<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration No: 333-84931
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS ARE NOT AN
OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED SEPTEMBER 15, 1999
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED AUGUST 31, 1999)
$150,000,000
[BORG-WARNER LOGO]
% SENIOR NOTES DUE 2019
----------------------
The notes will bear interest at % per year and will mature on
September , 2019. We will pay interest on the notes on March and September
of each year, beginning March , 2000. The notes will be redeemable prior to
maturity, in whole or in part, as described in this prospectus supplement.
FOR INFORMATION CONCERNING CERTAIN FACTORS THAT YOU SHOULD CONSIDER, SEE
"RISK FACTORS" BEGINNING ON PAGE 6 OF THE ACCOMPANYING PROSPECTUS.
----------------------
<TABLE>
<CAPTION>
PER NOTE TOTAL
-------- -----
<S> <C> <C>
Public offering price(1).................................. % $
Underwriting discount..................................... % $
Proceeds, before expenses, to Borg-Warner Automotive...... % $
</TABLE>
(1) Plus accrued interest from , 1999, if settlement occurs after
that date
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
The notes will be ready for delivery in book-entry form only through The
Depository Trust Company on or about , 1999.
----------------------
MERRILL LYNCH & CO.
BANC OF AMERICA SECURITIES LLC
BANC ONE CAPITAL MARKETS, INC.
CHASE SECURITIES INC.
----------------------
The date of this prospectus supplement is , 1999
<PAGE> 2
ABOUT THIS PROSPECTUS SUPPLEMENT
You should read this prospectus supplement along with the prospectus that
follows. You should rely on the information contained in this prospectus
supplement and the accompanying prospectus. We have not authorized anyone to
provide you with different information. We are offering to sell these securities
only in jurisdictions where offers or sales are permitted.
The information contained in this prospectus supplement and the
accompanying prospectus is accurate only as of the date on the front cover of
this prospectus supplement and as of the date on the front cover of the
accompanying prospectus, respectively.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this
prospectus supplement are "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements are subject to risks, uncertainties and other factors which could
cause actual results to differ materially from future results expressed or
implied by such forward-looking statements. The most significant of such risks,
uncertainties and other factors are discussed under the section called "Risk
Factors," beginning on page 6 of the accompanying prospectus, and you are urged
to carefully consider such factors. Additional risks and uncertainties are
detailed in our filings with the SEC, including the Cautionary Statements filed
as Exhibit 99.1 to our 1998 Annual Report on Form 10-K. We do not have any
obligation to update forward-looking statements and we may or may not do so.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
The Company........................... S-3
Selected Historical Consolidated
Financial Information............... S-5
Use of Proceeds....................... S-6
Capitalization........................ S-7
Description of the Notes.............. S-8
Underwriting.......................... S-10
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS
About this Prospectus................. 2
Where You Can Find More Information... 2
Special Note Regarding Forward-Looking
Statements.......................... 2
The Company........................... 4
Risk Factors.......................... 6
Use of Proceeds....................... 9
Ratio of Earnings to Fixed Charges.... 9
Description of Debt Securities........ 10
Description of Common Stock and
Rights.............................. 21
Certain U.S. Federal Income Tax
Considerations...................... 24
Plan of Distribution.................. 36
Legal Matters......................... 37
Experts............................... 37
</TABLE>
S-2
<PAGE> 3
THE COMPANY
OVERVIEW
We are a leading, global supplier of highly engineered systems and
components, primarily for automotive powertrain applications. Our products are
manufactured and sold worldwide, primarily to original equipment manufacturers
of passenger cars, sport utility vehicles and light trucks. We operate 54
manufacturing and technical facilities in 13 countries serving North America,
Europe and Asia, and we are an original equipment supplier to every major
original equipment manufacturer in the world. For additional information
regarding our four operating groups, see the section called "The Company"
beginning on page 4 in the accompanying prospectus.
RECENT TRANSACTIONS
Fluid Power
On August 3, 1999, we announced our agreement to acquire Fluid Power from
Eaton Corp. for approximately $310 million in cash. Fluid Power designs and
produces a variety of viscous and fan drive cooling systems for passenger
vehicles, primarily light trucks, sport utility vehicles and vans. The purchase
price for the acquisition is subject to post-closing adjustments, but we do not
currently expect the adjusted price to be materially different from the initial
price. Completion of the transaction is subject to regulatory approval and
customary closing conditions. We currently expect the transaction to close in
the beginning of October 1999. We expect to use the net proceeds of this
offering to pay a portion of the purchase price. See "Use of Proceeds."
Kuhlman
On March 1, 1999, we acquired Kuhlman for $693 million. Kuhlman is a
diversified, industrial manufacturing company operating in two product segments:
industrial products and electrical products. Through its Schwitzer Group, which
includes Kuhlman's industrial products business, Kuhlman is a leading worldwide
manufacturer of proprietary engine components, including turbochargers, fans and
fan drives, fuel tanks, instrumentation, heating/ventilation/air conditioning
systems, and other products used primarily in commercial transportation products
and industrial equipment. Kuhlman's electrical products businesses consist of
Kuhlman Electric and Coleman Cable and, as discussed below, we have entered into
agreements to sell both electrical products businesses. Completion of these
transactions are subject to customary closing conditions. No sales or income
from Kuhlman Electric or Coleman Cable are included in our consolidated results
presented or incorporated by reference in this prospectus supplement.
Coleman Cable. On August 25, 1999, we announced our agreement to sell
Coleman Cable to a group of equity investors including management for
approximately $144 million, less debt of approximately $4 million. The purchase
price for the sale is subject to certain post-closing adjustments, but we do not
currently expect the adjusted price to be materially different from the initial
price. Completion of the transaction is subject to customary closing conditions.
Kuhlman Electric. On August 30, 1999, we announced our 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 we do not currently expect the adjusted
price to be materially different from the initial price. Completion of the
transaction is subject to customary closing conditions.
S-3
<PAGE> 4
RECENT FINANCIAL RESULTS
On July 21, 1999, we reported that our second quarter 1999 net income was
$36.3 million, or $1.35 per share, compared with $19.6 million, or $.83 per
share, for the second quarter of 1998. Sales rose 42% to $640.8 million,
compared with $451.3 million in the second quarter of 1998. Our results were
driven by strong industry production, increased Borg-Warner Automotive content
in new engine and automatic transmission programs, the continued popularity of
sport utility vehicles and light trucks, and the acquisition of Kuhlman. Our
second quarter 1998 results were adversely affected by the GM strike, which
reduced sales by $10 million and earnings per share by $0.13.
Our net earnings for the first six months of 1999 were $68.4 million, or
$2.69 per share, compared with $45.6 million, or $1.92 per share, for the first
half of 1998. Our sales for the first half of 1999 rose 30% to $1.2 billion
compared with $916 million in 1998.
For the second quarter, revenue at Morse TEC, including BWA Turbo Systems,
rose 95% to $257.6 million. Strong demand for Morse TEC chain products and
systems for engines, automatic transmissions and four-wheel drive drove revenue
for those products. Accelerating demand for European passenger car turbochargers
continued to boost BWA Turbo Systems' results, which included a full quarter of
sales and earnings from the Kuhlman acquisition.
Powertrain Systems' sales of $142.1 million improved 11% over the second
quarter of 1998. The results reflect strong sales of four-wheel drive systems
for Ford light trucks and sport utility vehicles and the Mercedes M-Class All
Activity Vehicle, as well as the continued recovery of four-wheel drive transfer
case exports to Korea.
Automatic Transmission Systems' sales, exclusive of sales from divested
product lines, rose 21% to $118.1 million. The group saw continued strong
European demand, robust sales to North American automakers and stable conditions
in Asia during the quarter.
Sales for Air/Fluid Systems rose 52% to $135.6 million, due to
DaimlerChrysler engine and transmission programs and the inclusion of the fuel
tank business from Kuhlman.
S-4
<PAGE> 5
SELECTED HISTORICAL CONSOLIDATED
FINANCIAL INFORMATION
In the table below, we provide you with selected historical consolidated
financial information. We prepared this information using our audited
consolidated financial statements for each of the fiscal years in the five-year
period ended December 31, 1998, and our unaudited consolidated financial
statements for the six-month periods ended June 30, 1999 and June 30, 1998.
When you read this selected historical consolidated financial information,
you should also read the historical financial statements and accompanying notes
that we have included as Exhibit 13.1 to our 1998 Annual Report on Form 10-K and
in our Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. You
can obtain these reports by following the instructions we provide under "Where
You Can Find More Information" in the accompanying prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------- --------------------
1998 1997 1996(1) 1995 1994 1999 1998
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
Net sales.................. $1,836.8 $1,767.0 $1,540.1 $1,329.1 $1,223.4 $1,192.1 $ 916.0
Cost of sales.............. 1,450.7 1,375.4 1,205.5 1,044.9 948.4 916.1 725.1
-------- -------- -------- -------- -------- -------- --------
Gross profit............... 386.1 391.6 334.6 284.2 275.0 276.0 190.9
Depreciation............... 74.8 70.4 71.3 68.0 60.9 43.3 38.6
Selling, general and
administrative
expenses................. 135.1 132.0 122.7 97.8 92.1 95.9 71.7
Minority interest.......... 2.1 3.2 2.6 2.0 1.4 0.8 1.5
Goodwill amortization...... 16.8 16.7 13.5 9.6 9.6 13.4 8.4
Loss on sale of business... -- -- 61.5 -- -- -- --
Equity in affiliate
earnings and other
income................... (10.3) (13.2) (13.1) (18.6) (10.6) (7.1) (8.4)
-------- -------- -------- -------- -------- -------- --------
Earnings before interest
expense, finance charges
and income taxes......... 167.6 182.5 76.1 125.4 121.6 129.7 79.1
Interest expense and
finance charges.......... 26.9 24.6 21.4 14.2 13.9 21.2 13.0
-------- -------- -------- -------- -------- -------- --------
Earnings before income
taxes.................... 140.7 157.9 54.7 111.2 107.7 108.5 66.1
Provision for income
taxes.................... 46.0 54.7 12.9 37.0 43.3 40.1 20.5
-------- -------- -------- -------- -------- -------- --------
Net earnings............... $ 94.7 $ 103.2 $ 41.8 $ 74.2 $ 64.4 $ 68.4 $ 45.6
======== ======== ======== ======== ======== ======== ========
EBITDA(2).................. $ 259.2 $ 269.6 $ $ 203.0 $ 192.1 $ 186.4 $ 126.1
222.4(1)
BALANCE SHEET DATA
Total assets............... $1,846.1 $1,736.3 $1,623.6 $1,335.2 $1,240.3 $2,734.1 $1,762.2
Total debt................. $ 393.5 $ 338.1 $ 317.3 $ 134.7 $ 107.3 $ 919.1 $ 374.6
Stockholders' equity....... $ 777.3 $ 693.7 $ 628.8 $ 600.0 $ 534.9 $ 983.1 $ 715.6
</TABLE>
- ---------------
(1) We recorded a pre-tax loss on the sale of our North American manual
transmission business in the amount of $61.5 million, which, net of a tax
benefit of $26.5 million, resulted in an after-tax charge of $35.0 million,
or $1.49 per share. The $61.5 million amount is not reflected in the
earnings before interest, taxes, depreciation and amortization ("EBITDA")
figure for 1996.
(2) EBITDA is not intended to represent cash flow from operations as defined by
generally accepted accounting principles and should not be considered as an
alternative to net income as an indicator of our operating performance or
cash flows. We include EBITDA in this prospectus supplement to provide
additional information with respect to our ability to satisfy our debt
service, capital expenditures and working capital requirements. While EBITDA
is frequently used as a measure of operations and the ability of a company
to meet debt service requirements, it is not necessarily comparable to other
similarly titled captions of other companies due to differences in methods
of calculation.
S-5
<PAGE> 6
USE OF PROCEEDS
We expect to use the net proceeds from the sale of the notes to fund a
portion of the purchase price for the Fluid Power acquisition. See "The
Company -- Recent Transactions -- Fluid Power." The Fluid Power acquisition will
require the payment of approximately $310 million in cash. The portion of the
cash not supplied by the sale of the notes is expected to be borrowed under our
existing bank credit facility.
Completion of the Fluid Power acquisition is expected to occur in the
beginning of October 1999. If, as expected, the sale of the notes is completed
prior to the Fluid Power acquisition, the net proceeds from the sale of the
notes will be used to pay down short-term indebtedness and/or invested in
short-term, investment-grade financial instruments pending their use for the
acquisition.
If for any reason the Fluid Power acquisition is terminated after
completion of the sale of the notes, we intend to use the net proceeds from the
sale of the notes to repay existing debt. The existing debt to be repaid was
borrowed under various agreements with floating interest rates that averaged
5.60% as of June 30, 1999 and had maturities ranging from one day to one year.
The proceeds from this existing debt were used for general corporate purposes,
including capital expenditures and additions to working capital.
S-6
<PAGE> 7
CAPITALIZATION
The following table shows our consolidated capitalization as of June 30,
1999 and as adjusted to give effect to the issuance and sale by us of the notes,
assuming the completion of the Fluid Power acquisition and the sales of Coleman
Cable and Kuhlman Electric.
In the "As Adjusted" column below, we assume that
- we completed the Fluid Power acquisition on June 30, 1999, financed by
the net proceeds of the notes offering and borrowings under our credit
facility, and
- we sold Coleman Cable and Kuhlman Electric on June 30, 1999 for
approximately $205 million after taxes and applied the proceeds to reduce
borrowings under our credit facility.
When you read this capitalization table, you should read it along with
- the "Selected Historical Consolidated Financial Information," and
- the historical financial statements and accompanying notes that we
included as Exhibit 13.1 in our 1998 Annual Report on Form 10-K and in
our Quarterly Report on Form 10-Q for the quarter ended June 30, 1999,
which are incorporated by reference in this prospectus supplement. See
"Where You Can Find More Information" in the accompanying prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1999
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN MILLIONS)
<S> <C> <C>
Short-term debt:
Bank borrowings and other................................. $ 108.7 $ 108.7
Bank term loans........................................... 1.0 1.0
Capital lease liabilities................................. 0.4 0.4
-------- --------
Total short-term debt.................................. $ 110.1 $ 110.1
Long-term debt:
Bank borrowings and other................................. $ 236.4 $ 196.4
Bank term loans........................................... 23.8 23.8
Capital lease liabilities................................. 3.7 3.7
7% Senior notes due 2006.................................. 149.7 149.7
6 1/2% Senior notes due 2009.............................. 198.2 198.2
7 1/8% Senior notes due 2029.............................. 197.2 197.2
Notes offered by this prospectus supplement............... -- 150.0
-------- --------
Total long-term debt................................... $ 809.0 $ 919.0
Stockholders' equity:
Common stock.............................................. $ 0.3 $ 0.3
Other stockholders' equity................................ 982.8 982.8
-------- --------
Total stockholders' equity............................. $ 983.1 $ 983.1
-------- --------
Total Capitalization........................................ $1,902.2 $2,012.2
======== ========
</TABLE>
S-7
<PAGE> 8
DESCRIPTION OF THE NOTES
The following description of the particular terms of the notes supplements
the description of debt securities under the heading "Description of Debt
Securities" in the accompanying prospectus and, to the extent inconsistent,
supersedes that description.
The notes will be senior debt issued under the Indenture dated as of
September , 1999 (the "Senior Indenture") between Borg-Warner Automotive and
Chase Manhattan Trust Company, National Association, as Trustee.
The following summaries of certain provisions of the Senior Indenture are
not complete. You should refer to the applicable provisions of the Senior
Indenture for a complete statement of the terms of the notes. A copy of the
Senior Indenture has been filed as an exhibit to the registration statement of
which this prospectus supplement is a part and is incorporated by reference in
this prospectus supplement.
GENERAL
The notes will be limited to $150,000,000 principal amount in total. Each
note will bear interest at the annual rate stated on the cover page of this
prospectus supplement. Interest will be payable on March and September of
each year, beginning March , 2000. Interest on the notes will accrue from
September , 1999 and must be paid by the purchaser if the notes are delivered
after , 1999. Interest on the notes will be paid to holders of record on the
February or August immediately before the interest payment date. Interest
and principal will be payable in U.S. dollars at the Trustee's designated
corporate trust or agency office. The notes will mature on , 2019. The notes
will be issued only in denominations of $1,000 and integral multiples of $1,000.
There will be no sinking fund payments for the notes.
In the accompanying prospectus, there is a section called "Description of
Debt Securities -- Defeasance and Covenant Defeasance," which describes
provisions on the defeasance and covenant defeasance of securities issued under
the Senior Indenture. These provisions will apply to the notes.
