SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter ended March 31, 2000
Commission file number: 1-12162
BORGWARNER INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3404508
State or other jurisdiction of (I.R.S. Employer
Incorporation or organization Identification No.)
200 South Michigan Avenue, Chicago, Illinois 60604
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 322-8500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
On April 30, 2000 the registrant had 26,490,733 shares of Common Stock
outstanding.
BORGWARNER INC.
FORM 10-Q
THREE MONTHS ENDED MARCH 31, 2000
INDEX
Page No.
PART I. Financial Information
Item 1. Financial Statements
Introduction 2
Condensed Consolidated Balance Sheets at
March 31, 2000 and December 31, 1999 3
Consolidated Statements of Operations for the three
months ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 2000 and 1999 5
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risks 19
PART II. Other Information
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of
Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 22
<PAGE>
BORGWARNER INC.
FORM 10-Q
THREE MONTHS ENDED MARCH 31, 2000
PART I.
ITEM 1.
A. BORGWARNER INC. and Consolidated Subsidiaries'
Financial Statements
The financial statements of BorgWarner Inc. and Consolidated Subsidiaries
("Company") have been prepared in accordance with the instructions to Form 10-Q
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
statements are unaudited but include all adjustments, consisting only of
recurring items, except as noted, which the Company considers necessary for a
fair presentation of the information set forth herein. The results of
operations for the three months ended March 31, 2000 are not necessarily
indicative of the results to be expected for the entire year. The following
financial statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction with the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1999.
<PAGE>
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(millions of dollars except share data)
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
2000 1999
<S> <C> <C>
A S S E T S
Cash and cash equivalents $ 13.4 $ 21.7
Receivables 276.3 216.2
Inventories 180.0 164.4
Deferred income tax asset 2.8 2.8
Investments in businesses held for sale 6.7 129.0
Prepayments and other current assets 27.1 24.2
------- --------
Total current assets 506.3 558.3
Property, plant, and equipment at cost 1,231.5 1,204.1
Less accumulated depreciation 439.6 408.1
------- ---------
Net property, plant and equipment 791.9 796.0
Investments and advances 158.5 160.3
Goodwill 1,272.5 1,284.7
Deferred income tax asset 18.3 18.8
Other noncurrent assets 156.5 152.6
-------- ---------
Total other assets 1,605.8 1,616.4
--------- --------
$2,904.0 $2,970.7
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Notes payable $ 135.7 $ 134.0
Accounts payable and accrued expenses 449.0 433.7
Income taxes payable 69.5 92.1
--------- ----------
Total current liabilities 654.2 659.8
Long-term debt 767.3 846.3
Long-term retirement-related liabilities 344.6 343.9
Other long-term liabilities 58.8 63.2
--------- ---------
Total long-term liabilities 403.4 407.1
Capital stock:
Preferred stock, $.01 par value; authorized
5,000,000 shares; none issued -- --
Common stock, $.01 par value; authorized
50,000,000 shares; issued shares of
27,040,492 in 2000 and outstanding
shares of 26,585,733 in 2000 0.3 0.3
Non-voting common stock, $.01 par value;
authorized 25,000,000 shares; none issued
and outstanding in 2000 -- --
Capital in excess of par value 715.7 715.7
Retained earnings 382.7 346.4
Management shareholder note (2.5) (2.0)
Accumulated other comprehensive income 2.2 12.3
Common stock held in treasury, at cost:
454,759 shares in 2000 (19.3) (15.2)
--------- ----------
Total stockholders' equity 1,079.1 1,057.5
--------- ----------
$2,904.0 $2,970.7
========= ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
BORGWARNER INC.
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(millions of dollars except share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------
2000 1999
-------- ---------
<S> <C> <C>
Net sales $ 730.2 $ 551.3
Cost of sales 550.3 424.4
Depreciation 26.2 20.5
Selling, general and
administrative expenses 63.5 42.4
Minority interest 0.7 0.4
Goodwill amortization 11.0 5.7
Equity in affiliate earnings
and other income (3.5) (2.5)
------- ---------
Earnings before interest
expense, finance
charges and income taxes 82.0 60.4
Interest expense and finance charges 15.9 8.6
-------- ----------
Earnings before income taxes 66.1 51.8
Provision for income taxes 25.1 19.7
-------- --------
Net earnings $ 41.0 $ 32.1
========= ==========
Net earnings per share
Basic $ 1.54 $ 1.33
======== ==========
Diluted $ 1.53 $ 1.32
========= ==========
Average shares outstanding (thousands)
Basic 26,684 24,172
========= ===========
Diluted 26,772 24,330
======== ===========
Dividends declared per share $ 0.15 $ 0.15
========= ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(millions of dollars)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
2000 1999
------- --------
<S> <C> <C>
Operating
Net earnings $ 41.0 $ 32.1
Non-cash charges to operations:
Depreciation 26.2 20.5
Goodwill amortization 11.0 5.7
Deferred income tax provision - 0.8
Other, principally equity in
affiliate earnings (2.7) (2.7)
Changes in assets and liabilities, net of effects of
acquisitions and divestitures:
(Increase) decrease in receivables (63.0) 24.3
Increase in inventories (16.8) (14.2)
Increase in prepayments and
other current assets (3.2) (1.7)
Increase in accounts payable and accrued
expenses 17.5 32.7
Increase in income taxes payable 20.6 18.0
Net change in other long-term
assets and liabilities (7.3) (15.8)
------ -------
Net cash provided
by operating activities 23.3 99.7
Investing
Capital expenditures (28.3) (27.4)
Payments for businesses acquired - (543.0)
Proceeds from sale of business 122.3 -
Payments for taxes on businesses sold (43.0) -
Net proceeds from other assets 2.6 3.2
Net cash provided by
(used in) investing activities 53.6 (567.2)
Financing
Net increase (decrease) in notes payable 3.6 3.6
Additions to long-term debt 0.5 473.7
Reductions in long-term debt (79.3) (0.2)
Payments for purchases of treasury stock (6.1) -
Proceeds from stock options exercised 0.1 0.1
Dividends paid (4.0) (3.5)
------ --------
Net cash provided by (used in)
financing activities (85.2) 473.7
Effect of exchange rate changes on cash
and cash equivalents - (2.9)
------- --------
Net increase (decrease) in cash
and cash equivalents (8.3) 3.3
Cash and cash equivalents at
beginning of year 21.7 44.0
-------- ---------
Cash and cash equivalents at end
of period $ 13.4 $ 47.3
======== ==========
Supplemental Cash Flow Information
Net cash paid during the period for:
Interest $ 20.1 $ 8.8
Income taxes 56.2 5.6
Non-cash financing transactions:
Issuance of common stock for acquisition$ - $149.8
Issuance of common stock for management notes 0.5 -
Issuance of common stock for Executive Stock
Performance Plan 1.1 1.1
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
BORGWARNER INC. and Consolidated Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
(1) Research and development costs charged to expense for the three months
ended March 31, 2000 were $29.7 million. Costs charged to expense for the three
months ended March 31, 1999 were $19.0 million.
(2) Inventories consisted of the following (millions of dollars):
March 31, December 31,
2000 1999
---------- -----------
Raw materials $74.7 $ 76.4
Work in progress 62.3 39.1
Finished goods 43.0 48.9
---------- -------
Total inventories $180.0 $164.4
========== ========
(3) The Company has a 50% interest in NSK-Warner K.K. ("NSK-Warner"), a joint
aventure based in Japan that manufactures automatic transmission components and
systems. The Company's share of the earnings or losses reported by NSK-Warner
is accounted for using the equity method of accounting. NSK-Warner has a fiscal
year-end of March 31.
