholding any amounts
otherwise payable to the Executive under this Agreement, but the Company
otherwise shall be entitled to all other remedies that may be available to it at
law or equity.
11. Successors. (a) This Agreement is personal to the Executive and
without the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b)This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.
(c)The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to assume expressly and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. As used in
this Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise.
12. Miscellaneous. (a) This Agreement shall be governed by and
construed in accordance with the laws of the State of Illinois, without
reference to principles of conflict of laws. The captions of this Agreement are
not part of the provisions hereof and shall have no force or effect. This
Agreement may not be amended or modified otherwise than by a written agreement
executed by the parties hereto or their respective successors and legal
representatives.
(b) All notices and other communications hereunder shall be in writing
and shall be given by hand delivery to the other party or by registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
If to the Company:
Borg-Warner Automotive, Inc.
200 South Michigan
Chicago, Illinois 60604
Attention: General Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of any other provision of this
Agreement.
(d) The Company may withhold from any amounts payable under this Agreement such
Federal, state, local or foreign taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict compliance
with any provision hereof or any other provision of this Agreement or the
failure to assert any right the Executive or the Company may have hereunder,
including, without limitation, the right of the Executive to terminate
employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement,
shall not be deemed to be a waiver of such provision or right or any other
provision or right of this Agreement.
(f) The Executive and the Company acknowledge that, except as may otherwise be
provided under any other written agreement between the Executive and the
Company, the employment of the Executive by the Company is "at will" and, prior
to the Effective Date, the Executive's employment may be terminated by either
the Executive or the Company at any time prior to the Effective Date, in which
case the Executive shall have no further rights under this Agreement. From and
after the Effective Date this Agreement shall supersede any other agreement
between the parties with respect to the subject matter hereof.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's
hand and, pursuant to the authorization from its Board of Directors, the Company
has caused this Agreement to be executed in its name on its behalf, all as of
the day and year first above written.
BORG-WARNER AUTOMOTIVE, INC.
By--------------------------------
Laurene H. Horiszny, Vice President,
General Counsel & Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Financial Condition as of September 30, 1997
(unaudited) and the Condensed Consolidated Statement of Income for the Nine
Months Ended September 30, 1997 (unaudited) and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 16,800
<SECURITIES> 2,600
<RECEIVABLES> 138,600
<ALLOWANCES> 0
<INVENTORY> 111,800
<CURRENT-ASSETS> 304,200
<PP&E> 921,300
<DEPRECIATION> 362,600
<TOTAL-ASSETS> 1,696,400
<CURRENT-LIABILITIES> 388,300
<BONDS> 244,800
0
0
<COMMON> 200
<OTHER-SE> 687,400
<TOTAL-LIABILITY-AND-EQUITY> 1,696,400
<SALES> 1,300,000
<TOTAL-REVENUES> 1,300,000
<CGS> 1,016,300
<TOTAL-COSTS> 1,016,300
<OTHER-EXPENSES> 149,500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,000
<INCOME-PRETAX> 115,200
<INCOME-TAX> 39,200
<INCOME-CONTINUING> 76,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 76,000
<EPS-PRIMARY> 3.21
<EPS-DILUTED> 3.21
</TABLE>