RANKING
The notes will be senior unsecured obligations of Borg-Warner Automotive
and will rank equally with all of our other senior unsecured indebtedness. As of
June 30, 1999, we had approximately $919.1 million of senior indebtedness
outstanding. Because we are a holding company, the notes effectively will rank
junior to all liabilities of our subsidiaries. As of June 30, 1999 (other than
intercompany liabilities), our subsidiaries had approximately $467.8 million of
liabilities and $135.1 million of debt.
We may, without the consent of the noteholders, issue additional notes
having the same ranking and the same interest rate, maturity and other terms as
the notes offered by this prospectus supplement. Any such additional notes will
be a part of the series having the same terms as the notes.
OPTIONAL REDEMPTION
The notes may be redeemed in whole at any time or in part from time to
time, at our option, at a redemption price equal to the greater of (1) 100% of
the principal amount of the notes, and (2) the sum of the present values of the
remaining scheduled payments of principal and interest on the notes discounted
to the date of redemption on a semi-annual basis (assuming a 360-day year
consisting of twelve 30-day months) at the applicable Treasury Rate plus
basis points, plus, in either case, accrued and unpaid interest on the principal
amount being redeemed to the redemption date.
"Treasury Rate" means, with respect to any redemption date, (1) the yield,
under the heading which represents the average for the immediately preceding
week, appearing in the most recently published statistical release designated
"H.15(519)" or any successor publication which is published weekly by the Board
of Governors of the Federal Reserve System and which establishes yields on
actively traded United States Treasury securities adjusted to constant maturity
under the caption "Treasury Constant Maturities," for the maturity corresponding
to the Comparable Treasury Issue (if no maturity is within three months
S-8
<PAGE> 9
before or after the Remaining Life, yields for the two published maturities most
closely corresponding to the Comparable Treasury Issue will be determined and
the Treasury Rate will be interpolated or extrapolated from such yields on a
straight line basis, rounding to the nearest month) or (2) if such release (or
any successor release) is not published during the week preceding the
calculation date or does not contain such yields, the rate per annum equal to
the semi-annual equivalent yield-to-maturity of the Comparable Treasury Issue,
calculated using a price for the Comparable Treasury Issue (expressed as a
percentage of its principal amount) equal to the Comparable Treasury Price for
such redemption date. The Treasury Rate will be calculated on the third Business
Day preceding the redemption date.
"Business Day" means any calendar day that is not a Saturday, Sunday or
legal holiday in New York, New York and on which commercial banks are open for
business in New York, New York.
"Comparable Treasury Issue" means the United States Treasury security
selected by an Independent Investment Banker as having a maturity comparable to
the remaining term ("Remaining Life") of the notes to be redeemed that would be
utilized, at the time of selection and in accordance with customary financial
practice, in pricing new issues of corporate debt securities of comparable
maturity to the remaining term of such notes.
"Independent Investment Banker" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated or, if that firm is unwilling or unable to select the Comparable
Treasury Issue, an independent investment banking institution of national
standing appointed by the Trustee after consultation with Borg-Warner
Automotive.
"Comparable Treasury Price" means (1) the average of five Reference
Treasury Dealer Quotations for such redemption date, after excluding the highest
and lowest Reference Treasury Dealer Quotations, or (2) if the Independent
Investment Banker obtains fewer than five such Reference Treasury Dealer
Quotations, the average of all such quotations.
"Reference Treasury Dealer" means (1) Merrill Lynch, Pierce, Fenner & Smith
Incorporated and its successors, provided, however, that if any of the foregoing
shall cease to be a primary U.S. Government securities dealer in New York City
(a "Primary Treasury Dealer"), we will substitute for such Underwriter another
Primary Treasury Dealer and (2) any other Primary Treasury Dealer selected by
the Independent Investment Banker after consultation with Borg-Warner
Automotive.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any redemption date, the average, as determined by
the Independent Investment Banker, of the bid and asked prices for the
Comparable Treasury Issue (expressed in each case as a percentage of its
principal amount) quoted in writing to the Independent Investment Banker at 5:00
p.m., New York City time, on the third Business Day preceding such redemption
date.
Holders of notes to be redeemed will receive notice thereof by first-class
mail at least 30 and not more than 60 days prior to the date fixed for
redemption. If fewer than all of the notes are to be redeemed, the Trustee will
select, not more than 60 days prior to the redemption date, the particular notes
or portions thereof for redemption from the outstanding notes not previously
called by lot.
ADDITIONAL TERMS
For additional important information about the notes, see "Description of
Debt Securities" in the accompanying prospectus. That information includes:
- additional information on the terms of the notes;
- general information on the Senior Indenture and the Trustee;
- a description of certain restrictive covenants contained in the Senior
Indenture, including a limitation on liens and sale/leaseback
transactions and consolidation, merger and sale of assets;
- a description of events of default under the Senior Indenture; and
- a description of the delivery of the notes in book-entry form.
S-9
<PAGE> 10
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
among Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of America
Securities LLC, Banc One Capital Markets, Inc. and Chase Securities Inc., as
underwriters, and us, we have agreed to sell to the underwriters, and the
underwriters have severally agreed to purchase, the principal amount of the
notes set forth opposite their names below. The underwriting agreement provides
that the obligations of the underwriters are subject to certain conditions
precedent and that when such conditions are satisfied the underwriters will be
obligated to purchase all of the notes.
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITER AMOUNT OF NOTES
- ------------------------------------------------------------ ---------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Banc of America Securities LLC..............................
Banc One Capital Markets, Inc...............................
Chase Securities Inc........................................
------------
Total.......................................... $150,000,000
============
</TABLE>
The underwriters have advised us that they propose initially to offer the
notes to the public at the public offering price set forth on the cover page of
this prospectus supplement and to certain dealers at such price less a
concession not in excess of % of the principal amounts of the notes. The
underwriters may allow, and such dealers may reallow, a discount not in excess
of % of the principal amount of the notes to certain other dealers. After the
initial public offering, the underwriters may change the public offering price,
concession and discount.
The notes are new issues of securities, and there is currently no
established trading market for the notes. In addition, we do not intend to apply
for the notes to be listed on any securities exchange or to arrange for the
notes to be quoted on any quotation system. The underwriters have advised us
that they intend to make a market in the notes, but they are not obligated to do
so. The underwriters may discontinue any market making in the notes at any time
without notice. We can give you no assurance as to the liquidity of, or any
trading market for, the notes.
In connection with this offering, the underwriters are permitted to engage
in certain transactions that stabilize the price of the notes. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the notes. If the underwriters create a short position in the notes
in connection with this offering, that is, if they sell a greater aggregate
principal amount of notes than is set forth on the cover of this prospectus
supplement, the underwriters may reduce that short position by purchasing notes
in the open market. In general, purchases of a security for the purpose of
stabilization or to reduce a short position could cause the price of the
security to be higher than it might be in the absence of such purchases.
Neither we nor any underwriter makes any representation or prediction as to
the direction or magnitude of any effect that the transactions described above
may have on the price of the notes. In addition, neither we nor any underwriter
makes any representation that the underwriters will engage in such transactions
or that such transactions, once begun, will not be discontinued without notice.
We have agreed to indemnify the underwriters against, or to contribute to
payments that the underwriters may be required to make in respect of, certain
liabilities, including liabilities under the Securities Act of 1933.
In the ordinary course of their respective businesses, the underwriters or
their affiliates from time to time provide commercial and investment banking and
other financial services to Borg-Warner Automotive. The Chase Manhattan Bank, an
affiliate of Chase Securities Inc., is the administrative agent and a lender
under our credit facility and Bank of America, N.A., an affiliate of Banc of
America Securities LLC, and Bank One, NA, an affiliate of Banc One Capital
Markets, Inc., are lenders under our credit facility and
S-10
<PAGE> 11
will receive their proportional share of the repayment of amounts outstanding,
if any, under the credit facility if a portion of the proceeds of the offering
is used to repay indebtedness outstanding under the agreement. Chase Manhattan
Trust Company, National Association, the Trustee, is an affiliate of Chase
Securities Inc. Because The Chase Manhattan Bank, Bank of America, N.A. and Bank
One, NA may receive more than 10% of the proceeds from the sale of the notes,
not including underwriting compensation, this offering is being conducted in
compliance with the National Association of Securities Dealers Conduct Rule
2710(c)(8). See "Use of Proceeds." Alexis P. Michas, a member of our board of
directors, is a director of an affiliate of Merrill Lynch, Pierce, Fenner &
Smith Incorporated.
We estimate that the total expense of the offering, excluding underwriting
discounts and commissions, will be approximately $450,000.
S-11
<PAGE> 12
PROSPECTUS
BORG-WARNER AUTOMOTIVE, INC.
$350,000,000
DEBT SECURITIES
We may offer from time to time unsecured debt securities in the form of
either senior or subordinated debt. Senior debt includes our notes, debt and
other evidences of unsecured indebtedness, which are for money borrowed and are
not subordinated. Subordinated debt, designated at the time it is issued, is
entitled to interest and principal payments after the senior debt payments.
The specific terms of these securities will be provided in supplements to
this prospectus. You should read this prospectus and the supplements carefully
before you invest.
FOR INFORMATION CONCERNING CERTAIN FACTORS THAT YOU SHOULD CONSIDER, SEE
"RISK FACTORS" COMMENCING ON PAGE 6.
----------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
THE DATE OF THIS PROSPECTUS IS AUGUST 31, 1999.
<PAGE> 13
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission utilizing a "shelf" registration process.
Under this process, we may sell any combination of the securities described in
this prospectus in one or more offerings up to a total dollar amount of
$350,000,000. This prospectus provides you with a general description of the
securities we may offer. Each time we offer to sell securities, we will provide
a supplement to this prospectus that will contain specific information about the
terms of that particular offering. The prospectus supplement may also add,
update, or change information contained in this prospectus. You should read both
this prospectus and any prospectus supplement together with the additional
information described under the heading "Where You Can Find More Information."
To find more detail regarding certain of the documents, you should read the
exhibits filed with this registration statement.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the Public
Reference Rooms. Our filings with the SEC are also available to the public on
the SEC's Internet web site at http://www.sec.gov. Our common stock is listed on
the New York Stock Exchange and information about us is also available at the
NYSE's offices.
The SEC allows us to "incorporate by reference" the information we file
with it, which means that we can disclose important information to you by
referring you to other documents we file with the SEC. The information
incorporated by reference is considered to be part of this prospectus, and
information that we file with the SEC later will automatically update and
supersede this information. We incorporate by reference our documents listed
below and any future filings made by us with the SEC under Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, until we
sell all of the securities offered in this prospectus.
- Annual Report on Form 10-K for the year ended December 31, 1998, as
amended by the Form 10-K/A filed with the SEC on June 22, 1999;
- Proxy Statement dated March 26, 1999 (other than the sections entitled
"Compensation Committee Report on Executive Compensation" and
"Performance Graph");
- Quarterly Reports on Form 10-Q for the quarters ended March 31 and June
30, 1999; and
- Current Reports on Form 8-K dated January 27, 1999, February 1, 1999 (as
amended by the Form 8-K/A filed with the SEC on February 10, 1999),
February 9, 1999, February 18, 1999, February 24, 1999, March 1, 1999,
March 15, 1999 and August 16, 1999.
You may request a copy of these filings, at no cost, by writing or
telephoning us at:
Borg-Warner Automotive, Inc.
200 South Michigan Avenue
Chicago, Illinois 60604
Attn: Investor Relations and
Communications Department
Telephone (312) 322-8607
or (312) 322-8547
You should rely only on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. We have not authorized
anyone else to provide you with different or additional information. You should
not assume that the information in this prospectus or any supplement is accurate
as of any date other than the date on the front of this prospectus or the
prospectus supplement.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this
prospectus are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
subject to risks, uncertainties and other factors which could
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<PAGE> 14
cause actual results to differ materially from future results expressed,
implied or projected by such forward-looking statements. The most significant of
these risks, uncertainties and other factors are discussed under the heading
"Risk Factors," beginning on page 6 of this prospectus, and you are urged to
carefully consider such factors. Additional risks and uncertainties are detailed
in our filings with the SEC, including the Cautionary Statements filed as
Exhibit 99.1 to our 1998 Annual Report. We do not have any obligation to update
forward-looking statements and we may or may not do so.
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<PAGE> 15
THE COMPANY
We are a leader in highly engineered systems and components for vehicle
powertrains. As a global supplier, we design, manufacture and sell these
products worldwide, primarily to original equipment manufacturers of passenger
cars, sport-utility vehicles, light and heavy-duty trucks and commercial
vehicles. We have four reportable operating segments: Powertrain Systems,
Automatic Transmission Systems, Morse TEC and Air/Fluid Systems.
- Powertrain Systems. Powertrain Systems accounted for $518.8 million
(28%) of our 1998 consolidated sales before inter-business eliminations.
Its products include four-wheel drive ("4WD") and all-wheel drive
transfer cases. Transfer cases are installed primarily on light trucks
and sport-utility vehicles. A transfer case attaches to the transmission
and distributes torque to the front and rear axles for 4WD, improving
vehicle control during off-road use and in a variety of road conditions.
We believe that we are the world's leading independent manufacturer of
4WD transfer cases, producing approximately one million transfer cases in
1998.
Our largest customer of 4WD transfer cases is Ford Motor Company. We
supply the majority of the 4WD transfer cases for Ford, including those
installed in the Ford Explorer, the Ford Expedition, the Ford F-150
pick-up truck, the Ford Ranger, the Mercury Mountaineer and the Lincoln
Navigator. We also supply transfer cases for the Mercedes-Benz M-Class
and other 4WD vehicles manufactured by other original equipment
manufacturers around the world. We have designed and developed an
exclusive 4WD Torque-on-Demand(R) transfer case system, which allows
vehicles to automatically shift from two-wheel drive to 4WD when
electronic sensors indicate it is necessary. The Torque-on-Demand(R)
transfer case is available on the Ford Explorer, the best selling
sport-utility vehicle in the United States in 1997 and 1998, the Ford
Expedition, the Lincoln Navigator, the Isuzu Trooper and the SsangYong
(Daewoo) Musso.
- Automatic Transmission Systems. Automatic Transmission Systems accounted
for $402.6 million (21%) of our consolidated 1998 sales before
inter-business eliminations. It is the leading global supplier of
innovative automated transmission shift-quality systems. The components
for such systems include friction plates, clutch packs, one-way clutches,
transmission bands, and races. We supply virtually every major automatic
transmission manufacturer in the world.
- Morse TEC. Morse TEC accounted for $536.2 million (28%) of our
consolidated 1998 sales before inter-business eliminations. It
manufactures chain, including timing chain, HY-VO front-wheel drive
("FWD") transmission chain and 4WD chain; chain systems, including Morse
Gemini Chain Systems, and timing chain systems, including crankshaft and
camshaft sprockets, chain tensioners and chain snubbers; turbochargers;
and cooling fan and fan drives.
HY-VO chain is used in FWD transmissions and for 4WD transfer case
applications. We believe that we are the world's leading manufacturer of
chain for these applications, supplying products to every major
manufacturer that uses chain for such applications. Our Morse Gemini
Chain System is used on DaimlerChrysler's LH model and GM's midsize and
FWD vehicles. We also believe that we are the world's leading
manufacturer of timing chain. Our timing chain is used on Ford's new
family of overhead cam engines and DaimlerChrysler's 2.7, 3.7 and 4.7
liter overhead cam engines.
We supply turbochargers to European diesel and spark engine manufacturers
for use in the passenger car and commercial vehicle markets. On March 1,
1999, we purchased Kuhlman Corporation, a leading producer of
turbochargers for commercial vehicles and cooling fan and fan drives for
commercial vehicles and light trucks. With the acquisition of Kuhlman, we
believe that we are the second largest global supplier of turbochargers.
- Air/Fluid Systems. Air/Fluid Systems accounted for $351.4 million (19%)
of our consolidated 1998 sales before inter-business eliminations. It
designs and manufactures sophisticated mechanical, electro-mechanical and
electronic components and systems used for engine air intake and exhaust
management, fuel and vapor management, electronically controlled
automatic transmissions and
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<PAGE> 16
steering and suspension systems. Key products for engine air intake
management that we produce include throttle bodies, intake manifolds,
throttle position sensors, and complete engine induction systems. Our
products for emissions control and improved gas mileage include
mechanical and electrical air pumps, air control valves and pressure
feedback exhaust gas re-circulation valves. The fuel management and vapor
recovery products include roll valves, canister purge solenoids and
complete vapor recovery systems. We also produce oil pumps for automotive
applications and fuel tanks for commercial vehicles.
Our executive offices are located at 200 South Michigan Avenue, Chicago,
Illinois 60604, telephone (312) 322-8500.
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<PAGE> 17
RISK FACTORS
You should carefully consider the following factors, as well as the other
information in this prospectus and the information in the documents incorporated
by reference, before you make any decision to invest in the debt securities
described in this prospectus and the accompanying prospectus supplement.