The Company's investment in NSK-Warner was $152.3 million at March 31, 2000 and
$154.2 million at December 31, 1999.
Following are summarized financial data for NSK-Warner. Balance sheet data is
presented as of March 31, 2000 and March 31, 1999 and statement of income data
is presented for the three and twelve months ended March 31, 2000 and 1999. The
Company's results include its share of NSK-Warner's results for the three months
ended February 29, 2000 and February 28, 1999.
March 31, March 31,
2000 1999
Balance Sheet (in millions)
--------- --------
Current assets $ 197.5 $ 143.8
Noncurrent assets 156.3 137.4
Current liabilities (excluding debt) 95.1 69.9
Noncurrent liabilities (excluding debt) 5.1 6.9
Three Months Ended
March 31,
2000 1999
------ --------
Statement of Income (in millions)
Net sales $ 88.2 $ 69.2
Gross profit 19.5 18.4
Net income 9.5 5.7
Twelve Months Ended
March 31,
2000 1999
Statements of Income (in millions)
-------- ---------
Net sales $303.8 $235.9
Gross profit 64.7 52.6
Net income 27.7 16.9
(4) The Company's provisions for income taxes for the three months ended March
31, 2000 and 1999 are based upon estimated annual tax rates for the year applied
to federal, state and foreign income. The effective rate differed from the U.S.
statutory rate primarily due to a)state income taxes, b)foreign rates which
differ from those in the U.S., c) realization of certain business tax credits,
including foreign tax credits and research and development credits and d)other
non-deductible expenses, such as goodwill.
(5) Following is a summary of notes payable and long-term debt:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
Current Long-Term Current Long-Term
DEBT (millions of dollars)
--------- ------ ------- --------
<S> <C> <C> <C> <C>
Bank borrowings $135.2 $69.2 $133.3 $148.1
7% Senior Notes due 2006,
net of unamortized
discount - 149.7 - 149.7
6.5% Senior Notes due 2009,
net of unamortized
discount - 198.3 - 198.3
8% Senior Notes due 2019,
net of unamortized
discount - 149.9 - 149.9
7.125% Senior Notes due 2029,
net of unamortized
discount - 197.2 - 197.2
Capital lease liability 0.5 3.0 0.7 3.1
------- ------ ------ ------
Total notes payable and
Long-term debt $135.7 $767.3 $ 134.0 $846.3
======== ======== ======== ========
</TABLE>
The Company maintains a $350 million revolving credit facility. At March 31,
2000, the facility was unused. At December 31, 1999, $66.0 million of
borrowings under the facility were outstanding. The facility is available
through September 30, 2001.
The credit agreement contains numerous financial and operating covenants
including, among others, covenants requiring the Company to maintain certain
financial ratios and restricting its ability to incur additional foreign
indebtedness.
(6) The Company and certain of its current and former direct and indirect
corporate predecessors, subsidiaries and divisions have been identified by the
United States Environmental Protection Agency and certain state environmental
agencies and private parties as potentially responsible parties ("PRPs") at
various hazardous waste disposal sites under the Comprehensive Environmental
Response, Compensation and Liability Act ("Superfund") and equivalent state laws
and, as such, may be liable for the cost of clean-up and other remedial
activities at 42 such sites. Responsibility for clean-up and other remedial
activities at a Superfund site is typically shared among PRPs based on an
allocation formula.
Based on information available to the Company which, in most cases, includes: an
estimate of allocation of liability among PRPs; the probability that other PRPs,
many of whom are large, solvent public companies, will fully pay the costs
apportioned to them; currently available information from PRPs and/or federal or
state environmental agencies concerning the scope of contamination and estimate
remediation costs; remediation alternatives; estimate legal fees; and other
factors, the Company has established a reserve in its financial statements for
indicated environmental liabilities with a balance at March 31, 2000 of
approximately $14.4 million. The Company expects this amount to be expended
over the next three to five years.
The Company believes that none of these matters, individually or in the
aggregate, will have a material adverse effect on its financial position or
future operating results, generally either because estimates of the maximum
potential liability at a site are not large or because liability will be shared
with other PRPs, although no assurance can be given with respect to the ultimate
outcome of any such matters.
As of March 31, 2000, and at December 31, 1999, the Company had sold $150.0
million of receivables under a $153.0 million Receivables Transfer Agreement for
face value without recourse.
(7) Comprehensive income is a measurement of all changes in shareholders'
equity that result from transactions and other economic events other than
transactions with shareholders. For the Company, this includes foreign currency
translation adjustments, changes in minimum pension liability adjustments and
net earnings. The amounts presented as other comprehensive income, net of
related taxes, are added to net income which results in comprehensive income.
The following summarizes the components of other comprehensive income on a
pretax and after-tax basis for the periods ended March 31,
($ in millions)2000 1999
Income Income
tax After- tax After-
Pretax effect tax Pretax effect tax
-------- ------- -------- -------- -------- --------
Foreign currency
translation
adjustments $(16.3) $ 6.2 $(10.1) $ (5.2) $ 2.0 $ (3.2)
Net income as reported 41.0 32.1
-------- --------
Total comprehensive income $ 30.9 $28.9
====== ========
The components of accumulated other comprehensive income (net of tax) in the
Consolidated Balance Sheets are as follows:
March 31, Dec. 31,
2000 1999
------- ---------
Foreign currency
translation adjustment $ 2.3 $12.4
Minimum pension
liability adjustment (0.1) (0.1)
-------- ----------
2.2 12.3
======== ========
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information", requires the presentation of
descriptive information about reportable segments which is consistent with the
information made available to the management of the Company to assess
performance.
<PAGE>
<TABLE>
<CAPTION>
Sales
Quarter Ended March 31,
2000 1999
Inter- Inter-
Customer segment Net Customer segment Net
-------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Air/Fluid Systems $148.9 $ 2.7 $151.6 $106.7 $ 1.9 $108.6
Cooling Systems 80.0 0.1 80.1 9.0 0.3 9.3
Morse TEC 241.3 7.2 248.5 173.8 7.3 181.1
TorqTransfer Systems 146.7 0.6 147.3 149.4 0.8 150.2
Transmission Systems 113.3 2.3 115.6 99.6 2.3 101.9
Divested Operations - - - 12.8 0.8 13.6
Intersegment
eliminations - (12.9) (12.9) - (13.4) (13.4)
------ -------- ------- -------- -------- ----------
Total 730.2 - 730.2 551.3 - 551.3
Corporate, including
equity in affiliates - - - - - -
Consolidated $730.2 $- $730.2 $551.3 $ - $551.3
Earnings Before
Interest & Taxes
Three Months Ended Total Assets
March 31, March 31, Dec. 31
2000 1999 2000 1999
------ -------- -------- --------
Air/Fluid Systems $17.1 $10.2 $ 499.7 $ 486.4
Cooling Systems 11.0 1.4 564.8 560.8
Morse TEC 34.1 27.1 1,074.0 1,052.3
TorqTransfer Systems 10.4 10.9 275.4 261.3
Transmission Systems 14.7 15.5 361.9 356.0
Divested Operations - (1.3) - -
------- -------- ----------- --------
Total 87.3 63.8 2,755.8 2,716.8
Corporate, including
equity in affiliates (5.3) (3.4) 128.2 253.9
-------- -------- --------- -------
Consolidated $82.0 $60.4 $2,904.0 $2,970.7
======== ======== ======== ========
</TABLE>
The Company's forged powder metal race business sold in 1999 had previously been
included in the results of the Transmission Systems segment. Also, effective
January 1, 2000, the Company's instrumentation business has been transferred
from the Morse TEC segment to Air/Fluid Systems.
