-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Kl1nowGm3qSq5wnVCBxVlpJ/Sf6MBeytnrTeYgzTMplRZ3cNAsUppj9N988Mq8nt U0KqJP7PmhExegsIdYqE1Q== 0000950123-96-003736.txt : 19960724 0000950123-96-003736.hdr.sgml : 19960724 ACCESSION NUMBER: 0000950123-96-003736 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19960723 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BORG WARNER AUTOMOTIVE INC CENTRAL INDEX KEY: 0000908255 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 133404508 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-06041 FILM NUMBER: 96597507 BUSINESS ADDRESS: STREET 1: 200 S MICHIGAN AVE CITY: CHICAGO STATE: IL ZIP: 60604 BUSINESS PHONE: 3123228500 MAIL ADDRESS: STREET 2: 200 SOUTH MICHIGAN AVE CITY: CHICAGO STATE: IL ZIP: 60604 S-3/A 1 BORG WARNER AUTOMOTIVE, INC. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 22, 1996 REGISTRATION NO. 333-06041 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ BORG-WARNER AUTOMOTIVE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ DELAWARE 13-3404508 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
200 SOUTH MICHIGAN AVENUE CHICAGO, ILLINOIS 60604 (312) 322-8500 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ LAURENE H. HORISZNY, ESQ. VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL BORG-WARNER AUTOMOTIVE, INC. 200 SOUTH MICHIGAN AVENUE CHICAGO, ILLINOIS 60604 (312) 322-8500 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ Copies to: ANDREW R. BROWNSTEIN, ESQ. DAVID J. BEVERIDGE, ESQ. DAVID A. KATZ, ESQ. SHEARMAN & STERLING WACHTELL, LIPTON, ROSEN & KATZ 599 LEXINGTON AVENUE 51 WEST 52ND STREET NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10019 (212) 848-4000 (212) 403-1000
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this registration statement becomes effective. If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / / If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / - ------------------ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / - ------------------ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------------ CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------ PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------ Common Stock, $.01 par value........ 5,175,000 shares $41.00 $212,175,000 $73,164.31(3) - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------
(1) Includes 675,000 shares subject to the option of the Underwriters (as defined herein) to purchase shares from the Selling Stockholders (as defined herein) to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) on the basis of the average high and low prices for the Common Stock reported on the New York Stock Exchange Composite Tape on June 10, 1996. (3) Fee previously paid with filing of Registration Statement on June 14, 1996. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 EXPLANATORY NOTE This Registration Statement contains two forms of prospectuses: one to be used in connection with a United States and Canadian offering of the registrant's Common Stock (the "U.S. Prospectus") and one to be used in connection with a concurrent international offering of the Common Stock (the "International Prospectus" and, together with the U.S. Prospectus, the "Prospectuses"). The International Prospectus will be identical to the U.S. Prospectus except that it will contain different front and back cover pages, a different inside cover page and a different section entitled "Underwriting." The U.S. Prospectus is included herein and is followed by those pages to be used in the International Prospectus which differ from those in the U.S. Prospectus. Each of the pages for the International Prospectus included herein has been labeled "Alternate Page for International Prospectus." If required pursuant to Rule 424(b) of the General Rules and Regulations under the Securities Act of 1933, as amended, copies of each of the Prospectuses in the forms in which they are used will be filed with the Securities and Exchange Commission. 3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED JULY 22, 1996 PROSPECTUS - --------------------- 4,500,000 SHARES LOGO COMMON STOCK ------------------------ All of the shares of Common Stock offered hereby will be sold by certain stockholders (the "Selling Stockholders") of Borg-Warner Automotive, Inc. (the "Company"). See "Principal and Selling Stockholders." The Company will not receive any proceeds from the sale of the shares offered hereby. Of the 4,500,000 shares of Common Stock offered hereby, 3,600,000 shares are being offered in the United States and Canada by the U.S. Underwriters (the "U.S. Offering") and 900,000 shares are being offered in a concurrent offering outside the United States and Canada by the International Underwriters (the "International Offering" and, together with the U.S. Offering, the "Offerings"). The public offering price and the underwriting discount per share are identical for the Offerings. See "Underwriting." The Common Stock is listed on the New York Stock Exchange, Inc. ("NYSE"), under the symbol "BWA." On July 22, 1996, the last reported sale price of the Common Stock on the NYSE was $36.75 per share. See "Price Range of Common Stock." FOR INFORMATION CONCERNING CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS, SEE "RISK FACTORS" COMMENCING ON PAGE 11. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- PROCEEDS TO PRICE TO UNDERWRITING SELLING PUBLIC DISCOUNT(1) STOCKHOLDERS(2) - ----------------------------------------------------------------------------------------------------------- Per Share................................... $ $ $ - ----------------------------------------------------------------------------------------------------------- Total(3).................................... $ $ $ - ----------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the several Underwriters against certain liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) The Company has agreed to pay certain expenses of the Offerings estimated at $1,000,000. (3) The Selling Stockholders have granted the U.S. Underwriters and the International Underwriters options exercisable within 30 days after the date hereof to purchase up to 540,000 and 135,000 additional shares of Common Stock, respectively, solely to cover over-allotments, if any. If such options are exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Selling Stockholders will be $ , $ , and $ , respectively. See "Underwriting." ------------------------ The shares of Common Stock are offered by the several Underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the shares of Common Stock will be made in New York, New York on or about July , 1996. ------------------------ MERRILL LYNCH & CO. LEHMAN BROTHERS MORGAN STANLEY & CO. INCORPORATED ------------------------ The date of this Prospectus is July , 1996. 4 BORG-WARNER AUTOMOTIVE, INC.
1995 CONSOLIDATED SALES PRODUCTS % OF TOTAL TOP VEHICLE PROGRAMS ---------------------- ------------ ---------------------------------------- Powertrain Systems....... -4WD Transfer Cases $544.8 Ford Explorer -Manual Transmissions 40% Ford Expedition (August 1996) Ford F-Series and Ranger trucks Range Rover Mercedes AAV (1997) Isuzu Big Horn (Japan) SsangYong Musso (Korea) Automatic Transmission Systems................ -Friction Plates $454.4 All GM mid/large-sized vehicles and -One-Way Clutches 33% mini-vans -Bands All Ford mid/large-sized vehicles and -Precision Forged mini-vans Sintered Products All Chrysler FWD 4-speed automatic transmission vehicles All Toyota automatic transmission vehicles* All Honda North American-manufactured automatic transmission vehicles All Ford, GM, BMW, Mercedes, Renault and VW European-manufactured automatic transmission vehicles All Korean-manufactured automatic transmission vehicles Morse TEC................ -4WD Chain $257.6 Ford modular engine family: Contour/ -Transmission Chain 19% Mystique, Taurus/Sable, Town Car/Crown -Engine Timing Chain Victoria/Continental, and F-Series -Engine Timing Chain truck Systems All GM and Ford FWD automatic transmission vehicles Chrysler LH vehicles Ford, GM and Chrysler 4WD sport utility vehicles Air/Fluid Systems........ -Air Management $107.6 All Chrysler vehicles and mini-vans Systems 8% Ford Explorer -Fuel Systems Ford F-150 and Ranger trucks -Transmission Systems Ford mid-sized vehicles (such as the Taurus/Sable and Contour/Mystique) Mercedes vehicles * Through the Company's 50%-owned unconsolidated Japanese joint venture with NSK-Warner K.K.
CERTAIN STATEMENTS CONTAINED IN THIS PROSPECTUS UNDER THE CAPTIONS "PROSPECTUS SUMMARY," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS -- BUSINESS STRATEGY," IN ADDITION TO CERTAIN STATEMENTS CONTAINED ELSEWHERE IN THIS PROSPECTUS, ARE "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND ARE THUS PROSPECTIVE. 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 HEADING "RISK FACTORS," BEGINNING ON PAGE 11 OF THIS PROSPECTUS, AND PROSPECTIVE INVESTORS ARE URGED TO CAREFULLY CONSIDER SUCH FACTORS. ------------------------ IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. [Top half of gatefold page: Pictures of the Company's products from each of its four operating groups: Powertrain Systems, Automatic Transmission Systems, Morse TEC and Air/Fluid Systems along with textual descriptions.] [Bottom half of gatefold page: Picture of the Borg-Warner Indianapolis 500 Trophy and a schematic of an automobile displaying locations of some of the Company's products.] 5 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere or incorporated by reference in this Prospectus. Unless indicated otherwise, the information contained in this Prospectus assumes that the Underwriters' over-allotment options are not exercised. Unless the context otherwise requires, references in this Prospectus to the "Company" refer to Borg-Warner Automotive, Inc., a Delaware corporation and its subsidiaries, references to the "Common Stock" refer to shares of Common Stock, $.01 par value, of the Company, and references to the "Shares" refer to the 4,500,000 shares of Common Stock being offered in the Offerings. THE COMPANY The Company is a leading, global Tier I supplier of highly engineered systems and components, primarily for automotive powertrain applications. These products are manufactured and sold worldwide, primarily to original equipment manufacturers ("OEMs") of passenger cars, sport utility vehicles and light trucks. The Company, which operates 36 manufacturing facilities in 12 countries serving the North American, European and Asian automotive markets, is an original equipment supplier to every major OEM in the world. The Company has achieved its current leadership position and is well positioned to benefit from emerging trends in the global automotive markets as a result of several key competitive strengths, including: (i) the ability to supply its customers globally; (ii) demonstrated technological expertise in developing highly engineered systems and components; (iii) strong relationships with all major OEMs; (iv) significant market shares in a number of its key products; and (v) a strong presence in and focus on high-growth vehicle categories and platforms. The Company's products fall into four operating groups: Powertrain Systems, Automatic Transmission Systems, Morse TEC and Air/Fluid Systems (formerly known as Control Systems). The Powertrain Systems group accounted for $544.8 million (40%) of 1995 consolidated sales before inter-business eliminations. Its primary products include four-wheel and all-wheel drive transfer cases and manual transmissions. The Company supplies substantially all of the four-wheel drive ("4WD") transfer cases for Ford Motor Company ("Ford"), including those installed on the Ford Explorer, the best selling sport utility vehicle in the United States in 1995, and the Ford F-150 pickup truck. The Company has designed and developed an exclusive 4WD Torque-On-Demand(TM) ("TOD(TM)") transfer case, available on the Ford Explorer and to be available on the new Ford Expedition, which allows vehicles to automatically shift from two-wheel drive to 4WD when electronic sensors indicate it is necessary. The Automatic Transmission Systems group accounted for $454.4 million (33%) of 1995 consolidated sales before inter-business eliminations. Its products include friction plates, transmission bands, one-way clutches and torque converters for automatic transmissions. The Company is a supplier to virtually every major automatic transmission manufacturer in the world. The Company's 50%-owned joint venture in Japan, NSK-Warner Kabushiki Kaisha ("NSK-Warner"), with 1995 sales of $337 million, is a leading producer of friction plates and one-way clutches in Japan. The Morse TEC group accounted for $257.6 million (19%) of 1995 consolidated sales before inter-business eliminations. Morse TEC manufactures chain and chain systems including HY-VO(R) front-wheel drive ("FWD") and 4WD chain, MORSE GEMINI(TM) Transmission Chain Systems, timing chain and timing chain systems, crankshaft and camshaft sprockets, chain tensioners and snubbers. The Company is a supplier to every major manufacturer that uses chain for such applications. The Air/Fluid Systems group accounted for $107.6 million (8%) of 1995 consolidated sales before inter-business eliminations. The Company's air and fluid management products include mechanical, electromechanical and electronic components and systems used for engine and emission control, fuel and vapor management, electronically controlled automatic transmissions and steering and suspension systems. The Air/Fluid Systems group is the Company's fastest growing group and has grown from $52.1 million of consolidated sales in 1991 to $107.6 million in 1995 (a compound annual growth rate of 20%). As a result of the recently completed Coltec Acquisition (as hereinafter defined), the Air/Fluid Systems group will 3 6 comprise a significantly greater portion of the Company's revenues. See "-- Recent Developments" and "-- Pro Forma Financial Data." The Company believes that it is a leading supplier to major OEMs worldwide in each of its four product groups. For Powertrain Systems, the Company believes that it is the world's leading independent manufacturer of 4WD transfer cases, manufacturing approximately 847,000 transfer cases in 1995, principally for Ford. The Company also believes that, including its NSK-Warner joint venture, the Automatic Transmission Systems group is a leading manufacturer and supplier of friction elements and one-way clutches in North America, Europe and Asia. Similarly, the Morse TEC group manufactures transmission chains for FWD transmissions and 4WD transfer cases for every major OEM who uses chain for such applications. Finally, the Coltec Acquisition will position the Air/Fluid Systems group to become a leading supplier of air and fluid management systems with over 80% of its 1995 pro forma sales to the three largest North American OEMs -- Ford, General Motors Corporation ("GM") and Chrysler Corporation ("Chrysler"). As a result of the Coltec Acquisition, the Air/Fluid Systems group will comprise a significantly greater portion of the Company's revenues and will almost double the Company's sales to Chrysler. The Company's business objective is to maintain its position as one of the leading independent suppliers of highly engineered systems and components for automotive powertrain applications. The Company pursues this objective in several ways. First, the Company seeks to maintain its position and reputation as a technological leader in its product groups. Second, the Company seeks to maintain its price competitiveness by continuing to improve the efficiency of its operations, including its production processes. Third, the Company believes that it is well positioned to take advantage of certain trends within the global automotive market. The Company believes that these trends include (i) a growing demand for automatic transmissions with a greater number of speeds (the Company's component content in an automatic transmission rises as the number of speeds increases), (ii) a growing demand for 4WD vehicles, (iii) an increasing demand for overhead cam engines, (iv) a growing demand for automatic transmissions and air and fluid management systems in Europe and in Asia, (v) the increasing tendency of OEMs to purchase integrated systems rather than individual components, and (vi) demand in markets outside the United States for air and fluid management products, particularly emission controls. Fourth, the Company continues to pursue strategic joint ventures and selected acquisitions within its existing or related lines of business. The Company continues to maintain its strong presence in Europe and Asia as a result of its recent acquisitions and joint ventures. The Company believes its global presence will enable it to better withstand the effect of cyclical downturns in the United States automotive market, while serving its OEM customers as a global supplier. See "Business -- Business Strategy" and "Business -- Recent Developments." Over the past several years, the Company has remained focused on and committed to achieving its business objective. Sales have increased from $820 million in 1991 to $1.33 billion in 1995, reflecting a 12.8% compound annual growth rate and outperforming the approximately 4% compound annual growth rate of North American vehicle sales. The Company's sales outside the United States are increasing and in 1995 represented 16% of consolidated sales. Including unconsolidated joint ventures, 1995 sales outside the United States constituted 33% of total sales. The Company's sales have increased at a greater rate than market growth as a result of higher content per vehicle and higher market share. The Company's emphasis on providing systems and introduction of new technologies has enabled it to substantially increase its content per vehicle. For example, the timing system on the Ford modular engine consists of up to four chains as well as sprockets, snubbers and tensioners as compared with a single timing chain on the previous generation pushrod engine. The Company's market share gains have been achieved during a period of OEM supplier consolidation which has benefited the Company. Such growth in sales has been accompanied by growth in profitability. Over the same period, earnings before interest and taxes ("EBIT") increased from $22 million in 1991 to $125 million in 1995, with EBIT margins rising from 2.6% in 1991 to 9.4% in 1995, and sales per employee rising from $128,000 in 1991 to $163,000 in 1995. The Company's executive offices are located at 200 South Michigan Avenue, Chicago, Illinois 60604, telephone (312) 322-8500. 4 7 RECENT DEVELOPMENTS On June 17, 1996, the Company acquired the operations and substantially all of the operating assets of the Holley Automotive, Coltec Automotive and Performance Friction Products divisions (collectively, the "Coltec Divisions") of Coltec Industries Inc. ("Coltec") for $283 million in cash (the "Coltec Acquisition"). The Coltec Divisions have a broad base of air and fluid management products, established OEM relationships, and three technologically advanced manufacturing facilities. These operations produced combined sales of $255 million in 1995. The Coltec Acquisition was financed with borrowings under the Company's revolving credit facility. See "Business -- Recent Developments," "Business -- Air/Fluid Systems" and "-- Pro Forma Financial Data." The Coltec Acquisition will provide the Company with a number of strategic benefits. The air and fluid management systems market is one in which the Company believes there are significant growth opportunities driven principally by increasingly stringent air emissions regulations both in the U.S. and in Europe. The Company also believes that since few suppliers control a large share of the growing air and fluid management market, the Company has additional opportunities to increase its market share because of its technological expertise and broad range of products. By combining the Coltec Divisions' component products with the Air/Fluid System's complementary system-based products, the Coltec Acquisition positions the Company to capitalize on the high-growth air and fluid management systems market and to become a global supplier of complete, integrated air and fluid management systems. The Coltec Acquisition will also serve to better balance the Company's business mix by significantly expanding the Company's operations in the air and fluid management systems business as Air/Fluid Systems pro forma sales will represent approximately 22% of total consolidated sales, more than double the Air/Fluid Systems sales in 1995 of 8%. Moreover, the Coltec Acquisition will allow the Company to further strengthen its relationships with existing OEM customers, especially Chrysler. Additionally, with the Company's 1995 acquisition of France's Societe de l'Usine de la Marque ("SUM"), it is well positioned to begin manufacturing air and fluid management systems in Europe. On July 17, 1996, the Company reported that its second quarter 1996 net income was $21.8 million, or $0.93 per share, an increase of 3% compared with net income of $21.1 million, or $0.90 per share, reported in the second quarter of 1995. The Company's sales for the second quarter of 1996 increased 7% to $381.8 million compared with $356.0 million in the second quarter of 1995. The Company also reported that net income for the first six months of 1996 was $34.1 million, or $1.45 per share, compared with net income of $38.6 million, or $1.65 per share, for the first six months of 1995. With respect to the Company's quarterly sales increase, $8.9 million was contributed by the Coltec Divisions and $4.8 million was contributed by SUM. For the second quarter of 1996, the Company announced that Powertrain Systems' sales decreased 3% to $146.8 million (an increase of 14% without manual transmissions); Automatic Transmission Systems' sales increased 7% to $128.9 million; Morse TEC's sales increased 5% to $70.7 million; and Air/Fluid Systems' sales increased 78% to $44.6 million (a rise of 24% excluding the Coltec Acquisition and the SUM acquisition). In addition, the Company reported that its North American manual transmission business, which is in the process of being sold, continued to negatively impact sales and earnings, costing the Company approximately $0.12 per share compared with 1995, with year-over-year sales declining by $18.6 million. See "Risk Factors -- Sale of Manual Transmission Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Other Financial Condition Matters -- North American Manual Transmission Business." 5 8 THE OFFERINGS Common Stock offered by the Selling Stockholders: U.S. Offering................................. 3,600,000 shares International Offering........................ 900,000 shares Total.................................... 4,500,000 shares Total Outstanding Common Stock..................... 23,572,768 shares(1) Dividend policy.................................... $0.15 per share, per quarter. See "Dividend Policy." NYSE Symbol........................................ "BWA"
- --------------- (1) As of June 30, 1996. Includes 122,644 shares of the Company's Non-Voting Common Stock, $.01 par value (the "Non-Voting Common Stock"), which are convertible into Common Stock on a share-for-share basis. See "Description of Capital Stock." Excludes 542,631 shares of Common Stock issuable upon exercise of options held by employees of the Company and Borg-Warner Security Corporation ("BW-Security"). 6 9 SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION The following summary historical consolidated financial information for the Company for the five years ended December 31, 1995 and for the three-month periods ended March 31, 1996 and 1995 has been derived from the consolidated financial statements of the Company for such periods. The information for the years ended December 31, 1991, 1992, 1993, 1994 and 1995 is derived from the audited financial statements of the Company. The information for the three-month periods ended March 31, 1996 and 1995 is not audited, but in the opinion of management is a fair presentation of such information. This information is qualified by reference to the historical consolidated financial statements of the Company incorporated by reference herein. See "Incorporation of Certain Information by Reference."