BECAUSE OF OUR HOLDING COMPANY STRUCTURE THE DEBT SECURITIES WILL BE
SUBORDINATED TO OUR SUBSIDIARIES' LIABILITIES
We are a holding company with no material assets other than the stock of
our subsidiaries. Our subsidiaries conduct substantially all of our operations
and own substantially all of our assets. Consequently, our operating cash flow
and our ability to make principal and interest payments on our outstanding
indebtedness depends upon the cash flow of our subsidiaries and the payment of
funds by our subsidiaries to us in the form of loans, dividends or otherwise.
Our subsidiaries are not obligated to make funds available to us for payment on
the debt securities or otherwise.
The debt securities effectively will rank junior to all liabilities of our
subsidiaries. In the event of a bankruptcy, liquidation or dissolution of any of
our subsidiaries, and following payment of these liabilities, our subsidiaries
may not have sufficient assets remaining to make payments to us as a shareholder
or otherwise.
As of June 30, 1999, total liabilities (other than intercompany
liabilities) of our subsidiaries were approximately $467.8 million excluding
debt of our subsidiaries totaling approximately $135.1 million.
OUR INDUSTRY IS CYCLICAL AND OUR RESULTS OF OPERATIONS WILL BE ADVERSELY
AFFECTED BY INDUSTRY DOWNTURNS
Automotive and truck production and sales are cyclical and sensitive to
general economic conditions and other factors. For example, as compared to the
first half of 1998, automotive and truck production in the first half of 1999
increased in North America and Europe and increased slightly in Asia. As
compared to 1997, automotive production in 1998 remained at the same level in
North America, increased moderately in Europe, and declined in Asia. Any
significant reduction in automotive or truck production in any of the above
geographic areas would have a material adverse effect on our sales to original
equipment manufacturers and our financial position and operating results. In
1998 approximately 14% of our sales, including sales from unconsolidated joint
ventures, were in Asia and our 1998 results were adversely affected by the
decline in Asian auto production.
WE ARE DEPENDENT ON SPORT UTILITY VEHICLE AND LIGHT TRUCK MARKET SEGMENTS
Some of our products, in particular four-wheel drive transfer cases, are
currently used exclusively in four-wheel drive systems for sport utility
vehicles and light trucks. For the second quarter of 1999, sales of four-wheel
drive transfer cases represented 20.6% of our consolidated revenue. Any
significant reduction in production in this market segment or loss of business
in this market segment would have a material adverse effect on our sales to
original equipment manufacturers and our financial position and operating
results.
WE FACE STRONG COMPETITION
We compete worldwide with a number of other manufacturers and distributors
that produce and sell products similar to ours. Price, quality and technological
innovation are the primary elements of competition. Our competitors include
vertically integrated units of our major original equipment manufacturer
customers, as well as a large number of independent domestic and international
suppliers. We are not as large as a number of these companies and do not have as
many financial or other resources. The competitive environment has changed
dramatically over the past few years as our traditional United States original
equipment manufacturer customers, faced with intense international competition,
have expanded their worldwide sourcing of components. As a result, we have
experienced competition from
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<PAGE> 18
suppliers in other parts of the world that enjoy economic advantages, such as
lower labor costs, lower health care costs and, in some cases, export or raw
materials subsidies. Increased competition could adversely affect our
businesses.
WE ARE UNDER SUBSTANTIAL PRESSURE FROM ORIGINAL EQUIPMENT MANUFACTURERS TO
REDUCE THE PRICES OF OUR PRODUCTS
There is substantial and continuing pressure on the original equipment
manufacturers to reduce costs, including costs of products we supply. Although
original equipment manufacturers have indicated that they will continue to rely
on outside suppliers, a number of our major original equipment manufacturer
customers manufacture products for their own uses that directly compete with our
products. These original equipment manufacturers could elect to manufacture such
products for their own uses in place of the products we currently supply. We
believe that our ability to develop proprietary new products and to control our
costs will allow us to remain competitive. However, we cannot assure you that we
will be able to improve or maintain our gross margins on product sales to
original equipment manufacturers or that the recent trend by original equipment
manufacturers towards increased outsourcing will continue.
Annual price reductions to original equipment manufacturer customers appear
to have become a permanent feature of our business environment. In 1998,
Borg-Warner Automotive granted $23 million worth of price reductions as compared
to $18 million in 1997. To maintain our profit margins, we seek price reductions
from our suppliers, improve production processes to increase manufacturing
efficiency, update product designs to reduce costs and develop new products
whose benefits support increased pricing. Our ability to pass through increased
raw material costs to our original equipment manufacturer customers is also
limited, with cost recovery less than 100% and often on a delayed basis. We
cannot assure you that we will be able to reduce costs in an amount equal to
annual price reductions and increases in raw material costs.
WE RELY ON SALES TO SEVERAL MAJOR CUSTOMERS
Our worldwide sales in 1998 to Ford, DaimlerChrysler and GM constituted
approximately 36%, 19% and 16%, respectively, of our 1998 consolidated sales.
The corresponding percentages for 1997 were 43%, 14% and 20%. No other customer
accounted for more than 10% of our consolidated sales in either 1998 or 1997.
Our 1998 consolidated sales do not include the approximately $246 million of
sales made by our unconsolidated joint ventures. If sales from these
unconsolidated joint ventures were included in 1998 consolidated sales, our
worldwide sales to Toyota Motor Corporation and its affiliates would be
approximately 7% of consolidated sales.
Although we have had long-standing relationships with each of Ford,
DaimlerChrysler, GM and Toyota and have sold a wide variety of products to
various divisions of each company globally, the loss of any significant portion
of our sales to any of these customers would have a material adverse effect on
our financial position and operating results.
WE ARE SENSITIVE TO THE EFFECTS OF OUR MAJOR CUSTOMERS' LABOR RELATIONS
All three of our primary North American customers, Ford, DaimlerChrysler
and GM, have major union contracts with the United Automobile, Aerospace and
Agricultural Implement Workers of America, several of which are due to expire in
September 1999. Because of the United States original equipment manufacturers'
dependence on a single union, we are affected by labor difficulties and work
stoppages at original equipment manufacturers' facilities. We cannot assure you
that negotiations for new collective bargaining agreements will be resolved
without work stoppages in the North American operations of our original
equipment manufacturer customers. Any work stoppage could have a material
adverse effect on our financial position and operating results. For example, we
lost approximately $25 million in revenue as a result of the 1998 54-day strike
by the union at GM.
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<PAGE> 19
A SIGNIFICANT PART OF OUR LABOR FORCE IS UNIONIZED
As of June 30, 1999, approximately 34% of our domestic hourly employees
were unionized. Our two most significant domestic collective bargaining
agreements are for our Muncie, Indiana plant and our Ithaca, New York plant. The
Muncie agreement expires in March 2001 and the Ithaca agreement expires in
October 2003. The hourly workers at our European facilities are also unionized.
While we believe that our relations with our employees are good, a prolonged
dispute with our employees could have a material adverse effect on our financial
position and operating results.
WE ARE SUBJECT TO EXTENSIVE ENVIRONMENTAL REGULATIONS
Our operations are subject to laws governing, among other things, emissions
to air, discharges to waters and the generation, handling, storage,
transportation, treatment and disposal of waste and other materials. We believe
that our business, operations and activities have been and are being operated in
compliance in all material respects with applicable environmental and health and
safety laws. However, the operation of automotive parts manufacturing plants
entails risks in these areas and we cannot assure you that we will not incur
material costs or liabilities. In addition, potentially significant expenditures
could be required in order to comply with evolving environmental and health and
safety laws that may be adopted in the future.
We believe that the overall impact of compliance with regulations and
legislation protecting the environment will not have a material adverse effect
on our future financial position or operating results, but we cannot assure you
that this will be the case. Capital expenditures and expenses in 1998
attributable to compliance with environmental laws were not material.
WE MAY HAVE LIABILITY UNDER ENVIRONMENTAL REGULATIONS
We and certain of our current and former direct and indirect corporate
predecessors, subsidiaries and divisions have been identified by the United
States Environmental Protection Agency and certain state environmental agencies
and private parties as potentially responsible parties at various hazardous
waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act and equivalent state laws. As a result, we may be
liable for the cost of clean-up and other remedial activities at 42 of these
sites.
Based on information available to us, we have established a reserve in our
financial statements for indicated environmental liabilities with a balance of
approximately $12.4 million at June 30, 1999. We currently expect this amount to
be expended over the next three to five years.
We believe that none of these matters, individually or in the aggregate,
will have a material adverse effect on our future financial position or
operating results, either because estimates of the maximum potential liability
at a site are not large or because liability will be shared with other
potentially responsible parties. However, we cannot assure you of the ultimate
outcome.
OUR BUSINESS COULD BE ADVERSELY IMPACTED BY YEAR 2000 COMPLIANCE ISSUES
We are in the process of upgrading certain aspects of our operations to
ensure that our business systems do not fail to function either when the Year
2000 arrives or at other date intervals. Our program to become Year 2000
compliant is being operated on an enterprise-wide basis. A coordinator has been
assigned overall administrative responsibility; however, each operating unit is
responsible for compliance at its location. As of June 30, 1999, substantially
all of our operations had completed remedial actions to become Year 2000
compliant or are expected to be compliant by September 1999. Our exposure to an
enterprise-wide failure is less likely because of the relative autonomy of our
operating units. We have received confirmation from key suppliers and other
third parties that their systems and applications that affect us will be Year
2000 compliant.
As with any program to upgrade business systems, there are risks that
programs will not be completed on schedule and that programs will not accomplish
all that they were supposed to accomplish. The chance
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<PAGE> 20
of this happening throughout our company is remote. Moreover, the impact of
individual failures to upgrade timely and effectively would most likely be a
reduced level of quality control for the affected operations and a substantial
increase in manual intervention in areas such as material planning and inventory
control, statistical process control, and financial and operational
recordkeeping.
We cannot assure you that the corrective actions we are implementing will
prevent dating-systems problems or that the cost of doing so will not be
material. In addition, disruptions with respect to the computer systems of
vendors or customers, including both information technology and non-IT systems
could impair our ability to obtain necessary materials or products to sell to or
serve our customers and could have a material adverse effect on our financial
position or operating results.
YOU SHOULD REFER TO THE DISCUSSION ABOVE UNDER THE HEADING "SPECIAL NOTE
REGARDING FORWARD-LOOKING STATEMENTS."
USE OF PROCEEDS
Unless otherwise set forth in the applicable prospectus supplement, the net
proceeds from the sale of the debt securities will be used for general corporate
purposes, including the repayment of existing indebtedness, additions to working
capital, capital expenditures and acquisitions. Any specific allocation of the
net proceeds of an offering of debt securities to a specific purpose will be
described in the related prospectus supplement. We anticipate that we will raise
additional funds from time to time through equity or debt financings to repay
outstanding indebtedness and to finance our businesses.
RATIO OF EARNINGS TO FIXED CHARGES
Our ratio of earnings to fixed charges for the periods indicated below was
as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
- -------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
- ---- ---- ---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C> <C>
7.9x 7.0x 3.1x 6.2x 5.3x 5.2x 5.6x
</TABLE>
In the computation of our ratio of earnings to fixed charges, earnings
consist of earnings before income taxes, fixed charges and capitalized interest
amortization expense. Fixed charges consist of interest expense excluding the
benefit of capitalized interest and including one-third of rental expense
(approximate portion representing interest).
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DESCRIPTION OF DEBT SECURITIES
The following descriptions of the terms of the debt securities set forth
certain general terms and provisions of the debt securities. The particular
terms of the debt securities offered by any prospectus supplement and the
extent, if any, to which such general provisions may apply to the debt
securities so offered will be described in the prospectus supplement relating to
such offered debt securities. To the extent that any prospectus supplement is
inconsistent with any provision in this summary, the information contained in
such prospectus supplement will control.
The debt securities that will be our senior debt will be issued under an
Indenture (the "SENIOR DEBT INDENTURE") to be entered into between Borg-Warner
Automotive and a trustee to be determined (the "SENIOR TRUSTEE"). The debt
securities that will be our subordinated debt ("SUBORDINATED DEBT SECURITIES")
will be issued under an Indenture (the "SUBORDINATED DEBT INDENTURE" and,
collectively with the Senior Debt Indenture, the "INDENTURES"), to be entered
into between Borg-Warner Automotive and a trustee to be determined (the
"SUBORDINATED TRUSTEE"). The forms of the Indentures and the debt securities
have been filed, or will be filed by amendment, as exhibits to the registration
statement and you should read them for the provisions that may be important to
you. The Indentures are subject to and governed by the Trust Indenture Act of
1939, as amended (the "TIA"). We have summarized certain provisions of the debt
securities and the Indentures below. The summary is not complete and is subject
to, and qualified in its entirety by reference to, the Indentures and the debt
securities. Capitalized terms used in the summary have the meanings set forth in
the applicable Indenture unless otherwise defined herein.
GENERAL
The debt securities will be our unsecured senior or subordinated
obligations.
The Indentures do not limit the amount of debt securities that we may issue
thereunder and provide that we may issue debt securities under the Indentures
from time to time in one or more series.
Reference is made to the prospectus supplement for the following terms of
and information relating to the offered debt securities (to the extent such
terms are applicable to such debt securities):
- classification as senior or subordinated debt securities;
- the specific designation, aggregate principal amount, purchase price and
denomination of the offered debt securities;
- the currency or units based on or relating to currencies in which such
debt securities are denominated and/or in which principal (and premium,
if any) and/or any interest will or may be payable;
- any date of maturity;
- the method by which amounts payable in respect of principal, premium (if
any) or interest on, or upon the redemption of, such debt securities may
be calculated, and any currencies or indices, or value, rate or price,
relevant to such calculation;
- interest rate or rates (or the method by which such rate will be
determined), if any;
- the date or dates on which any such interest will be payable;
- the place or places where the principal of and interest, if any, on the
offered debt securities will be payable;
- any redemption, repayment or sinking fund provisions for the offered debt
securities;
- whether the offered debt securities will be issuable in registered form
or bearer form ("BEARER SECURITIES") or both and, if Bearer Securities
are issuable, any restrictions applicable to the exchange of one form for
another and to the offer, sale and delivery of Bearer Securities;
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- any applicable United States federal income tax consequences not
described in this prospectus, including whether and under what
circumstances we will pay additional amounts on offered debt securities
held by a person who is not a U.S. person (as defined in the prospectus
supplement) in respect of any tax, assessment or governmental charge
withheld or deducted and, if so, whether we will have the option to
redeem such debt securities rather than pay such additional amounts;
- the anticipated market for the offered debt securities; and
- any other specific terms of the offered debt securities, including any
additional or different events of default, remedies or covenants provided
for with respect to such debt securities, and any terms which may be
required by or advisable under applicable laws or regulations.
Debt securities may be presented for exchange and registered debt
securities may be presented for transfer in the manner, at the places and
subject to the restrictions set forth in the debt securities and the prospectus
supplement. Such services will be provided without charge, other than any tax or
other governmental charge payable in connection therewith, but subject to the
limitations provided in the applicable Indenture. Bearer Securities and the
coupons, if any, attached to such Bearer Securities will be transferable by
delivery.
Debt securities may bear interest at a fixed rate or a floating rate. Debt
securities bearing no interest or interest at a rate that at the time of
issuance is below the prevailing market rate may be sold at a discount below
their stated principal amount. Special United States federal income tax
considerations applicable to any such discounted debt securities or to certain
debt securities issued at par which are treated as having been issued at a
discount for United States federal income tax purposes will be described in the
relevant prospectus supplement to the extent not described in this prospectus.
See "Certain U.S. Federal Income Tax Considerations."
We may issue debt securities from time to time with payment terms which are
calculated by reference to the value or price of one or more currencies or
indices. Holders of such debt securities may receive a payment of the principal
amount on any principal payment date, or a payment of interest on any interest
payment date, that is greater than or less than the amount of principal or
interest otherwise payable on such dates, or a redemption amount on any
redemption date that is greater than or less than the principal amount of such
debt securities, depending upon the value or price on such dates of the
applicable currency or index. Information for determining the amount of
principal, premium (if any), interest or redemption amounts payable on any date,
the currencies, commodities or indices to which the amount payable on such date
is linked and certain additional tax considerations will be set forth in the
relevant prospectus supplement.
We are a holding company with no material assets other than the stock of
our subsidiaries. Our subsidiaries conduct substantially all of our operations
and own substantially all of our assets. Consequently, our operating cash flow
and our ability to make principal and interest payments on our outstanding
indebtedness depend upon the cash flow of our subsidiaries and the payment of
funds by our subsidiaries to us in the form of loans, dividends or otherwise.
Our subsidiaries are not obligated to make funds available to us for payment on
the debt securities or otherwise.
The debt securities effectively will rank junior to all liabilities of our
subsidiaries. In the event of a bankruptcy, liquidation or dissolution of any of
our subsidiaries, and following payment of these liabilities, our subsidiaries
may not have sufficient assets remaining to make payments to us as a shareholder
or otherwise.