<PAGE>
(9) Sale of Coleman Cable
Systems, Inc.
The sale of Coleman Cable Systems, Inc. ("Coleman Cable"), one of the electrical
products businesses acquired from Kuhlman Corporation in March 1999, was closed
into escrow on December 30, 1999 and cleared escrow on January 4, 2000. The
Company's net investment in Coleman Cable was reflected in the December 31, 1999
Consolidated Balance Sheet as an investment held for sale in current assets.
The total sales price of $137 million was comprised of debt securities with a
face value of $15 million, and $122 million in cash. The net proceeds from the
sale were used to repay indebtedness.
Announcement to Sell Fuel Systems and Kysor/Westran
In April 2000, the Company announced its intention to sell two non-core
businesses, which did not fit the Company's strategic focus on powertrain
technology, Fuel Systems and Kysor-Westran HVAC. These businesses were acquired
as part of the vehicle products business of Kuhlman Corporation in March of
1999. The Fuel Systems unit, currently reported as part of Air/Fluid Systems,
produces metal tanks for the heavy truck market in North America. Kysor-Westran
HVAC, currently reported as part of Morse TEC, serves the commercial vehicle
market in North America and Europe. Proceeds from the sales are
expected to be used for general corporate purposes, such as repaying
indebtedness or repurchasing the Company's stock on the open market.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
BorgWarner Inc. (the "Company") is a leading global supplier of highly
engineered systems and components for powertrain applications. Its products are
manufactured and sold worldwide, primarily to original equipment manufacturers
("OEMs") of passenger cars, sport-utility vehicles, trucks, commercial
transportation products and industrial equipment. The Company operates
manufacturing facilities serving customers in North America, Europe and Asia,
and is an original equipment supplier to every major OEM in the world.
The following discussion covers the results of operations for the three months
ended March 31, 2000 and 1999 and financial condition as of March 31, 2000 and
December 31, 1999.
RESULTS OF OPERATIONS
The Company's products fall into five reportable operating segments: Air/Fluid
Systems, Cooling Systems, Morse TEC, TorqTransfer Systems and Transmission
Systems. The following tables present net sales and earnings before interest
and taxes ("EBIT") by segment for the three months ended March 31, 2000 and 1999
in millions of dollars.
<TABLE>
<CAPTION>
Three Months Ended
NET SALES March 31,
2000 1999
------- --------
<S> <C> <C>
Air/Fluid Systems $151.6 $108.6
Cooling Systems 80.1 9.3
Morse TEC 248.5 181.1
TorqTransfer Systems 147.3 150.2
Transmission Systems 115.6 101.9
Divested operations N/A 13.6
------- -------
743.1 564.7
Intersegment eliminations (12.9) (13.4)
------ -------
Net sales $730.2 $551.3
======= ========
Three Months Ended
EBIT March 31,
2000 1999
------- -------
Air/Fluid Systems $ 17.1 $ 10.2
Cooling Systems 11.0 1.4
Morse TEC 34.1 27.1
TorqTransfer Systems 10.4 10.9
Transmission Systems 14.7 15.5
Divested operations N/A (1.3)
------- ------
Earnings before interest and taxes $ 87.3 $ 63.8
</TABLE>
Consolidated sales of $730.2 million for the quarter ended March 31, 2000 were
32% higher than the first quarter sales in the prior year. Internal growth in
sales, comparing businesses owned for both periods, was strong at 12%. This
compares favorably with worldwide automobile and truck production, which
increased by 7%, 2%, and 4% in North America, Europe and Asia, respectively. As
shown in the above table, the improvement was spread across nearly all of the
operating segments. Overall, the Company's increase is attributable to strong
worldwide vehicle production, the continued popularity of trucks and sport
utility vehicles, the trend toward turbocharged direct injected diesel engines
in Europe, and increased demand for emission control products. The Company is
anticipating the favorable industry trends to continue into the second quarter
and expects sales to remain strong throughout the year, despite an anticipated
cooling in vehicle builds.
The Air/Fluid Systems segment generated a 40% growth in sales and a 68%
improvement in EBIT compared to the prior year. Sales growth for businesses
owned both periods was 24% as the segment benefited from increased emission
control business in North America and increased content. Continued growth is
expected due to the worldwide emphasis on improved operating efficiency and
reduced emissions, both of which can be realized through improved air and fuel
management.
Cooling Systems' results are not fully comparable to the prior year because of
the October 1999 acquisition of the Eaton Fluid Power Division. First quarter
EBIT margin of 13.7% compares favorably with the full year 1999 margin of 12.7%.
Morse TEC benefited from strong internal growth as well as the year over year
impact of the Kuhlman acquisition. Of the overall 37% sales increase, 17% was
related to businesses held both periods. This growth came from new and expanded
engine timing programs in every geography, especially Europe, and continued
penetration of turbochargers on direct injected diesel engines as well as
gasoline engines.
TorqTransfer Systems experienced a modest sales decline as unit volumes were
about equal with the prior year, but certain price concessions to customers
reduced sales. The segment was successful in cost containment to keep the
decline in EBIT to a minimum. Sales are expected to remain fairly flat
throughout 2000.
Excluding businesses sold in 1999, Transmission Systems increased sales by 13%
due to a strong market and market share gains in shift quality components.
However, manufacturing issues, cost economics and R&D spending adversely
affected the EBIT comparison. EBIT comparisons are expected to improve some-
what as a result of cost containment efforts.
Gross margin was 24.6%, up from 23.0% in the first quarter of 1999. Higher sales
volume with a favorable mix, successful implementation of cost reduction
programs and productivity improvements, inclusion of higher margin Kuhlman and
Eaton businesses, and divestiture of lower margin operations in 1999 drove the
improvement. Partially offsetting the margin gain was an increase in selling,
general and administrative expenses ("SG&A"). The Company increased its
spending on research and development ("R&D") to 4.1% of sales from 3.4% as the
Company continued to invest in its product leadership position. In part, the
results reflect the mix impact from the newly acquired businesses, which
generate a higher level of R&D expenditures. Nevertheless, efforts are being
made to keep SG&A and R&D levels more consistent with historical levels. SG&A
spending is expected to be near 8% of sales, while R&D spending is targeted in
the 4% of sales range.
Goodwill amortization and interest expense and finance charges both increased as
a result of our recent acquisitions. Equity in affiliate earnings and other
income for the three months ended March 31, 2000 and 1999, amounted to $3.5
million and $2.5 million, respectively. The majority of the income is related
to the Company's 50% owned Japanese joint venture, NSK-Warner. NSK-Warner has
been able to achieve strong results despite the Asian economy through higher
product content per transmission and improved operating efficiency.
The Company's income taxes are based upon estimated annual tax rates for the
year. The anticipated effective income tax rate for 2000 is lower than the
standard federal and state tax rates due to the expected realization of certain
R&D and foreign tax credits, due to foreign rates which differ from those in the
U.S. and due to other non-deductible expenses, such as goodwill. The Company
expects taxes to be in the range of 38% of sales throughout 2000.
