SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): September 21, 1999
BORG-WARNER AUTOMOTIVE, INC.
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(Exact Name of Registrant as Specified in Charter)
Delaware 1-12162 13-3404508
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(State or Other (Commission File Number) IRS Employer
Jurisdiction of Identification
Incorporation) Number
200 South Michigan Avenue, Chicago, Illinois 60604
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (312) 322-8500
<PAGE>
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
The following consolidated financial statements of Kuhlman
Corporation and independent public accountants' report are set forth as Exhibit
99.1 and are incorporated herein by reference:
Independent Public Accountants' Report.
Consolidated Statements of Income for the years ended December 31, 1998,
1997 and 1996.
Consolidated Balance Sheets as of December 31, 1998 and 1997.
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996.
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
(b) Pro Forma Financial Information.
The following pro forma financial information of Borg-Warner
Automotive, giving effect to the merger with Kuhlman, are set forth as Exhibit
99.2 and are incorporated herein by reference:
Unaudited Pro Forma Consolidated Financial Statements - Introduction.
Unaudited Pro Forma Consolidated Balance Sheet as of December 31, 1998.
Unaudited Pro Forma Consolidated Statement of Operations for the year
ended December 31, 1998.
Notes to Unaudited Pro Forma Consolidated Financial Statements.
(c) Exhibits.
23.1 Consent of Arthur Andersen LLP
99.1 Audited financial statements of Kuhlman Corporation as of December
31, 1998 and 1997 and for the years ended December 31, 1998, 1997
and 1996
99.2 Unaudited pro forma consolidated financial statements related to
acquisition of Kuhlman Corporation
Page 2 of 4
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: September 21, 1999
BORG-WARNER AUTOMOTIVE, INC.
/s/ Stephanie C. Bransfield
By___________________________________
Name: Stephanie C. Bransfield
Title: Assistant Secretary
Page 3 of 4
<PAGE>
EXHIBIT LIST
Page No.
23.1 Consent of Arthur Andersen LLP.
99.1 Audited financial statements of Kuhlman Corporation as of
December 31, 1998 and 1997 and for the years ended
December 31, 1998, 1997 and 1996
99.2 Unaudited pro forma consolidated financial statements
related to acquisition of Kuhlman Corporation
Page 4 of 4
Exhibit 23.1
[ARTHUR ANDERSEN LLP LETTERHEAD]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated February 10, 1999 (except with respect to the matter discussed in
Note 16 as to which the date is March 1, 1999) included in this Form 8-K. It
should be noted that we have not audited any financial statements of the Company
subsequent to December 31, 1998 or performed any audit procedures subsequent to
the date of our report.
/s/ Arthur Andersen LLP
Louisville, Kentucky
September 20, 1999
Exhibit 99.1
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders
of Kuhlman Corporation:
We have audited the accompanying consolidated balance sheets of Kuhlman
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of income, shareholders'
equity and comprehensive income, and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Kuhlman Corporation
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Louisville, Kentucky
February 10, 1999 (except with respect to the matter
discussed in Note 16 as to which the date is March 1, 1999)
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
KUHLMAN CORPORATION AND SUBSIDIARIES
For the years ended December 31, 1998 1997 1996
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IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<S> <C> <C> <C>
NET SALES $ 762,024 $ 643,440 $ 456,465
Cost of goods sold 585,273 495,220 355,530
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Gross profit 176,751 148,220 100,935
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Operating expenses:
Selling, engineering, general and
administrative expenses 101,660 88,068 60,755
Intangible amortization 3,637 3,004 1,769
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Total operating expenses 105,297 91,072 62,524
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OPERATING PROFIT 71,454 57,148 38,411
Other income (expense):
Interest expense, net (6,860) (8,637) (6,981)
Other, net (1,976) (2,009) (2,087)
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Total other income (expense), net (8,836) (10,646) (9,068)
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Income before taxes 62,618 46,502 29,343
Taxes on income 24,335 18,573 12,007
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NET INCOME $ 38,283 $ 27,929 $ 17,336
==============================================================================================
Per share amounts:
Basic $ 2.28 $ 1.84 $ 1.29
Diluted $ 2.20 $ 1.75 $ 1.25
Average shares outstanding:
Basic 16,786 15,160 13,389
Diluted 17,422 15,929 13,858
</TABLE>
THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SHOULD BE READ IN CONJUNCTION
WITH THESE STATEMENTS.
-1-
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
KUHLMAN CORPORATION AND SUBSIDIARIES
December 31, 1998 1997
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IN THOUSANDS
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 4,743 $ 6,529
Accounts receivable, less reserves of $3,320 and $3,726
at December 31, 1998 and 1997, respectively 109,233 104,190
Inventories 78,403 71,282
Deferred income taxes 10,616 13,540
Prepaid expenses and other current assets 10,452 4,726
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TOTAL CURRENT ASSETS 213,447 200,267
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PLANT AND EQUIPMENT
Land 3,945 4,130
Buildings and leasehold improvements 49,037 47,744
Machinery, fixtures and equipment 176,057 173,300
Construction in progress 16,703 5,720
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245,742 230,894
Less-accumulated depreciation and amortization (119,996) (105,368)
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PLANT AND EQUIPMENT - NET 125,746 125,526
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Intangible assets, net of amortization of $11,082 and $7,445
at December 31, 1998 and 1997, respectively 120,743 123,616
Other assets 9,225 11,909
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$469,161 $461,318
===============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 1,106 $ 1,475
Accounts payable 62,124 50,913
Accrued liabilities 75,276 87,814
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TOTAL CURRENT LIABILITIES 138,506 140,202
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Long-term debt 85,021 116,257
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Accrued postretirement benefits 20,004 19,573
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Other long-term liabilities 9,152 10,833
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TOTAL LIABILITIES 252,683 286,865
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SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00, 2,000 shares authorized,
none issued; Junior participating preferred stock, Series
A, no par value, 200 shares authorized, none issued -- --
Common stock, par value $1.00, 40,000 shares authorized,
17,542 and 16,601 shares issued at December 31, 1998 and
1997, respectively 17,542 16,601
Additional paid-in capital 126,132 103,543
Retained earnings 86,001 57,777
Accumulated other comprehensive income (2,457) (2,548)
Other (9,820) --
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217,398 175,373
Less - treasury stock at cost (72 shares in 1998 and 1997) (920) (920)
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TOTAL SHAREHOLDERS' EQUITY 216,478 174,453
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$469,161 $461,318
===============================================================================================
</TABLE>
THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SHOULD BE READ IN CONJUNCTION
WITH THESE BALANCE SHEETS.
-2-
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
KUHLMAN CORPORATION AND SUBSIDIARIES
For the years ended December 31, 1998 1997 1996
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IN THOUSANDS
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 38,283 $ 27,929 $ 17,336
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 23,759 19,916 12,470
Deferred income taxes 3,821 (1,100) (25)
Provision for losses on accounts
receivable 431 472 685
Non-cash charges and other, net 4,014 2,794 (217)
Changes in operating assets and
liabilities: (1)
Accounts receivable (6,206) (4,976) (4,780)
Inventories (7,967) (1,765) (1,300)
Prepaid expenses and other current
assets (1,492) (87) 274
Accounts payable 11,469 2,266 3,915
Accrued liabilities (10,464) 9,203 9,325
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NET CASH PROVIDED BY OPERATING 55,648 54,652 37,683
ACTIVITIES
===============================================================================================
Cash flows from investing activities:
Capital expenditures (24,312) (19,966) (10,980)
Acquisition of businesses, net of cash
acquired -- (104,744) (39,863)
Proceeds from sales of assets 4,854 437 126
Other (430) -- --
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NET CASH USED FOR INVESTING ACTIVITIES (19,888) (124,273) (50,717)
===============================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in revolving loan facility (30,992) (67,016) (21,572)
Proceeds from issuance of long-term debt 834 90,000 39,439
Repayment of long-term debt (1,442) (1,939) (1,850)
Dividends paid (10,009) (8,676) (7,967)
Stock options exercised 8,061 2,561 2,000
Cash proceeds from stock issuance -- 68,187 4,905
Redemption of warrants -- (9,139) --
Other (3,769) (12) (534)
- -----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES (37,317) 73,966 14,421
===============================================================================================
Effect of exchange rate changes on cash and
cash equivalents (229) (25) 241
Increase (decrease) in cash and cash
equivalents (1,786) 4,320 1,628
Cash and cash equivalents, beginning of year 6,529 2,209 581
- -----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,743 $ 6,529 $ 2,209
===============================================================================================
</TABLE>
(1) NET OF THE EFFECTS OF ACQUISITIONS AND FOREIGN CURRENCY TRANSACTION, WHERE
APPLICABLE. SEE NOTE 10 FOR INFORMATION ON NON-CASH INVESTING AND FINANCING
ACTIVITIES.
THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SHOULD BE READ IN CONJUNCTION
WITH THESE STATEMENTS.