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ---------------------------------------------------- ------------------- 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA Net sales.............................. $ 820.3 $ 926.0 $ 985.4 $1,223.4 $1,329.1 $ 327.8 $ 348.9 Cost of sales.......................... 660.4 755.2(a) 769.3 948.4 1,044.9 253.0 277.5 Depreciation........................... 62.0(b) 64.3(a) 57.9 60.9 68.0 17.2 18.4 Selling, general and administrative expenses............................. 77.7 69.6 83.5 92.1 97.8 26.4 30.8 Minority interest...................... (1.3) (1.3) 0.1 1.4 2.0 0.4 0.7 Goodwill amortization.................. 9.7 9.7 9.7 9.6 9.6 2.4 2.6 Equity in affiliate earnings and other income............................... (9.9) (6.9) (10.6) (10.6) (18.6) (4.2) (4.1) Interest expense and finance charges... 53.8(d) 44.8(d) 18.4 13.9 14.2 3.5 3.5 Provision for income taxes............. 3.7 2.7 24.3 43.3 37.0 11.5 7.2 ------- ------- ------- ------- ------- ------- ------- Earnings (loss) before cumulative effect of accounting change.......... (35.8) (12.1) 32.8 64.4 74.2 17.6 12.3 Cumulative effect of change in accounting(b)........................ 4.8 -- (130.8) -- -- -- -- ------- ------- ------- ------- ------- ------- ------- Net earnings (loss).................... $ (31.0) $ (12.1) $ (98.0) $ 64.4 $ 74.2 $ 17.6 $ 12.3 ======= ======= ======= ======= ======= ======= ======= Earnings (loss) per share before cumulative effect of accounting change(b)............................ -- $ (0.53) $ 1.41 $ 2.75 $ 3.15 $ 0.75 $ 0.52 Net earnings (loss) per share(c)....... -- $ (0.53) $ (4.21) $ 2.75 $ 3.15 $ 0.75 $ 0.52 Average shares outstanding (thousands)(c)....................... -- 23,005 23,284 23,424 23,562 23,385 23,495 Cash dividend declared per share....... -- -- 0.125 0.45 0.60 0.15 0.15 OTHER OPERATING DATA Research and development............... $ 26.9 $ 26.8 $ 25.2 $ 33.8 $ 36.7 $ 8.4 $ 11.7 Capital expenditures................... 53.9 47.7 65.5 98.8 92.5 15.1 11.6 Number of full-time employees (thousands).......................... 6.4 6.7 6.6 7.8 8.6 7.8 8.4 Sales per full-time employee (thousands).......................... $ 128.0 $ 139.0 $ 149.0 $ 158.0 $ 163.0 $ 167.0 $ 166.0 BALANCE SHEET DATA (AT END OF PERIOD) Net property, plant and equipment...... $ 463.5 $ 412.9 $ 418.3 $ 462.3 $ 523.0 $ 462.3 $ 513.0 Total assets........................... 1,080.0 1,074.2 1,159.4 $1,240.3 $1,335.2 $1,269.6 $1,361.4 Total debt............................. --(d) --(d) 159.6 107.3 134.7 135.1 134.6 BW-Security investment(e).............. 743.5 728.2 -- -- -- -- -- Stockholders' equity(e)................ -- -- 459.1 534.9 600.0 554.0 604.3
- --------------- (a) Cost of sales for 1992 included a $28.7 million charge for the write-off of excess capacity and depreciation included $7.3 million related to such capacity. (b) Amounts reflect the adoption of Statement of Financial Accounting Standards ("SFAS") No. 109 in 1991 and SFAS No. 106 in 1993. In 1991, depreciation increased by $11.2 million because of an adjustment to fixed assets related to the adoption of SFAS No. 109. (c) Earnings per share for 1992 and 1993 have been calculated assuming that the initial public offering of the Company's Common Stock completed in August 1993 (the "IPO") had been completed on January 1, 1992. (d) Prior to the spin-off of the Company by BW-Security on January 27, 1993 (the "Spin-Off"), interest was allocated to the Company on the basis of the Company's relative operating investment compared to BW-Security's overall capital investment (debt plus equity). Prior to the Spin-Off, all debt was considered to be part of the BW-Security investment. (e) Prior to the Spin-Off, the Company was wholly owned by BW-Security and its stockholders' equity is reported as BW-Security investment. After the Spin-Off, the Company's equity is reported as stockholders' equity. 7 10 PRO FORMA FINANCIAL DATA The following unaudited pro forma financial data for the year ended December 31, 1995 and the three months ended March 31, 1996, and certain financial ratios derived therefrom, give effect to the Coltec Acquisition. The unaudited pro forma statement of earnings data give effect to the Coltec Acquisition as if it had occurred on January 1, 1995 with respect to the year ended December 31, 1995, and as if it had occurred on January 1, 1996 with respect to the three-month period ended March 31, 1996 and the unaudited pro forma balance sheet data give effect to the Coltec Acquisition as if it had occurred on March 31, 1996. The unaudited pro forma combined financial statements do not purport to be indicative of the results of operations or financial position of the Company that would have actually been obtained had the Coltec Acquisition been completed as of the assumed dates and for the periods presented, or which may be obtained in the future. The unaudited pro forma combined financial data should be read in conjunction with the separate historical consolidated financial statements of the Company and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Prospectus or incorporated by reference herein. For 1996, the Company expects that the sales contribution from the Coltec Divisions will be less than their 1995 sales because of the timing of certain new and expiring programs. The Company also expects that there will be a similar impact with respect to the earnings contribution from these operations in 1996 because of lower volume, a change in the product mix of the businesses, and price reductions partially offset by cost reductions and productivity gains. This trend is expected to continue through 1997, after which new programs are expected to positively impact sales and earnings trends. Reference is made to the separate historical financial statements of the Coltec Divisions incorporated by reference herein, which were filed with the Company's Report on Form 8-K dated June 17, 1996. See "Incorporation of Certain Information By Reference." 8 11 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1995
PRO FORMA ADJUSTMENTS HISTORICAL ----------------------------- ------------------------------ DIVISION OF COMPANY COLTEC DIVISIONS(1) EXPENSES(2) ACQUISITION(3) PRO FORMA -------- -------------------- ------------ --------------- ---------- (DOLLARS IN MILLIONS) Net sales.................. $1,329.1 $255.1 -- -- $1,584.2 Cost of sales.............. 1,044.9 183.6 -- -- 1,228.5 Depreciation............... 68.0 5.0 -- -- 73.0 Selling, general and administrative expenses................. 97.8 28.3 (5.3)(a) -- 120.8 Minority interest.......... 2.0 0.0 2.0 Goodwill amortization...... 9.6 0.2 (0.2)(b) 8.0(a) 17.6 Equity in affiliate earnings and other income................... (18.6 ) (0.3) -- -- (18.9) ------- ------- ------- ------- ------- Earnings before interest and finance charges and income taxes............... 125.4 38.3 5.5 (8.0) 161.2 Interest expense and finance charges.......... 14.2 0.0 0.0 25.8(b) 40.0 Earnings before income taxes............... 111.2 38.3 5.5 (33.8) 121.2 Provision for income taxes.................... 37.0 13.5 (13.5)(c) 3.8(c) 40.8 ------- ------- ------- ------- ------- Net earnings.......... $ 74.2 $ 24.8 $ 19.0 ($37.6) $ 80.4 ======= ======= ======= ======= ======= Earnings per share......... $ 3.15 -- -- -- $ 3.41 ======= ======= Average shares outstanding (thousands).............. 23,562 -- -- -- 23,562 ======= =======
- --------------- (1) Coltec Divisions' combined historical income statement includes certain revenues and expenses not acquired in the Coltec Acquisition. Coltec Divisions reflects certain reclassifications to conform to the Company presentation. Depreciation and goodwill amortization are presented as separate captions. (2) Adjustments to reflect the retention of certain revenues and expenses of the Coltec Divisions by Coltec. (a) Adjustment to eliminate the 1995 overfunded pension plan benefit of ($0.6) million, and $5.9 million corporate office service charge from Coltec. (b) Adjustment to eliminate the 1995 goodwill amortization of $0.2 million. (c) Adjustment to eliminate the Coltec Divisions' income tax expense. (3) Adjustments to record the purchase of the Coltec Divisions. (a) Reflects the goodwill amortization relating to the Company's excess of the purchase price over the historical book value, assuming no allocation to tangible assets and liabilities. For pro forma purposes, a composite life of 30 years is assumed. Actual amortization may differ depending on the final allocation of the purchase price. (b) Reflects the interest expense that would have been incurred had the Coltec Acquisition and the anticipated borrowings to finance the Coltec Acquisition occurred at the beginning of fiscal year 1995. The interest rate was assumed to equal the Company's cost of borrowing five-year fixed rate funds under its revolving credit facility, at 9.0%. (c) Reflects the income tax impact of the Coltec Divisions' results of operations and the related pro forma adjustments. The tax rate reflects the United States statutory rate plus applicable state income tax rates. 9 12 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS FOR THE THREE MONTHS ENDED MARCH 31, 1996
PRO FORMA ADJUSTMENTS HISTORICAL ---------------------------- ----------------------------- DIVISION OF COMPANY COLTEC DIVISIONS(1) EXPENSES(2) ACQUISITION(3) PRO FORMA ------- ------------------- ----------- -------------- --------- (DOLLARS IN MILLIONS) ------------------------------------------------------------------------ Net sales.......................... $348.9 $66.4 -- -- $ 415.3 Cost of sales...................... 277.5 49.8 -- -- 327.3 Depreciation....................... 18.4 1.4 -- -- 19.8 Selling, general and administrative expenses......................... 30.8 6.8 (1.3)(a) -- 36.3 Minority interest.................. 0.7 0.0 -- -- 0.7 Goodwill amortization.............. 2.6 0.0 -- 2.0(a) 4.6 Equity in affiliate earnings and other income..................... (4.1 ) (0.2) -- -- (4.3) ------- ------ ----- ------ --------- Earnings before interest and finance charges and income taxes......................... 23.0 8.6 1.3 (2.0) 30.9 Interest expense and finance charges.......................... 3.5 0.0 -- 4.6(b) 8.1 ------- ------ ----- ------ --------- Earnings before income taxes..... 19.5 8.6 1.3 (6.6) 22.8 Provision for income taxes......... 7.2 3.0 (3.0)(b) 1.3(c) 8.5 ------- ------ ----- ------ --------- Net earnings..................... $ 12.3 $ 5.6 $ 4.3 ($ 7.9) $ 14.3 ======= ============== ========= ========== ======== Earnings per share................. $ 0.52 -- -- -- $ 0.61 ======= ======== Average shares outstanding (thousands)...................... 23,495 -- -- -- 23,495 ======= ========
- --------------- (1) Coltec Divisions' combined historical income statement includes certain revenues and expenses not acquired in the Coltec Acquisition. Coltec Divisions reflects certain reclassifications to conform to the Company presentation. Depreciation and goodwill amortization are presented as separate captions. (2) Adjustments to reflect the retention of certain revenues and expenses of the Coltec Divisions by Coltec. (a) Adjustment to eliminate the 1996 overfunded pension plan benefit of ($0.2) million and $1.5 million corporate office service charge from Coltec. (b) Adjustment to eliminate the Coltec Divisions' income tax expense. (3) Adjustments to record the purchase of the Coltec Divisions. (a) Reflects the goodwill amortization relating to the Company's excess of the purchase price over the historical book value, assuming no allocation to tangible assets and liabilities. For pro forma purposes, a composite life of 30 years is assumed. Actual amortization may differ depending on the final allocation of the purchase price. (b) Reflects the interest expense that would have been incurred had the Coltec Acquisition and the anticipated borrowings to finance the Coltec Acquisition occurred at the beginning of fiscal year 1996. The interest rate was assumed to equal the Company's cost of borrowing five-year fixed rate funds under its revolving credit facility, at 6.4%. (c) Reflects the income tax impact of the Coltec Divisions' results of operations and the related pro forma adjustments, assuming a 38% tax rate. The tax rate reflects the United States statutory rate plus applicable state income tax rates. 10 13 UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1996