For the quarter ended March 31, 2000, the Company's net earnings of $41.0
million were $8.9 million over 1999's first quarter performance of $32.1
million. Fully diluted earnings per share of $1.53 were 16% ahead of the prior
year. The factors discussed above are responsible for the increases.
FINANCIAL CONDITION AND LIQUIDITY
The Company's cash and cash equivalents decreased by $8.3 million at March 31,
2000 compared to December 31, 1999. Net cash proceeds of $79.3 million from the
sale of businesses and $23.3 million of cash from operations were mainly used to
fund $28.3 million of capital expenditures and to pay down $79.3 million of the
Company's long-term debt.
Capital spending for the three months ended March 31, 2000 increased by $0.9
million to $28.3 million compared to the same period of 1999. The Company
anticipates that capital spending for full-year 2000 will be higher than
1999 in order to fund existing and new programs, but remain at about 6.5% of
sales.
Cash generated from operations for the three months ended March 31, 2000 totaled
$23.3 million and consists of net earnings of $41.0 million and non-cash charges
of $34.5 million, offset by a $52.2 million increase in net operating assets and
liabilities. The primary non-cash charges, depreciation and amortization,
increased in comparison to the prior year mainly due to the acquisitions made in
1999. Increases in the net operating investment line items are consistent with
higher levels of business, including Europe, in 2000. First quarter 1999 cash
flows were enhanced by the collection of $33 million in payments a major
customer had deferred in December 1998.
The Company repaid $66.0 million of borrowings under its revolving credit
facility and $13.3 million of other borrowings between December 31, 1999 and
March 31, 2000. The $350 million facility is unused as of March 31, 2000. The
Company also spent $6.1 million to repurchase shares into treasury in the first
quarter of 2000.
As of March 31, 2000 and December 31, 1999, the Company had sold $150 million of
receivables under a $153 million Receivables Transfer Agreement for face value
without recourse.
The Company believes that the combination of cash from its operations and
available credit facilities will be sufficient to satisfy cash needs for its
current level of operations and planned operations for the remainder of 2000 and
for the foreseeable future.
OTHER MATTERS
Sale of Coleman Cable Systems, Inc.
The sale of Coleman Cable Systems, Inc. ("Coleman Cable"), one of the electrical
products businesses acquired from Kuhlman Corporation in March 1999, was closed
into escrow on December 30, 1999 and cleared escrow on January 4, 2000. The
Company's net investment in Coleman Cable was reflected in the December 31, 1999
Consolidated Balance Sheet as an investment held for sale in current assets.
The total sales price of $137 million was comprised of debt securities with a
face value of $15 million, and $122 million in cash. The net proceeds from the
sale were used to repay indebtedness.
Announcement to Sell Fuel Systems and Kysor/Westran
In April 2000, the Company announced its intention to sell two non-core
businesses, which did not fit the Company's strategic focus on powertrain
technology, Fuel Systems and Kysor-Westran HVAC. These businesses were acquired
as part of the vehicle products business of Kuhlman Corporation in March of
1999. The Fuel Systems unit, currently reported as part of Air/Fluid Systems,
produces metal tanks for the heavy truck market in North America. Kysor-Westran
HVAC, currently reported as part of Morse TEC, serves the commercial vehicle
market in North America and Europe. Proceeds from the sales are
expected to be used for general corporate purposes, such as repaying
indebtedness or repurchasing the Company's stock on the open market.
Authorization of Share Repurchase Program
In May 2000, the Company announced that its board of directors had authorized
the purchase of up to 1.2 million shares of the Company's common stock. The
shares will be repurchased in the open market at prevailing prices and at times
and amounts to be determined by management as market conditions and its capital
position warrant. Purchased shares will be placed in treasury and may
subsequently be reissued for general corporate use.
Litigation
As discussed more fully in Note 6 of the Notes to the Consolidated Financial
Statements, various claims and suits seeking money damages arising in the
ordinary course of business and involving environmental liabilities have been
filed against the Company. In each of these cases, the Company believes that it
has a defendable position and has made adequate provisions to protect the
Company from material losses. The Company believes that it has established
adequate provisions for litigation liabilities in its financial statements in
accordance with generally accepted accounting principles.
The Company believes that none of these matters, individually or in the
aggregate, will have a material adverse effect on its financial position or
future operating results, although no assurance can be given with respect to the
ultimate outcome of any such matter.
Dividends
On April 10, 2000, the Company declared a $0.15 per share dividend to be paid on
May 15, 2000 to shareholders of record as of May 1, 2000.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). The effective date of SFAS
133 was extended to those fiscal years beginning after June 15, 2000 by
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" in June 1999. SFAS 133 established accounting and reporting
requirements for derivative instruments, including the recognition of all
derivative instruments in the statement of financial condition as either assets
or liabilities, measured at fair value. This statement additionally requires
changes in the fair value of derivatives to be recorded each period in current
earnings or comprehensive income depending on the intended use of the
derivatives. The Company is currently performing an assessment of the impact of
SFAS 133 on its results of operations, financial condition and cash flows.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Statements contained in this Management's Discussion and Analysis of Financial
Condition and Results of Operations may contain forward-looking statements as
contemplated by the 1995 Private Securities Litigation Reform Act that are based
on management's current expectations, estimates and projections. Words such as
"expects," "anticipates," "intends," "plans," "believes," "estimates,"
variations of such words and similar expression are intended to identify such
forward-looking statements. Forward-looking statements are subject to risks and
uncertainties, which could cause actual results to differ materially from those
projected or implied in the forward-looking statements. Such risks and
uncertainties include: fluctuations in domestic or foreign vehicle production,
the continued use of outside suppliers, fluctuations in demand for vehicles
containing the Company's products, general economic conditions, as well as other
risks detailed in the Company's filings with the Securities and Exchange
Commission, including the Cautionary Statements filed as Exhibit 99.1 to the
Form 10-K for the fiscal year ended December 31, 1999.
Item 3. Quantitative and Qualitative Disclosure about Market Risks
The Company's market risk exposure at March 31, 2000 is consistent with the
types of market risk and amount of exposure presented in its 1999 Annual Report
on Form 10-K.
PART II
Item 1. Legal Proceedings
Inapplicable.
Item 2. Changes in Securities
Inapplicable.
Item 3. Defaults Upon Senior Securities
Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders
Inapplicable.
Item 5. Other Information
Inapplicable.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
10.1 - Employment Agreement for Lawrence B. Skatoff
27.1 - Financial Data Schedule
99.1 - Certificate of Ownership and Merger Merging BorgWarner Inc.
into Borg-Warner Automotive,Inc.
(b) Reports on Form 8-K
On February 10, 2000, the Company filed a report on Form 8-K
announcing the Company had changed its name to BorgWarner Inc. from Borg-Warner
Automotive, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
BORGWARNER INC.
(Registrant)
By /s/ William C. Cline
(Signature)
William C. Cline
Vice President and Controller
(Principal Accounting Officer)
Date: May 12, 2000
February 4, 2000
Mr. Lawrence B. Skatoff
1420 Sheridan Road
Wilmette, IL 60091
Dear Larry:
This letter sets forth certain terms and conditions of your
employment by Borg-Warner Automotive, Inc., a Delaware
Corporation ("BWA") and will hereinafter be referred to as the
"Agreement".
RECITALS
BWA desires to provide an additional incentive for you to
provide services for the benefit of BWA and its affiliates, and
you desire to accept such employment with BWA under the terms and
conditions of this Agreement.