CERTAIN DEFINITIONS
"ATTRIBUTABLE INDEBTEDNESS" means, with respect to any Sale/Leaseback
Transaction as of any particular time, the present value (discounted at the rate
of interest implicit in the terms of the lease) of the obligations of the lessee
under such lease for net rental payments during the remaining term of the lease
(including any period for which such lease has been extended). "NET RENTAL
PAYMENTS" under any lease for any period means the sum of the rental and other
payments required to be paid in such period by
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the lessee thereunder, not including, however, any amounts required to be paid
by such lessee (whether or not designated as rental or additional rental) on
account of maintenance and repairs, insurance, taxes, assessments or similar
charges.
"CONSOLIDATED NET TANGIBLE ASSETS" means the total amount of assets (less
applicable reserves and other properly deductible items) after deducting
therefrom (1) all current liabilities (excluding any current liabilities which
are by their terms extendible or renewable at the option of the obligor thereon
to a time more than 12 months after the time as of which the amount thereof is
being computed), (2) all goodwill, trade names, trademarks, patents, unamortized
debt discount and expense and other like intangibles and (3) appropriate
adjustments on account of minority interests of other Persons holding stock of
our Subsidiaries, all as set forth on our most recent balance sheet (but, in any
event, as of a date within 150 days of the date of determination) and computed
in accordance with generally accepted accounting principles.
"CONSOLIDATED NET WORTH" means the amount of total stockholders' equity
shown in our most recent consolidated statement of financial position.
"CURRENT ASSETS" of any Person includes all assets of such Person that
would in accordance with generally accepted accounting principles be classified
as current assets.
"CURRENT LIABILITIES" of any Person includes all liabilities of such Person
that would in accordance with generally accepted accounting principles be
classified as current liabilities.
"NON-RECOURSE INDEBTEDNESS" means our indebtedness or the indebtedness of
any of our Subsidiaries in respect of which the recourse of the holder of such
indebtedness, whether direct or indirect and whether contingent or otherwise, is
effectively limited to specified assets, and with respect to which neither we
nor any of our Subsidiaries provide any credit support.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"PRINCIPAL PROPERTY" means any manufacturing plant or warehouse, together
with the land upon which it is erected and fixtures comprising a part thereof,
that we own or that is owned by one of our Subsidiaries which constitutes a
"significant subsidiary" as defined in Rule 1-02 of Regulation S-X of the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and is located
in the United States, the gross book value (without deduction of any reserve for
depreciation) of which on the date as of which the determination is being made
is an amount which exceeds 1% of Consolidated Net Tangible Assets, other than
any such manufacturing plant or warehouse or any portion thereof (together with
the land upon which it is erected and fixtures comprising a part thereof) (1)
which is financed by Industrial Development Bonds or (2) which, in the opinion
of our board of directors, is not of material importance to our total business
conducted and the total business conducted by our Subsidiaries, taken as a
whole.
"SALE/LEASEBACK TRANSACTION" means any arrangement with any Person pursuant
to which we or any of our Subsidiaries lease for a period of more than three
years, any real or personal property, which property we have or such Subsidiary
has sold or transferred or will sell or transfer to such Person in contemplation
of such leasing.
"SUBSIDIARY" of a Person means (1) any corporation more than 50% of the
outstanding securities having ordinary voting power of which is owned, directly
or indirectly, by such Person or by one or more of its Subsidiaries, or by such
Person and one or more of its Subsidiaries, or (2) any partnership or similar
business organization more than 50% of the ownership interests having ordinary
voting power of which shall at the time be so owned. For the purposes of this
definition, "SECURITIES HAVING ORDINARY VOTING POWER" means securities or other
equity interests that ordinarily have voting power for the election of
directors, or persons having management power with respect to the Person,
whether at all times or only so long as no senior class of securities has such
voting power by reason of any contingency.
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SENIOR DEBT
The debt securities and coupons, if any, appertaining thereto that will
constitute part of our senior debt will be issued under the Senior Debt
Indenture and will rank pari passu with all of our other unsecured and
unsubordinated debt.
Limitation on Liens
The Senior Debt Indenture provides that we will not, and will not permit
any of our Subsidiaries to, issue, assume or guarantee any indebtedness for
money borrowed ("DEBT") if such Debt is secured by a mortgage, pledge, security
interest or lien (a "MORTGAGE" or "MORTGAGES") upon any of our Principal
Properties or of any of our Subsidiaries' Principal Properties or upon any
shares of stock or other stock or other equity interest or indebtedness of any
of our Subsidiaries (whether such property, shares of stock or other equity
interest or indebtedness is now owned or hereafter acquired) which owns any
Principal Property, without in any such case effectively providing that the debt
securities shall be secured equally and ratably with (or prior to) such Debt;
provided, however, that the foregoing restrictions shall not apply to:
- mortgages existing on the date the debt securities are originally issued
or mortgages provided for under the terms of agreements existing on such
date;
- mortgages on Current Assets securing Current Liabilities;
- mortgages on any property we or any of our Subsidiaries acquire,
construct, alter or improve after the date of the Indenture that are
created or assumed contemporaneously with or within one year after such
acquisition (or, in the case of property constructed, altered or
improved, after the completion and commencement of commercial operation
of such property, whichever is later) to secure or provide for the
payment of the purchase price or cost of such property, provided that in
the case of any such construction, alteration or improvement the
mortgages shall not apply to any property we or any of our Subsidiaries
theretofore owned, other than (1) the property so altered or improved and
(2) any theretofore unimproved real property on which the property so
constructed or altered, or the improvement, is located;
- existing mortgages on property we or any of our Subsidiaries acquire
(including mortgages on any property acquired from a Person that is
consolidated with or merged with or into us or any of our Subsidiaries)
or mortgages outstanding at the time any Person becomes one of our
Subsidiaries that are not incurred in connection with such entity
becoming one of our Subsidiaries;
- mortgages in our or any of our Subsidiaries' favor;
- mortgages on any property (1) in favor of domestic or foreign
governmental bodies to secure partial, progress, advance or other
payments pursuant to any contract or statute, (2) securing indebtedness
incurred to finance all or any part of the purchase price or cost of
constructing, installing or improving the property subject to such
mortgages including mortgages to secure Debt of the pollution control or
industrial revenue bond type, or (3) securing indebtedness issued or
guaranteed by the United States, any State, any foreign country or any
department, agency, instrumentality or political subdivision of any such
jurisdiction; and
- any extension, renewal or replacement (or successive extensions, renewals
or replacements), in whole or in part, of any mortgage referred to in the
foregoing bullet points; provided, however, that the principal amount of
Debt secured thereby shall not exceed the principal amount of Debt so
secured at the time of such extension, renewal or replacement, together
with the reasonable costs related to such extension, renewal or
replacement, and that such extension, renewal or replacement shall be
limited to all or a part of the property that secured the mortgage so
extended, renewed or replaced (plus improvements on such property).
Notwithstanding the foregoing, we and any of our Subsidiaries may, without
securing the debt securities, issue, assume or guarantee secured Debt (that
would otherwise be subject to the foregoing
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restrictions) in an aggregate amount that, together with all other such secured
Debt and the aggregate amount of our and our Subsidiaries' Attributable
Indebtedness deemed to be outstanding in respect of all Sale/Leaseback
Transactions entered into pursuant to the provisions described below under
"-- Limitation on Sale/Leaseback Transactions" (excluding any such
Sale/Leaseback Transactions the proceeds of which have been applied in
accordance with clauses (2) or (3) under the "-- Limitation on Sale/Leaseback
Transactions" covenant described below), does not exceed 10% of the Consolidated
Net Worth, as shown on a consolidated balance sheet as of a date not more than
90 days prior to the proposed transaction we prepare in accordance with
generally accepted accounting principles.
Limitation on Sale/Leaseback Transactions
The Senior Debt Indenture provides that we will not, and will not permit
any of our Subsidiaries to, enter into any Sale/Leaseback Transaction with any
Person (other than ourself or one of our Subsidiaries) unless:
(1) at the time of entering into such Sale/Leaseback Transaction, we
or such Subsidiary would be entitled to incur Debt, in a principal amount
equal to the Attributable Indebtedness with respect to such Sale/Leaseback
Transaction, secured by a mortgage on the property subject to such Sale/
Leaseback Transaction, pursuant to the provisions of the covenant described
under "-- Limitation on Liens" without equally and ratably securing the
debt securities pursuant to such provisions;
(2) after the date on which debt securities are first issued, and
within a period commencing six months prior to the consummation of such
Sale/Leaseback Transaction and ending six months after the consummation
thereof, we or such Subsidiary shall have expended for property used or to
be used in our or such Subsidiary's ordinary course of business (including
amounts expended for additions, expansions, alterations, repairs and
improvements thereto) an amount equal to all or a portion of the net
proceeds of such Sale/Leaseback Transaction, and we shall have elected to
designate such amount as a credit against such Sale/Leaseback Transaction
(with any such amount not being so designated to be applied as set forth in
clause (3) below); or
(3) during the 12-month period after the effective date of such
Sale/Leaseback Transaction, we shall have applied to the voluntary
defeasance or retirement of debt securities or any of our pari passu
indebtedness an amount equal to the net proceeds of the sale or transfer of
the property leased in such Sale/Leaseback Transaction, which amount shall
not be less than the fair value of such property at the time of entering
into such Sale/Leaseback Transaction (adjusted to reflect any amount we
expended as set forth in clause (2) above), less an amount equal to the
principal amount of such debt securities and pari passu indebtedness we
voluntarily defeased or retired within such 12-month period and not
designated as a credit against any other Sale/Leaseback Transaction we or
any of our Subsidiaries entered into during such period.
Unless otherwise specified in the prospectus supplement relating to a
particular series of offered debt securities, the covenants applicable to the
debt securities would not necessarily afford holders protection in the event
that we are involved in a highly leveraged or other transaction, or in the event
of a material adverse change in our financial position or results of operations.
Unless otherwise specified in the prospectus supplement relating to a particular
series of offered debt securities, the debt securities do not contain any other
provisions that are designed to afford protection in the event that we are
involved in a highly leveraged transaction.
SUBORDINATED DEBT
The debt securities and coupons, if any, attached to such debt securities
that will constitute part of the Subordinated Debt Securities will be issued
under the Subordinated Debt Indenture and will be subordinate and junior in
right of payment, to the extent and in the manner set forth in the Subordinated
Debt Indenture, to all of our Senior Indebtedness. The Subordinated Debt
Indenture defines "SENIOR INDEBTEDNESS" as all of our indebtedness, including
indebtedness we have guaranteed or assumed, for borrowed money or evidenced by
bonds, debentures, notes, letters of credit, interest rate exchange
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agreements, currency exchange agreements, commodity forward contracts or other
similar instruments, or indebtedness or obligations with respect to any lease of
real or personal property whether existing on the date hereof or hereinafter
incurred, and any guarantee, amendments, renewals, extensions, modifications and
refundings of any such indebtedness or obligation, provided that Senior
Indebtedness shall not include (1) obligations that, when incurred and without
respect to any election under Section 1111(b) of Title 11, United States Code,
were without recourse to the issuer, (2) our obligations to any of our
Subsidiaries, and (3) any other obligations which by the terms of the instrument
creating or evidencing the same are specifically designated as not being senior
in right of payment to the Subordinated Debt Securities.
In the event (1) of any insolvency or bankruptcy proceedings, or any
receivership, liquidation or other similar proceedings including reorganization
in respect of Borg-Warner Automotive or a substantial part of our property, or
(2) that (a) a default shall have occurred with respect to the payment of
principal of (and premium, if any) or any interest on or other monetary amounts
due and payable on any Senior Indebtedness or (b) there shall have occurred an
event of default (other than a default in the payment of principal, premium, if
any, or interest, or other monetary amounts due and payable) with respect to any
Senior Indebtedness, as defined therein or in the instrument under which the
same is outstanding, permitting the holder or holders thereof to accelerate the
maturity thereof, and such default or event of default shall not have been cured
or waived or shall not have ceased to exist, unless, in the case of a default
under clause (b) above, the default with respect to the Senior Indebtedness is
cured or waived, or 180 days pass after notice of the default is given to the
holders of Senior Indebtedness (unless the maturity of such Senior Indebtedness
has been accelerated), then the holders of all Senior Indebtedness shall first
be entitled to receive payment of the full amount unpaid thereon, or provision
shall be made, in accordance with the relevant Senior Indebtedness, for such
payment in money or money's worth, before the holders of any of the Subordinated
Debt Securities or coupons are entitled to receive a payment on account of the
principal of (and premium, if any) or any interest on the indebtedness evidenced
by such Subordinated Debt Securities or of such coupons. No new period of
suspension of payments under clause (b) above may be commenced by reason of the
same event of default (or any other event of default that existed or was
continuing on the date of the commencement of such period) within twelve months
after the first such notice relating thereto. Without limitation of the
foregoing, upon any acceleration of the Subordinated Debt Securities because of
an event of default, we must promptly notify the holders of Senior Indebtedness
of such acceleration, and may not pay the Subordinated Debt Securities unless
(A) 120 days pass after such acceleration and (B) the terms of the Subordinated
Debt Indenture permit such payment at such time.
By reason of such subordination, in the event of our bankruptcy, insolvency
or liquidation, our creditors who are holders of Senior Indebtedness and our
general creditors may recover more, ratably, than holders of the Subordinated
Debt Securities. Certain of our contingent obligations, including certain
guarantees, letters of credit, interest rate exchange agreements, currency
exchange agreements and commodity forward contracts, would constitute Senior
Indebtedness if we became obligated to pay such contingent obligations.
We expect from time to time to incur additional indebtedness constituting
Senior Indebtedness. The Subordinated Debt Indenture does not prohibit or limit
the incurrence of additional Senior Indebtedness or any other indebtedness and
does not require us to adhere to financial covenants or similar restrictions. To
the extent we issue Subordinated Debt Securities, we refer you to the applicable
prospectus supplement for the amount of Senior Indebtedness outstanding.
CONVERSION AND EXCHANGE
The terms, if any, on which debt securities of any series will be
convertible into or exchangeable for our common stock or preferred stock,
property or cash, or a combination of any of the foregoing, will be summarized
in the prospectus supplement relating thereto. Such terms may include provisions
for conversion or exchange, either on a mandatory basis, at the option of the
holder, or at our option, in which case the number of our shares of common stock
or preferred stock to be received by the holders of the debt securities would be
calculated according to the factors and at such time as summarized in the
related
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prospectus supplement. The prospectus supplement will also summarize the
material federal income tax consequences applicable to such convertible or
exchangeable debt securities to the extent not set forth in this prospectus.
EVENTS OF DEFAULT
An "EVENT OF DEFAULT" is defined under each Indenture with respect to debt
securities of any series issued under such Indenture as being:
- default in the payment of any interest on any debt security when it
becomes due and payable, and continuance of such default for a period of
30 days;
- default in the payment of the principal of any debt security at its
maturity
- default in our performance (or our breach) of any of our covenants or
agreements in such Indenture, continued for 90 days after we receive
written notice;
- acceleration of, or any failure to pay at final maturity, any of our or
our Subsidiaries' Debt (other than the debt securities or Non-Recourse
Indebtedness) in an aggregate amount in excess of $25 million if such
acceleration is not rescinded or annulled, or such indebtedness shall not
have been discharged, within 15 days after we receive written notice
thereof; and
- certain events of our or of one of our Significant Subsidiaries'
bankruptcy, insolvency or reorganization.
Each Indenture provides that if an Event of Default, other than certain
events with respect to our bankruptcy, insolvency or reorganization, shall occur
and be continuing, then the Senior Trustee or the Subordinated Trustee, as the
case may be, or the holders of not less than 25% in aggregate principal amount
of the outstanding debt securities may, by a notice in writing to us (and to the
Senior Trustee or the Subordinated Trustee, as the case may be, if given by the
holders), declare the principal of the debt securities, and all accrued and
unpaid interest thereon, to be due and payable immediately. If an Event of
Default with respect to certain events of our bankruptcy, insolvency or
reorganization shall occur and be continuing, then the principal on the debt
securities, and all accrued and unpaid interest thereon, shall be due and
payable immediately without any act on the part of the Senior Trustee or the
Subordinated Trustee, as the case may be, or any holder.
The holders of not less than a majority in principal amount of the
outstanding debt securities may, on behalf of the holders of all of the debt
securities, waive any past default under the Indenture and its consequences,
except a default (1) in respect of the payment of principal of or interest on
the debt securities or (2) in respect of a covenant or provision that cannot be
modified or amended without the consent of each holder.
Under each Indenture we are required to file annually with the Senior
Trustee or the Subordinated Trustee, as the case may be, an officers'
certificate as to our compliance with all conditions and covenants. Each
Indenture will provide that the Senior Trustee or the Subordinated Trustee, as
the case may be, may withhold notice to the holders of the debt securities of
any default (except payment defaults on the debt securities) if it considers it
to be in the interest of such holders to do so.