HISTORICAL PRO FORMA ADJUSTMENTS ------------------------ -------------------------------- COLTEC DIVISION OF COMPANY DIVISIONS(1) ASSETS(2) ACQUISITION(3) PRO FORMA -------- ------------ ------------ --------------- --------- (DOLLARS IN MILLIONS) ASSETS Cash................................................ $ 10.5 $ 1.1 $ (1.1)(2a) $ -- $ 10.5 Short-term securities............................... 5.9 -- -- -- 5.9 Receivables......................................... 112.0 23.9 (2.0) -- 133.9 Inventories......................................... 104.8 14.6 0.7(2a)-- -- 120.1 Prepayments......................................... 9.0 0.8 (0.8)(2a) -- 9.0 ------- ----- ------ ------ ------- Total current assets............................ 242.2 40.4 (3.2) -- 279.4 Property, plant and equipment at cost............... 930.1 80.9 -- (54.7)(3a) 956.3 Less accumulated depreciation....................... 417.1 54.7 -- (54.7)(3a) 417.1 ------- ----- ------ ------ ------- Net property, plant and equipment............... 513.0 26.2 -- -- 539.2 Investments and advances............................ 139.3 -- -- -- 139.3 Goodwill............................................ 312.0 3.8 (3.8)(2c) 238.4(3b) 550.4 Deferred income tax asset........................... 40.7 -- -- -- 40.7 Other noncurrent assets............................. 114.2 2.3 (2.3)(2d) -- 114.2 ------- ----- ------ ------ ------- Total other assets.............................. 606.2 6.1 (6.1) 238.4 844.6 ------- ----- ------ ------ ------- $1,361.4 $ 72.7 $ (9.3) $ 238.4 $1,663.2 ======= ===== ====== ====== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Notes payable....................................... $ 44.8 $-- $-- $-- $ 44.8 Accounts payable and accrued expenses............... 208.1 36.5 (23.7)(2b) 1.2(3b) 222.1 Income taxes payable................................ 27.2 -- -- -- 27.2 ------- ----- ------ ------ ------- 280.1 36.5 (23.7) 1.2 294.1 Long-term debt...................................... 89.8 -- -- 287.8(3c) 377.6 Long-term liabilities: Retirement-related liabilities.................... 336.7 -- -- -- 336.7 Other............................................. 50.5 2.8 (2.8) -- 50.5 ------- ----- ------ ------ ------- Total long-term liabilities..................... 387.2 2.8 (2.8) -- 387.2 Capital stock....................................... 0.2 -- -- -- 0.2 Other stockholders' equity.......................... 604.1 33.4 17.2 (50.6)(3d) 604.1 ------- ----- ------ ------ ------- Total stockholders' equity...................... 604.3 33.4 17.2 (50.6) 604.3 ------- ----- ------ ------ ------- $1,361.4 $ 72.7 $ (9.3) $ 238.4 $1,663.2 ======= ===== ====== ====== =======
- --------------- (1) Consists of historical balance sheet of the Coltec Divisions, including certain assets and liabilities not acquired by the Company in the Coltec Acquisition. (2) Adjustments to reflect the retention of certain assets and liabilities of the Coltec Divisions by Coltec. (a) Reflects the elimination of a cash balance, the LIFO reserve and certain prepaid assets retained by Coltec. (b) Reflects the elimination of certain liabilities retained by Coltec, including $5.1 million of accrued expenses, $7.2 million of trade and other accounts payable and $11.4 million of liabilities to other Coltec units. (c) Reflects the elimination of Coltec historical goodwill. (d) Reflects the elimination of pension asset retained by Coltec. (3) Adjustment to record the purchase of the Coltec Divisions. (a) Reflects the elimination of accumulated depreciation of the Coltec Divisions as required by the purchase method of accounting. (b) The Coltec Acquisition is accounted for under the purchase method of accounting and, accordingly, an allocation of purchase cost to the Company's assets and liabilities is made to reflect fair values. Amount paid to Coltec............................................................. $283.0 Adjustments to purchase price to reflect expenses incurred and adjustments required pursuant to the purchase agreement..................................... 4.8 ----- Total purchase cost............................................................... $287.8 Net book value of assets acquired................................................. 50.6 ----- Pro forma unallocated excess of purchase cost over net assets acquired............ $237.2 Allocation for assumption of certain liabilities.................................. 1.2 ----- Pro forma goodwill................................................................ $238.4 =====
(c) Reflects the bank financing required as if the Coltec Acquisition had occurred on March 31, 1996. The total purchase price was $287.8 million which included $283 million paid to Coltec and $4.8 million in other acquisition costs. (d) Reflects the elimination of the equity accounts of the Coltec Divisions. 11 14 RISK FACTORS The following factors, as well as the information contained elsewhere in this Prospectus, should be carefully considered by prospective investors before any decision is made to invest in the Shares. AUTOMOTIVE INDUSTRY CYCLICALITY AND CONDITIONS The Company's principal operations are directly related to domestic and foreign automotive production. Automotive sales and production are cyclical and dependent upon general economic conditions and other factors. As compared to 1995, the Company expects automotive production in 1996 to be flat or to decline slightly in North America and Europe, and to improve slightly in Asia. Any significant reduction in automotive production would have an adverse effect on the level of the Company's sales to OEMs and the Company's financial position and operating results. Each of the Company's primary North American customers, Ford, GM and Chrysler, have major contracts with the United Automobile, Aerospace and Agricultural Implement Workers of America (the "UAW") which will expire and are subject to renegotiation during 1996. Because of the OEMs' dependence on a single union, labor difficulties and work stoppages at OEMs' facilities have an impact on the Company. For example, a 17-day March 1996 work stoppage in two Dayton, Ohio, GM plants resulted in the concomitant shutdown of the Company's production lines dedicated to the manufacture of products for GM vehicles. Although the Company took steps to minimize the consequences of the work stoppage, the Company lost $8.5 million in revenue as a result of the 17-day strike. Many of the Company's products are currently used exclusively in sport utility vehicles and light trucks, the most rapidly growing segment in the overall automotive market. Any significant reduction in production in this market segment would have an adverse effect on the level of the Company's sales to OEMs and the Company's financial position and operating results. COMPETITION The Company competes worldwide with a number of other manufacturers and distributors which produce and sell similar products. Price, quality and technological innovation are the primary elements of competition. The Company's competitors include vertically integrated units of the Company's major OEM customers, as well as a large number of independent domestic and international suppliers. A number of these companies are larger and have greater resources than the Company. There can be no assurance that the Company's business will not be adversely affected by increased competition in the markets in which it operates. The competitive environment has also changed dramatically over the past few years as the Company's traditional United States OEM customers, faced with intense international competition, have expanded their worldwide sourcing of components. As a result, the Company has experienced competition from suppliers in other parts of the world which enjoy economic advantages such as lower labor costs, lower health care costs, and, in some cases, export subsidies and/or raw materials subsidies. There is also substantial and continuing pressure from the OEMs to reduce costs, including costs associated with outside suppliers such as the Company. Although OEMs have indicated that they will continue to rely on outside suppliers, a number of the Company's major OEM customers manufacture products for their own use that compete with the Company's products and that these OEMs could elect to manufacture for their own use in place of the products now supplied by the Company. The Company believes that its ability to develop proprietary new products and to control its own costs will allow it to remain competitive. However, there can be no assurance that the Company will be able to improve or maintain its gross margins on product sales to OEMs or that the recent trend by OEMs towards increased outsourcing will continue. Annual price reductions to OEM customers appear to have become a permanent feature of the Company's business environment. Price reductions granted in 1995 totalled approximately $8 million. To maintain its profit margins, the Company, among other things, seeks price reductions from its own suppliers, adopts improved production processes to increase manufacturing efficiency, updates product designs to reduce 12 15 costs and develops new products whose benefits support increased pricing. The Company's ability to pass through increased raw material costs to its OEM customers is also limited, with cost recovery less than 100% and often on a delayed basis. There can be no assurance that the Company will be able to reduce costs in an amount equal to the annual price reductions and the increase in raw material costs. RELIANCE ON MAJOR CUSTOMERS The Company's worldwide sales in 1995 to Ford and GM constituted approximately 41% and 25%, respectively, of its 1995 consolidated sales. The corresponding percentages for 1994 were 39% and 27%. No other customer accounted for more than 10% of the Company's consolidated sales in either 1995 or 1994. After giving effect to the Coltec Acquisition, sales to Ford and GM would have been approximately 40% and 26%, respectively, of 1995 consolidated sales. Sales to Chrysler constituted approximately 9% of total consolidated sales in 1995, and pro forma for the Coltec Acquisition, sales to Chrysler would have constituted approximately 13% of 1995 consolidated sales. The Company's 1995 consolidated sales do not include the approximately $394 million of sales made by the Company's unconsolidated joint ventures. If sales from unconsolidated joint ventures were included in 1995 consolidated sales, worldwide sales to Toyota Motor Corporation and its affiliates ("Toyota") would be approximately 10% of such sales. See "Business -- Customers." Although the Company has had long-standing relationships with each of Ford, GM, Chrysler and Toyota and sells a wide variety of products to various divisions of each company globally, if the Company lost any significant portion of its sales to any of these customers, it would have a material adverse effect on the financial condition and results of operations of the Company. LABOR RELATIONS Approximately 50% of the Company's domestic hourly employees are unionized. The Company's two most significant domestic collective bargaining agreements expire in March 1998 for its Muncie, Indiana plant (transfer case and manual transmissions businesses), and in October 1998 for its Ithaca, New York plant (Morse TEC group). While the Company believes that its relations with its employees are good, a prolonged dispute could have a material adverse effect on the Company. See "-- Automotive Industry Cyclicality and Conditions" and "Business -- Employees." UNFUNDED PENSION OBLIGATIONS The Company has a substantial unfunded pension obligation. On December 31, 1995, the present values of the Company's projected benefit obligations and accumulated benefit obligations with respect to underfunded plans were $221.5 million and $217.7 million, respectively. The fair value of the Company's pension plan assets with respect to such plans as of December 31, 1995 was $135.7 million. The resulting unfunded portion of $85.8 million at December 31, 1995 compared with an unfunded portion of $77.5 million at December 31, 1994 (based on the Company's projected benefit obligations on the respective dates). This increase was due in part to a change in the discount rate from 8.5% in 1994 to 7.25% in 1995. Had the discount rate remained 8.5%, the unfunded portion as of December 31, 1995 would have been $20.8 million lower, or $65.0 million. Of the 1995 unfunded portion, approximately $29.4 million relates to pension obligations for the Company's German subsidiary, which does not require funding. The Company's long-term objective is to fund its entire pension obligation with funds that are generated from operations, although there can be no assurance that this will occur. In connection with the Spin-Off, the Company and BW-Security entered into an agreement with the Pension Benefit Guaranty Corporation (the "PBGC") resolving certain issues with respect to the Company's pension obligations. Pursuant to such agreement, the Company paid $17.5 million in 1993 to a specified underfunded plan of the Company and agreed to pay to such plan, in each year from 1993 through 2002, $1 million in excess of amounts that the Company would otherwise be required to contribute under statutory or contractual obligations. BW-Security also agreed to become the sponsor of two plans covering certain employees of certain discontinued automotive operations, and the Company will have no further liability for 13 16 such plans. In addition, the Company agreed to file certain reports and financial statements with the PBGC and to give the PBGC advance notice of certain significant asset sales. SALE OF MANUAL TRANSMISSION BUSINESS The Company has announced its intention to sell its North American manual transmission business, which is based in the Company's Muncie, Indiana plant. See "-- Labor Relations." Although profitable in 1994, this business lost money on an operating basis in 1995 and during the first quarter of 1996 due to a decline in volume. While the sale process is continuing, the Company expects to continue to report operating losses for such business until it is sold. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Other Financial Condition Matters -- North American Manual Transmission Business." ENVIRONMENTAL REGULATION AND PROCEEDINGS The Company's operations are subject to federal, state, local and foreign laws and regulations governing, among other things, emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of waste and other materials. The Company believes that its business, operations and facilities have been and are being operated in compliance in all material respects with applicable environmental and health and safety laws and regulations, many of which provide for substantial fines and criminal sanctions for violations. However, the operation of automotive parts manufacturing plants entails risks in these areas, and there can be no assurance that the Company 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, regulations or requirements that may be adopted or imposed in the future. The Company believes that the overall impact of compliance with regulations and legislation protecting the environment will not have a material effect on its future financial position or results of operations, although no assurance can be given. Capital expenditures and expenses in 1995 attributable to compliance with such regulations and legislation were not material. 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 28 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 these sites. Responsibility for clean-up and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula. See "Business -- Environmental Regulations and Proceedings." Based on information available to the Company which, in most cases, includes an estimate of allocation of liability among PRPs; the probability that other PRPs, many of whom are large, solvent public companies, will fully pay the costs apportioned to them; currently available information from PRPs and/or federal or state environmental agencies concerning the scope of contamination and estimated remediation costs; estimated legal fees; and other factors, the Company has established a reserve in its financial statements for indicated environmental liabilities with a balance of approximately $11 million at March 31, 1996. The Company expects this amount to be expended over the next three to five years. In connection with the Spin-Off, the Company and BW-Security entered into a Distribution and Indemnity Agreement which provided for, among other matters, certain cross-indemnities designed principally to place financial responsibility for the liabilities of businesses conducted by BW-Security and its subsidiaries with BW-Security and financial responsibility for liabilities of the Company or related to its automotive businesses with the Company. The Company has been advised that BW-Security believes that the Company is responsible for certain liabilities relating to environmental matters retained by BW-Security at the time of the Spin-Off. BW-Security has requested indemnification from the Company for past costs of approximately $1.6 million and for future costs related to these environmental matters. At the time of the Spin-Off, BW-Security maintained a letter of credit for approximately $9 million with respect to the principal portion of 14 17 such environmental matters. Although there can be no assurance, based upon information currently available to the Company, the Company does not believe that it is required to indemnify BW-Security under the Distribution and Indemnity Agreement with respect to such liabilities. In addition, the Company does not currently have information sufficient to determine what its liability would be if it is ultimately determined that it is required to indemnify BW-Security with respect to such liabilities. The Company believes that none of these matters, individually or in the aggregate, will have a material adverse effect on its financial position or future operating results, generally either because estimates of the maximum potential liability at a site are not large or because liability will be shared with other PRPs, although no assurance can be given with respect to the ultimate outcome of any such matter. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Other Financial Condition Matters -- Environmental." PRINCIPAL STOCKHOLDER Upon completion of the Offerings, certain affiliates of Merrill Lynch Capital Partners, Inc. ("MLCP") will control approximately 19.50% of the voting power of the Company and it is estimated that the executive officers and directors of the Company (without regard to shares held by affiliates of MLCP) will control in the aggregate approximately 1.08% of the voting power of the Company. See "Principal and Selling Stockholders." As a result of such stock ownership, if the MLCP affiliates and the executive officers and directors of the Company were to vote together, they may be able to influence significantly the election of the Board of Directors of the Company and votes on all other matters submitted to the Company's stockholders for approval. In addition, three of the members of the Company's Board of Directors are associated with MLCP. In the event that the ownership of the Common Stock becomes more widely dispersed in the future as a result of additional sales by existing stockholders or further issuances by the Company, certain provisions of the Company's Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") and Bylaws (the "Bylaws") and Delaware law may make the acquisition of control of the Company in a transaction not approved by the Company's Board of Directors more difficult or expensive. For example, the Delaware takeover statute limiting transactions with "interested stockholders" applies to the Company and the Company's Certificate of Incorporation and Bylaws provide for a classified Board of Directors, limitations on the removal of directors, limitations on stockholder action and advance notification procedures. See "Description of Capital Stock -- The Delaware General Corporation Law" and "-- Certificate of Incorporation; Bylaws." These provisions could discourage an acquisition attempt or other transactions in which stockholders might receive a premium over the then current market price for the Common Stock. SHARES ELIGIBLE FOR FUTURE SALE The Merrill Lynch entities, which include the entities named in Note 1 of the table in "Principal and Selling Stockholders" (the "ML Entities"), certain institutional investors and certain management investors have rights entitling them, under specified circumstances, to cause the Company to register for sale all or part of their shares of Common Stock and to include such shares in any registered public offerings of Common Stock by the Company. The Company is effecting the Offerings pursuant to the exercise by the ML Entities of their demand registration rights under the Registration Rights Agreement (as defined herein). See "Description of Capital Stock -- Registration Rights Agreement." No prediction can be made as to the effect, if any, that future sales of shares of Common Stock, or the availability of shares of Common Stock for future sales, will have on the market price of the shares of Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock, or the perception that such sales could occur, could adversely affect prevailing market prices for the Common Stock. In addition, certain of the ML Entities that are limited partnerships are expected to distribute an aggregate of between 230,338 and 249,414 shares of Common Stock owned by them to their partners that have elected not to receive their pro rata share of the proceeds of the sale of Common Stock by such partnerships (the "Merrill Lynch Distribution"). The exact number of shares distributed will depend upon the Price to Public in the Offerings. As a condition to receiving shares of Common Stock in the Merrill Lynch 15 18 Distribution, such partners have agreed to be bound by the same lock-up provision as each of the holders of at least 1% of the outstanding shares of the Common Stock who is a party to the Registration Rights Agreement for a period of 180 days after the effective date of the Registration Statement. The Merrill Lynch Distribution is expected to occur as soon as practicable after 180 days from the effective date of the Registration Statement, or on such earlier date consented to by the Representatives (as defined herein). In addition, each of the Company and the executive officers and directors of the Company will agree, for a period of 180 days after the effective date of the Registration Statement, not to sell or otherwise dispose of any shares of Common Stock or securities convertible into or exchangeable or exercisable for Common Stock, or any rights or warrants to acquire Common Stock, without the prior written consent of the Representatives. USE OF PROCEEDS The Selling Stockholders will receive all of the proceeds from the Offerings and the Company will receive no proceeds. See "Principal and Selling Stockholders." PRICE RANGE OF COMMON STOCK The Common Stock is traded on the NYSE under the symbol "BWA." The following table sets forth on a per share basis, for the period indicated, the high and low sales prices of the Common Stock as reported on the NYSE Composite Tape and dividends paid.
HIGH LOW DIVIDEND ------- ------- -------- 1994 First Quarter.............................. $34.000 $26.375 $ 0.125 Second Quarter............................. $31.625 $22.625 $ 0.15 Third Quarter.............................. $29.125 $22.625 $ 0.15 Fourth Quarter............................. $25.500 $21.625 $ 0.15 1995 First Quarter.............................. $26.125 $22.375 $ 0.15 Second Quarter............................. $29.375 $23.500 $ 0.15 Third Quarter.............................. $33.875 $28.500 $ 0.15 Fourth Quarter............................. $32.250 $27.625 $ 0.15 1996 First Quarter.............................. $33.625 $28.625 $ 0.15 Second Quarter............................. $43.000 $33.625 $ 0.15 Third Quarter (through July 22)............ $40.375 $36.125 --
On July 2, 1996, the closing price of the Common Stock on the NYSE Composite Tape was $39.875 per share. Prospective investors should obtain a current quote on the shares of Common Stock. As of June 30, 1996, there were approximately 152 holders of record of Common Stock. DIVIDEND POLICY A dividend of $0.15 per share was paid on May 15, 1996 to stockholders of record as of May 1, 1996. While the Company currently expects that comparable cash dividends will continue to be paid in the future, the dividend policy is subject to review and change at the discretion of the Board of Directors of the Company. 16 19 CAPITALIZATION The following table sets forth the capitalization of the Company at March 31, 1996, and as adjusted to give effect to the Coltec Acquisition. This table should be read in conjunction with "Selected Historical Financial Data" and "Summary -- Pro Forma Financial Data" and the historical Consolidated Financial Statements of the Company appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (the "Annual Report") and Form 10-Q for the quarter ended March 31, 1996, which are incorporated by reference herein.
HISTORICAL AS ADJUSTED ---------- ----------- Short-term debt: Bank borrowings...................................................... 31.1 31.1 Bank term loans...................................................... 13.6 13.6 Capital lease liability.............................................. 0.1 0.1 ---------- ----------- Total short-term debt........................................ $ 44.8 $ 44.8 ======= ========= Long-term debt: Bank borrowings...................................................... $ 12.9 $ 12.9 Bank term loans...................................................... 70.3 70.3 Revolving credit facility............................................ -- 287.8 Other long-term debt................................................. 6.6 6.6 ---------- ----------- Total long-term debt......................................... $ 89.8 $ 377.6 ======= ========= Stockholders' equity: Common stock......................................................... $ 0.2 $ 0.2 Other stockholders' equity........................................... 604.1 604.1 ---------- ----------- Total stockholders' equity................................... $604.3 $ 604.3 ======= =========
17 20 SELECTED HISTORICAL FINANCIAL DATA The following table sets forth selected historical financial information for the Company for 1991 through March 31, 1996. The information for the years ended December 31, 1991, 1992, 1993, 1994 and 1995 is derived from the audited financial statements of the Company. The information for the three-month periods ended March 31, 1996 and 1995 is not audited, but in the opinion of the Company is a fair presentation of such information. This information is qualified by reference to the historical consolidated financial statements of the Company incorporated by reference herein. See "Incorporation of Certain Information by Reference." The following table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations."