In the course of your employment with BWA, you will have
access to confidential information that relates to or will
relate to the business of BWA and its affiliates; and
BWA desires that any such information not be disclosed to
other parties or otherwise used for unauthorized purposes.
In consideration of the above and the following mutual
covenants and conditions, we agree as follows:
1. Employment. BWA shall employ you under this Agreement
as its Executive Vice President and Chief Financial Officer for
the period January 5, 2000 to December 30, 2005. You hereby
accept such employment and appointment and agree to the remaining
terms and conditions set forth in this Agreement.
2. Duties. You shall work for BWA in a full-time
capacity, and you shall have the duties, responsibilities,
powers, and authority customarily associated with the position of
Chief Financial Officer. You shall diligently, competently, and
faithfully perform all duties, and shall devote your business
time, energy, attention, and skill to the performance of duties
for BWA or its affiliates and use your best efforts to promote
the interests of BWA.
Notwithstanding the foregoing provisions of this Section 2,
nothing in this Agreement shall preclude you from devoting
reasonable periods of time during normal business hours to
managing your personal investments and, provided you have
obtained written approval of the Chief Executive Officer, (i)
serving as a director, trustee or member of or participant in any
organization or a business so long as such activity would not
constitute a violation of Section 8, or (ii) engaging in
charitable and community activities.
3. Term of Employment. This Agreement shall begin January
5, 2000 and end on December 30, 2005. If a Change of Control as
defined in the Change of Control Employment Agreement to be
entered into between you and BWA as of January 5, 2000 (the
"Change of Control Agreement") occurs on or before December 30,
2005, this Agreement shall terminate on the Effective Date of the
Change of Control Agreement and the Change of Control Agreement
shall control the employment relationship between you and BWA.
4. Compensation.
A. Base Salary. BWA will pay you the amount of
$320,000 per year as "Base Salary," payable in accordance
with BWA's normal payroll practices. The payment of your
Base Salary shall be subject to any payroll or other
deductions as may be required to be made pursuant to law,
government order, or by agreement with or consent of you.
Base Salary may be increased (but not decreased) from time
to time, following an annual review in January of each year,
and any reference to Base Salary herein shall include any
increases to such salary.
B. Performance Bonus. You will participate in the
Borg-Warner Automotive, Inc. Management Incentive Bonus Plan
or any successor plan (the "BWA Bonus Plan"), as such plan
may exist from time to time, the terms of which are
expressly incorporated herein. Your minimum annual target
incentive opportunity under the BWA Bonus Plan shall be
$221,700.
C. Long-Term Incentive. You will participate in the
Borg-Warner Automotive, Inc. Executive Stock Performance
Plan or any successor plan (the "BWA Long-Term Incentive
Plan"), as such plan may exist from time to time, the terms
of which are expressly incorporated herein. Your minimum
target incentive under the BWA Long-Term Incentive Plan for
any performance cycle shall be $260,000. You shall be
entitled to a pro-rata portion of any award payable under
the BWA Long-Term Incentive Plan for any performance cycle
that is partially completed as of the expiration of this
Agreement on December 30, 2005, which pro-rata award will be
payable to you on or about the end of such performance
cycle.
D. Loan to Purchase BWA Stock. On the first day of
employment with BWA, the company will loan you $500,000,
which you will use to purchase BWA Common Stock. In
exchange for this loan, you will issue to BWA a full
recourse note (the "Note"), a copy of which is attached to
this Agreement as Attachment A, by which you will agree to
repay the $500,000 loan, plus interest at 5.99% per annum,
which is the applicable Federal mid-term rate (as defined in
Section 1274(d) of the Internal Revenue Code of 1986, as
amended) as of December 1, 1999, compounded semi-annually.
The Note shall provide that the principal and accumulated
interest shall be payable in full on December 30, 2005, or
earlier upon your voluntary termination of employment or
your involuntary termination by BWA for "cause" (as defined
in paragraph 5 below) prior to the December 30, 2005
expiration of this Agreement. Notwithstanding the
foregoing, the entire loan, including all accumulated
interest, shall be forgiven by BWA as of the December 30,
2005 expiration of this Agreement if you remain employed by
BWA through that date, or as of the earlier termination of
your employment upon your death, "disability" (as defined in
Paragraph 5 below), or involuntary termination other than
for "cause" (as defined in Paragraph 5 below). Also
notwithstanding the foregoing, upon your termination of
employment following the occurrence of a "Change of Control"
(as defined in the Change of Control Employment Agreement),
the Note shall either be forgiven or payable in full,
pursuant to the applicable terms of the Change of Control
Agreement, as it may be amended from time to time. You
hereby agree not to sell any of the BWA Common Stock
purchased with the loan proceeds until the earlier of your
full payment of the Note or BWA's forgiveness of the entire
outstanding Note. The transfer of such BWA Common Stock to
your immediate family members (whether directly or through a
family trust or partnership) shall not be deemed a sale for
this purpose.
E. Other Benefits. During the term of this
Agreement, BWA shall include you in any life insurance,
disability insurance, medical, dental or health care
insurance, retirement plans and other benefit plans or
programs (including,if applicable, any excess benefit or
supplemental executive retirement plans) maintained by BWA
for the benefit of its executives.
5. Termination. Your services under this Agreement shall
terminate only upon the first to occur of the following events:
A. At the end of the term of this Agreement.
B. Upon your date of death or the date you are given
written notice by the Chief Executive Officer that BWA has
determined you to be disabled. For purposes of this
Agreement, you shall be deemed to be "disabled" if you, as a
result of illness or incapacity, shall be unable to perform
substantially your required duties for a period of six
consecutive months or for any aggregate period of six months
in any twelve-month period.
C. On the date the BWA Board of Directors (by
majority action), provides you with written notice that you
are being terminated for cause. For purposes of this
Agreement, you shall be deemed terminated for "cause" if you
are terminated after you:
(1) commit any act which results in your
conviction of any felony including, but not limited to,
a felony involving fraud, theft, misappropriation,
dishonesty, or embezzlement of BWA's property;
(2) shall have committed intentional acts that
materially impair the goodwill or business of BWA or
cause material damage to its property, goodwill, or
business;
(3) shall have refused to, or willfully failed
to, perform your material duties hereunder; or
(4) shall have materially violated any of the terms
and conditions set forth in Paragraph 8 below.
D. On the date you terminate your employment for any
reason, provided that you shall give the Chief
Executive Officer 30 days' written notice prior to such
date of your intention to terminate this Agreement.
E. On the date the BWA Board of Directors (by
majority action) terminates your employment for any
other reason, provided that BWA shall give you 30 days'
written notice prior to such date or its intention to
terminate this Agreement.
6. Compensation Upon Termination.
A. If your services are terminated pursuant to
Paragraph 5, you shall be entitled to your Base Salary,
then in effect, through your final date of active
employment, plus any accrued but unused vacation pay.
B. If your services are terminated pursuant to
Paragragh 5.E, you shall also be entitled to any
compensation and benefits provided under this
Agreement, and any compensation and benefits mandated
under the Consolidated Omnibus Budget Reconciliation
Act of 1985, as amended, ("COBRA") or required under
the terms of any death, insurance, incentive, or
retirement plan, program, or agreement provided by BWA
and to which you are a party or in which you are a
participant, including, but not limited to, the
following: (i) any short-term or long-term disability
plan or program, if applicable; (ii) the BWA Bonus
Plan; and (iii) the Long-Term Incentive Plan.