Subject to the provisions of each Indenture relating to the duties of the
Senior Trustee or the Subordinated Trustee, as the case may be, each Indenture
provides that when an Event of Default occurs and is continuing, the Senior
Trustee or the Subordinated Trustee, as the case may be, will be under no
obligation to exercise any of its rights or powers under such Indenture at the
request or direction of any of the holders, unless such holders shall have
offered to the Senior Trustee or the Subordinated Trustee, as the case may be,
reasonable security or indemnity. Subject to such provisions concerning the
rights of the Senior Trustee or the Subordinated Trustee, as the case may be,
the holders of a majority in aggregate principal amount of the outstanding debt
securities will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Senior Trustee or the
Subordinated Trustee,
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as the case may be, or exercising any trust or power conferred on the Senior
Trustee or the Subordinated Trustee, as the case may be, under such Indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
Each Indenture provides that we will not consolidate with or merge into any
other corporation, or convey, transfer or lease, or permit one or more of our
Significant Subsidiaries to convey, transfer or lease, all or substantially all
of our property and assets on a consolidated basis, to any Person unless (1)
either we are the continuing corporation or such corporation or Person assumes
by supplemental indenture all of our obligations under such Indenture and the
debt securities issued thereunder, (2) immediately after such transaction no
Default or Event of Default shall exist, and (3) the surviving corporation or
such Person is a corporation, partnership or trust organized and validly
existing under the laws of the United States of America, any state thereof or
the District of Columbia.
MODIFICATION OR WAIVER
Each Indenture provides that we may modify and amend such Indenture, and
the Senior Trustee or the Subordinated Trustee, as the case may be, may modify
and amend such Indenture with the consent of the holders of not less than a
majority in principal amount of the outstanding debt securities; provided that
no such modification or amendment may, without the consent of each holder, among
other things:
- change the maturity of the principal of, or any installment of interest
on, the debt securities;
- reduce the principal amount of, or the rate of interest on, the debt
securities;
- change the place or currency of payment of principal of, or interest on,
the debt securities;
- impair the right to institute suit for the enforcement of any such
payment on or after the maturity thereof;
- reduce the percentage of holders necessary to modify or amend such
Indenture or to consent to any waiver thereunder or reduce the
requirements for voting or quorum described below; or
- modify the foregoing requirements or reduce the percentage of outstanding
debt securities necessary to waive any past default.
Each Indenture provides that we may modify and amend such Indenture and the
Senior Trustee or the Subordinated Trustee, as the case may be, may modify and
amend such Indenture without the consent of any holder for any of the following
purposes:
- to evidence the succession of another Person to Borg-Warner Automotive
and the assumption by such Person of our covenants contained in such
Indenture and the debt securities;
- to add covenants of Borg-Warner Automotive for the benefit of the holders
or to surrender any right or power conferred upon our company;
- to add Events of Default;
- to secure the debt securities;
- to evidence and provide for the acceptance of appointment by a successor
Senior Trustee or a successor Subordinated Trustee, as the case may be;
- to cure any ambiguity, defect or inconsistency in such Indenture;
provided such action does not adversely affect the interests of the
holders;
- to supplement any of the provisions of such Indenture to the extent
necessary to permit or facilitate defeasance and discharge of the debt
securities; provided such action shall not adversely affect the interests
of the holders; or
- to conform with the requirements of the TIA.
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DEFEASANCE AND COVENANT DEFEASANCE
We may, at our option and at any time, terminate our obligations with
respect to the outstanding debt securities ("DEFEASANCE"). Defeasance means that
we will be deemed to have paid and discharged the entire indebtedness
represented by the outstanding debt securities, except for (1) the rights of the
holders of outstanding debt securities to receive payment in respect of the
principal of and interest on such debt securities when such payments are due,
(2) our obligations to issue temporary debt securities, register and transfer or
exchange any debt securities, replace mutilated, destroyed, lost or stolen debt
securities, maintain an office or agency for payments in respect of the debt
securities and segregate and hold money in trust, (3) the rights, powers,
trusts, duties and immunities of the Senior Trustee or the Subordinated Trustee,
as the case may be, and (4) the Defeasance provisions of the applicable
Indenture. In addition, we may, at our option and at any time, elect to
terminate our obligations with respect to the debt securities (being primarily
the restrictions described under "-- Limitation on Liens" and "-- Limitation on
Sale/Leaseback Transactions"), and any omission to comply with such obligations
will not constitute a Default or an Event of Default with respect to the debt
securities ("COVENANT DEFEASANCE").
In order to exercise either Defeasance or Covenant Defeasance:
- we must irrevocably deposit with the Senior Trustee or the Subordinated
Trustee, as the case may be, in trust, for the benefit of the holders,
cash in United States dollars, U.S. Government Obligations, or a
combination thereof, in such amounts as will be sufficient, in the
opinion of a nationally recognized firm of independent public
accountants, to pay the principal of and interest on the outstanding debt
securities to maturity;
- we must deliver to the Senior Trustee or the Subordinated Trustee, as the
case may be, an opinion of counsel to the effect that the holders of the
outstanding debt securities will not recognize income, gain or loss for
federal income tax purposes as a result of such Defeasance or Covenant
Defeasance, and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the
case if such Defeasance or Covenant Defeasance had not occurred (in the
case of Defeasance, such opinion must refer to and be based upon a ruling
of the Internal Revenue Service issued, or a change in applicable federal
income tax laws occurring, after the date hereof);
- no Default or Event of Default shall have occurred and be continuing on
the date of such deposit or, insofar as the last bullet point under the
first paragraph under "-- Events of Default" is concerned, at any time
during the period ending the 91st day after the date of deposit (it being
understood that this condition shall not be deemed satisfied until the
expiration of such period);
- such Defeasance or Covenant Defeasance shall not cause the Senior Trustee
or the Subordinated Trustee, as the case may be, to have a conflicting
interest (as defined by the TIA) with respect to any of our securities;
- such Defeasance or Covenant Defeasance shall not result in a breach or
violation of, or constitute a default under, the applicable Indenture or
any material agreement or instrument to which we are a party or by which
we are bound; and
- we shall have delivered to the Senior Trustee or the Subordinated
Trustee, as the case may be, an officers' certificate and an opinion of
counsel, each stating that all conditions precedent under the applicable
Indenture to either Defeasance or Covenant Defeasance, as the case may
be, have been complied with and that no violations under agreements
governing any other outstanding Debt would result.
SATISFACTION AND DISCHARGE
Each Indenture provides that it will be discharged and will cease to be of
further effect (except as to any surviving rights of registration of transfer or
exchange of the debt securities, as expressly provided for in such Indenture) as
to all outstanding debt securities when (1) either (a) all the debt securities
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theretofore authenticated and delivered (except lost, stolen or destroyed debt
securities which have been replaced or paid and debt securities for whose
payment money or certain U.S. Government Obligations has theretofore been
deposited in trust or segregated and held in trust by us and thereafter repaid
to us or discharged from such trust) have been delivered to the Senior Trustee
or the Subordinated Trustee, as the case may be, for cancellation or (b) all
debt securities not theretofore delivered to the Senior Trustee or the
Subordinated Trustee, as the case may be, for cancellation have become due and
payable or will become due and payable at maturity within one year and we have
irrevocably deposited or caused to be deposited with the Senior Trustee or the
Subordinated Trustee, as the case may be, funds in an amount sufficient to pay
and discharge the entire indebtedness on the debt securities not theretofore
delivered to the Senior Trustee or the Subordinated Trustee, as the case may be,
for cancellation, for principal of and interest on the debt securities to the
date of deposit together with irrevocable instructions from us directing the
Senior Trustee or the Subordinated Trustee, as the case may be, to apply such
funds to the payment thereof at maturity; (2) we have paid or have caused to be
paid all other sums payable under such Indenture by us; and (3) we have
delivered to the Senior Trustee or the Subordinated Trustee, as the case may be,
an officers' certificate and an opinion of counsel stating that all conditions
precedent under such Indenture relating to the satisfaction and discharge of
such Indenture have been complied with.
BOOK-ENTRY SYSTEM
Unless otherwise specified in the applicable prospectus supplement, any
debt securities will be represented by certificate in book-entry form ("GLOBAL
DEBT SECURITIES") as set forth below.
Any Global Debt Securities will be registered in the name of The Depository
Trust Company's ("DTC") nominee. Except as set forth below, a Global Debt
Security may not be transferred except as a whole by DTC to a nominee of DTC or
by a nominee of DTC to DTC or another nominee of DTC or by DTC or any such
nominee to a successor of DTC or a nominee of such successor.
DTC has advised us that it is a limited-purpose trust company organized
under the laws of the State of New York, a member of the Federal Reserve System,
a "clearing corporation" within the meaning of the New York Uniform Commercial
Code and a "clearing agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC was created to hold securities of its participants
and to facilitate the clearance and settlement of securities transactions among
its participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. DTC's participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations, some of whom (and/or their representatives) own DTC. Access to
DTC's book-entry system is also available to others, such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly. Persons who are
not participants may beneficially own securities held by DTC only through
participants.
Upon the issuance by us of any Global Debt Securities, DTC will credit, on
its book-entry registration and transfer system, the respective principal
amounts of debt securities to the accounts of participants. The accounts to be
credited will be designated by the applicable underwriter. Ownership of
beneficial interests in a Global Debt Security will be limited to participants
or persons that may hold interests through participants. Beneficial interests in
a Global Debt Security will be shown on, and the transfer thereof will be
effected only through, records maintained by DTC (with respect to beneficial
interests of participants) or by participants or persons that may hold interests
through participants (with respect to beneficial interests of beneficial
owners). The laws of some states require that certain purchasers of securities
take physical delivery of such securities in certificated form. Such limits and
such laws may impair the ability to transfer beneficial interests in a Global
Debt Security.
For a Global Debt Security, so long as DTC or its nominee is the registered
owner of such Global Debt Security, DTC or its nominee, as the case may be, will
be considered the sole owner or holder of the debt securities represented by
such Global Debt Security for all purposes under the Senior Debt Indenture.
Except as provided below, owners of beneficial interests in a Global Debt
Security will not be entitled to
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have debt securities represented by such Global Debt Security registered in
their names, will not receive or be entitled to receive physical delivery of
such debt securities in certificated form and will not be considered the owners
or holders thereof under the Senior Debt Indenture or the Subordinated Debt
Indenture, as the case may be.
Principal and interest payments in respect of the debt securities will be
made in immediately available funds by us to DTC or its nominee, as the case may
be, as the holder of the related Global Debt Securities. None of us, the Senior
Trustee or the Subordinated Trustee will have any responsibility or liability
for any aspect of the records relating to or payments made on account of
beneficial ownership interests in any Global Debt Securities, or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests. None of us, the Senior Trustee or the Subordinated Trustee
will have any responsibility or liability for DTC's exercise of or failure to
exercise any redemption option with respect to any debt securities on behalf of
any holder of a beneficial interest therein, other than our obligation to redeem
such debt securities if such option is properly exercised by DTC or its nominee,
as registered holder, in accordance with the procedures specified therefor. We
expect that DTC, upon receipt of any payment of principal or interest in respect
of any Global Debt Securities, will credit immediately the accounts of the
related participants with payment in amounts proportionate to their respective
beneficial interests in the principal amount of such Global Debt Securities as
shown on the records of DTC. We also expect that payments by participants to
owners of beneficial interests in any Global Debt Securities will be governed by
standing customer instructions and customary practices, as is now the case, with
securities held for the accounts of customers in bearer form or registered in
"street name," and will be the responsibility of such participants. Payments to
DTC in respect of the debt securities which are represented by any Global Debt
Securities shall be our responsibility or the responsibility of the Senior
Trustee or the Subordinated Trustee, as the case may be. Disbursement of such
payments to direct participants shall be the responsibility of DTC and
disbursement of such payments to beneficial owners shall be the responsibility
of direct and indirect participants.
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants and by direct and
indirect participants to beneficial owners, and vice versa, are governed by
arrangements among them, subject to statutory or regulatory requirements as may
be in effect from time to time; and none of us, the Senior Trustee or the
Subordinated Trustee will have any responsibility or liability with respect
thereto.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that we believe to be reliable, but we take no
responsibility for the accuracy of such information.
If DTC is at any time unwilling or unable to continue as depository and we
do not appoint a successor depository within 90 days, we will issue debt
securities in certificated form in exchange for each Global Debt Security. In
addition, we may at any time determine not to have one or more series of debt
securities represented by any Global Debt Securities. In any such instance,
owners of beneficial interests in any such Global Debt Security will be entitled
to physical delivery of debt securities in certificated form equal in principal
amount to such beneficial interest and to have such debt securities registered
in their names. Debt securities so issued in certificated form will be issued in
denominations of $1,000 or any integral multiple thereof and will be issued in
registered form only, without coupons.
THE TRUSTEES
The Indentures and provisions of the TIA incorporated by reference therein
contain limitations on the rights of the Senior Trustee or the Subordinated
Trustee, as the case may be thereunder, should the Senior Trustee or the
Subordinated Trustee, as the case may be, become one of our creditors, to obtain
payment of claims in certain cases. We may from time to time maintain bank
accounts and have other customary banking relationships with and obtain credit
facilities and lines of credit from the Senior Trustee or the Subordinated
Trustee, in the ordinary course of business; provided, however, that if the
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Senior Trustee or the Subordinated Trustee, as the case may be, acquires any
conflicting interest (as defined in Section 310(b) of the TIA), it must
eliminate such conflict or resign.
We will appoint the Senior Trustee or the Subordinated Trustee, as the case
may be, at the offices specified in the applicable Indenture as registrar,
principal paying agent and transfer agent for the debt securities. In such
capacities, the Senior Trustee or the Subordinated Trustee, as the case may be,
will be responsible for, among other things, (1) maintaining a record of the
aggregate holdings of debt securities represented by the Global Debt Security
and accepting debt securities for exchange and registration of transfer, (2)
ensuring that payments of principal of and interest on the Global Debt Security
and other debt securities received from us by the Senior Trustee or the
Subordinated Trustee, as the case may be, are duly paid to DTC or its nominee or
the holders thereof, as the case may be, and (3) transmitting to us any notices
from holders of debt securities. We will cause the transfer agent to act as a
registrar. We may vary or terminate the appointment of the transfer agent or
appoint additional or other transfer agents or approve any change in the office
through which any transfer agent acts.
DESCRIPTION OF COMMON STOCK AND RIGHTS
Our shares of common stock registered under the registration statement of
which this prospectus is a part are issuable solely upon conversion or exchange
of debt securities and will not be separately sold or issued.
The following summary is not complete. You should refer to the applicable
provisions of our restated certificate of incorporation, including the
certificate of designations under which any outstanding series of preferred
stock may be issued, the rights agreement governing our shareholder rights plan,
and the Delaware General Corporation Law for a complete statement of the terms
and rights of our common stock and non-voting common stock. Copies of our
restated certificate of incorporation, certificate of designation, preferences
and rights of Series A Junior Participating Preferred Stock, and rights
agreement have been filed as exhibits to the registration statement of which
this prospectus is a part and are incorporated by reference into this
prospectus.
GENERAL
Our restated certificate of incorporation provides that we have authority
to issue 50,000,000 shares of common stock, par value $.01 per share and
25,000,000 shares of non-voting common stock, par value $.01 per share. As of
August 2, 1999, we had 26,719,692 shares of common stock issued and outstanding
and no shares of non-voting common stock issued and outstanding.
VOTING RIGHTS
Each holder of our common stock is entitled to one vote per share in the
election of directors and on all other matters submitted to a vote of
stockholders and does not have cumulative voting rights. Holders of our
non-voting common stock do not have voting rights, other than those required by
law.
CONVERSION RIGHTS
Qualified institutional investors who are subject to regulatory
requirements that forbid or limit their right to own general voting stock may
convert their common stock into non-voting common stock on a share-for-share
basis as needed to satisfy applicable regulatory requirements, or directly
purchase non-voting common stock because of such regulatory requirements.
Thereafter, the non-voting common stock may be converted into common stock on a
share-for-share basis in such circumstances as are permitted by applicable
regulatory requirements.
DIVIDENDS
Subject to any preferential rights of any of our outstanding preferred
stock, holders of our common stock and non-voting common stock, treated as a
single class, are entitled to receive, based on the number
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of shares held, cash dividends when and as declared by our board of directors
from funds legally available for such purpose.
RIGHTS UPON LIQUIDATION
If we liquidate, holders of our common stock and non-voting common stock,
treated as a single class, are entitled to receive, based on the number of
shares held, all of the assets available for distribution to stockholders after
payment of all prior claims, including any preferential liquidation rights of
any preferred stock outstanding at that time. The holders of our common stock
and non-voting common stock do not have any redemption rights.