-3-
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
KUHLMAN CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Income
--------------------
Foreign
Common Additional Currency Minimum
For the years ended Stock Paid-In Retained Translation Pension Treasury
December 31, 1998, 1997 Issued Capital Earnings Adjustment Liability Other Stock Total
and 1996 (1)
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IN THOUSANDS
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31,
1995 $13,240 $26,217 $37,988 $(1,911) $(382) -- $(920) $74,232
Net Income -- -- 17,336 -- -- -- -- 17,336
Cash dividends declared
($0.60) per share -- -- (8,052) -- -- -- -- (8,052)
Exercise of stock options 223 1,777 -- -- -- -- -- 2,000
Issuance of common stock (2) 340 4,755 -- -- -- -- -- 5,095
Other comprehensive income -- -- -- 1,271 (308) -- -- 963
- ----------------------------------------------------------------------------------------------------------
Balance - December 31,
1996 $13,803 $32,749 $47,272 $(640) $(690) -- $(920) $91,574
Net income -- -- 27,929 -- -- -- -- 27,929
Cash dividends declared
($0.60 per share) -- -- (9,095) -- -- -- -- (9,095)
Issuance of common stock (3) 2,638 69,203 -- -- -- -- -- 71,841
Exercise of stock options 160 2,401 -- -- -- -- -- 2,561
Redemption of warrants -- (810) (8,329) -- -- -- -- (9,139)
Other comprehensive income -- -- -- (724) (494) -- -- (1,218)
- ---------------------------------------------------------------------------------------------------------
Balance - December 31,
1997 $16,601 $103,543 $57,777 $(1,364) $(1,184) -- $(920) $174,453
Net income -- -- 38,283 -- -- -- -- 38,283
Cash dividends declared
($0.60) per share) -- -- (10,059) -- -- -- -- (10,059)
Exercise of stock options (4) 788 17,094 -- -- -- -- -- 17,882
Issuance of common stock (5) 153 5,495 -- -- -- -- -- 5,648
Other comprehensive income -- -- -- 255 (164) -- -- 91
Loans to executive
officers (4) -- -- -- -- -- (9,820) -- (9,820)
- ----------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, $17,542 $126,132 $86,001 $(1,109) $(1,348) $(9,820) $(920) $216,478
1998
==========================================================================================================
Comprehensive income, in thousands:
For the year ended December 31, 1998 1997 1996
- -----------------------------------------------------------------
$38,374 $26,711 $18,299
</TABLE>
(1) COMMON SHARES OUTSTANDING REPRESENT SHARED ISSUED LESS 72 TREASURY SHARES,
OR 17,470, 16,529 AND 13,731 AT DECEMBER 31, 1998, 1997 AND 1996,
RESPECTIVELY.
(2) _____ INCLUDES $4,905 ASSOCIATED WITH THE ACQUISITION OF WEB WIRE PRODUCTS,
INC.
(3) INCLUDES $68,187, NET OF EXPENSES, ASSOCIATED WITH THE COMPANY'S
STOCK OFFERING AND $3,510 OF STOCK ISSUED UNDER THE COMPANY'S LONG-TERM
INCENTIVE PLAN.
(4) THE COMPANY HAD $9,820 OF OPTION EXERCISES BY EXECUTIVE OFFICERS IN DECEMBER
1998, CONSUMMATED THROUGH SECURED LOANS PROVIDED BY THE COMPANY, DUE TO THE
PENDING ACQUISITION OF THE COMPANY BY BORG-WARNER AUTOMOTIVE, INC. SEE NOTE
2, "MERGER AGREEMENT" FOR ADDITIONAL DISCLOSURE.
(5) INCLUDES $5,504 OF STOCK ISSUED UNDER THE COMPANY'S LONG-TERM INCENTIVE
PLAN.
THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SHOULD BE READ IN CONJUNCTION
WITH THESE STATEMENTS.
-4-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
KUHLMAN CORPORATION AND SUBSIDIARIES
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Kuhlman
Corporation and all majority-owned subsidiaries (the "Company"). Investments of
50% or less in affiliated companies are accounted for under the equity method.
All significant intercompany transactions have been eliminated. The consolidated
statements of income include the results of acquired businesses accounted for
under the purchase method of accounting from the date of acquisition. Further
information pertaining to the acquisitions is presented in Note 3,
"Acquisitions."
Certain amounts in the Company's 1997 and 1996 financial statements have
been reclassified to conform with the 1998 presentation.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles (GAAP) requires management 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. Actual results could differ from those estimates as changes in
estimates do and will continue to occur due to changes in available relevant
data and consummation of the events and transactions.
REVENUE RECOGNITION
The Company recognizes sales of its products when the products are
shipped to customers.
CASH AND CASH EQUIVALENTS
The Company considers short-term investments with an original maturity
of three months or less to be cash equivalents, which are reflected at their
approximate fair value.
INVENTORIES
Inventories are stated at the lower of cost or market and are determined
by either the last-in, first-out (LIFO) or first-in, first-out (FIFO) method for
domestic inventories. Inventories of foreign operations are determined
principally by the first-in, first-out (FIFO) method. Approximately 70% of the
inventories at December 31, 1998 and 1997 were determined using the LIFO method.
Inventory costs include material, labor and manufacturing overhead.
-5-
<PAGE>
PLANT AND EQUIPMENT
Plant and equipment are carried at cost and are depreciated over their
estimated useful lives, ranging from 3 to 40 years, using principally the
straight-line method for financial reporting purposes and accelerated methods
for tax reporting purposes. Plant and equipment obtained through the acquisition
of a company are recorded at estimated fair value as of the date of acquisition.
All additions subsequent to the acquisition date are recorded at cost. The
carrying value of all long-lived assets is evaluated periodically to determine
if adjustment to the depreciation period or the carrying value is warranted.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill related to the
acquisition of businesses. Goodwill is being amortized on a straight-line basis
over forty years. When factors indicate that goodwill should be evaluated for
possible impairment, the Company uses an estimate of the related operation's
undiscounted cash flows over the remaining life of goodwill in measuring whether
or not the goodwill is recoverable. Other intangible assets are amortized to
expense using the straight-line method over three to six years.
ENGINEERING
Engineering expenses include activities associated with product
development, the application of products to specific customer needs, and ongoing
efforts to refine and enhance existing products. These costs are expensed as
incurred and totaled approximately $13,648,000, $11,733,000 and $7,009,000 in
1998, 1997 and 1996, respectively.
ENVIRONMENTAL REMEDIATION AND COMPLIANCE
Environmental liabilities for remediation costs are accrued based on
estimates of known environmental remediation exposures. The measurement of
environmental liabilities is based on an evaluation of currently available facts
with respect to each individual site and considers factors such as existing
technology, presently enacted laws and regulations, and prior experience in
remediation of contaminated sites. Liabilities are recognized for remedial
activities, including direct and indirect costs, when they can be reasonably
estimated. Environmental compliance costs, which include maintenance and
operating costs with respect to pollution control equipment, cost of ongoing
monitoring programs and similar costs, are expensed as incurred. Environmental
costs are capitalized if the costs increase the value of the property and/or
mitigate or prevent contamination from future operations.
FOREIGN CURRENCY TRANSLATION
The Company has foreign subsidiaries located in the United Kingdom
("U.K."), Wales and Brazil. Financial data of the U.K. and Wales subsidiaries
for all periods presented and the Brazilian subsidiary for 1998 are translated
into U.S. dollars at current exchange rates and translation adjustments are
accumulated as a separate component of shareholders' equity. Foreign currency
transaction gains and losses for these subsidiaries are credited or charged to
income as
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<PAGE>
they occur. During 1997 and 1996, the Brazilian subsidiary was accounted for as
operating in a hyperinflationary economy. Accordingly, financial data stated in
Brazilian currencies for those periods were remeasured into U.S. dollars at both
current (monetary items) and approximate historical (non-monetary items)
exchange rates and the resulting transaction adjustments were charged or
credited to income. These charges were not significant for the periods shown.
FINANCIAL INSTRUMENTS AND HEDGING
Certain financial instruments are used to hedge risk caused by
fluctuating commodity prices, foreign currencies and interest rates. The Company
enters into futures or option contracts to hedge price fluctuations for
commodities used in the manufacture of its products. The terms of the contracts
are consistent with the terms of the underlying transaction they are designed to
hedge and generally have a term of less than one year. As a result, gains or
losses on the transactions included in the Company's results of operations
offset losses and gains of the underlying transactions being hedged.
In addition, the Company uses interest rate swap agreements to manage
interest costs and risks associated with changing interest rates. The
differential to be paid or received under these agreements is accrued as
interest rates change and is recognized in interest expense consistent with the
terms of the agreements. The counterparty to each interest rate swap agreement
is a major financial institution. The possibility of credit loss from
counterparty non-performance is remote and not anticipated.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
standard establishes accounting and reporting standards for derivative
instruments and for hedging activities, including a requirement to recognize all
derivatives at their fair value as either assets or liabilities in the balance
sheet. The Company plans to adopt the provisions of SFAS No. 133 in 2000 and
does not expect that the adoption will have a material impact on its financial
position.
COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income". This standard
established rules for the reporting of comprehensive income and its components.
The provisions of SFAS No. 130 are reflected in the Company's financial
statements.
STOCK BASED COMPENSATION
During 1996, the Company adopted SFAS No. 123, "Accounting for Stock
Based Compensation". The Company has applied APB Opinion No. 25 and related
interpretations in accounting for its stock-based compensation plans, and has
adopted the disclosure option related to SFAS No. 123. See Note 12, "Stock Based
Compensation Plans," for related disclosures.