C. Except in the event of your termination
pursuant to Paragraph 5.C. or 5.D, you shall be deemed
to have completed 5 years of service for purposes of
any "employee pension benefit plan" as defined in
Section 3(2)(A) of the Employee Retirement Income
Security Act of 1974, as amended, of BWA in which you
are a participant.
7. Retirement. Upon the expiration of this Agreement,
you will retire from BWA (unless your employment is continued by
mutual agreement of BWA and you). During the term of this
Agreement, you shall use your best efforts to work with the Chief
Executive Officer in developing and implementing a succession
plan and selecting and engaging a successor to your position.
8. Protective Covenants. You acknowledge that during the
course of your employment by, and relationship with, BWA, you
will acquire "Confidential Information", as hereinafter defined,
as well as special knowledge of BWA's relationships with its
customers and business brokers, and that BWA has long-term, near-permanent
relationships with its customers and business brokers.
In return for the consideration described in this Agreement, and
other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and as a condition
precedent to BWA entering into this Agreement, and as an
inducement to BWA to do so, you hereby represent, warrant, and
covenant as follows:
A. You have executed and delivered this Agreement as
your free and voluntary act, after having determined that
the provisions contained herein are of a material benefit to
you, and that the duties and obligations imposed on you
hereunder are fair and reasonable and will not prevent you
from earning a livelihood following the termination of your
employment with BWA;
B. You have read and fully understand the terms and
conditions set forth herein, have had time to reflect on and
consider the benefits and consequences of entering into this
Agreement, and have had the opportunity to review the terms
hereof with an attorney or other representative, if you so
choose;
C. Your execution and delivery of this Agreement does
not conflict with, or result in a breach of or constitute a
default under, any agreement or contract, whether oral or
written, to which you are a party or by which you may be
bound;
D. You agree that during the time of your employment
and for a period of two years after the termination of your
employment hereunder for any reason whatsoever or for no
reason, whether voluntary or involuntary, you will not,
except on behalf of BWA:
(1) directly or indirectly, contact, solicit or
direct any person, firm, or corporation to contact or
solicit, any of BWA's customers, prospective customers,
or business brokers (as hereinafter defined) for the
purpose of selling or attempting to sell, any products
and/or services that are the same as or similar to the
products and services provided by BWA to its customers
during the term hereof. In addition, you will not
disclose the identity of any such business brokers,
customers or prospective customers, or any part
thereof, to any person, firm, corporation, association,
or other entity for any reason or purpose whatsoever;
(2) directly or indirectly, whether as an
investor, lender, owner, stockholder (except merely as
a less than 1% stockholder in a publicly traded
corporation having at least 1,000 outstanding shares),
officer, director, consultant, employee, agent,
salesperson or in any other capacity, whether part-time
or full-time, engage in any business involved in the
design, manufacture, marketing, or servicing of
products then constituting 10% or more of the annual
sales of BWA. You agree that the scope described above
is necessary and reasonable in order to protect BWA in
the conduct of its business;
(3) solicit or accept if offered to you, with or
without solicitation, on your own behalf or on behalf
of any other person, the services of any person who is
an employee of BWA, nor solicit any of BWA's employees
to terminate employment with BWA; or
(4) act as a consultant, advisor, officer,
manager, agent, director, partner, independent
contractor, owner, or employee for or on behalf of any
of BWA's business brokers, customers, or prospective
customers (as hereinafter defined), with respect to or
in any way with regard to any aspect of BWA's business
and/or any other business activities in which BWA
engages during the term hereof;
E. You agree that both during your employment and
thereafter you will not, for any reason whatsoever, whether
voluntary or involuntary, use for yourself or disclose to
any person not employed by BWA any "Confidential
Information" of BWA acquired by you during your relationship
with BWA, both prior to and during the term of this
Agreement. You further agree to use Confidential Information
solely for the purpose of performing duties with BWA and
further agree not to use Confidential Information for your
own private use or commercial purposes or in any way
detrimental to BWA. "Confidential Information" includes but
is not limited to: (a) any financial, business, planning,
operations, services, potential services, products,
potential products, technical information and/or know-how,
formulas, production, purchasing, marketing, sales,
personnel, customer, broker, supplier, or other information
of BWA; (b) any papers, data, records, processes, methods,
techniques, systems, models, samples, devices, equipment,
compilations, invoices, customer lists, or documents of BWA;
(c) any confidential information or trade secrets of any
third party provided to BWA in confidence or subject to
other use or disclosure restrictions or limitations; and (d)
any other information, written, oral, or electronic, whether
existing now or at some time in the future, whether
pertaining to current or future developments, and whether
previously accessed during your tenure with BWA or to be
accessed during your future employment with BWA, which
pertains to BWA's affairs or interests or with whom or how
BWA does business. BWA acknowledges and agrees that
Confidential Information does not include (i) information
properly in the public domain, or (ii) information in your
possession prior to the date of your original employment
with BWA;
F. During and after the term of employment hereunder,
you will not remove from BWA's premises any documents,
records, files, notebooks, correspondence, computer
printouts, computer programs, computer software, price
lists, microfilm, or other similar documents containing
Confidential Information, including copies thereof, whether
prepared by you or others, except as your duty shall
require, and in such cases, will promptly return such items
to BWA. Upon termination of your employment with BWA, all
such items including summaries or copies thereof, then in
your possession, shall be returned to BWA immediately. You
agree to the return of such items, which shall be a
requirement in order for you to receive, at the time of such
termination, or any time thereafter, any compensation due
you pursuant to any paragraphs hereunder or otherwise;
G. You recognize and acknowledge that the identity of
BWA's customers, prospective customers, and business
brokers, as they may exist from time to time, are and will
continue to be, valuable, special and unique assets. For
purposes of this Paragraph 8, "customer" shall be defined as
any person, firm, or entity that purchased any type of
product and/or service from BWA or is or was doing business
with BWA or you within the 36-month period immediately
preceding termination of your employment. For purposes of
this Paragraph 8, "prospective customer" shall be defined as
any person, firm, or entity contacted or solicited by BWA or
you (whether directly or indirectly) or who contacted BWA or
you (whether directly or indirectly) within the 12-month
period immediately preceding termination of your employment
for the purpose of having such persons, firms, or entities
become a customer of BWA. For purposes of this Paragraph 8,
"business broker" shall be defined as any person, firm, or
entity who is or was doing business with BWA or you or who
was contacted or solicited by BWA or you (whether directly
or indirectly) or who contacted or solicited BWA or you
(whether directly or indirectly) within the 36- month period
immediately preceding termination of your employment;
H. You recognize and agree that all ideas,
inventions, enhancements, plans, writings, and other
developments or improvements (the "Inventions") conceived by
you, alone or with others, during the term of your
employment, whether or not during working hours, that are
within the scope of BWA's business operations or that relate
to any of BWA's work or projects, are the sole and exclusive
property of BWA. You further agree that (a) you will
promptly disclose all Inventions to BWA and hereby assign to
BWA all present and future rights you have or may have in
those Inventions, including without limitation those
relating to patent, copyright, trademark or trade secrets;
and (b) all of the Inventions eligible under the copyright
laws are "work made for hire." At the request of and
without charge to BWA, you will do all things deemed by BWA
to be reasonably necessary to perfect title to the
Inventions in BWA and to assist in obtaining for BWA such
patents, copyrights or other protection as may be provided
under law and desired by BWA, including but not limited to
executing and signing any and all relevant applications,
assignments or other instruments. Notwithstanding the
foregoing, pursuant to the Employee Patent Act, Illinois
Public Act 83-493, BWA hereby notifies you that the
provisions of this Paragraph 8 shall not apply to any
Inventions for which no equipment, supplies, facility or
trade secret information of BWA was used and which were
developed entirely on your own time, unless (a) the
Invention relates (i) to the business of BWA, or (ii) to
actual or demonstrably anticipated research or development
of BWA, or (b) the Invention results from any work performed
by you for BWA;
I. You acknowledge and agree that all customer lists,
supplier lists, and customer and supplier information,
including, without limitation, addresses and telephone
numbers, are and shall remain the exclusive property of BWA,
regardless of whether such information was developed,
purchased, acquired, or otherwise obtained by BWA or you.