OTHER RIGHTS
The holders of our common stock and non-voting common stock do not have
preemptive rights to subscribe to any additional shares of any class of our
capital stock. All of our outstanding shares of common stock are, and, upon
conversion or exchange any issued shares of our common stock and/or non-voting
common stock will be, fully paid and non-assessable. Our common stock and
non-voting common stock do not have any sinking fund provisions.
Our common stock is listed on the NYSE under the symbol "BWA" and the
transfer agent and registrar for our common stock is ChaseMellon Shareholder
Services.
SOME IMPORTANT CHARTER AND STATUTORY PROVISIONS
Our restated certificate of incorporation provides for the division of our
board of directors into 3 classes of directors, each serving staggered, 3-year
terms. In addition, our restated certificate of incorporation and our bylaws
provide that directors may be removed only for cause and only upon the
affirmative vote of holders of at least 80% of our outstanding voting power. Our
restated certificate of incorporation further provides generally that any
alteration, amendment or repeal of its sections regarding the composition,
election and classification of the board of directors requires the approval of
the holders of at least 80% of our outstanding voting power.
Our restated certificate of incorporation also provides that when it is
evaluating any proposal from another party to (1) make a tender offer for our
equity securities, (2) merge or consolidate us with another corporation or (3)
purchase or otherwise acquire substantially all of our properties and assets,
our board of directors must give due consideration to all relevant factors,
including the social and economic effects on our employees, customers, suppliers
and other constituents and the communities in which we operate or are located.
Our restated certificate of incorporation provides that a director will not
be personally liable for monetary damages to us or our stockholders for breach
of fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders; or
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; or
- for paying a dividend or approving a stock repurchase or redemption in
violation of Section 174 of the Delaware General Corporation Law; or
- for any transaction from which the director derived an improper personal
benefit.
Our restated certificate of incorporation also provides that each of our current
or former directors, officers, employees or agents, or each such person who is
or was serving or who had agreed to serve at our request as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise (including the heirs, executors, administrators or estate of
that person), will be indemnified by us to the full extent permitted by the
Delaware General Corporation Law. Our restated certificate of
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incorporation also specifically authorizes us to enter into agreements with any
person providing for indemnification greater or different than that provided by
our certificate of incorporation.
These provisions may have the effect of deterring hostile takeovers or
delaying changes in control of our company or our management.
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless:
(1) prior to that date, the board of directors approved either the
business combination or the transaction that resulted in the stockholder
becoming an interested stockholder; or
(2) when the transaction that resulted in such person becoming an
interested stockholder was completed, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction began, excluding, for purposes of determining the number of
shares outstanding, shares owned by some directors or employee stock plans;
or
(3) on or after the date the stockholder became an interested
stockholder, the business combination is approved by the board of directors
and authorized by the affirmative vote, and not by the written consent, of
at least two-thirds of outstanding voting stock, excluding the stock owned
by the interested stockholder.
For purposes of Section 203, a "business combination" includes a merger, asset
sale, or other transaction resulting in a financial benefit to the interested
stockholder. An "interested stockholder" is a person, other than the corporation
and any direct or indirect majority-owned subsidiary of the corporation, who
together with affiliates and associates, owns or, as an affiliate or associate,
within three years prior, did own, 15% or more of the corporation's outstanding
voting stock.
SHAREHOLDER RIGHTS PLAN
On July 21, 1998, our board of directors adopted a shareholder rights plan
and signed a rights agreement with ChaseMellon Shareholder Services, L.L.C., as
rights agent. A copy of our rights agreement has been filed as an exhibit to the
registration statement of which this prospectus is a part and is incorporated by
reference into this prospectus. Under our shareholder rights plan, one preferred
stock purchase right is attached to each outstanding share of our common stock.
We refer to these preferred stock purchase rights as the "rights." Each share of
common stock and each share of non-voting common stock issued in the future will
also receive a right until the rights become exercisable. Until a right is
exercised, the holder of a right does not have any additional rights as a
stockholder. These rights will expire on July 22, 2008, unless they are
previously redeemed or exchanged by us as described below. These rights trade
automatically with our common stock and non-voting common stock and will
separate from the common stock and non-voting common stock and become
exercisable only under the circumstances described below.
In general, the rights will become exercisable when the first of the
following events happen:
(1) ten calendar days after a public announcement that a person or
group has acquired beneficial ownership of 20% or more of the sum of our
outstanding common stock and non-voting common stock; or
(2) ten business days, or such other date determined by our board of
directors, after the beginning of, or announcement of an intention to
begin, a tender offer or exchange offer that would result in a person or
group beneficially owning 20% or more of the sum of our outstanding common
stock and non-voting common stock.
If the rights become exercisable, holders of the rights will be able to
purchase from us one one-hundredth of a share of our Series A Junior
Participating Preferred Stock at a price of $300, subject to
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adjustment. However, all rights owned by any persons or groups triggering the
event shall be void. If a person or group acquires 20% or more of the sum of our
outstanding common stock and non-voting common stock then each right will
entitle the holder (other than the 20% or more person or group that triggered
the rights) to purchase a number of shares of our common stock in respect of
rights attached to our common stock, or a number of shares of our non-voting
common stock in respect of rights attached to our non-voting common stock, in
either case having a market value of 2 times the exercise price of the right.
If we are acquired in a merger or other business combination transaction,
or 50% or more of our consolidated assets or earning power are sold after a
person or group acquires 20% or more of the sum of our outstanding common stock
and non-voting common stock, then each right will entitle the holder (other than
the 20% or more person or group that triggered the rights) to purchase a number
of shares of common stock of the surviving or acquiring corporation having a
market value of 2 times the exercise price of the right.
At any time after a person or group has acquired beneficial ownership of
20% or more of our outstanding common stock and non-voting common stock, our
board of directors may, at its option, exchange all or any part of the then
outstanding and exercisable rights for shares of common stock or shares of
Series A Preferred Stock at an exchange ratio of one share of common stock or
one one-hundredth of a share of Series A Junior Participating Preferred Stock
per right. However, our board of directors will not be empowered to effect such
exchange at any time after any person or group becomes the beneficial owner of
50% or more of our outstanding common stock.
Our board of directors may redeem the rights for $.01 per right at any time
before a person or group has acquired beneficial ownership of 20% or more of the
sum of our outstanding common stock and non-voting common stock. Our board of
directors may generally reduce the 20% trigger to the higher of (1) the largest
percentage then known to our company beneficially owned by a person or group or
(2) 10%, and may otherwise amend the rights at any time before a person or group
has acquired beneficial ownership of 20% or more of the sum of our outstanding
common stock and non-voting common stock. The rights will expire at the close of
business on July 22, 2008, unless we redeem them before that date.
CERTAIN U.S. FEDERAL INCOME
TAX CONSIDERATIONS
The following is a summary of the material U.S. federal income tax
consequences of the acquisition, ownership and disposition by a U.S. Holder (as
defined below) or a United States Alien Holder (as defined below) of debt
securities issued in registered form. In the event that we issue debt securities
in bearer form, the applicable prospectus supplement will describe the material
U.S. federal income tax consequences thereof.
The discussion does not cover all aspects of U.S. federal income taxation
that may be relevant to, or the actual tax effect that any of the matters
described herein will have on, the acquisition, ownership or disposition of debt
securities by particular investors, and does not address state, local, foreign
or other tax laws. In particular, this summary addresses only investors that
will hold the debt securities as capital assets and does not discuss all of the
tax considerations that may be relevant to certain types of investors subject to
special treatment under the federal income tax laws (such as banks, insurance
companies, investors liable for the alternative minimum tax, individual
retirement accounts and other tax-deferred accounts, tax-exempt organizations,
dealers in securities or currencies, traders in securities that elect to mark to
market for U.S. federal income tax purposes, investors that will hold the debt
securities as part of straddles, hedging transactions or conversion transactions
for federal tax purposes, investors whose functional currency is not the U.S.
dollar or investors who enter into "constructive sales" of the debt securities).
Additional United States federal income tax consequences applicable to
particular debt securities may be set forth in the applicable prospectus
supplement.
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As used herein, the term "U.S. HOLDER" means a beneficial owner of debt
securities that is (1) a citizen or individual resident of the United States for
U.S. federal income tax purposes, (2) a corporation, partnership or limited
liability company created or organized under the laws of the United States, any
state thereof or the District of Columbia, (3) an estate the income of which is
subject to U.S. federal income tax on a net income basis regardless of its
source or (4) a trust if (a) a court within the United States is able to
exercise primary supervision over the administration of the trust and one or
more United States persons has the authority to control all substantial
decisions of the trust, or (b) a valid election has been made under applicable
Treasury regulations for the trust to be treated as a U.S. person. A "UNITED
STATES ALIEN HOLDER" is any holder who or that is not a U.S. Holder.
This summary is based on the Internal Revenue Code of 1986, as amended (the
"CODE"), its legislative history, existing and proposed Treasury regulations
promulgated thereunder, published rulings and court decisions, all as currently
in effect and all subject to change at any time, perhaps with retroactive
effect.
THIS SUMMARY IS FOR GENERAL INFORMATION ONLY. YOU ARE URGED TO CONSULT
YOUR PERSONAL TAX ADVISORS AS TO THE PARTICULAR FEDERAL, STATE, LOCAL, FOREIGN
AND OTHER TAX CONSEQUENCES TO YOU OF ACQUIRING, OWNING AND DISPOSING OF THE DEBT
SECURITIES.
U.S. HOLDERS
Except where otherwise expressly indicated, this summary under "U.S.
Holders" deals only with initial purchasers of debt securities at the issue
price that are U.S. Holders.
Payments of Interest
General. Interest on a debt security, whether payable in U.S. dollars or a
currency, composite currency or basket of currencies other than U.S. dollars (a
"FOREIGN CURRENCY"), other than interest on a "Discount Debt Security" that is
not "qualified stated interest" (each as defined below under "-- Original Issue
Discount -- General"), will be taxable to a U.S. Holder as ordinary income at
the time it is received or accrued, depending on the holder's method of
accounting for U.S. federal income tax purposes.
Foreign Currency Denominated Interest. If an interest payment is
denominated in, or determined by reference to, a foreign currency, the amount of
income recognized by a cash basis U.S. Holder will be the U.S. dollar value of
the interest payment, based on the exchange rate in effect on the date of
receipt, regardless of whether the payment is in fact converted into U.S.
dollars.
An accrual basis U.S. Holder may determine the amount of income recognized
with respect to an interest payment denominated in, or determined by reference
to, a foreign currency in accordance with either of two methods. Under the first
method, the amount of income accrued will be based on the average exchange rate
in effect during the interest accrual period (or, with respect to an accrual
period that spans two taxable years of a U.S. Holder, the part of the period
within the taxable year).
Under the second method, the U.S. Holder may elect to determine the amount
of income accrued on the basis of the exchange rate in effect on the last day of
the accrual period or, in the case of an accrual period that spans two taxable
years, the exchange rate in effect on the last day of the part of the period
within the taxable year. Additionally, if a payment of interest is actually
received within five business days of the last day of the accrual period, an
electing accrual basis U.S. Holder may instead translate such accrued interest
into U.S. dollars at the exchange rate in effect on the day of actual receipt.
Any such election will apply to all debt instruments held by the U.S. Holder at
the beginning of the first taxable year to which the election applies or
thereafter acquired by the U.S. Holder, and will be irrevocable without the
consent of the Internal Revenue Service (the "IRS").
Upon receipt of the interest payment (including a payment attributable to
accrued but unpaid interest upon the sale or retirement of a debt security)
denominated in, or determined by reference to, a foreign currency, an accrual
basis U.S. Holder that is required to accrue interest income prior to the date
of
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receipt will recognize ordinary income or loss measured by the difference
between the exchange rate used to accrue interest income pursuant to one of the
two above methods and the exchange rate in effect on the date of receipt,
regardless of whether the payment is in fact converted into U.S. dollars.
Original Issue Discount
General. The following is a summary of the principal federal income tax
consequences of the ownership of debt securities issued at an original issue
discount. It is based in part upon the rules governing original issue discount
that are set forth in Sections 1271 through 1275 of the Code and in Treasury
regulations thereunder (the "OID REGULATIONS"). The following summary does not
discuss the federal income tax consequences of an investment in contingent
payment debt instruments. In the event we issue contingent payment debt
instruments, the applicable prospectus supplement will describe the material
federal income tax consequences thereof.
A debt security, other than a debt security with a term of one year or less
(a "SHORT-TERM DEBT SECURITY"), will be treated as issued at an original issue
discount (a "DISCOUNT DEBT SECURITY") if the excess of the debt security's
"stated redemption price at maturity" over its issue price is more than a "de
minimis amount" (as defined below). Generally, the issue price of a debt
security will be the first price at which a substantial amount of debt
securities included in the issue of which the debt security is a part is sold to
persons other than bond houses, brokers, or similar persons or organizations
acting in the capacity of underwriters, placement agents, or wholesalers. The
stated redemption price at maturity of a debt security is the total of all
payments provided by the debt security that are not payments of "QUALIFIED
STATED INTEREST." A qualified stated interest payment is generally any one of a
series of stated interest payments on a debt security that are unconditionally
payable in cash or property (other than our debt instruments) at least annually
during the entire term of the debt security at a single fixed rate (with certain
exceptions for lower rates paid during some periods) applied to the outstanding
principal amount of the debt security. Special rules for "Floating Rate Debt
Securities" (as defined below under "-- Floating Rate Debt Securities") are
described below under "-- Floating Rate Debt Securities."
In general, if the excess of a debt security's stated redemption price at
maturity over its issue price is less than 1/4 of 1 percent of the debt
security's stated redemption price at maturity multiplied by the number of
complete years to its maturity from the issue date (the "DE MINIMIS AMOUNT"),
then such excess, if any, constitutes "DE MINIMIS ORIGINAL ISSUE DISCOUNT" and
the debt security is not a Discount Debt Security. Unless the election described
below under "-- Election to Treat All Interest as Original Issue Discount" is
made, a U.S. Holder of a debt security with de minimis original issue discount
must include such de minimis original issue discount in income as capital gain
as stated principal payments on the debt security are made. The includible
amount with respect to each such payment will equal the product of the total
amount of the debt security's de minimis original issue discount and a fraction,
the numerator of which is the amount of the principal payment made and the
denominator of which is the stated principal amount of the debt security.
U.S. Holders of Discount Debt Securities having a maturity of more than one
year from their date of issue must include original issue discount ("OID") in
income calculated on a constant-yield method before the receipt of cash
attributable to such income, and generally will have to include in income
increasingly greater amounts of OID over the life of the debt security. The
amount of OID includible in income by a U.S. Holder of a Discount Debt Security
is the sum of the daily portions of OID with respect to the Discount Debt
Security for each day during the taxable year or portion of the taxable year on
which the U.S. Holder holds such Discount Debt Security ("ACCRUED OID"). The
daily portion is determined by allocating to each day in any "accrual period" a
pro rata portion of the OID allocable to that accrual period. Accrual periods
with respect to a debt security may be of any length selected by the U.S. Holder
and may vary in length over the term of the debt security as long as (1) no
accrual period is longer than one year and (2) each scheduled payment of
interest or principal on the debt security occurs on either the final or first
day of an accrual period. The amount of OID allocable to an accrual period
equals the excess of (a) the product of the Discount Debt Security's adjusted
issue price at the beginning of the accrual
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period and such debt security's yield to maturity (determined on the basis of
compounding at the close of each accrual period and properly adjusted for the
length of the accrual period) over (b) the sum of the payments of qualified
stated interest on the debt security allocable to the accrual period. The
"ADJUSTED ISSUE PRICE" of a Discount Debt Security at the beginning of any
accrual period is the issue price of the debt security increased by (x) the
amount of accrued OID for each prior accrual period and decreased by (y) the
amount of any payments previously made on the debt security that were not
qualified stated interest payments. For purposes of determining the amount of
OID allocable to an accrual period, if an interval between payments of qualified
stated interest on the debt security contains more than one accrual period, the
amount of qualified stated interest payable at the end of the interval
(including any qualified stated interest that is payable on the first day of the
accrual period immediately following the interval) is allocated pro rata on the
basis of relative lengths to each accrual period in the interval, and the
adjusted issue price at the beginning of each accrual period in the interval
must be increased by the amount of any qualified stated interest that has
accrued prior to the first day of the accrual period but that is not payable
until the end of the interval. The amount of OID allocable to an initial short
accrual period may be computed using any reasonable method if all other accrual
periods other than a final short accrual period are of equal length. The amount
of OID allocable to the final accrual period is the difference between (x) the
amount payable at the maturity of the debt security (other than any payment of
qualified stated interest) and (y) the debt security's adjusted issue price as
of the beginning of the final accrual period.