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<PAGE>
PER SHARE INFORMATION
In March 1997, the Company adopted SFAS No. 128, "Earnings Per Share."
The Company's historical earnings per share have been adjusted to comply with
the disclosure requirements of SFAS No. 128. Under the provisions of SFAS No.
128, basic earnings per share are computed by dividing net income by the
weighted average shares outstanding for the period. Diluted earnings per share
includes the dilutive effects of common stock equivalents, including options and
warrants, in the weighted average shares outstanding. The following is a
reconciliation of the weighted average shares outstanding used in the
computation of annual diluted earnings per share:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average shares outstanding 16,786 15,160 13,389
Dilutive impact of common stock equivalents
outstanding 636 769 469
- ----------------------------------------------------------------------------------------
Dilutive average shares outstanding 17,422 15,929 13,858
========================================================================================
</TABLE>
NOTE 2. MERGER AGREEMENT
On December 17, 1998, the Company announced that it had signed a
definitive merger agreement providing for the acquisition of the Company by
Borg-Warner Automotive, Inc., for $39.00 per Company share in cash and stock of
Borg-Warner Automotive. In the transaction, Borg-Warner Automotive will be
issuing $150 million worth of its stock to Kuhlman shareholders with the
remainder of the purchase price to be paid in cash. The acquisition is subject
to certain closing conditions including the approval of the Company's
shareholders. It is anticipated that the transaction will close in the first
quarter of 1999.
Under terms of the merger agreement, change of control related severance
payments and certain of the Company stock based compensation obligations and
other related liabilities will be paid in cash subsequent to the closing to
certain executives and other employees of the Company. See Note 16, "Subsequent
Event," Note 9, "Commitments and Contingencies" and Note 12, "Stock Based
Compensation Plans" for additional disclosures.
Borg-Warner Automotive is a leading global Tier 1 supplier of highly
engineered systems and components, primarily for automotive powertrain
applications.
NOTE 3. ACQUISITIONS
ACQUISITION OF KYSOR TRANSPORTATION PRODUCTS GROUP
On March 10, 1997, the Company purchased certain assets and assumed
certain liabilities of the Transportation Products Group ("Kysor") of Kysor
Industrial Corporation, a Michigan corporation traded on the New York Stock
Exchange. The purchase price for Kysor was $86,000,000 in cash plus the
assumption of approximately $722,000 of debt. The purchase of Kysor was financed
from borrowings under the Company's existing credit facilities.
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<PAGE>
The transaction was accounted for as a purchase, and the goodwill
associated with the transaction is being amortized over 40 years. The purchase
price has been allocated to the assets based on their estimated fair market
value. The excess of the purchase price over the fair value of assets was
approximately $52,909,000. The results of operations for Kysor are included in
the consolidated financial statements of the Company from the date of
acquisition.
The following unaudited pro forma information for the Company for the
periods shown below gives effect to the Kysor acquisition as if it had occurred
as of the beginning of each period.
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------------
IN THOUSANDS, EXCEPT PER SHARE DATA 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 670,249 $ 592,619
Net income $ 28,747 $ 20,771
Diluted per share amounts:
Net income $ 1.80 $ 1.50
</TABLE>
The unaudited pro forma information assumes the acquisition of the net
assets at the beginning of the periods presented and accordingly includes
adjustments for goodwill amortization, interest expense, certain administrative
costs and income taxes. The unaudited pro forma financial data is presented for
informational purposes only and is not necessarily indicative of the results of
operations that actually would have been achieved had the acquisition of Kysor
been consummated at the beginning of the periods presented.
ACQUISITION OF SNYDER TANK CORPORATION
On November 14, 1997, a subsidiary of the Company acquired all of the
outstanding stock of Snyder Tank Corp. ("Snyder Tank") for approximately
$20,000,000 in cash plus the assumption of approximately $1,200,000 of debt.
Snyder is a manufacturer of steel and aluminum fuel and air tanks for medium and
heavy-duty trucks, and metal tanks for liquified natural gas fuel systems. Net
sales of Snyder Tank for the fiscal year ended August 31, 1997 were
approximately $45,700,000. The impact on operations of this acquisition was not
significant for any of the periods presented and, therefore, pro forma amounts
are not presented giving effect to the transaction.
ACQUISITION OF WEB WIRE
On October 8, 1996, a subsidiary of the Company acquired substantially
all of the assets of Web Wire Products, Inc. ("Web Wire") in exchange for
approximately 329,000 shares of the Company's common stock. Web Wire is a
manufacturer of battery cables, ignition wire sets and related accessories for
the automotive aftermarket. Net sales of Web Wire for the twelve months ended
December 31, 1996 were approximately $6,300,000. The impact on operations of
this acquisition was not significant for any of the periods presented and,
therefore, pro forma amounts were not presented giving effect to the
transaction.
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<PAGE>
ACQUISITION OF COMMUNICATION CABLE, INC.
On February 16, 1996, the Company, through a wholly-owned subsidiary,
completed a tender offer for the outstanding shares of Communication Cable, Inc.
("CCI"), a North Carolina corporation, at $14.00 per share in cash. The purchase
of the tendered shares, which was consummated on February 21, 1996, along with
subsequent actions resulted in CCI becoming a wholly-owned subsidiary of the
Company as of June 28, 1996. The aggregate total cost of the acquisition of the
outstanding shares of CCI, which was primarily funded through bank debt, was
approximately $43,800,000. CCI engineers, designs and manufactures a wide
variety of low voltage electronic wire and cable products. The impact on
operations for the period January 1 through February 20, 1996 was not
significant and, therefore, pro forma amounts were not presented giving effect
to the transaction for that period.
NOTE 4. DEBT
The Company has two principal domestic credit facilities. The first
facility is a 5-year, $165,000,000 revolving credit facility is used for general
corporate purposes and is due on June 30, 2002. The second facility is a
364-day, $125,000,000 facility which was established primarily to fund future
acquisitions, was extended to June 28, 1999, and amounts drawn under this
facility, if any, would convert to a four-year term loan with payments
commencing on October 1, 1999 with equal quarterly installments. There were no
borrowings at December 31, 1998 under the 364-day facility. Interest rates on
amounts borrowed under each facility are based principally on the London
Inter-Bank Offered Rate (LIBOR) plus an applicable margin factor. The Company
also pays a commitment fee on the unused portion of each facility. The margin
factor and the commitment fee rate are determined based on the Company's
leverage ratio (as defined in the credit facility agreements). The Company's
credit facilities are subject to various covenants, including financial
covenants relating to minimum levels of net worth, interest coverage and the
leverage ratio. The Company was free of any material restrictions as to the
payment of dividends as of December 31, 1998. The average interest rate as of
December 31, 1998 under the Company's primary credit facilities was 5.7%.
At December 31, 1998, the Company had unused availability under its
domestic and foreign revolving credit facilities of approximately $89,519,000,
excluding the 364-day facility.
At December 31, 1998 and 1997, long-term debt consisted of the
following:
<TABLE>
<CAPTION>
IN THOUSANDS 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Variable rate notes supported by revolving credit
agreement with banks $ 80,500 $ 111,500
Miscellaneous other long-term debt, annual interest
rates up to 18%, payable through 2011 5,627 6,232
- --------------------------------------------------------------------------------------------------
86,127 117,732
Less - current portion (1,106) (1,475)
==================================================================================================
$ 85,021 $ 116,257
==================================================================================================
</TABLE>
-10-
<PAGE>
The minimum scheduled principal payments on long-term debt outstanding
at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
----------------------------------------------------------------------------
<S> <C>
1999 $ 1,106
2000 863
2001 485
2002 80,766
2003 292
Thereafter 2,615
----------------------------------------------------------------------------
Total minimum scheduled principal payments $ 86,127
============================================================================
</TABLE>
NOTE 5. INVENTORIES
Inventories at December 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
IN THOUSANDS 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
FIFO cost:
Raw materials $ 34,260 $ 32,904
Work-in-progress 16,274 17,270
Finished products 26,638 21,662
- -------------------------------------------------------------------------------------
77,172 71,836
Difference in FIFO and LIFO cost 1,231 (554)
- -------------------------------------------------------------------------------------
$ 78,403 $ 71,282
=====================================================================================
</TABLE>
NOTE 6. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1998 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
IN THOUSANDS 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Salaries, wages and employee benefits $ 29,923 $ 31,513
Product related accruals 14,343 17,085
Accrued income taxes 5,748 7,443
Workers compensation 5,485 5,856
Dividends payable 2,528 2,479
Other 17,249 23,438
- -------------------------------------------------------------------------------------
$ 75,276 $ 87,814
=====================================================================================
</TABLE>
NOTE 7. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
In 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." The provisions of SFAS No. 132
revised employers' disclosures about pensions and other postretirement benefit
plans. The information for 1997 and 1996 has been restated to conform with the
1998 presentation.
-11-
<PAGE>
EMPLOYEE PENSION PLANS
The Company has various employee retirement plans which provide pension
benefits to substantially all of its employees. Defined benefit plans provide
benefits of stated amounts based on an employee's years of service and, for
certain plans, compensation for a specified period of time before retirement.