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, --------------------------------------------- ------------------- 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- -------- -------- (MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA Net sales.......................... $ 820.3 $ 926.0 $ 985.4 $1,223.4 $1,329.1 $ 327.8 $ 348.9 Cost of sales...................... 660.4 755.2(a) 769.3 948.4 1,044.9 253.0 277.5 Depreciation....................... 62.0(b) 64.3(a) 57.9 60.9 68.0 17.2 18.4 Selling, general and administrative expenses......................... 77.7 69.6 83.5 92.1 97.8 26.4 30.8 Minority interest.................. (1.3) (1.3) 0.1 1.4 2.0 0.4 0.7 Goodwill amortization.............. 9.7 9.7 9.7 9.6 9.6 2.4 2.6 Equity in affiliate earnings and other income..................... (9.9) (6.9) (10.6) (10.6) (18.6) (4.2) (4.1) Interest expense and finance charges.......................... 53.8(d) 44.8(d) 18.4 13.9 14.2 3.5 3.5 Provision for income taxes......... 3.7 2.7 24.3 43.3 37.0 11.5 7.2 -------- -------- -------- -------- -------- -------- -------- Earnings (loss) before cumulative effect of accounting change...... (35.8) (12.1) 32.8 64.4 74.2 17.6 12.3 Cumulative effect of change in accounting(b).................... 4.8 -- (130.8) -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Net earnings (loss)................ $ (31.0) $ (12.1) $ (98.0) $ 64.4 $ 74.2 $ 17.6 $ 12.3 ======== ======== ======== ======== ======== ======== ======== Earnings (loss) per share before cumulative effect of accounting change(c)........................ -- $ (0.53) $ 1.41 $ 2.75 $ 3.15 $ 0.75 $ 0.52 Net earnings (loss) per share(c)..................... -- $ (0.53) $ (4.21) $ 2.75 $ 3.15 $ 0.75 $ 0.52 Average shares outstanding (thousands)(c)................... -- 23,005 23,284 23,424 23,562 23,385.. 23,495 Cash dividend declared per share........................ -- -- 0.125 0.45 0.60 0.15 0.15 OTHER OPERATING DATA Research and development........... $ 26.9 $ 26.8 $ 25.2 $ 33.8 $ 36.7 $ 8.4 $ 11.7 Capital expenditures............... 53.9 47.7 65.5 98.8 92.5 15.1 11.6 Number of full-time employees (thousands).................... 6.4 6.7 6.6 7.8 8.6 7.8 8.4 Sales per full-time employee (thousands)...................... $ 128.0 $ 139.0 $ 149.0 $ 158.0 $ 163.0 $ 167.0 $ 166.0 BALANCE SHEET DATA (at end of period) Net property, plant and equipment........................ $ 463.5 $ 412.9 $ 418.3 $ 462.3 $ 523.0 $ 462.3 513.0 Total assets....................... 1,080.0 1,074.2 1,159.4 $1,240.3 $1,335.2 $1,269.6 $1,361.4 Total debt......................... --(d) --(d) 159.6 107.3 134.7 135.1 134.6 BW-Security investment(e).......... 743.5 728.2 -- -- -- -- -- Stockholders' equity(e)............ -- -- 459.1 534.9 600.0 554.0 604.3
- --------------- (a) Cost of sales for 1992 included a $28.7 million charge for the write-off of excess capacity and depreciation included $7.3 million related to such capacity. (b) Amounts reflect the adoption of SFAS No. 109 in 1991 and SFAS No. 106 in 1993. In 1991, depreciation increased by $11.2 million because of an adjustment to fixed assets related to the adoption of SFAS No. 109. (c) Earnings per share for 1992 and 1993 have been calculated assuming that the IPO had been completed on January 1, 1992. (d) Prior to the Spin-Off, interest was allocated to the Company on the basis of the Company's relative operating investment compared to BW-Security's overall capital investment (debt plus equity). Prior to the Spin-Off, all debt was considered to be part of the BW-Security investment. (e) Prior to the Spin-Off, the Company was wholly owned by BW-Security and its stockholders' equity is reported as BW-Security investment. After the Spin-Off, the Company's equity is reported as stockholders' equity. 18 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The Company became independent on January 27, 1993, when its Common Stock was distributed to the stockholders of its then parent, BW-Security, as a dividend in the Spin-Off. The initial capital structure was established with $480 million of equity and $251 million of debt. In August 1993, the Company completed the IPO of 3.66 million shares of Common Stock, yielding net proceeds of $83.2 million. The Company is a technology-driven supplier of highly engineered components and systems, primarily for automotive powertrain applications. The Company, which operates 36 manufacturing facilities in 12 countries serving the North American, European and Asian automotive markets, is an original equipment supplier to every major automaker in the world. Its products fall into four operating groups: Powertrain Systems, Automatic Transmission Systems, Morse TEC and Air/Fluid Systems. Except for the information under "-- Pro Forma Capital Resources and Liquidity of the Company," this discussion does not give effect to the Coltec Acquisition. "Management's Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with the historical Consolidated Financial Statements of the Company included in the Annual Report and the Company's Form 10-Q for the quarter ended March 31, 1996. See "Incorporation of Certain Information by Reference." Also see "Selected Historical Financial Data" for additional information. RESULTS OF OPERATIONS The following table details the Company's results of operations as a percentage of sales:
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------- ----------------- 1993 1994 1995 1995 1996 ----- ----- ----- ----- ----- Net sales...................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales.................................. 78.1 77.5 78.6 77.2 79.5 Depreciation................................... 5.8 5.0 5.1 5.2 5.3 Selling, general and administrative expenses... 8.5 7.5 7.4 8.1 8.8 Goodwill amortization.......................... 1.0 0.8 0.7 0.7 0.7 Minority interest, affiliate earnings and other income, net.................................. (1.1) (0.8) (1.2) (1.1) (0.9)
Historically, the Company's sales have been seasonal in nature, with the fourth quarter of each year generally having higher sales. This trend has been less prevalent in recent years. The fourth quarter has traditionally been the quarter for new model introduction by the automotive industry, but this trend is diminishing as the auto industry becomes more global and competitive pressure for continual model updates intensifies. First Quarter 1996 Compared with First Quarter 1995 Sales for the quarter ended March 31, 1996 were up 6% from the same period in the prior year. The increase in sales is attributable to the purchase of the Precision Forged Products Division ("PFPD") of Federal-Mogul Corporation at the end of April 1995 and the SUM business at the end of 1995. PFPD contributed $17 million in sales while SUM contributed $4 million. Excluding PFPD and SUM, sales were relatively unchanged from the prior year. The Company has realized revenue growth because of the presence of its products on vehicles, such as light trucks, sales of which are growing at a rate in excess of the overall market. Revenue growth in most areas has been offset by $8.5 million in revenues lost due to the GM strike in March and a $16.3 million decrease in sales versus 1995 in the manual transmission business due to the loss of the GM S-Truck business in the summer of 1995. The Company's manual transmission business had sales of $28.4 million for the quarter ended March 31, 1996 and $44.7 million for the quarter ended March 31, 1995. In the first quarter of 1996 the Automatic Transmission Systems and Air/Fluid Systems groups both reported increases in sales while the Powertrain Systems and Morse TEC groups reported slightly lower sales 19 22 results. Powertrain Systems reported a decrease of 1% or $1.4 million due to the loss of the GM S-Truck manual transmission business as well as a decline in sales of sporty cars which utilize manual transmissions. This decline was offset by volume increases in its domestic transfer case applications, particularly in the light truck area. A decrease in sales of 6% or $4.4 million at Morse TEC was primarily due to the GM strike in March. Increased sales of 21% at the Automatic Transmission Systems group (4% excluding the PFPD acquisition) were related to volume increases by the Company's OEM customers as well as increased content in certain automatic transmissions tempered by the GM strike. Sales at Air/Fluid Systems have also shown improvement, 21% over the comparable 1995 period, due to volume increases of various solenoids and valves particularly in Chrysler applications as well as $4 million related to the acquired SUM business. The lost GM manual transmission business and the GM strike contributed to the relatively flat sales volume, net of acquisitions. Adjusted for the GM strike, the effect of the manual transmission business decline and the impact of acquisitions, sales increased 7.8% against a North American market which was off by 13%, a European market which was stagnant and a Japanese market which declined slightly. However, the timing of the GM strike and the fixed cost structure of the manual transmission business translated into a gross profit decrease of $3.4 million to $71.4 million in 1996. The Company's income taxes are based upon estimated annual tax rates for the year. In the first quarter of 1996, the Company realized certain tax credits related to its foreign operations. These realized credits resulted in the effective income tax rate for the first quarter of 1996 being lower than the standard federal and state rates. The effective income tax rate for the first quarter of 1995 exceeded the United States statutory rate due to state income taxes as well as higher foreign rates which exceeded those in the United States. The Company has increased its spending on research and development ("R&D") by $3.3 million to $11.7 million for the three months ended March 31, 1996 in order to maintain and expand its technological expertise in both product and process. Although R&D spending increased in the first quarter of 1996, the Company expects 1996 R&D spending to be approximately 3% of sales, which is consistent with prior years. Although down from the prior year, the NSK-Warner joint venture continued to report strong earnings in the current period. For the Company's three months ended March 31, 1996 and 1995, the Company's portion of NSK-Warner's earnings were $3.7 million and $4.0 million, respectively. The earnings decline resulted from a small decrease in sales volume and a weakening of the yen. The effects on net income of the GM strike and the loss of the manual transmission business were partially offset by tax credits resulting in the Company's reported earnings in the first quarter of 1996 of $12.3 million, $5.3 million lower than the first quarter of 1995. 1995 Compared with 1994 Overall, North American automotive production was down 3% in 1995 versus 1994, while Japanese automotive production was down about 3%, Korean automotive production was up 12% and European automotive production was flat. Against this backdrop, the Company was able to register gains in sales of 9% and earnings of 15%. The gains were the result of the Company's participation in one of the most rapidly growing segments in the overall automotive marketplace -- sport utility vehicles and light trucks -- and the Company's ability to increase the value of components supplied per vehicle through ongoing aggressive marketing and engineering programs. The Company's acquisition of PFPD in 1995 accounted for approximately 40% of the sales gain, or $52 million. After adjusting for the acquisition and the 1994 disposition of a marine and industrial business, sales increased 7%. 20 23 The following table shows net sales by product grouping:
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ---------------------------------- ----------------- 1993 1994 1995 1995 1996 -------- -------- -------- ------ ------ (MILLIONS OF (MILLIONS OF DOLLARS) DOLLARS) Powertrain Systems........................ $ 418.4 $ 529.9 $ 544.8 $140.4 $139.0 Automatic Transmission Systems............ 307.6 378.5 454.4 98.6 119.3 Morse TEC................................. 202.3 239.9 257.6 70.4 66.0 Air/Fluid Systems......................... 83.7 97.3 107.6 28.0 33.8 ------ ------ ------ ------ ------ 1,012.0 1,245.6 1,364.4 337.4 358.1 Interbusiness eliminations................ (26.6) (22.2) (35.3) (9.6) (9.2) ------ ------ ------ ------ ------ Total..................................... $ 985.4 $1,223.4 $1,329.1 $327.8 $348.9 ====== ====== ====== ====== ======
Powertrain Systems' sales grew by 3% in 1995 (8% excluding a 1994 disposition). In the 4WD transfer case business, the TODTM transfer case for the Ford Explorer yielded higher volume due to Ford's increased capacity for this sport utility vehicle. Increased features over the transfer case model it replaced also improved the Company's revenue per unit. Volume increases in large transfer cases for full-size pickup truck applications were, in part, offset by the discontinuance of the automatic locking hub business, due to technological changes. In 1995, the Company sold 452,000 small transfer cases and 395,000 large transfer cases compared with 398,000 and 343,000, respectively, in 1994. Revenue from manual transmissions declined by $29 million to $148 million in 1995 because of the loss of the GM S-Truck business combined with declines in volume for the principal remaining North American applications - -- high-performance five-speed and six-speed sporty cars such as the Ford Mustang, Chevrolet Camaro, Pontiac Firebird and Dodge Viper. See "-- Other Financial Condition Matters -- North American Manual Transmission Business" for a discussion of the Company's decision to seek a buyer for the North American manual transmission business. The Automatic Transmission Systems group realized a $75.9 million increase in sales over 1994, up 20%. Of the increase, $52 million resulted from the acquisition of the PFPD business in April 1995. The remainder of the increase (6% over 1994) resulted from volume gains in North America, Germany and Korea, which were offset by approximately $2.3 million in price reductions to customers. In Korea, the volume increase was market driven. In North America and Europe, the volume gains were the result of the Company's increased content per vehicle. This group sells to the widest array of OEMs and is most susceptible to trends in the marketplace. In 1995, it benefited from the move to four- and five-speed automatic transmissions from three-speed models, which increases the Company's componentry even if market volumes are flat. During 1995, the Company saw the first of what it believes will be an increasing number of five-speed transmission models, again affording the opportunity to improve volume without being dependent upon overall market growth. The acquisition of the PFPD business should also lead to opportunities to bundle components into a system, thereby increasing the Company's content per vehicle. PFPD also offers a promising product line in engine connecting rods, a new area for the Company. The Morse TEC group continued its sales growth in 1995 with a 7% gain. Two percentage points of the gain resulted from favorable exchange rates for the yen. The remainder is the