Acquisition Premium. A U.S. Holder that purchases a Discount Debt Security
for an amount less than or equal to the sum of all amounts payable on the debt
security after the purchase date other than payments of qualified stated
interest but in excess of its adjusted issue price (any such excess being
"ACQUISITION PREMIUM") and that does not make the election described below under
"-- Election to Treat All Interest as Original Issue Discount" is permitted to
reduce the daily portions of OID by a fraction, the numerator of which is the
excess of the U.S. Holder's adjusted basis in the debt security immediately
after its purchase over the adjusted issue price of the debt security, and the
denominator of which is the excess of the sum of all amounts payable on the debt
security after the purchase date, other than payments of qualified stated
interest, over the debt security's adjusted issue price.
Pre-Issuance Accrued Interest. If (1) a portion of the initial purchase
price of a debt security is attributable to pre-issuance accrued interest, (2)
the first stated interest payment on the debt security is to be made within one
year of the debt security's issue date and (3) the payment will equal or exceed
the amount of pre-issuance accrued interest, then the issue price of the debt
security may be computed by reducing the issue price (as determined under
"-- General") by the amount of pre-issuance accrued interest. In that event, a
portion of the first stated interest payment will be treated as a return of the
excluded pre-issuance accrued interest and not as an amount payable on the debt
security.
Debt Securities Subject to Contingencies Including Optional Redemption. In
general, if a debt security provides for an alternative payment schedule or
schedules applicable upon the occurrence of a contingency or contingencies and
the timing and amounts of the payments that comprise each payment schedule are
known as of the issue date, and if, based on all the facts and circumstances as
of the issue date, a single payment schedule is significantly more likely than
not to occur, then the yield and maturity of the debt security are computed
based on that payment schedule.
Notwithstanding the general rule described in the preceding paragraph, if
we have an unconditional option or options to redeem a debt security, or the
Holder has an unconditional option or options to cause a debt security to be
repurchased, prior to the debt security's stated maturity, then (1) in the case
of our option or options, we will be deemed to exercise or not exercise an
option or combination of options in the manner that minimizes the yield on the
debt security and (2) in the case of an option or options of the holder, the
holder will be deemed to exercise or not exercise an option or combination of
options in the manner that maximizes the yield on the debt security. For
purposes of those calculations, the yield on the debt security is determined by
using any date on which the debt security may be redeemed or repurchased as the
maturity date and the amount payable on such date in accordance with the terms
of the debt security as the principal amount payable at maturity.
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If a contingency (including the exercise of an option) actually occurs or
does not occur contrary to an assumption made according to the above rules (a
"CHANGE IN CIRCUMSTANCES") then, except to the extent that a portion of the debt
security is repaid as a result of the change in circumstances and solely for
purposes of the accrual of OID, the yield and maturity of the debt security are
redetermined by treating the debt security as reissued on the date of the change
in circumstances for an amount equal to the debt security's adjusted issue price
on that date.
Election to Treat All Interest as Original Issue Discount. A U.S. Holder
may elect to include in gross income all interest that accrues on a debt
security using the constant-yield method described above under the heading
"-- General," with the modifications described below. For purposes of this
election, interest includes stated interest, OID, de minimis original issue
discount, market discount, de minimis market discount and unstated interest, as
adjusted by any amortizable bond premium (described below under "-- Debt
Securities Purchased at a Premium") or acquisition premium.
In applying the constant-yield method to a debt security with respect to
which this election has been made, the issue price of the debt security will
equal the electing U.S. Holder's adjusted basis in the debt security immediately
after its acquisition, the issue date of the debt security will be the date of
its acquisition by the electing U.S. Holder, and no payments on the debt
security will be treated as payments of qualified stated interest. This election
will generally apply only to the debt security with respect to which it is made
and may not be revoked without the consent of the IRS. If this election is made
with respect to a debt security with amortizable bond premium, then the electing
U.S. Holder will be deemed to have elected to apply amortizable bond premium
against interest with respect to all debt instruments with amortizable bond
premium (other than debt instruments the interest on which is excludible from
gross income) held by the electing U.S. Holder as of the beginning of the
taxable year in which the debt security with respect to which the election is
made is acquired or thereafter acquired. The deemed election with respect to
amortizable bond premium may not be revoked without the consent of the IRS.
If the election to apply the constant-yield method to all interest on a
debt security is made with respect to a Market Discount Debt Security (as
defined below under "-- Market Discount"), the electing U.S. Holder will be
treated as having made the election discussed below under "-- Market Discount"
to include market discount in income currently over the life of all debt
instruments with market discount acquired by the electing U.S. Holder on or
after the first day of the first taxable year to which the election applies.
Floating Rate Debt Securities. Debt securities that bear interest at a
floating rate ("FLOATING RATE DEBT SECURITIES") generally will bear interest at
a "qualified floating rate" and thus will be treated as "variable rate debt
instruments" under the OID Regulations. A Floating Rate Debt Security will
qualify as a "variable rate debt instrument" under the OID Regulations if (a)
its issue price does not exceed the total noncontingent principal payments due
under the Floating Rate Debt Security by more than a specified de minimis amount
and (b) it does not provide for stated interest other than stated interest, paid
or compounded at least annually, at current values of (1) one or more qualified
floating rates, (2) a single fixed rate and one or more qualified floating
rates, (3) a single "objective rate," or (4) a single fixed rate and a single
objective rate that is a qualified inverse floating rate.
A "QUALIFIED FLOATING RATE" is any variable rate where variations in the
value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Floating Rate Debt Security is denominated. Although a multiple of a qualified
floating rate will generally not itself constitute a qualified floating rate, a
variable rate equal to the product of a qualified floating rate and a fixed
multiple that is greater than 0.65 but not more than 1.35 will constitute a
qualified floating rate. A variable rate equal to the product of a qualified
floating rate and a fixed multiple that is greater than 0.65 but not more than
1.35, increased or decreased by a fixed rate, will also constitute a qualified
floating rate. In addition, under the OID Regulations, if a debt security
provides for two or more qualified floating rates that can reasonably be
expected to have approximately the same values throughout the term of the
Floating Rate Debt Security (e.g., two or more qualified floating rates
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with values within 25 basis points of each other as determined on the Floating
Rate Debt Security's issue date), then such qualified floating rates will be
treated as a single qualified floating rate. Notwithstanding the foregoing, a
variable rate that would otherwise constitute a qualified floating rate but
which is subject to one or more restrictions, such as a maximum numerical
limitation (i.e., a cap) or a minimum numerical limitation (i.e., a floor), may,
under certain circumstances, fail to be treated as a qualified floating rate
under the OID Regulations unless such cap or floor is fixed throughout the term
of the debt security or is not reasonably expected significantly to affect the
yield on the debt security.
An "OBJECTIVE RATE" is a rate that is not itself a qualified floating rate
but which is determined using a single fixed formula and which is based upon
objective financial or economic information (e.g., one or more qualified
floating rates or the yield of actively traded personal property) that is not
within the control of the issuer or a related party and is not unique to the
circumstances of the issuer or a related party, such as dividends, profits or
the value of the issuer's stock. The OID Regulations also provide that other
variable interest rates may be treated as objective rates if so designated by
the IRS in the future. Despite the foregoing, a variable rate of interest on a
Floating Rate Debt Security will not constitute an objective rate if it is
reasonably expected that the average value of such rate during the first half of
the Floating Rate Debt Security's term will be either significantly less than or
significantly greater than the average value of the rate during the final half
of the Floating Rate Debt Security's term. A "QUALIFIED INVERSE FLOATING RATE"
is any objective rate where such rate is equal to a fixed rate minus a qualified
floating rate, as long as variations in the rate can reasonably be expected to
reflect inversely contemporaneous variations in the qualified floating rate. The
OID Regulations also provide that if a Floating Rate Debt Security provides for
stated interest at a fixed rate for an initial period of one year or less
followed by a variable rate that is either a qualified floating rate or an
objective rate and if the variable rate on the Floating Rate Debt Security's
issue date is intended to approximate the fixed rate (e.g., the value of the
variable rate on the issue date does not differ from the value of the fixed rate
by more than 25 basis points), then the fixed rate and the variable rate
together will constitute either a single qualified floating rate or objective
rate, as the case may be.
A qualified floating rate or objective rate in effect at any time during
the term of the instrument must be set at a "current value" of that rate. A
"CURRENT VALUE" of a rate is the value of the rate on any day that is no earlier
than 3 months prior to the first day on which that value is in effect and no
later than 1 year following that first day.
If a Floating Rate Debt Security that provides for stated interest at
either a single qualified floating rate or a single objective rate throughout
the term thereof qualifies as a "variable rate debt instrument" under the OID
Regulations, then any stated interest on such Floating Rate Debt Security which
is unconditionally payable in cash or property (other than our debt instruments)
at least annually will constitute qualified stated interest and will be taxed
accordingly. Thus, a Floating Rate Debt Security that provides for stated
interest at either a single qualified floating rate or a single objective rate
throughout the term thereof and that qualifies as a "variable rate debt
instrument" under the OID Regulations will generally not be treated as having
been issued with OID unless the Floating Rate Debt Security is issued at a
"true" discount (i.e., at a price below the debt security's stated principal
amount) in excess of a specified de minimis amount. OID on such a Floating Rate
Debt Security arising from "true" discount is allocated to an accrual period
using the constant yield method described above by assuming that the variable
rate is a fixed rate equal to (1) in the case of a qualified floating rate or
qualified inverse floating rate, the value, as of the issue date, of the
qualified floating rate or qualified inverse floating rate, or (2) in the case
of an objective rate (other than a qualified inverse floating rate), a fixed
rate that reflects the yield that is reasonably expected for the Floating Rate
Debt Security.
In general, any other Floating Rate Debt Security that qualifies as a
"variable rate debt instrument" will be converted into an "equivalent" fixed
rate debt instrument for purposes of determining the amount and accrual of OID
and qualified stated interest on the debt security. The OID Regulations
generally require that such a Floating Rate Debt Security be converted into an
"equivalent" fixed rate debt instrument by substituting any qualified floating
rate or qualified inverse floating rate provided for under the terms of the
Floating Rate Debt Security with a fixed rate equal to the value of the
qualified floating
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rate or qualified inverse floating rate, as the case may be, as of the Floating
Rate Debt Security's issue date. Any objective rate (other than a qualified
inverse floating rate) provided for under the terms of the Floating Rate Debt
Security is converted into a fixed rate that reflects the yield that is
reasonably expected for the Floating Rate Debt Security. In the case of a
Floating Rate Debt Security that qualifies as a "variable rate debt instrument"
and provides for stated interest at a fixed rate in addition to either one or
more qualified floating rates or a qualified inverse floating rate, the fixed
rate is initially converted into a qualified floating rate (or a qualified
inverse floating rate, if the Floating Rate Debt Security provides for a
qualified inverse floating rate). Under such circumstances, the qualified
floating rate or qualified inverse floating rate that replaces the fixed rate
must be such that the fair market value of the Floating Rate Debt Security as of
the Floating Rate Debt Security's issue date is approximately the same as the
fair market value of an otherwise identical debt instrument that provides for
either the qualified floating rate or qualified inverse floating rate rather
than the fixed rate. Subsequent to converting the fixed rate into either a
qualified floating rate or a qualified inverse floating rate, the Floating Rate
Debt Security is then converted into an "equivalent" fixed rate debt instrument
in the manner described above.
Once the Floating Rate Debt Security is converted into an "equivalent"
fixed rate debt instrument pursuant to the foregoing rules, the amount of OID
and qualified stated interest, if any, are determined for the "equivalent" fixed
rate debt instrument by applying the general OID rules to the "equivalent" fixed
rate debt instrument and a U.S. Holder of the Floating Rate Debt Security will
account for such OID and qualified stated interest as if the U.S. Holder held
the "equivalent" fixed rate debt instrument. In each accrual period, appropriate
adjustments will be made to the amount of qualified stated interest or OID
assumed to have been accrued or paid with respect to the "equivalent" fixed rate
debt instrument in the event that such amounts differ from the actual amount of
interest accrued or paid on the Floating Rate Debt Security during the accrual
period.
If a Floating Rate Debt Security does not qualify as a "variable rate debt
instrument" under the OID Regulations, then the Floating Rate Debt Security
would be treated as a contingent payment debt obligation. Special United States
federal income tax considerations applicable to Floating Rate Debt Securities
that are treated as contingent payment debt obligations will be more fully
described in the applicable prospectus supplement.
Short-Term Debt Securities. In general, an individual or other cash basis
U.S. Holder of a Short-Term Debt Security is not required to accrue OID (as
specially defined below for the purposes of this paragraph and the immediately
following paragraph) for United States federal income tax purposes unless it
elects to do so (but may be required to include any stated interest in income as
the interest is received). Accrual basis U.S. Holders and certain other U.S.
Holders, including banks, regulated investment companies, dealers in securities,
common trust funds, U.S. Holders who hold debt securities as part of certain
identified hedging transactions, certain pass-thru entities and cash basis U.S.
Holders who so elect, are required to accrue OID on Short-Term Debt Securities
on either a straight-line basis or under the constant-yield method (based on
daily compounding), at the election of the U.S. Holder. In the case of a U.S.
Holder not required and not electing to include OID in income currently, any
gain realized on the sale, exchange or retirement of the Short-Term Debt
Security will be ordinary income to the extent of the OID accrued on a
straight-line basis (unless an election is made to accrue the OID under the
constant-yield method) through the date of sale, exchange or retirement. U.S.
Holders who are not required and do not elect to accrue OID on Short-Term Debt
Securities will be required to defer deductions for interest on borrowings
incurred or continued to purchase or carry such Short-Term Debt Securities in an
amount not exceeding the deferred interest income until the deferred interest
income is realized.
For purposes of determining the amount of OID subject to these rules, all
interest payments on a Short-Term Debt Security, including stated interest, are
included in the Short-Term Debt Security's stated redemption price at maturity.
Foreign Currency Discount Debt Securities. OID for any accrual period on a
Discount Debt Security that is denominated in, or determined by reference to, a
foreign currency will be determined in the foreign currency and then translated
into U.S. dollars in the same manner as stated interest accrued by an accrual
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basis U.S. Holder, as described above under "-- Payments of Interest -- Foreign
Currency Denominated Interest." Upon receipt of an amount attributable to OID
(whether in connection with a payment of interest or the sale or retirement of a
debt security), a U.S. Holder may recognize ordinary income or loss.
Market Discount
A debt security, other than a Short-Term Debt Security, will be treated as
purchased at a market discount (a "MARKET DISCOUNT DEBT SECURITY") if the debt
security's stated redemption price at maturity or, in the case of a Discount
Debt Security, the debt security's "revised issue price," exceeds the amount for
which the U.S. Holder purchased the debt security by at least 1/4 of 1 percent
of such debt security's stated redemption price at maturity or revised issue
price, respectively, multiplied by the number of complete years to the debt
security's maturity remaining after the U.S. Holder acquired the debt security.
If such excess is not sufficient to cause the debt security to be a Market
Discount Debt Security, then such excess constitutes "DE MINIMIS MARKET
DISCOUNT." The Code provides that, for these purposes, the "REVISED ISSUE PRICE"
of a debt security generally equals its issue price, increased by the amount of
any OID that has accrued on the debt security.
Any gain recognized on the maturity or disposition of a Market Discount
Debt Security will be treated as ordinary income to the extent that such gain
does not exceed the accrued market discount on such debt security.
Alternatively, a U.S. Holder of a Market Discount Debt Security may elect to
include market discount in income currently over the life of the debt security.
Such an election shall apply to all debt instruments with market discount
acquired by the electing U.S. Holder on or after the first day of the first
taxable year to which the election applies. This election may not be revoked
without the consent of the IRS.
Market discount on a Market Discount Debt Security will accrue on a
straight-line basis unless the U.S. Holder elects to accrue such market discount
on a constant-yield method. Such an election shall apply only to the debt
security with respect to which it is made and may not be revoked without the
consent of the IRS. A U.S. Holder of a Market Discount Debt Security that does
not elect to include market discount in income currently generally will be
required to defer deductions for interest on borrowings allocable to such debt
security in an amount not exceeding the accrued market discount on such debt
security until the earlier of the maturity or disposition of such debt security.
Recent Developments. President Clinton's fiscal year 2000 budget plan
contains a proposal which, if enacted, would require U.S. Holders who use the
accrual method of accounting to include market discount in income as it accrues.
Under the budget proposal, the U.S. Holder's yield for purposes of calculating
and accruing market discount would be limited to the larger of (1) the
applicable Federal rate at the time the U.S. Holder acquired the debt instrument
plus five percentage points and (2) the original yield-to-maturity of the debt
instrument plus five percentage points. The proposal would affect any debt
instrument acquired on or after the date on which the proposal is enacted. This
summary of the budget proposal concerning market discount is for general
information only. You are urged to consult your personal tax advisors concerning
the status of the proposal and the particular consequences to you if it is
enacted.