Net periodic pension expense in 1998, 1997 and 1996 for the defined
benefit plans is comprised of the following elements:
<TABLE>
<CAPTION>
IN THOUSANDS 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 3,525 $ 2,798 $ 1,803
Interest cost 4,598 3,939 2,167
Expected return on assets (6,518) (5,021) (2,384)
Amortization of prior service cost 221 165 140
Amortization of transition obligation (63) (63) (65)
Amortization of actuarial (gain) or loss 159 186 106
- ----------------------------------------------------------------------------------------
Net periodic pension cost $ 1,922 $ 2,004 $ 1,767
========================================================================================
</TABLE>
The Company's funding policy is to make annual contributions required by
applicable regulations, which may, from time to time, exceed the Internal
Revenue Service deductibility limits by immaterial amounts. The Company annually
contributes to its defined benefit plans based on actuarially determined amounts
to provide the plans with sufficient assets to meet future benefit payment
requirements. Plan assets consist substantially of investments in pooled funds
which are comprised primarily of equity securities, U.S. Government securities,
corporate bonds and investments in short-term investment funds.
The following table summarizes changes in the benefit obligation, plan
assets and the funded status of the Company's defined benefit pension plans and
the related amounts recognized in the Company's consolidated balance sheets as
of December 31, 1998 and 1997:
-12-
<PAGE>
<TABLE>
<CAPTION>
IN THOUSANDS 1998 1997
- --------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
<S> <C> <C>
Benefit obligation at beginning of year $ 65,017 $ 32,494
Service cost 3,525 2,798
Interest cost 4,598 3,939
Amendments 964 325
Actuarial gain 1,465 2,915
Acquisitions -- 25,196
Benefits paid (3,574) (2,650)
==================================================================================================
BENEFIT OBLIGATION AT END OF YEAR 71,995 65,017
==================================================================================================
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 70,075 29,875
Actual return on plan assets 9,056 9,726
Acquisitions -- 31,711
Employer contribution 2,580 1,413
Benefits paid (3,574) (2,650)
- --------------------------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS AT END OF YEAR 78,137 70,075
==================================================================================================
FUNDED STATUS 6,142 5,058
Unrecognized net transition obligation (337) (126)
Unrecognized net actuarial loss (gain) (249) 1,117
Unrecognized prior service cost 1,775 1,164
==================================================================================================
PREPAID BENEFIT COST 7,331 7,213
==================================================================================================
PREPAID BENEFIT COST 7,331 7,213
Accrued minimum pension liability (3,065) (2,893)
Intangible asset 839 925
==================================================================================================
Net amount recognized in consolidated balance sheet $ 5,105 $ 5,245
==================================================================================================
</TABLE>
The assumptions used as of December 31, 1998, 1997 and 1996 in
determining pension expense and funded status information shown above are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.0% 7.2% 7.5%
Rate of salary progression 4.0% 4.2% 4.2%
Long-term rate of return on assets 9.7% 9.7% 9.7%
</TABLE>
The aggregate accumulated benefit obligation and aggregate fair value of
plan assets for those pension plans with accumulated benefit obligations in
excess of plan assets were approximately $9,315,000 and $6,921,000,
respectively, as of December 31, 1998, and $7,798,000 and $6,211,000,
respectively, as of December 31, 1997.
DEFINED CONTRIBUTION PLANS
In addition to providing pension benefits, the Company and certain
operating subsidiaries provide savings plans for management and other employees.
The plans provide for matching contributions based on the terms of such plans to
the accounts of plan participants. The
-13-
<PAGE>
Company and its operating subsidiaries expensed approximately $1,616,000,
$1,472,000 and $831,000 in the years ended December 31, 1998, 1997 and 1996,
respectively, related to these savings plans.
POSTRETIREMENT BENEFIT PLANS OTHER THAN PENSION
The Company charges the cost of postretirement benefits other than
pensions to earnings during the active service period of its employees and
non-employee directors.
Net periodic postretirement benefit cost for 1998, 1997 and 1996
included the following components:
<TABLE>
<CAPTION>
IN THOUSANDS 1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 509 $ 264 $ 126
Interest cost 1,698 1,466 929
Amortization of prior service cost 278 -- --
Amortization of actuarial net (gain) or loss 51 86 133
- --------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 2,536 $ 1,816 $ 1,188
==================================================================================================
</TABLE>
The amounts recognized in the Company's consolidated balance sheet at
December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
<S> <C> <C>
Benefit obligation at beginning of year $ 23,279 $ 12,154
Service cost 509 264
Interest Cost 1,698 1,466
Amendments 851 325
Actuarial gain 289 (349)
Acquisitions -- 11,192
Benefits paid (1,988) (1,773)
- --------------------------------------------------------------------------------------------------
BENEFIT OBLIGATION AT END OF YEAR 24,638 23,279
Unrecognized net loss (1,695) (1,477)
Unrecognized prior service cost (898) (326)
- --------------------------------------------------------------------------------------------------
ACCRUED BENEFIT COST 22,045 21,476
Less: current portion (2,041) (1,903)
==================================================================================================
Accrued postretirement benefits - long-term $ 20,004 $ 19,573
==================================================================================================
</TABLE>
The accumulated postretirement obligation was determined using a
discount rate of approximately 7.0%. An increase of approximately 8% in per
capita claims cost was assumed for 1998. The assumption provides for this rate
to decline by approximately 1% per year through 2000 and then remain constant at
5% in 2001 and thereafter.
A 1% increase or decrease in the health care cost trend rate would
increase or decrease, respectively, the estimated accumulated postretirement
benefit obligation as of December 31, 1998 by approximately $1,932,000. The
impact on net periodic cost is minimal. The Company's postretirement benefit
plans are unfunded.
-14-
<PAGE>
NOTE 8. INCOME TAXES
Income before taxes consisted of the following:
<TABLE>
<CAPTION>
IN THOUSANDS 1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $ 53,983 $ 38,681 $ 26,190
Foreign 8,635 7,821 3,153
- --------------------------------------------------------------------------------------------------
$ 62,618 $ 46,502 $ 29,343
==================================================================================================
</TABLE>
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
IN THOUSANDS 1998 1997 1996
- --------------------------------------------------------------------------------------------------
Current:
<S> <C> <C> <C>
Federal $ 16,293 $ 15,173 $ 9,380
State 1,502 1,928 1,732
Foreign 2,824 2,495 1,252
- --------------------------------------------------------------------------------------------------
$ 20,619 $ 19,596 $ 12,364
Deferred:
Federal $ 3,271 $ (906) $ (439)
State 422 (106) (136)
Foreign 23 (11) 218
- --------------------------------------------------------------------------------------------------
$ 3,716 $ (1,023) $ (357)
- --------------------------------------------------------------------------------------------------
Total $ 24,335 $ 18,573 $ 12,007
==================================================================================================
</TABLE>
The provision for income taxes includes Federal, state and foreign
income taxes currently payable and those deferred or prepaid because of
temporary differences between financial statement and tax bases of assets and
liabilities. The Company records income taxes under the liability method. Under
this method, deferred income taxes are recognized for the estimated future tax
effects of differences between the tax bases of assets and liabilities and their
financial reporting amounts based on enacted tax laws. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
The significant components of the (provision) benefit for deferred
income taxes, resulting from differences in the timing of recognition of income
and expenses for income tax and financial reporting purposes, consist of the
following:
<TABLE>
<CAPTION>
IN THOUSANDS 1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net operating loss carryforwards $ (148) $ (177) $ (177)
Depreciation (820) (330) (304)
Tax goodwill (672) (532) --
Compensation, benefits and pension (400) 2,408 1,025
Postretirement benefits 612 (80) 53
Severance and related (786) (497) --
Other (1,502) 231 (240)
=================================================================================================
Total $ (3,716) $ 1,023 $ 357
=================================================================================================
</TABLE>
The effective income tax provision differs from the amount calculated
using the statutory United States Federal income tax rate, principally due to
the following:
-15-
<PAGE>
<TABLE>
<CAPTION>
IN THOUSANDS 1998 1997 1996
- --------------------------------------------------------------------------------------------------
PERCENTAGE Percentage Percentage
OF INCOME of income of income
AMOUNT BEFORE Amount before Amount before
TAXES taxes taxes
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Statutory United States
Federal income tax $21,916 35.0% $16,276 35.0% $10,271 35.0%
State income taxes, net of
Federal income tax effect 1,599 2.6 1,183 2.5 1,037 3.5
Amortization of goodwill 715 1.1 543 1.2 479 1.6
Effect of foreign (173) (0.2) (253) (0.6) (70) (0.2)
subsidiaries
Other 278 0.4 824 1.8 290 1.0
- --------------------------------------------------------------------------------------------------
$24,335 38.9% $18,573 39.9% $12,007 40.9%
==================================================================================================
</TABLE>
The net deferred tax asset recognized in the consolidated statements of
financial position as of December 31, 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
IN THOUSANDS 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1,126 $ 1,364
Postretirement benefits 4,826 4,214
Employee compensation & benefits 10,910 9,503
Other 533 4,557
- --------------------------------------------------------------------------------------------------
Total deferred tax assets 17,395 19,638
- --------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation (8,774) (8,053)
Prepaid expenses and other (1,293) (2,624)
- --------------------------------------------------------------------------------------------------
Total deferred tax liabilities (10,067) (10,677)
- --------------------------------------------------------------------------------------------------
Net deferred tax asset $ 7,328 $ 8,961
==================================================================================================
</TABLE>
One of the Company's wholly-owned domestic subsidiaries has available
net operating losses which expire as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
- --------------------------------------------------------------------------------------------------
<S> <C>
2005 $ 3,185
2006 31
==================================================================================================
$ 3,216
==================================================================================================
</TABLE>
The application of these net operating loss carryforwards against future
taxable income is limited under the provisions of Internal Revenue Code Section
382 to $455,000 per taxable period. Management expects that the full amount of
these carryforwards will be utilized over the next eight years.