result of increased volume and improved product mix. The group realized a full year of sales of the MORSE GEMINITM Transmission Chain System, which it began providing for the Chrysler LH series in mid-1994. However, monthly volumes for the Chrysler LH fell in 1995 versus 1994. In 1995, the group was selected to provide the MORSE GEMINITM system for all of GM's FWD automatic transmission applications beginning in 1997. The transmission chain business benefited from increased sales of sport utility vehicles, which use the Morse HY-VO(R) chain. Engine timing systems sales also grew as Ford expanded its modular engine program to the Taurus/Sable as well as the new F-Series pickup truck, which was introduced in the beginning of 1996. The modular engine series uses a Morse engine timing system, consisting of chains, sprockets, tensioners and snubbers. Previously the Company provided only a single chain. The modular engine series at Ford now consists of 2.5 liter and 3.0 liter V-6s and 4.6 liter and 5.2 liter V-8s. 21 24 Air/Fluid Systems realized an 11% sales increase in 1995. The group received a full year of benefit of providing 100% of certain Chrysler transmission solenoid requirements for its front-wheel drive vehicles. The group also increased its volume of Ford EGR valves (required for emission regulations) and began providing the clutch coil incorporated in the Company's TODTM transfer case. With the recent acquisitions of SUM and the Coltec Divisions, the Air/Fluid Systems business is expected to contribute a greater portion of consolidated revenues in 1996 and beyond. Because of the nature of the OEM marketplace, the Company's sales tend to be concentrated among a small number of large customers. In 1995, the Company's top ten customers constituted about 86% of total consolidated sales compared with 83% in 1994. Ford, the Company's largest customer, accounted for 41% of sales in 1995 and 39% of sales in 1994. GM accounted for 25% of 1995 sales and 27% of 1994 sales. Chrysler accounted for 9% of total consolidated sales in 1995. These sales represent a variety of different products to a number of OEM divisions worldwide. Gross margin in 1995 slipped to 21.4% versus 22.5% in 1994. Four factors were responsible for the decline. First, the decline in volume in the manual transmission business had a material impact on margins. Excluding the manual transmission business, gross margin would have been 23.5% in 1995 versus 24.5% in 1994. Next, raw material prices increased at a faster rate than the Company's ability to pass through such increases. For example, aluminum went from $0.63 per pound at the beginning of 1994 to $0.97 at the beginning of 1995 to $0.77 at the end of 1995. Aluminum is a key component of the Company's transfer cases and cases for solenoids. The Company's contracts with OEMs have economic pass-through clauses, but these do not provide for 100% recovery, and in many cases, recovery takes place on a delayed basis. The Company has sought to minimize its exposure to material cost fluctuations through pass-through clauses, and through the use of alternative materials where feasible. The third factor affecting the margin comparison is price reductions to customers where the Company has not been able to achieve offsetting cost reductions. The timing required to implement and get approval for cost reduction proposals is partially responsible for this factor. The final significant factor in the margin comparison is that the acquired PFPD business has a relatively lower margin than the Company as a whole. Annual price reductions to customers appear to have become a permanent feature of the Company's business environment. Price reductions granted in 1995 totaled approximately $8.0 million. Contractual price reductions can in some cases be offset by economic pass-through of material costs and credit for other product features or savings realized by the customer. To maintain margins, the Company has a three-part strategy. The first is to reduce costs by continual improvement in the Company's production processes and by price reductions from suppliers. The next is to update product designs to reduce cost and/or improve productivity by the OEM customer in the final application. Finally, the Company makes an ongoing effort to develop new products whose benefits support the pricing. The increase in sales, offset by the margin decline, translated into EBIT of $125.4 million, a $3.8 million, or 3%, increase over 1994. Other trends affecting EBIT include higher depreciation from increased capital spending in recent years. Depreciation increased $7.1 million, or 12%, in 1995. Selling, general and administrative expenses increased by $5.7 million, or 6%, in 1995. As a percentage of sales, such expenses declined to 7.4% in 1995 from 7.5% in 1994. Included in the 1995 expenses was $36.7 million in R&D spending, a 9% increase over 1994. The Company continued to invest in R&D at a rate in excess of 2.7% of sales, recognizing that a key corporate strategy is to position the Company on the leading technological edge. Examples of new products resulting from the R&D investments in recent years include the TODTM transfer case, the MORSE GEMINITM Transmission Chain System and the new Ford one-way clutch/drum system, which the Company will begin to produce in mid-1996. In 1994, the Company provided approximately $5.2 million of additional accruals for environmental and other liabilities. No similar accruals were provided for in 1995. Equity in affiliate earnings and other income jumped to $18.6 million in 1995 compared with $10.6 million in 1994. The Company's 50%-owned joint venture in Japan, NSK-Warner, continued to outperform the Japanese automotive marketplace. The Company's share of earnings for this venture increased to $19.0 million in 1995 versus $13.9 million in 1994. The venture experienced 16% sales growth in 1995 to $352 22 25 million. Earnings were up approximately 25% in local currency, with the rest of the increase attributable to the strong yen in 1995. The remainder of the increase resulted from the net loss in 1994 of $3.5 million from the disposition of certain non-core investments and assets. No similar losses were realized in 1995. Interest expense was essentially flat between the two years at around $14 million. Higher debt levels resulting from acquisitions during 1995 were offset by lower interest rates on foreign debt outstanding. The Company benefited from the general decline in foreign interest rates throughout 1995 and improved spreads versus nominal borrowing rates in 1995. As a result of the above items, pre-tax earnings were $111.2 million in 1995, a 3% increase over $107.7 million in 1994. Income taxes totaled $37.0 million in 1995, an effective rate of 33.3%, versus an effective rate of 40.2% in 1994. A significant reason for the improved tax rate was substantially higher credits against taxes otherwise payable, particularly for R&D spending and foreign credits. The Company has available approximately $22 million of foreign tax credits, which can be offset only against foreign source income. Other factors affecting the nominal tax rate were the level of affiliate earnings, which are recognized on an after-tax basis, and goodwill amortization, which is nondeductible. 1994 Compared with 1993 The overall growth in the North American automotive market was 11% in 1994. Europe was up slightly and Japan was essentially flat. Compared with these market trends, Company sales of $1.2 billion increased 24% from 1993. Each of the Company's four business groups contributed to the overall increase. The Powertrain Systems group increased sales by $111.5 million, or 27%, over the prior year. This increase was driven by substantial volume growth in both transfer cases and manual transmissions. Transfer case sales volume growth resulted from increased installations in pickup trucks, as Ford Explorer sport utility sales were essentially flat at full capacity. The increase in manual transmission sales resulted from gains in GM pickup truck installations, sporty car installations and the introduction of the new Ford Mustang. The Automatic Transmission Systems group reported sizable growth in United States sales in 1994, while European sales increased only marginally as the region was emerging from a recession. The group's products are on a large variety of models from all major OEMs, so the group benefited from industry growth. A higher rate of four-speed automatic transmission applications, which require more of the Company's components, also caused sales to increase. The Company's Morse TEC group continued its sales growth in 1994 with increased volume of transmission chain and engine timing chain components and systems. The group introduced the MORSE GEMINITM Transmission Chain System in mid-1994 on the Chrysler LH series, yielding substantial incremental 1994 sales. The timing system for the Ford modular engine program was expanded to the 2.5 liter V-6 Duratec model for the Contour/Mystique vehicles in mid-1994. The group also benefited from the increased popularity of 4WD vehicles, most of which use the Company's chain in their transfer cases. Air/Fluid Systems group sales have increased with the improving demand for various solenoids and valves. The group provided 100% of Chrysler's requirements for certain transmission solenoids. Gross margin in 1994 of 22.5% improved over the prior year's 21.9%. This translated to a greater gain in EBIT. EBIT of $121.6 million in 1994 increased 61.1% over the 1993 level of $75.5 million, and the EBIT margin increased to 10.0% from 7.7%. The EBIT gains were the result of ongoing cost reduction programs, as well as operating leverage due to the somewhat fixed nature of certain elements of the cost structure. The Company continues to focus on its manufacturing processes for opportunities to reduce cost. As in 1993, the Company has adapted to the industry-wide practice of continuous price reduction pressures from its customers, causing the Company to give actual price reductions, as well as forego some recovery of inflationary costs. Selling, general and administrative expenses increased from $83.5 million in 1993 to $92.1 million in 1994, but decreased as a percentage of sales from 8.5% in 1993 to 7.5% in 1994. The Company provided approximately $5.2 million of additional accruals for environmental and other liabilities in 1994 and $3.3 23 26 million in 1993. Overall selling, general and administrative spending increased at a much lower rate than the rate at which the level of business increased. Depreciation increased from $57.9 million in 1993 to $60.9 million in 1994. The increase can be attributed to higher capital expenditures over the past two years. Equity in affiliate earnings and other income for both 1994 and 1993 was $10.6 million. Even though the Japanese economy was essentially flat, the Company's portion of its Japanese joint venture's earnings increased $4.5 million to $13.9 million in 1994. The increase in earnings from affiliates was partially offset by a net loss of $3.5 million attributed to the sales of certain non-core investments and assets in 1994. Interest expense and finance charges decreased $4.5 million from $18.4 million in 1993 to $13.9 million in 1994. The decrease was due to lower debt levels, resulting from higher operating cash flows in 1994 and proceeds from the IPO. Pre-tax income improved $50.6 million, or 88.6% from the prior year income of $57.1 million. The improvement can be attributed to the large increase in sales volume, the improved margins and the decrease in interest expense and finance charges offset by an increase in selling, general and administrative expenses. Income taxes increased from $24.3 million in 1993 to $43.3 million in 1994. However, the effective tax rate for 1994 decreased to 40.2% compared to 42.6% in 1993. The income tax rate for both 1994 and 1993 exceeded the U.S. statutory rate due to state taxes, foreign taxes that exceed U.S. rates and the nondeductibility of goodwill amortization. In 1993, the Company recorded a $130.8 million charge, net of tax benefit of $76.8 million, for the cumulative effect of the adoption of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." FINANCIAL CONDITION AND LIQUIDITY The following discussion compares the Company's financial condition at March 31, 1996 to its financial condition at December 31, 1994, the period covered in this Prospectus. The Company was able to maintain its strong financial position in 1995 and the first quarter of 1996 despite spending over $46 million for acquisitions in 1995. At March 31, 1996 total debt was $134.6 million, compared with $107.3 million at December 31, 1994. Cash from operations was sufficient to fund $104.1 million of capital spending as well as the acquisitions referred to above. Total cash from operations over the period was $129.3 million. At March 31, 1996, debt represented 18% of the Company's capitalization as compared with 17% at December 31, 1994. In April 1995, the Company acquired PFPD, a maker of forged sintered transmission and engine components, including races and connecting rods. The price was $28 million plus certain working capital. In early 1995, the Company acquired the remaining 47% of its Italian chain joint venture for $5 million. In December, the Company acquired SUM, a French maker of control components such as solenoids and sensors, for $13 million. The results of PFPD were included in consolidated results beginning in May 1995. No results of operation were included for SUM in 1995, but its accounts were included in the December 31, 1995 balance sheet. Capital expenditures totaled $93 million in 1995, compared with $99 million for 1994. Capital expenditures for the first quarter of 1996 were $11 million compared to $15 million for the first quarter of 1995. Major spending programs included the Ford large transfer case, expansion of the MORSE GEMINITM Transmission Chain Systems program, continued spending on the Ford modular engine timing system, the Chrysler solenoid program, the Ford one-way clutch/drum program in Germany and the purchase of the Seneca, South Carolina, plant for future Mercedes-Benz transfer case business. Spending in the first three months of 1996 was at a ratio of 0.6 times depreciation versus a ratio of 1.4 times depreciation in full year 1995 and 1.6 times depreciation in full year 1994. The Company remains committed to be a net investor in its continuing businesses. The Company believes that the decline during the first three months of 1996 is a function of timing and expects 1996 capital spending to be similar to 1995 levels. The Company believes that the combination of cash flow from its operations and available credit facilities will be adequate to satisfy cash needs for 1996. 