Debt Securities Purchased at a Premium
A U.S. Holder that purchases a debt security for an amount in excess of its
principal amount, or in the case of a Discount Debt Security, its stated
redemption price at maturity, may elect to treat such excess as "amortizable
bond premium," in which case the amount required to be included in the U.S.
Holder's income each year with respect to interest on the debt security will be
reduced by the amount of amortizable bond premium allocable (based on the debt
security's yield to maturity) to such year. A U.S. Holder who makes such
election must reduce such Holder's tax basis in the debt security by the amount
of amortized premium. In the case of a debt security that is denominated in, or
determined by reference to a foreign currency, bond premium will be computed in
units of foreign currency, and amortizable bond premium will reduce interest
income in units of the foreign currency. At the time amortized bond premium
offsets interest income, exchange gain or loss (taxable as ordinary income or
loss) is realized
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measured by the difference between exchange rates at that time and at the time
of the acquisition of the debt securities. Any election to amortize bond premium
shall apply to all bonds (other than bonds the interest on which is excludible
from gross income) held by the U.S. Holder at the beginning of the first taxable
year to which the election applies or thereafter acquired by the U.S. Holder,
and is irrevocable without the consent of the IRS. See also "-- Original Issue
Discount -- Election to Treat All Interest as Original Issue Discount."
Purchase, Sale and Retirement of the Debt Securities
A U.S. Holder's tax basis in a debt security will generally be its U.S.
dollar cost (as defined below), increased by the amount of any OID or market
discount included in the U.S. Holder's income with respect to the debt security
and the amount, if any, of income attributable to de minimis original issue
discount and de minimis market discount included in the U.S. Holder's income
with respect to the debt security, and reduced by (1) the amount of any payments
that are not qualified stated interest payments, and (2) the amount of any
amortizable bond premium applied to reduce interest on the debt security. The
U.S. dollar cost of a debt security purchased with a foreign currency will
generally be the U.S. dollar value of the purchase price on the date of purchase
or, in the case of debt securities traded on an established securities market,
as defined in the applicable Treasury Regulations, that are purchased by a cash
basis U.S. Holder (or an accrual basis U.S. Holder that so elects), on the
settlement date for the purchase.
A U.S. Holder will generally recognize gain or loss on the sale or
retirement of a debt security equal to the difference between the amount
realized on the sale or retirement and the tax basis of the debt security. The
amount realized on a sale or retirement for an amount in foreign currency will
be the U.S. dollar value of such amount on the date of sale or retirement or, in
the case of debt securities traded on an established securities market, as
defined in the applicable Treasury Regulations, sold by a cash basis U.S. Holder
(or an accrual basis U.S. Holder that so elects), on the settlement date for the
sale. Except to the extent described above under "-- Original Issue
Discount -- Short-Term Debt Securities" or "-- Market Discount" or described in
the next succeeding paragraph or attributable to accrued but unpaid interest,
gain or loss recognized on the sale or retirement of a debt security will be
capital gain or loss. Gain recognized on the disposition of a capital asset held
by an individual taxpayer for more than one year is generally subject to a
maximum rate of tax of 20%. U.S. Holders are urged to consult their own tax
advisors with respect to recently enacted capital gains legislation.
Gain or loss recognized by a U.S. Holder on the sale or retirement of a
debt security that is attributable to changes in exchange rates will be treated
as ordinary income or loss. However, exchange gain or loss is taken into account
only to the extent of total gain or loss realized on the transaction.
Exchange of Amounts in Other than U.S. Dollars
Foreign currency received as interest on a debt security or on the sale or
retirement of a debt security will have a tax basis equal to its U.S. dollar
value at the time such interest is received or at the time of such sale or
retirement. Foreign currency that is purchased will generally have a tax basis
equal to the U.S. dollar value of the foreign currency on the date of purchase.
Any gain or loss recognized on a sale or other disposition of foreign currency
(including its use to purchase debt securities or upon exchange for U.S.
dollars) will be ordinary income or loss.
Amortizing Debt Securities
The applicable prospectus supplement will contain a discussion of special
United States federal income tax rules applicable to debt securities that
provide for partial principal payments prior to stated maturity.
UNITED STATES ALIEN HOLDERS
An alien individual who is neither a citizen nor a lawful, permanent
resident of the United States may, subject to certain exceptions, be deemed to
be a resident of the United States for U.S. federal
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income tax purposes by virtue of being present in the United States on at least
31 days in the calendar year and for an aggregate of at least 183 days during a
three-calendar-year period ending in the current calendar year (counting for
such purposes all of the days present in the current year, one-third of the days
present in the immediately preceding year and one-sixth of the days present in
the second preceding year). Resident aliens are subject to United States federal
income tax as if they were United States citizens and residents. See "U.S.
Holders" above.
Under present United States federal income and estate tax law and subject
to the discussion of backup withholding below:
(1) payments of principal, premium (if any) and interest (including
OID) by us or any of our paying agents to any holder of a debt security who
or which is a United States Alien Holder will not be subject to United
States federal withholding tax (and, except as discussed in paragraph (4)
below, will not generally be subject to U.S. federal income tax) if, in the
case of premium (if any), interest or OID, (a) the beneficial owner of the
debt security does not actually or constructively own 10% or more of the
total combined voting power of all classes of our stock entitled to vote,
(b) the beneficial owner of the debt security is not a controlled foreign
corporation that is related to us through stock ownership, (c) the interest
on the debt security is not contingent interest to which Section
871(h)(4)(A) of the Code is applicable, and (d) either (i) the beneficial
owner of the debt security certifies to us or our agent, under penalties of
perjury, that it is not a U.S. Holder and provides its name and address or
(ii) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of its
trade or business (a "FINANCIAL INSTITUTION") and holds the debt security
certifies to us or our agent under penalties of perjury that such statement
has been received from the beneficial owner by it or by a financial
institution acting on behalf of the beneficial owner and furnishes the
payor with a copy thereof;
(2) a United States Alien Holder of a debt security will not be
subject to United States federal withholding tax on any gain realized on
the sale or exchange of a debt security;
(3) a debt security held by an individual who at death is not a
citizen or resident of the United States will not be includible in the
individual's gross estate for purposes of the United States federal estate
tax as a result of the individual's death if the individual did not
actually or constructively own 10% or more of the total combined voting
power of all classes of our stock entitled to vote, the income on the debt
security would not have been effectively connected with a United States
trade or business of the individual at the individual's death and, in the
case of a debt security on which all or a portion of the interest payments
are contingent interest to which Section 871(h)(4)(A) is applicable, to the
extent that the value of such debt security is not allocable to such
contingent interest;
(4) if premium, interest or OID on a debt security of a United States
Alien Holder is effectively connected with the conduct of a United States
trade or business, then such holder, with respect to such premium, interest
or OID, (a) will be exempt from United States withholding tax (upon such
holder's delivery of a properly completed and periodically updated IRS Form
4224 or successor form thereto), (b) will be subject to United States
federal income tax in the same manner and at the same rates as if such
holder were a U.S. Holder and (c) may be subject, if the United States
Alien Holder is a corporation, to the "branch profits tax" at a 30% rate
(which tax is generally imposed on a foreign corporation on the actual or
deemed repatriation from the United States of earnings and profits
attributable to income that is effectively connected with the conduct of a
U.S. trade or business); and
(5) a United States Alien Holder of a debt security will not be
subject to United States federal income tax on any gain realized on the
sale or exchange of a debt security unless (a) such gain is effectively
connected with the conduct of a United States trade or business, in which
case such holder will be subject to United States federal income tax on
such gain in the same manner and at the same rates as if such holder were a
U.S. Holder and such holder may be subject to the branch profits tax
described in clause (4)(c) above, (b) subject to certain exceptions, the
United States Alien Holder is
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an individual who holds the debt security as a capital asset and is present
in the United States for 183 days or more in the taxable year of the
disposition, or (c) the United States Alien Holder is subject to tax
pursuant to provisions of United States tax law applicable to certain
United States expatriates (including certain former citizens or residents
of the United States).
The payment of premium, interest or OID that qualifies for neither the
withholding exemption set forth in paragraph (1) above nor the withholding
exemption set forth in paragraph (4) above will be subject to U.S. federal
withholding tax at the rate of 30%, unless a U.S. income tax treaty applies to
reduce or eliminate such withholding. To claim the benefit of a tax treaty, a
United States Alien Holder must deliver a properly completed and periodically
updated IRS Form 1001 or successor form.
Treasury regulations that will be effective with respect to payments made
after December 31, 2000 (the "WITHHOLDING REGULATIONS"), will provide
alternative methods for satisfying the certification requirements described in
clause (1)(d) above. The Withholding Regulations also will require, in the case
of debt securities held by a foreign partnership, that (x) such certification
requirements be satisfied by the partners and (y) the partnership provide
certain information, including its U.S. taxpayer identification number. A
look-through rule will apply in the case of tiered partnerships. Under the
Withholding Regulations, a United States Alien Holder who is claiming the
benefits of a treaty may be required to obtain a U.S. taxpayer identification
number and providing certain documentary evidence issued by a foreign
governmental authority to prove residence in the foreign country. Certain
special procedures are provided in the Withholding Regulations for payments
through qualified intermediaries.
BACKUP WITHHOLDING AND INFORMATION REPORTING
U.S. Holders
In general, information reporting requirements will apply to payments of
principal, any premium and interest on a debt security to non-corporate U.S.
Holders, the payment of the proceeds of the sale of a debt security before
maturity within the United States to non-corporate U.S. Holders and the accrual
of OID on a Discount Debt Security with respect to non-corporate U.S. Holders,
and "backup withholding" at a rate of 31% will apply to such payments and to
payments of OID if the U.S. Holder fails to provide an accurate taxpayer
identification number or to report all interest and dividends required to be
shown on such U.S. Holder's federal income tax returns. Holders should consult
their tax advisors regarding their qualification for exemption from backup
withholding and the procedure for obtaining such an exemption if applicable. The
amount of any backup withholding from a payment to a U.S. Holder will be allowed
as a credit against such U.S. Holder's U.S. federal income tax liability and may
entitle such U.S. Holder to a refund, provided that the required information is
furnished to the IRS in a timely manner.
United States Alien Holders
Backup withholding will generally not apply to payments of principal,
premium (if any) and interest (including OID) made by us or a paying agent to a
United States Alien Holder on a debt security if the certification described in
clause (1)(d) under "United States Alien Holders" above is received, provided
that the payor does not have actual knowledge that the holder is a United States
person. We may be required to report annually to the IRS and to each United
States Alien Holder the amount of interest paid to, and the tax withheld, if
any, with respect to such Holder. These information reporting requirements apply
regardless of whether withholding is required. Copies of the information returns
reporting such withholding may also be made available to the tax authorities in
the country in which the United States Alien Holder resides under the provisions
of an applicable income tax treaty.
Payments of the proceeds from the sale by a United States Alien Holder of a
debt security made to or through a foreign office of a broker will not be
subject to information reporting or backup withholding, except that if the
broker is a United States person, a controlled foreign corporation for United
States tax purposes, a foreign person 50% or more of whose gross income is
effectively connected with a United States trade or business for a specified
three-year period or, effective after December 31, 2000, in certain other cases
specified under the Withholding Regulations, information reporting may apply to
such
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payments. Payments of the proceeds from the sale of a debt security to or
through the United States office of a broker is subject to information reporting
and backup withholding unless the holder or beneficial owner certifies as to its
non-United States status or otherwise establishes an exemption from information
reporting and backup withholding.
THE SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS FOR
GENERAL INFORMATION ONLY. YOU SHOULD CONSULT YOUR OWN PERSONAL TAX ADVISORS AS
TO THE PARTICULAR TAX CONSEQUENCES OF THE DEBT SECURITIES TO YOU, INCLUDING THE
APPLICABILITY AND EFFECT OF STATE, FEDERAL, LOCAL, FOREIGN AND OTHER TAX LAWS
AND POSSIBLE CHANGES IN TAX LAW.
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PLAN OF DISTRIBUTION
We may sell the debt securities in and/or outside the United States: (1)
through underwriters or dealers; (2) directly to a limited number of purchasers
or to a single purchaser; or (3) through agents. The applicable prospectus
supplement with respect to the debt securities will set forth the terms of the
offering of the debt securities, including the name or names of any underwriters
or agents, if any, the purchase price of the debt securities and the proceeds to
us from such sale. In addition, the applicable prospectus supplement will set
forth any delayed delivery arrangements, any underwriting discounts and other
items constituting underwriters' compensation, any initial public offering price
and any discounts or concessions allowed or re-allowed or paid to dealers. Any
initial public offering price and any discount or concessions allowed or
reallowed or paid to dealers may be changed from time to time.
If underwriters are used in the sale, the debt securities will be acquired
by the underwriters for their own account and may be resold from time to time in
one or more transactions including negotiated transactions, at a fixed public
offering price or at varying prices determined at the time of sale. The debt
securities may be offered to the public either through underwriting syndicates
represented by one or more managing underwriters or directly by one or more
firms acting as underwriters. The underwriter or underwriters with respect to a
particular underwritten offering of debt securities will be named in the
prospectus supplement relating to such offering and, if an underwriting
syndicate is used, the managing underwriter or underwriters will be set forth on
the cover of such prospectus supplement. Unless otherwise set forth in the
prospectus supplement relating thereto, the obligations of the underwriters to
purchase the offered debt securities will be subject to conditions precedent and
the underwriters will be obligated to purchase all the offered debt securities
if any are purchased.
If dealers are used in the sale of debt securities in respect of which this
prospectus is delivered, we will sell such debt securities to the dealers as
principals. The dealers may then resell such debt securities to the public at
varying prices to be determined by such dealers at the time of resale. The names
of the dealers and the terms of the transaction will be set forth in the
prospectus supplement relating thereto.
The debt securities may be sold through agents we designate from time to
time. Any agent involved in the offer or sale of the debt securities in respect
to which this prospectus is delivered will be named, and any commissions payable
by us to such agent will be set forth, in the prospectus supplement relating
thereto. Unless otherwise indicated in the prospectus supplement, any such agent
will be acting on a best efforts basis for the period of its appointment.
We may sell the debt securities directly to institutional investors or
others, who may be deemed to be underwriters within the meaning of the
Securities Act of 1933, as amended (the "SECURITIES ACT"), with respect to any
resale thereof. The terms of any such sales, including the terms of any bidding
or auction process, will be described in the prospectus supplement relating
thereto.
Agents, dealers and underwriters may be entitled under agreements entered
into with us to indemnification by us against certain civil liabilities,
including liabilities under the Securities Act, or to contribution with respect
to payments which such agents, dealers or underwriters may be required to make
in respect thereof. Agents, dealers and underwriters may be our customers,
engage in transactions with us, or perform services for us in the ordinary
course of business.
In connection with an offering, certain persons participating in such
offering may engage in transactions that stabilize, maintain or otherwise affect
the price of the debt securities. Specifically, such persons may overallot such
offering, creating a syndicate short position. In addition, such persons may bid
for, and purchase, the debt securities in the open market to cover syndicate
shorts or to stabilize the price of the debt securities. Finally, such persons
may reclaim selling concessions allowed for distributing the debt securities in
an offering, if such persons repurchase previously distributed debt securities
in syndicate covering transactions, in stabilization transactions or otherwise.
Any of these activities may stabilize or maintain the market price of the debt
securities above independent market levels. Such persons are not required to
engage in these activities, and may end any of these activities at any time. The
debt securities
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may or may not be listed on a national securities exchange. We cannot assure you
as to the future liquidity of the trading market, if any, for any debt
securities issued.
LEGAL MATTERS
Certain legal matters in connection with the debt securities offered hereby
will be passed upon for us by our counsel Wachtell, Lipton, Rosen & Katz, New
York, New York and for any underwriters or agents by Shearman & Sterling, New
York, New York.
EXPERTS
The consolidated financial statements of Borg-Warner Automotive, Inc. as of
December 31, 1998 and December 31, 1997 and for each of the three years in the
period ended December 31, 1998 incorporated in this prospectus by reference from
our Annual Report on Form 10-K for the year ended December 31, 1998, as amended
by the Form 10-K/A filed with the Securities and Exchange Commission on June 27,
1999, have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report, which is incorporated herein by reference, and have been
so incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The financial statements of NSK-Warner Kabushiki Kaisha as of March 31,
1999 and 1998, and for each of the years in the three-year period ended March
31, 1999, have been incorporated by reference herein in reliance upon the report
of KPMG, independent certified public accountants, incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing.
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$150,000,000
[BORG-WARNER LOGO]
% SENIOR NOTES DUE 2019
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PROSPECTUS SUPPLEMENT
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MERRILL LYNCH & CO.
BANC OF AMERICA SECURITIES LLC
BANC ONE CAPITAL MARKETS, INC.
CHASE SECURITIES INC.
, 1999
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