Undistributed earnings of the Company's foreign subsidiaries are
considered to be indefinitely reinvested and, accordingly, no provision for
United States Federal and state income taxes has been provided thereon. If
distribution of those earnings in the form of dividends were to occur, the
Company may be subject to both United States income taxes and foreign
withholding taxes. Determination of the amount of unrecognized deferred United
States income tax liability is not reasonably determinable until such
distribution actually occurs because of the
-16-
<PAGE>
variability of factors associated with the tax liability calculation, including
reductions associated with any available foreign tax credits.
NOTE 9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases certain of its buildings, machinery and equipment
under operating lease agreements which expire at various dates over the next six
years.
The following is a summary of rent expense under all operating leases:
<TABLE>
<CAPTION>
IN THOUSANDS 1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Rent expense $4,698 $4,142 $3,248
==================================================================================================
</TABLE>
Minimum future rental payments under noncancellable operating leases for
each of the next five years and in the aggregate are as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
- --------------------------------------------------------------------------------------------------
<S> <C>
1999 $ 4,748
2000 4,321
2001 3,117
2002 1,637
2003 1,297
Subsequent to 2003 5,629
==================================================================================================
Total minimum rental payments $ 20,749
==================================================================================================
</TABLE>
CAPITAL LEASES
The Company leases various manufacturing, office and warehouse
properties and office equipment under capital leases which expire at various
dates through 2009. The assets and liabilities under capital leases are recorded
at the lower of the present value of the minimum lease payments or the fair
value of the assets. The assets are depreciated over the shorter of their
related lease terms or their estimated productive lives. Depreciation of assets
under capital leases is included in depreciation expense.
Minimum future lease payments under capital leases as of December 31,
1998 are as follows:
-17-
<PAGE>
<TABLE>
<CAPTION>
IN THOUSANDS
- --------------------------------------------------------------------------------------------------
<S> <C>
1999 $ 567
2000 546
2001 384
2002 350
2003 346
Subsequent to 2003 1,940
- --------------------------------------------------------------------------------------------------
Total minimum lease payments $ 4,133
Less - amounts representing interest (1,816)
- --------------------------------------------------------------------------------------------------
Present value of net minimum lease payments 2,317
Less - current portion (247)
==================================================================================================
Long-term obligations under capital leases $ 2,070
==================================================================================================
</TABLE>
Obligations under capital leases are included with debt in the
accompanying consolidated balance sheet. Certain capital leases provide for
purchase options. Generally, purchase options are at prices representing the
expected fair value of the property at the expiration of the lease term.
LEGAL AND ENVIRONMENTAL MATTERS
The Company has accrued for various legal matters and certain
investigatory and non-capital environmental remediation costs consistent with
the policy set forth in Note 1, "Summary of Significant Accounting Policies."
Estimates of these costs have been made and accrued in the financial statements.
Based on the information currently available, management does not expect that
the sums that may have to be paid in connection with these matters will exceed
balances already accrued in any material respects and, therefore, management
does not expect that the outcome of such matters will have a material effect on
the consolidated financial position or results of operations of the Company.
SEVERANCE AND CONTROL AGREEMENTS
The Company maintains a severance policy applicable to certain of its
executive officers. The severance policy provides that if an executive officer's
employment is terminated, the executive's base pay, medical and dental coverage,
health and accident insurance and disability and group life insurance will be
continued for a period of up to twenty-four months, subject to certain
conditions. The aggregate maximum commitment under the executive severance
policy should all four covered employees be terminated is up to approximately
$3,100,000.
The Company modified its existing severance policy for its executive
officers during 1996 to include change of control agreements ("Control
Agreements"). Under the Control Agreements upon a change of control, as defined,
each such officer would be entitled to receive, among other things, three times
his current annual pay and three times his highest cash bonus in the past three
years. Each of the aforementioned would be adjusted for any resulting income or
excise tax liabilities to the officer. These Control Agreements are subject to
amendment or waiver by the Company's Board of Directors prior to any change of
control, as defined. Although the aggregate commitment of the Company pursuant
to the Control Agreements cannot be specifically determined until the occurrence
of such change of control event, such payments
-18-
<PAGE>
could have a material effect on the consolidated financial position and results
of operations of the Company. The Control Agreements are designed to encourage
the continuity of management.
Under the terms and conditions of the pending Merger Agreement described
in Note 2, "Merger Agreement," upon the change of control described therein, the
change of control payments to the executive officers will be approximately
$19,283,000.
NOTE 10. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest and net cash payments for income taxes are as
follows:
<TABLE>
<CAPTION>
IN THOUSANDS 1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest $ 7,903 $ 9,248 $ 6,419
Income taxes, net of refunds $ 17,938 $ 14,948 $ 9,758
</TABLE>
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES
In 1998, 1997, and 1996, the Company issued 3,012, 5,646 and 10,736
shares of its common stock, respectively, under the 1993 Non-Employee Director's
Stock Plan in non-cash transactions. The fair market value of the stock at the
time of issuance was approximately $144,000, $144,000 and $192,000 in 1998, 1997
and 1996, respectively, and this amount was amortized to expense over the
one-year term of the grants.
In December 1998, certain executive officers of the Company exercised
stock options as an inducement to the pending acquisition of the Company by
Borg-Warner Automotive, Inc. Consideration for the option exercises consisted of
secured loans, with recourse, to the respective executive officers totaling
approximately $9,820,000. The loans will be repaid upon the closing of the
pending merger described in Note 2, "Merger Agreement."
See Note 3, "Acquisitions," and Note 12, "Stock Based Compensation
Plans," for additional supplemental information on non-cash investing and
financing activities.
OTHER FINANCING ACTIVITIES
As a result of the executive officer option exercises in December 1998,
the Company loaned the respective executives approximately $3,769,000 to fund
their related personal income tax liability. The loans were secured, with
recourse, to the executive officers.
NOTE 11. STOCK RELATED INFORMATION
PREFERRED STOCK PURCHASE RIGHTS
The Company has distributed one preferred stock purchase right for each
outstanding share of common stock. Each right initially entitles the holder to
purchase one one-hundredth (1/100) of a share of Junior Participating Preferred
Stock at a price of $80 per right. The rights, which do not have voting rights,
will become exercisable for common stock of the Company if a person or group,
without the Company's prior consent, acquires 15% or more of such common
-19-
<PAGE>
stock or announces a tender offer which would result in such ownership of 15% or
more of such common stock. In the event the rights become exercisable for common
stock, each right will entitle its holder to purchase, at the right's
then-current exercise price, common stock of the Company having a value of twice
the exercise price of the right. In the event the rights become exercisable for
common stock and thereafter the Company is acquired in a merger or other
business combination, each right will entitle its holder to purchase, at the
right's then-current exercise price, common stock of the acquiring company
having a value of twice the exercise price of the right. The rights expire on
April 30, 2007, and may be redeemed by the Company at a price of $0.001 per
right at any time before a 15% position has been acquired or a tender offer has
been announced.
On December 17, 1998, the Company amended its preferred stock purchase
rights to exempt the Merger described in Note 2, "Merger Agreement" and the
events and transactions contemplated thereby from the application of the rights.
STOCK OFFERING
On June 27, 1997 and July 8, 1997, the Company sold 2,350,000 and
150,000 shares respectively, of its common stock at a per share price to the
public of $28.875. The total proceeds, net of expenses, were approximately
$68,187,000 of which approximately $59,100,000 was used to reduce amounts
outstanding under the Company's credit facilities associated with the
acquisition of Kysor, and approximately $9,100,000 was used to redeem
outstanding warrants held by a former lender of Schwitzer as described below.
On a supplementary basis, assuming that the total offering and sale of
2,500,000 shares as described above had been completed as of January 1, 1996 and
the estimated net proceeds had been used to reduce the Company's indebtedness
and redeem the warrants, diluted earnings per share for the years ended December
31, 1997 and 1996 would have been approximately $1.70 and $1.21, respectively.
WARRANTS
The Company issued detachable warrants in 1992 to a former lender of
Schwitzer. The warrants gave the holder the right to purchase 480,750 shares, in
the aggregate, of the Company's common stock at an exercise price of $8.32 per
share, subject to certain conditions. The warrants were redeemed by the Company
in June 1997 at the request of the warrant holder.
NOTE 12. STOCK BASED COMPENSATION PLANS
STOCK AWARD PLANS
In 1996, the Board of Directors adopted the Long-Term Incentive Plan
("LTIP") in order to better align stockholder and employee interests by
encouraging employee stock ownership in the Company and motivating employees
with compensation conditioned upon achievement of the Company's financial goals.