You agree to furnish to BWA on demand at any time during the
term of this Agreement, and upon termination of this
Agreement, your complete list of the correct names and
places of business and telephone numbers of all of its
customers served by you and located within any or all of the
territories to which you have been assigned, including all
copies wherever located. You further agree to notify
immediately BWA of the name and address of any new customer,
and report all changes of a location of old customers, so
that upon the termination of this Agreement, BWA will have a
complete list of the correct names and addresses of all of
its customers with which you have had dealings. Also, you
agree to furnish to BWA on demand at any time during the
term of this Agreement, and upon the termination of this
Agreement, any other records, notes, computer printouts,
computer programs, computer software, price lists,
microfilm, or any other documents related to BWA's business,
including originals and copies thereto; and
J. It is agreed that any breach or anticipated or
threatened breach of any of your covenants contained in this
Paragraph 8 will result in irreparable harm and continuing
damages to BWA and its business and that BWA's remedy at law
for any such breach or anticipated or threatened breach will
be inadequate and, accordingly, in addition to any and all
other remedies that may be available to BWA at law or in
equity in such event, any court of competent jurisdiction
may issue a decree of specific performance or issue a
temporary and permanent injunction, without posting bond or
furnishing other security and without proving special
damages or irreparable injury, enjoining and restricting the
breach, or threatened breach, of any such covenant,
including, but not limited to, any injunction restraining
the breaching party from disclosing, in whole or part, any
Confidential Information. The prevailing party shall be
entitled to an award of costs and expenses, including
reasonable attorneys' and accountants' fees, incurred in the
application of this Paragraph 8.J.
9. Notices. Any and all notices required in connection
with this Agreement shall be deemed adequately given only if
(a) in writing and personally delivered, or sent by first class,
registered, or certified mail, postage prepaid, return receipt
requested or by recognized overnight courier, (b) sent by
telefacsimile, provided a hard copy is mailed on that date to the
party for whom such notices are intended, or (c) sent by other
means at least as fast and reliable as first class mail. A
written notice shall be deemed to have been given to the
recipient party on the earlier of (a) the date it shall be
delivered to the address required by this Agreement; (b) the date
delivery shall have been refused as the address required by this
Agreement; (c) with respect to notices sent by mail or overnight
courier, the date as of which the Postal Service or overnight
courier, as the case may be, shall have indicated such notice to
be undeliverable at the address required by this Agreement; or
(d) with respect to a telefacsimile, the date on which the
telefacsimile is sent and receipt of which is confirmed. Any and
all notices referred to in this Agreement, or which either party
desires to give to the other, shall be addressed to your
residence in your case, or to its principal office in the case of
BWA.
10. Waiver of Breach. A waiver by BWA of a breach of any
provision of this Agreement by you shall not operate or be
construed as a waiver or estoppel of any subsequent breach by
you. No waiver shall be valid unless in writing and signed by an
authorized officer of BWA.
11. Assignment. You acknowledge that the services to be
rendered by you are unique and personal. Accordingly, you may
not assign any of your rights or delegate any of your duties or
obligations under this Agreement. The rights and obligations of
BWA under this Agreement shall inure to the benefit of and shall
be binding upon the successors and assigns of BWA.
12. Entire Agreement. This Agreement sets forth the entire
and final agreement and understanding of the parties and contains
all of the agreements made between the parties with respect to
the subject matter hereof. This Agreement supersedes any and all
other agreements, either oral or in writing, between the parties
hereto, with respect to the subject matter hereof. No change or
modification of this Agreement shall be valid unless in writing
and signed by a person so authorized by the Chief Executive
Officer and you. If any provision of this Agreement shall be
invalid or unenforceable, in whole or in part, then such
provision shall be deemed modified or restricted to the extent
and in the manner necessary to render the same valid and
enforceable, or shall be deemed excised from this Agreement, as
the case may require, and this Agreement shall be construed and
enforced to the maximum extent permitted by law, as if such
provision had been originally incorporated herein as so modified
or restricted, or as if such provision had not been originally
incorporated herein, as the case may be. The parties further
agree to seek a lawful substitute for any provision found to be
unlawful.
13. Headings. The headings in this Agreement are inserted
for convenience only and are not to be considered a construction
of the provisions hereof.
14. Execution of Agreement. This Agreement may be executed
in several counterparts, each of which shall be considered an
original, but which when taken together, shall constitute one
agreement.
15. Recitals. The recitals to this Agreement are an
integral part hereof and shall be considered as substantive and
not precatory language.
16. Arbitration. Any controversy or claim arising out of
or relating to this Agreement or breach thereof, or arising out
of or relating to the employment relationship between BWA and
you, other than any controversy or claim arising under
Paragraph 8, shall be settled by arbitration in accordance with
the Voluntary Labor Arbitration Rules of the American Arbitration
Association, and judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction
thereof in the State of Illinois. In reaching its decision, the
arbitrator shall have no authority (a) to interpret or enforce
Paragraph 8 of this Agreement (for which Paragraph 17 shall
provide the exclusive venue), (b) to change or modify any
provision of this Agreement, or (c) to base any part of its
decision on the common law principle of constructive termination.
If you are the prevailing party herein, you shall be entitled to
an award of costs and reasonable attorneys' fees, and you may
petition the arbitrator for pre and post-judgment interest to be
included in the award. If BWA is the prevailing party herein, or
the arbitrator determines that there is no prevailing party, the
parties shall each be responsible for its own costs and fees
incurred in the application of this Paragraph 16.
17. Governing Law. This Agreement shall be governed by the
laws of the State of Illinois, without reference to its conflict
of law provisions, and any court action commenced to enforce
Paragraph 8 of this Agreement shall have as its venue the County
of Cook, Illinois.
If this letter meets with your understanding and approval,
kindly sign and return to BWA the enclosed copy of this letter
which will then constitute our agreement on this subject.
Sincerely,
BORG-WARNER AUTOMOTIVE, INC.
/s/ John F. Fiedler
By: -------------------------------
John F. Fiedler
Chairman and Chief Executive Officer
Accepted and agreed to this
- ----day of ------------, 2000
/s/ Lawrence B. Skatoff
By: ----------------------
Lawrence B. Skatoff
ATTACHMENT A
NON-NEGOTIABLE FULL RECOURSE PROMISSORY NOTE
Maturity Date: December 30, 2005 February 4, 2000 Amount: $500,000
On or before December 30, 2005 (the "Maturity Date"), for value received,
LAWRENCE B. SKATOFF, 1420 Sheridan Road, Wilemtte, IL 60091 ("Borrower")
promises to pay to the order of BORG-WARNER AUTOMOTIVE, INC., a Delaware
corporation ("Company"), the principal sum of Five Hundred Thousand Dollars
($500,000) together with interest thereon from the date hereof at the rate
of 5.99% per annum, compounded semiannually, on the unpaid balance until paid.