The LTIP was approved by the shareholders of the Company in April, 1997. Under
the terms of the LTIP, awards may be made of incentive and nonqualified
-20-
<PAGE>
stock options, stock appreciation rights and restricted stock to eligible
employees. In addition, awards may also be made to eligible employees with a
value tied to specific performance goals. The value of these awards may be paid
with Company common stock or cash, or a combination of the two. The program
specifies that a number of awards equal to two and one-half percent of the
outstanding shares of the Company will be available for grant under the various
award alternatives on January 1 of each year subject to certain conditions and
adjustments.
In August 1996, award levels were approved by the Board of Directors
whereby certain key employees would receive a payout after the attainment of
price thresholds for Kuhlman common stock of $23 and $27, subject to vesting
requirements and other factors. In April and May, 1997, performance award levels
were achieved for the attainment of the two share price targets of $23 and $27,
respectively. The payout to eligible participants, which consisted of
two-thirds stock and one-third cash, was made in four quarterly installments
subject to certain vesting requirements and other factors, commencing on May 1
and June 1, 1997, respectively. The estimated pre-tax expense of such awards is
approximately $7,000,000, with approximately $3,600,000 and $3,400,000 paid for
the $23 and $27 targets, respectively. Recognition of the related compensation
expense of such awards was based on the commencement date and the vesting
requirements.
In July, 1997, additional award levels were approved by the Board of
Directors whereby certain key employees would receive a payout after the
attainment of each of two share price thresholds within two years from the award
date, subject to vesting requirements and other factors. The stock price
thresholds were $36 and $42 per share, and the pre-tax cost of the awards were
approximately $4,450,000 each. The Company achieved the $36 and $42 thresholds
in October 1997 and March 1998, respectively, with vesting and payouts
commencing in the second quarter of 1998.
In February 1998, additional award levels were approved by the Board of
Directors whereby certain key employees would receive a payout after attainment
of $48 and $56 per share price thresholds and other factors under conditions
similar to the previous awards. The pre-tax cost of the awards would be
approximately $4,400,000 each.
In 1998 and 1997, the Company recognized approximately $9,182,000 and
$4,553,000, respectively, of expense associated with the LTIP, of which
two-thirds represented a non-cash charge for the issuance of stock under terms
of the program.
Under the terms and conditions of the pending Merger Agreement described
in Note 2, "Merger Agreement," upon the change of control described therein, the
payouts specified under the $48 per share performance award will be paid in cash
to the respective participants. Such payout will be approximately $4,400,000
upon consummation of the merger.
DIRECTOR'S STOCK PLAN
In 1993, the Board of Directors adopted and the shareholders approved
the 1993 Non-Employee Director's Stock Plan ("New Director's Plan"). Pursuant to
the New Directors Plan, each non-employee director receives annually a number of
shares equal to an aggregate fair
-21-
<PAGE>
market value of $24,000 concurrent with the meeting of the Board of
Directors held each year following the Annual Meeting of Stockholders.
Approximately 17,000 shares were available for grants under the New Director's
Plan as of December 31, 1998.
STOCK APPRECIATION RIGHTS
In addition to the stock appreciation rights that may be issued pursuant
to the LTIP noted above, the Company has a 1994 Stock Appreciation Rights Plan
(the "SAR Plan"). The SAR Plan provides for discretionary grants to key
employees of cash-only stock appreciation rights in shares of the Company's
common stock. Each Stock Appreciation Right ("SAR") measures the change in value
of a share of the Company's common stock from the date of grant to the date of
exercise. All SARs vest and are automatically exercised on the earliest to occur
of the fifth anniversary of the grant or other circumstances, including a change
in control of the Company as defined in the SAR Plan. Unearned compensation,
representing changes in the market value of the SAR, has been charged to income
in the period incurred. Expenses of approximately $1,043,000, $1,152,000 and
$546,000 were recognized in 1998, 1997 and 1996, respectively, under the
Company's SAR plans. As of December 31, 1998, 198,500 SARs with an average basis
of $20.19 per SAR had been awarded and were outstanding under the SAR Plan.
Under the terms and conditions of the pending Merger Agreement described
in Note 2, "Merger Agreement," upon the change of control described therein, the
outstanding SAR's will be converted into the right to receive a payment, if any,
in cash equal to the excess of $39.00 over the price of shares of Kuhlman common
stock on the date of grant. Such payout will be approximately $3,800,000 upon
consummation of the merger.
STOCK OPTIONS
The Company has various stock option plans for employees and
non-employee directors. These plans provide for the granting of options to
purchase common shares of the Company. All options under these plans are granted
at prices equal to the market value at the date of grant, become exercisable
between six and forty-eight months after the date of grant, and may be exercised
up to ten years from the grant date. As of December 31, 1998 there were
approximately 99,502 and 62,000 options available for grant to employees and
non-employee directors, respectively, under the Company's option plans. The
option grants available to employees, at December 31, 1998 could be used for any
of the other types of employee awards available under the LTIP.
The following is a summary of options outstanding as of December 31,
1998:
-22-
<PAGE>
<TABLE>
<CAPTION>
Weighted
Average Average
Exercise Options Exercise Remaining
Price (000's) Price Life
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$4.81-$7.20 139 $ 5.61 2.1 yrs
$7.20-$10.80 118 8.87 3.8 yrs
$10.80-$16.20 383 13.92 5.8 yrs
$16.20-$24.30 349 20.71 7.8 yrs
$24.30-$49.07 478 40.00 9.1 yrs
-------
1,467
</TABLE>
Under the terms and conditions of the pending Merger Agreement described
in Note 2, "Merger Agreement," upon the change of control described herein, all
outstanding stock options will be converted into the right to receive payment,
if any, in cash equal to the number of outstanding options multiplied by the
excess, if any, of $39.00 over the exercise price of options on the date of
grant. Based on options outstanding at December 31, 1998, such payout will be
approximately $24,454,000 upon consummation of the merger.
STOCK BASED COMPENSATION
Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant dates for awards under those
plans, consistent with the guidelines of SFAS No. 123, the Company's net income
and earnings per share would have been adjusted to the pro forma amounts listed
below:
<TABLE>
<CAPTION>
IN THOUSANDS EXCEPT PER SHARE DATA 1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income
As reported $ 38,283 $ 27,929 $ 17,336
Pro forma $ 36,974 $ 27,295 $ 17,068
Basic earnings per share
As reported $ 2.28 $ 1.84 $ 1.29
Pro forma $ 2.20 $ 1.80 $ 1.27
Diluted earnings per share
As reported $ 2.20 $ 1.75 $ 1.25
Pro forma $ 2.12 $ 1.71 $ 1.23
</TABLE>
Because the method of accounting required by SFAS No. 123 has not been
applied to options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
In accordance with SFAS No 123, the Company measures compensation cost
for disclosure purposes using the Black-Scholes model with the following
assumptions: dividend yields ranging from 1.7% to 3.7%; an expected life of 4 to
6 years; expected volatility ranging from approximately 32%-33%; and risk-free
interest rates ranging from approximately 5.4% to 7.5%.
The following table summarizes the transactions pursuant to the
Company's stock option plans for the three-year period ended December 31, 1998:
-23-
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
SHARES WEIGHTED AVG. Shares Weighted Avg. Shares Weighted Avg.
(000'S) EXERCISE (000's) Exercise Price (000's) Exercise Price
PRICE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of 1,810 $14.92 1,521 $12.81 1,572 $12.08
year
Granted 457 40.83 449 21.40 310 14.14
Exercised (790) 15.13 (160) 12.98 (308) 9.82
Forfeited (10) 10.50 -- -- (24) 16.16
Expired -- -- -- -- (29) 16.90
- ----------------------------------------------------------------------------------------------------------
Outstanding at end of year 1,467 $22.91 1,810 $14.92 1,521 $12.81
- ----------------------------------------------------------------------------------------------------------
Exercisable at end of year 1,454 $23.05 1,762 $14.98 1,434 $13.03
- ----------------------------------------------------------------------------------------------------------
Weighted average fair value
of options granted $13.93 $ 7.42 $ 3.97
------ ------- -------
</TABLE>
NOTE 13. BUSINESS AND GEOGRAPHICAL SEGMENT INFORMATION
In 1998, the Company adopted SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information" which altered the way the Company reports
information about its business segments. The information for 1997 and 1996 has
been restated to conform to the 1998 presentation.
The Company's operations are organized into three business segments
which are defined as Electrical Transformers, Wire and Cable Products and
Industrial Products. The Electrical Transformers Segment manufactures and
markets distribution, power and instrument transformers primarily for domestic
electrical utilities and certain industrial users. The Wire and Cable Products
Segment manufactures and markets electrical and electronic wire and cable
products for consumer, commercial and industrial applications domestically. The
Industrial Products Segment designs, produces and markets proprietary engine
components, fuel tanks and other products used on light, medium and heavy-duty
trucks, and construction, agricultural, mining, power generation and marine
equipment. Approximately 70% of the Industrial Products Segment's sales,
excluding export sales from the United States, are made to domestic customers
with the balance sold throughout the world.
Net sales represent shipments to unaffiliated customers. Operating
earnings for each segment include all costs and expenses directly related to the
segment before financing charges or corporate allocations. Corporate items
principally represent general and administrative costs and costs associated with
the Company's Long-Term Incentive Plan. Identifiable assets are those used in
the operations of each business or geographic segment. Corporate assets consist
primarily of property and equipment.
-24-
<PAGE>
The Company's operations by business segment and geographic area for the
years ended December 31, 1998, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
FINANCIAL DATA BY BUSINESS SEGMENT
IN THOUSANDS 1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES
Electrical Transformers $ 112,322 $ 106,677 $ 97,798
Wire & Cable Products 190,457 190,410 171,048
Industrial Products 459,245 346,353 187,619
==================================================================================================
$ 762,024 $ 643,440 $ 456,465
==================================================================================================
INCOME BEFORE TAXES AND EXTRAORDINARY ITEM
Electrical Transformers $ 13,020 $ 9,920 $ 6,630
Wire & Cable Products 15,265 11,245 13,473
Industrial Products 58,751 46,636 22,386
- --------------------------------------------------------------------------------------------------
Operating earnings(1) $ 87,036 $ 67,801 $ 42,489
Corporate expenses(2) (17,558) (12,662) (6,165)
Interest expense, net (6,860) (8,637) (6,981)
==================================================================================================
$ 62,618 $ 46,502 $ 29,343
==================================================================================================
IDENTIFIABLE ASSETS
Electrical Transformers $ 44,763 $ 40,396 $ 41,391
Wire & Cable Products 143,948 140,818 141,077
Industrial Products 266,681 270,493 91,353
Corporate/unallocated 13,769 9,611 3,595
- --------------------------------------------------------------------------------------------------
$ 469,161 $ 461,318 $ 277,416
==================================================================================================
CAPITAL EXPENDITURES
Electrical Transformers $ 4,347 $ 2,807 $ 1,872
Wire & Cable Products 5,940 2,757 3,262
Industrial Products 13,938 12,142 5,615
Corporate/unallocated 87 2,260 231
- --------------------------------------------------------------------------------------------------
$24,312 $ 19,966 $ 10,980
==================================================================================================
DEPRECIATION AND AMORTIZATION
Electrical Transformers $ 2,461 $ 2,286 $ 2,046
Wire & Cable Products 5,459 5,244 4,597
Industrial Products 15,287 11,963 5,633
Corporate/unallocated 552 423 194
- --------------------------------------------------------------------------------------------------
$ 23,759 $ 19,916 $ 12,470
==================================================================================================
</TABLE>
-25-
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL DATA BY GEOGRAPHIC SEGMENT
IN THOUSANDS 1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES
United States $ 661,796 $ 562,546 $ 397,393
Europe 89,423 70,384 50,757
Other 10,805 10,510 8,315
==================================================================================================
$ 762,024 $ 643,440 $ 456,465
==================================================================================================
INCOME BEFORE TAXES AND EXTRAORDINARY ITEM
United States $ 77,728 $ 60,162 $ 39,077
Europe 8,400 6,703 3,045
Other 908 936 367
- --------------------------------------------------------------------------------------------------
Operating earnings(1) $ 87,036 $ 67,801 $ 42,489
Corporate expenses(2) (17,558) (12,662) (6,165)
Interest expense, net (6,860) (8,637) (6,981)
- --------------------------------------------------------------------------------------------------
$ 62,618 $ 46,502 $ 29,343
==================================================================================================
IDENTIFIABLE ASSETS
United States $ 399,339 $ 399,867 $ 236,441
Europe 47,951 43,038 30,544
Other 8,102 8,802 6,836
Corporate 13,769 9,611 3,595
- --------------------------------------------------------------------------------------------------
$ 469,161 $ 461,318 $ 277,416
==================================================================================================
</TABLE>
(1) OPERATING EARNINGS IS DEFINED AS OPERATING PROFIT PLUS OTHER, NET
DIRECTLY ATTRIBUTABLE TO EACH SEGMENT.
(2) SEE NOTE 12, "STOCK BASED COMPENSATION PLANS" FOR ADDITIONAL INFORMATION
ON CORPORATE EXPENSES.
NOTE 14. FINANCIAL INSTRUMENTS
FINANCIAL INSTRUMENTS
The Company has limited involvement with derivative financial
instruments and does not use them for speculation or trading purposes. The
Company hedges the effects of fluctuations in commodity prices, principally
copper, through either commodity futures contracts or forward purchase
commitments. In addition, the Company hedges currency fluctuations for certain
international transactions through various mechanisms, including futures
contracts, and hedges interest rates through interest rate swap agreements to
reduce the risk of movements in interest rates on a portion of its variable rate
debt.
As of December 31, 1998, the Company had entered into two interest rate
swap agreements. The terms of the agreements allow the Company to receive or
make payments on the difference between the stated LIBOR rate and current market
rates. The LIBOR rates are fixed at a weighted average rate of 6.0%. The
agreements commenced on October 30, 1997 and mature on various dates, the latest
of which is April 1, 2001.
-26-
<PAGE>
At December 31, 1998 and 1997 the Company had approximately $3,456,000
and $10,100,000, respectively, of forward purchase commitments, principally for
copper, at approximately fair market value. The purchase commitments generally
extend up to twelve months.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values of cash equivalents, trade receivables and trade
payables are considered to be representative of their respective fair values
because of the immediate or short-term maturity of these financial instruments.
The fair value of the Company's debt instruments approximated the book value
because a substantial portion of the underlying instruments are variable rate
notes which re-price frequently.
The fair value of the Company's futures contracts are estimated based on
current settlement values. The fair value of the interest rate swaps are based
on valuations from financial institutions. The carrying amounts of the Company's
financial instruments used in its hedging activities at December 31 were as
follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------- ---------------------------
Notional Fair Notional Fair
IN THOUSANDS Amount Value Amount Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate swaps $60,000 $(1,183) $60,000 $ (349)
Commodity price futures 4,928 (770) -- --
</TABLE>
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of trade accounts receivable.
While the Company does have a concentration of accounts receivable with
customers in the commercial transportation industry, management believes that
the risk of collectibility is limited due to their individual financial strength
and dispersion across many different geographies, and because of the large
number of entities comprising the Company's customer base.
-27-
<PAGE>
NOTE 15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's quarterly results are summarized below for the years ended
December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998
QUARTER
----------------------------------------------
IN THOUSANDS, EXCEPT PER SHARE FIRST SECOND THIRD FOURTH TOTAL
DATA
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET SALES $184,102 $194,142 $192,856 $190,924 $762,024
GROSS PROFIT 42,087 45,453 43,929 45,282 176,751
OPERATING PROFIT 16,722 18,390 18,261 18,081 71,454
NET INCOME 8,817 9,990 9,769 9,707 38,283
EARNINGS PER SHARE:
NET INCOME - BASIC 0.53 0.60 0.58 0.57 2.28
NET INCOME - DILUTED 0.51 0.57 0.55 0.56 2.20
</TABLE>
<TABLE>
<CAPTION>
1997
QUARTER
----------------------------------------------
IN THOUSANDS, EXCEPT PER SHARE FIRST SECOND THIRD FOURTH TOTAL
DATA
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET SALES $134,148 $170,221 $164,364 $174,707 $643,440
GROSS PROFIT 29,742 38,514 39,134 40,830 148,220
OPERATING PROFIT 11,251 14,228 15,241 16,428 57,148
NET INCOME 5,282 6,409 7,673 8,565 27,929
EARNINGS PER SHARE:
NET INCOME - BASIC 0.38 0.46 0.47 0.53 1.84
NET INCOME - DILUTED 0.36 0.43 0.45 0.51 1.75
</TABLE>
NOTE 16. SUBSEQUENT EVENT
On March 1, 1999, the Company's shareholders approved Borg-Warner
Automotive's acquisition of the Company. See Note 2, "Merger Agreement," for
additional disclosures.
-28-
Exhibit 99.2
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements
consist of an unaudited pro forma consolidated balance sheet as of December 31,
1998, and an unaudited pro forma consolidated statement of operations for the
year ended December 31, 1998. The pro forma statements combine the historical
financial statements of Borg-Warner Automotive, Inc. ("Borg-Warner Automotive")
and Kuhlman Corporation ("Kuhlman") as of and for the periods indicated. The pro
forma financial statements also reflect the following:
o The merger was accounted for as a purchase. Borg-Warner Automotive
funded the transaction by issuing 3,286,596 shares of Borg-Warner
Automotive common stock and borrowing approximately $543 million in
cash. Subject to the provisions of the Agreement and Plan of Merger
among Borg-Warner Automotive, BWA Merger Corp., and Kuhlman, dated as
of December 17, 1998, each outstanding share of Kuhlman common stock
was converted into the right to receive (1) $39.00 in cash, without
interest, or (2) $39.00 worth of shares of Borg-Warner Automotive
common stock.
o Borg-Warner Automotive refinanced Kuhlman's existing indebtedness which
was $151 million at the closing of the merger. In addition,
Borg-Warner Automotive had planned to incur additional indebtedness
for the settlement of stock options and certain long-term incentive
programs and severance programs, which were estimated to be
approximately $45 million, net of tax benefits. Substantially all
of such payments were made prior to closing, excluding the tax
benefit, and are included in the ending debt balance.
o Borg-Warner Automotive and Kuhlman paid investment banking, legal,
accounting and regulatory fees and costs related to the merger
estimated at $14 million.