Notwithstanding the foregoin, Borrower shall be obligated to prepay his entire
obligation hereunder (including principal and interest accrued thereon through
the date of prepayment) within ten (10) days of the effective date of his volun-
tary termination of employment with Company prior to the Maturity Date (other
than his "disability," as defined in the letter agreement governing the terms
of BOrrower's employment with Company through the Maturity Date (the "Letter
Agreement")) or his involuntary termination of employment with Company prior the
Maturity Date for "cause," as defined in the Letter Agreement.
Also notwithstanding the foregoin, Borrower's obligation hereunder (including
principal and interest thereon) shall be deemed satisfied and shall thereby be
forgiven by Company upon the occurrence of certain events and/or Borrower's
satisfaction of certain conditions in accordance with the terms and conditions
set forth in Paragraph 4E of the Letter Agreement.
Also notwithstanding the foregoing, the status of Borrower's obligation here-
under upon his termination of employment from the Company following a "change of
control" (ad defined in the Change of Control Employment Agreement entered into
between Company and Borrower on February 4, 2000) shall be as set forth in such
Agreement, as it may be amended from time to time.
Company has the right to set-off any amounts due and owing under this Note from
any distributions Company shall make to Borrower from time to time. Borrower
shall have the right under this Note to prepay the principal amount
without penalty; provided that all such prepayment shall be first applied to
accrued but unpaid interest.
Borrower hereby waives presentment, demand, notice of dishonor, protest and all
other notices whatsoever, and agrees that Company may in its sole discretion,
from time to time, extend or renew this Note for any period of time and grant
any releases, compromises, extensions, renewals or indulgences with respect
to this Note or Borrower, all without notice to or consent of Borrower, without
affecting in any manner the Note. Upon and after any default, Company may in
its sole discretion, declare the Note to be immediately due and payable without
notice or demand of Borrower or ny other person.
This Note is a full-recourse note evidencing an unconditional promise by
Borrower to make the payments specified herein.
No delay or omission on the part of the holder hereof to exercise rights under
this Note shall impair any such right or power or shall be construed to be a
waiver of any such default or acquiescence therein. No waiver of any default
shall be construed, taken or held to be a waiver of any other default or
acquiescence in or consent to any further or succeeding default of the same
nature.
BORROWER ACKNOWLEDGES THAT THIS NOTE IS BEING ACCEPTED BY COMPANY IN PARTIAL
CONSIDERATION OF COMPANY'S RIGHT TO ENFORCE IN THE JURISDICTION STATED BELOW THE
TERMS AND PROVISIONS HEREUNDER BORROWER CONSENTS TO JURISDICTION IN, AND
CONSTRUCTION OF THIS NOTE UNDER THE INTERNALLAWS OF THE STATE OF ILLINOIS AND
VENUE INT HE COUNTY OF COOK FOR SUCH PURPOSES AND BORROWER WAIVES ANY AND ALL
RIGHTS TO CONTEST SUCH JURISDICTIONAND VENUE. BORROWER WAIVES ANY RIGHT TO
COMMENCE ANY ACTION AGAINST COMPANY IN ANY JURISDICTION EXCEPT THE AFORESAID
COUNTIES AND STATE.
SIGNED AND DELIVERED in Chicago, Illinois, by the undersigned as of the 4th
day of February, 2000.
/s/ LAWRENCE B. SKATOFF
- -------------------------------
LAWRENCE B. SKATOFF
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Balance Sheet as of March 31, 2000 (unaudited) and the
Consolidated Statement of Operations for the Three Months Ended March 31, 2000
(unaudited) and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 5,700
<SECURITIES> 7,700
<RECEIVABLES> 276,300
<ALLOWANCES> 0
<INVENTORY> 180,000
<CURRENT-ASSETS> 506,300
<PP&E> 1,231,500
<DEPRECIATION> 439,600
<TOTAL-ASSETS> 2,904,000
<CURRENT-LIABILITIES> 654,200
<BONDS> 767,300
0
0
<COMMON> 300
<OTHER-SE> 1,078,800
<TOTAL-LIABILITY-AND-EQUITY> 2,904,000
<SALES> 730,200
<TOTAL-REVENUES> 730,200
<CGS> 550,300
<TOTAL-COSTS> 550,300
<OTHER-EXPENSES> 97,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,900
<INCOME-PRETAX> 66,100
<INCOME-TAX> 25,100
<INCOME-CONTINUING> 41,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,000
<EPS-BASIC> 1.54
<EPS-DILUTED> 1.53
</TABLE>
CERTIFICATE OF OWNERSHIP AND MERGER
MERGING
BORGWARNER INC.
(a Delaware corporation)
INTO
BORG-WARNER AUTOMOTIVE, INC.
Borg-Warner Automotive, Inc., a corporation duly organized and existing under
and by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That Borg-Warner Automotive, Inc. (the "Corporation") and BorgWarner Inc.
("BW") are corporations duly organized and existing under and by virtue of the
General Corporation Law of the State of Delaware.
SECOND: That the Corporation owns all of the issued and outstanding shares of
the capital stock of BW.
THIRD: That the board of directors of the Corporation adopted the following
resolutions at a meeting of the Board of Directors on February 2, 2000, and that
such resolutions have not been rescinded and are in full force and effect on the
date hereof:
"WHEREAS, BorgWarner Inc., a Delaware corporation ("BW"), is a wholly owned
subsidiary of the Corporation;
WHEREAS, the board of directors of the Corporation deems it advisable and
in the best interest of the Corporation to merge BW with and into the
Corporation, with the Corporation begin the surviving corporation;
NOW, THEREFORE, BE IT RESOLVED, that BW be merged with and into the
Corporation pursuant to Section 253 of the General Corporation Law of the State
of Delaware, and that the Corporation succeed to and possess all the rights and
assets of BW and be subject to all of the liabilities and obligations of BW;
RESOLVED, that the Corporation change its corporate name by changing
Article 1 of the Restated Certificate of Incorporation of the Corporation to
read in its entirety as follow:
"The name of the corporation (hereinafter called the "Corporation") is
BorgWarner Inc."
RESOLVED, that each share of common stock, $1.00 par value per share, of BW
issued and outstanding immediately prior to the effective date of the merger
shall, upon the effective date and by virtue of the merger, be canceled without
payment therefor;
RESOLVED, that the merger shall become effective on the date the
Corporation files a Certificate of Ownership and Merger with respect to such
merger with the Secretary of State of the State of Delaware;
RESOLVED, that the appropriate officers of the Corporation are hereby
authorized and empowered to file the necessary documents with the Secretary of
State of the State of Delaware, to incur the necessary expenses therefor and to
take, or cause to be taken, all such further action and to execute and deliver
or cause to be executed and delivered, in the name of and on behalf of the
Corporation, all such further instruments and documents as any such officer may
deem to be necessary or advisable in order to effect the purpose and intent of
the foregoing resolutions and to be in the best interests of the Corporation (as
conclusively evidenced by the taking of such action or the execution and
delivery of such instruments and documents, as the case may be, by or under the
direction of any such officer); and
RESOLVED, that the prior actions of the officers and directors of the
Corporation in undertaking to carry out the transactions contemplated by the
foregoing resolutions be, and the same hereby are, in all respects, approved,
adopted, ratified and confirmed."
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed by
its duly authorized officer this 3rd day of February, 2000.
/s/ Laurene H. Horiszny
--------------------------------
LAURENE H. HORISZNY