Borg-Warner Automotive has not completed the analyses necessary to
determine the allocation of purchase price based on the fair values of assets
and liabilities acquired and, therefore, the excess of purchase price over net
assets acquired, except for the amount allocated to the electrical products
businesses as discussed below, is reflected as goodwill in these pro forma
financial statements.
Borg-Warner Automotive intends to sell Kuhlman's electrical products
businesses. In the pro forma balance sheet, Borg-Warner Automotive's net
investment in the electrical products businesses is reflected as an asset held
for sale in current assets. The investment includes a portion of the goodwill
related to the merger. The amount of goodwill was allocated based on the
relative historical performance of the electrical products businesses compared
with the total Kuhlman business. While the result is not certain, Borg-Warner
Automotive believes that the net investment in the electrical products
businesses is not greater than the amounts that Borg-Warner Automotive will
receive upon sale of the businesses. Proceeds from the sale will be used to
repay merger indebtedness.
On August 25, 1999, Borg-Warner Automotive announced its agreement
to sell Coleman Cable to a group of equity investors including management for
approximately $144
<PAGE>
million, less debt of approximately $4 million. The purchase price for the sale
is subject to certain post-closing adjustments, but Borg-Warner Automotive does
not currently expect the adjusted price to be materially different for the
initial price. Completion of the transaction is subject to customary closing
conditions.
On August 30, 1999, Borg-Warner Automotive announced its agreement
to sell Kuhlman Electric to The Carlyle Group for approximately $120 million
less debt of approximately $1 million. The purchase price for the sale is
subject to certain post-closing adjustments, but Borg-Warner Automotive does not
currently expect the adjusted price to be materially different from the initial
price. Completion of the transaction is subject to customary closing conditions.
The pro forma consolidated financial statements should be read in
conjunction with the Borg-Warner Automotive and Kuhlman historical consolidated
financial statements and notes thereto. The pro forma consolidated statements
are presented for informational purposes only and do not purport to be
indicative of what the actual results would have been had the merger occurred as
described above for the periods presented. The pro forma consolidated statement
of operations should not be considered indicative of the results of future
operations of the merged companies.
The pro forma consolidated balance sheet was prepared assuming the
merger occurred on December 31, 1998, and the pro forma consolidated statement
of operations was prepared assuming that the merger took place on January 1,
1998. In addition to an accrual for merger-related costs noted above, the pro
forma consolidated statements include the following:
o the effects of amortization of the goodwill related to the merger
(which is being amortized over a 40-year life),
o interest expense on borrowings incurred to finance the merger, but
excluding the portion of the interest expense allocated to the
electrical products businesses,
o the elimination of expenses related to Kuhlman's corporate headquarters
which will be closed,
o exclusion of revenues, costs and expenses for the electrical products
businesses, and
o tax effects of all the preceding adjustments.
2
<PAGE>
BORG-WARNER AUTOMOTIVE
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Less: Pro
Electrical Forma
Borg-Warner Pro Forma Products Borg-Warner
Automotive Kuhlman Adjustments Businesses(1) Automotive
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Cash................................ $ 37.8 $ 4.7 $ 0.2 $ 42.3
Short-term securities............... 6.2 6.2
Receivables......................... 185.4 109.3 42.7 252.0
Inventories......................... 115.7 78.4 37.2 156.9
Deferred income tax asset........... 4.7 10.6 5.0 10.3
Prepayments and other current assets 26.3 10.5 2.5 34.3
Investment in electrical products $ 212.0 (1) 212.0
businesses
-----------------------------------------------------------------
Total current assets............. 376.1 213.5 212.0 87.6 714.0
Property, plant and equipment at 1,004.9 245.7 77.5 1,173.1
cost................................
Less accumulated depreciation....... (370.4) (120.0) (35.2) (455.2)
-----------------------------------------------------------------
Net property, plant and equipment 634.5 125.7 42.3 717.9
Investments and advances............ 141.9 141.9
Goodwill............................ 560.4 120.7 490.3 (2) 134.7 1,036.7
Deferred income tax asset........... 7.7 7.7
Other noncurrent assets............. 125.5 9.3 4.4 130.4
-----------------------------------------------------------------
$1,846.1 $ 469.2 $ 702.3 $ 269.0 $2,748.6
=================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable....................... $ 145.0 $ 1.1 $ 0.6 $ 145.5
Accounts payable and accrued 276.9 131.6 $ 14.0 (2) 47.1 375.4
expenses............................
Income taxes payable................ 32.2 5.8 0.8 37.2
-----------------------------------------------------------------
Total current liabilities........ 454.1 138.5 14.0 48.5 558.1
Long-term debt...................... 248.5 85.0 542.8 (2) 2.8 873.5
Long-term liabilities:
Retirement-related liabilities... 318.6 20.0 2.2 336.4
Other long-term liabilities...... 47.6 9.2 3.5 53.3
Common stock........................ 0.2 17.5 (17.5)(2) 0.2
Other stockholders' equity.......... 777.1 199.0 163.0 (2) 212.0 927.1
-----------------------------------------------------------------
Total stockholders' equity....... 777.3 216.5 145.5 212.0 927.3
-----------------------------------------------------------------
$1,846.1 $ 469.2 $ 702.3 $ 269.0 $2,748.6
=================================================================
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
3
<PAGE>
BORG-WARNER AUTOMOTIVE
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
Less Pro Forma
Borg-Warner Pro Forma Electrical Products Borg-Warner
Automotive Kuhlman Adjustments Businesses (1) Automotive
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales............................. $ 1,836.8 $ 762.0 $ 305.5 $ 2,293.3
Cost of sales.......................... 1,450.7 585.3 232.7 1,803.3
Depreciation........................... 74.8 23.8 11.2 87.4
Selling, general and administrative 135.1 77.9 $ (17.7)(3) 30.4 164.9
expenses...............................
Minority interest in earnings.......... 2.1 2.1
Goodwill amortization.................. 16.8 3.6 8.9 (2) 1.8 27.5
Equity in affiliate earnings and other (10.3) 1.9 (8.4)
income.................................
----------------------------------------------------------------------
Earnings before interest, finance
charges, and income taxes......... 167.6 69.5 8.8 29.4 216.5
Interest expense and finance charges... 26.9 6.9 30.2 (2) 6.3 57.7
------------------------- --------------------------------------------
Earnings before income taxes........ 140.7 62.6 (21.4) 23.1 158.8
Provision for income taxes............. 46.0 24.3 (8.1)(4) 11.2 51.0
----------------------------------------------------------------------
Net earnings ....................... $ 94.7 $ 38.3 $ (13.3) $ 11.9 $ 107.8
======================================================================
Net earnings per share
Basic............................... $ 4.03 $ 2.28 $ 4.03
===================== ============
Diluted............................. $ 4.00 $ 2.20 $ 4.00
===================== ============
Average shares outstanding (thousands)
Basic............................... 23,479 16,786 3,287 26,766
================================ ============
Diluted............................. 23,676 17,422 3,287 26,963
================================ ============
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial
statements.
4
<PAGE>
BORG-WARNER AUTOMOTIVE
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998
(1) The electrical products businesses include two businesses of Kuhlman, one
of which manufactures transformers and the other of which manufactures
wire and cable. Borg-Warner Automotive plans to sell the electrical
products businesses after the merger. The pro forma consolidated balance
sheet reflects the electrical products businesses at net carrying value.
This carrying value of $212 million includes $121 million of the excess
purchase price of the merger. Revenues, costs and expenses of the
electrical products businesses have been deducted from the pro forma
Borg-Warner Automotive column of the pro forma consolidated financial
statements. For purposes of the unaudited pro forma consolidated statement
of operations, a portion of interest expense and amortization of goodwill
relating to the merger has been allocated to the electrical products
businesses, and accordingly has been deducted in arriving at the pro forma
consolidated statement of operations data. The goodwill amortization was
based upon the goodwill allocated to such businesses. Interest expense was
allocated assuming the businesses were responsible for the interest on
$212 million in acquisition indebtedness.
(2) The estimated purchase price for purposes of the calculation of goodwill
is as follows:
Purchase of Kuhlman common stock.................... $ 692.8
Fees and expenses related to the merger............. 14.0
--------
Total purchase price............................. 706.8
Net book value of Kuhlman........................ 216.5
--------
Excess purchase price............................... 490.3
Excess purchase price allocated to electrical
products businesses............................... 120.9
--------
Goodwill............................................ $ 369.4
===========
The pro forma consolidated financial statements reflect issuance of
3,286,596 shares of Borg-Warner Automotive common stock issued in the
merger, corresponding to an average Borg-Warner Automotive common stock
price of $45.59.
Interest expense on acquisition borrowings has been calculated at rates in
effect for the periods presented in the pro forma consolidated statement
of operations.
(3) The adjustment to eliminate the Kuhlman corporate headquarters expense
reflects the cost of operating Kuhlman's executive and administrative
offices in Savannah, Georgia, which will be closed upon completion of the
merger. A one-time charge to close the headquarters office is included in
the aggregate purchase price.
(4) The tax effect adjustment accounts for the tax effects of the various
other adjustments, using a domestic marginal rate, where applicable.
Amortization of goodwill arising from the merger is not deductible for
U.S. income tax purposes.
5