24 27 At March 31, 1996, working capital, excluding notes payable, increased by $25.1 million, reflecting the working capital of acquisitions. Receivables sold under the receivables transfer agreement increased by $10 million to $85 million over this period. Net fixed assets increased by $51 million over the 15-month period, reflecting the $104 million of capital spending and fixed assets of acquisitions offset by $86 million of depreciation. Investments and advances increased by $13 million reflecting the NSK-Warner earnings net of dividends. Other ventures entered into in this period have not yet required a significant amount of investment. These ventures include: - Divgi-Warner Private, Ltd. ("Divgi-Warner"), a 60%-owned venture making transfer cases and manual transmissions for the Indian market. - Huazhong Warner Transmission Company Ltd. ("Huazhong Warner"), a 60%-owned manufacturer of manual transmissions for light-truck applications for the central Chinese market. - Warner Ishi Europe, a 50%-owned venture that makes turbochargers in Europe. - Borg-Warner Automotive - Taiwan Co., Ltd., a 100%-owned subsidiary that makes chains in Taiwan. Other balance sheet changes included an increase in other assets of $14 million due principally to recognition of $10 million in intangible pension assets. Goodwill was relatively unchanged despite $18 million in amortization due to goodwill related to acquisitions. Retirement-related liabilities increased by only $11 million despite a decline in the discount rate related to such liabilities. This was due to the earnings on pension assets offset by the excess of annual expense associated with such liabilities over the related cash disbursement. Equity increased by $69 million over the 15-month period. Earnings totaled $86 million offset by $18 million in dividends. The currency translation adjustment declined by $8 million due to less favorable rates for the U.S. dollar, while the minimum pension liability adjustment improved by $3 million due to earnings on pension assets. OTHER FINANCIAL CONDITION MATTERS North American Manual Transmission Business In January 1996, the Company announced that its North American manual transmission business would be offered for sale and that it had retained Lehman Brothers Inc. to assist in the sale process. This decision resulted from the recognition that all major North American OEMs have allied suppliers for their significant rear-wheel drive manual transmission applications, leaving only one niche open to the Company in North America. The niche served by the Company -- sporty and performance cars -- suffered declines of 20-30% in 1995, a trend the Company feels is long-term in nature. This business had sales of $148 million in 1995, $177 million in 1994 and $102 million in 1993. Although profitable in 1994, the business lost money on an operating basis in 1995 and the first quarter of 1996 due to declining volume. The business has a nominal investment of approximately $60 million, including $21 million in working capital. This amount does not reflect any retirement-related liabilities. Any gain or loss on the sale is dependent on not only the purchase price agreed upon by the parties but also an agreement as to which assets/liabilities will be included in the transaction. The sale process is still ongoing. Despite the announcement, the Company plans to continue to implement its strategy to capitalize on manual transmission opportunities in developing markets such as China and India. Environmental 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 PRPs at 28 hazardous waste disposal sites under the Superfund and equivalent state laws and, as such, may be liable for the cost of clean-up and other remedial activities at these sites. Responsibility for clean-up and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula. The means of determining allocation among PRPs is generally set forth in a written agreement entered into by the PRPs at a particular site. An allocated share assigned to a PRP is often based on the PRP's volumetric contribution of waste to the site and the characteristics of the waste material. 25 28 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 cost apportioned to them; currently available information from PRPs and/or federal or state environmental agencies concerning the scope of contamination and estimated remediation costs; estimated legal fees; and other factors, the Company has established a reserve in its financial statements for indicated environmental liabilities of approximately $11 million at March 31, 1996. The Company expects this amount to be expended over the next three to five years. In connection with the Spin-Off, the Company and BW-Security entered into a Distribution and Indemnity Agreement which provided for, among other matters, certain cross-indemnities designed principally to place financial responsibility for the liabilities of businesses conducted by BW-Security and its subsidiaries with BW-Security and financial responsibility for liabilities of the Company or related to its automotive businesses with the Company. The Company has been advised that BW-Security believes that the Company is responsible for certain liabilities relating to environmental matters retained by BW-Security at the time of the Spin-Off. BW-Security has requested indemnification from the Company for past costs of approximately $1.6 million and for future costs related to these environmental matters. At the time of the Spin-Off, BW-Security maintained a letter of credit for approximately $9 million with respect to the principal portion of such environmental matters. Although there can be no assurance, based upon information currently available to the Company, the Company does not believe that it is required to indemnify BW-Security under the Distribution and Indemnity Agreement with respect to such liabilities. In addition, the Company does not currently have information sufficient to determine what its liability would be if it is ultimately determined that it is required to indemnify BW-Security with respect to such liabilities. The Company believes that none of these matters, individually or in the aggregate, will have a material adverse effect on its financial position or future operating results, generally either because estimates of the maximum potential liability at a site are not large or because liability will be shared with other PRPs, although no assurance can be given with respect to the ultimate outcome of any such matter. Coltec Acquisition On June 17, 1996, the Company acquired the operations and substantially all of the operating assets of the Coltec Divisions for $283 million in cash. The Coltec Acquisition was financed with borrowings under the Company's revolving credit facility. PRO FORMA CAPITAL RESOURCES AND LIQUIDITY OF THE COMPANY The Unaudited Pro Forma Consolidated Balance Sheet reflects significant changes from the Company's historical financial condition as of March 31, 1996. Net working capital and net fixed assets would have increased $23 million and $26 million, respectively, as a result of the Coltec Acquisition. Net working capital acquired in the Coltec Acquisition excludes substantially all operations-related accrued expenses incurred in the normal monthly operating cycle. The Company believes that an increase in these types of liabilities will occur with the operation of the Coltec Divisions and could result in a reduction of net working capital position in the remainder of 1996. For purposes of the pro forma financial statements, the excess of the purchase price over the value of the assets was allocated to goodwill. Goodwill would have increased $238 million as a result of the Coltec Acquisition, from $312 million to $550 million. Goodwill is expected to be amortized over its estimated useful life. For pro forma purposes, a 30-year amortization period has been used. The $283 million purchase price plus approximately $5 million in other acquisition costs was financed with borrowings under the Company's $300 million revolving credit facility; this would result in a $288 million increase in long-term debt, from $90 million to $378 million. There would be no change in the Company's stockholders' equity as a result of the Coltec Acquisition. The resulting capital structure of $422 million in total debt and $604 million in equity increases the Company's leverage ratio of debt to debt plus equity from 18% to 41%. The Company believes that it will be able to satisfy cash needs for the remainder of 1996 and meet its long-term business growth objectives with adequate sources of capital available through a combination of cash from operations, borrowing capacity and access to capital markets. 26 29 BUSINESS The Company is a leading, global Tier I supplier of highly engineered systems and components, primarily for automotive powertrain applications. These products are manufactured and sold worldwide, primarily to OEMs of passenger cars, sport utility vehicles and light trucks. The Company, which operates 36 manufacturing facilities in 12 countries serving the North American, European and Asian automotive markets, is an original equipment supplier to every major OEM in the world. The Company has achieved its current leadership position and is well positioned to benefit from emerging trends in the global automotive markets as a result of several key competitive strengths, including: (i) the ability to supply its customers globally; (ii) demonstrated technological expertise in developing highly engineered systems and components; (iii) strong relationships with all major OEMs; (iv) significant market shares in a number of its key products; and (v) a strong presence in and focus on high-growth vehicle categories and platforms. The Company maintains a global network of contacts within the automotive industry and works with its customers in all stages of production, including design, development, component sourcing, quality assurance, manufacture and delivery. The Company believes that its industry contacts and early involvement in the design and engineering of new products as a Tier I supplier affords the Company a competitive advantage in securing new business and provides customers significant cost reduction opportunities through the coordination of design, development and manufacturing processes. Suppliers to OEMs that design, engineer, manufacture and conduct quality control testing are generally referred to as "Tier I" suppliers. The Company maintains an excellent reputation with the OEMs for timely delivery and customer service and for providing world-class quality at a competitive price. The Company has received more than 40 awards for outstanding quality from its customers worldwide. PRIOR HISTORY OF THE COMPANY The Company was incorporated in Delaware in 1987 in connection with the acquisition of Borg-Warner Corporation ("Old Borg-Warner") by an indirect wholly owned subsidiary of BW-Security. The Company was a wholly owned subsidiary of BW-Security until January 27, 1993, at which time it was distributed to the stockholders of BW-Security in the tax-free Spin-Off. The capital structure of the Company was established with $480 million of equity and debt of $251 million. For additional information concerning the history of the Company and BW-Security and a description of the benefits derived from the acquisition of Old Borg-Warner by affiliates of MLCP and other investors, including the Company's management, as well as certain obligations of the Company and BW-Security to each other under agreements entered into in connection with the Spin-Off, see "Certain Relationships and Related Transactions" in the Company's Proxy Statement for the 1996 Annual Meeting of Stockholders, which is incorporated by reference herein. See "Incorporation of Certain Information by Reference." BUSINESS STRATEGY The Company's business objective is to maintain its position as one of the leading independent suppliers of highly engineered systems and components for automotive powertrain applications. The Company pursues this objective in several ways. First, the Company seeks to maintain its position and reputation as a technological leader in its product groups. Second, the Company seeks to maintain its price competitiveness by continuing to improve the efficiency of its operations, including its production processes. Third, the Company believes that it is well positioned to take advantage of certain trends within the global automotive market. The Company believes that these trends include (i) a growing demand for automatic transmissions with a greater number of speeds (the Company's component content in an automatic transmission rises as the number of speeds increases), (ii) a growing demand for 4WD vehicles, (iii) an increasing demand for overhead cam engines, (iv) a growing demand for automatic transmissions and air and fluid management systems in Europe and in Asia, (v) the increasing tendency of OEMs to purchase integrated systems rather than individual components, and (vi) demand in markets outside the United States for air and fluid management products, particularly emission controls. Fourth, the Company continues to pursue strategic joint ventures and selected acquisitions within its existing or related lines of business. The Company continues to maintain its strong presence in Europe and Asia as a result of its recent acquisitions and joint ventures. The 27 30 Company believes its global presence will enable it to better withstand the effect of cyclical downturns in the United States automotive market, while serving its OEM customers as a global supplier. See " -- Recent Developments." Over the past several years, the Company has remained focused on and committed to achieving its business objective. Sales have increased from $820 million in 1991 to $1.33 billion in 1995, reflecting a 12.8% compound annual growth rate and outperforming the approximately 4% compound annual growth rate of North American vehicle sales. The Company's sales outside the United States are increasing and in 1995 represented 16% of consolidated sales. Including unconsolidated joint ventures, 1995 sales outside the United States constituted 33% of total sales. The Company's sales have increased at a greater rate than market growth as a result of higher content per vehicle and higher market share. The Company's emphasis on providing systems and introduction of new technologies has enabled it to substantially increase its content per vehicle. For example, the timing system on the Ford modular engine consists of up to four chains as well as sprockets, snubbers and tensioners as compared with a single timing chain on the previous generation pushrod engine. The Company's market share gains have been achieved during a period of OEM supplier consolidation which has benefited the Company. Such growth in sales has been accompanied by growth in profitability. Over the same period, EBIT increased from $22 million in 1991 to $125 million in 1995, with EBIT margins rising from 2.6% in 1991 to 9.4% in 1995, and sales per employee rising from $128,000 in 1991 to $163,000 in 1995. Demonstrated Technological Expertise and Leadership. The Company believes that it is recognized throughout the global automotive industry as a leader in technological innovation, expertise and excellence. A significant component of the Company's business strategy is to maintain and enhance this reputation. In order to achieve this, the Company is committed to being the technological leader in its markets by developing and producing state-of-the-art products using state-of-the-art processes. The Company is also able to parlay its technological expertise into designing and developing complete systems for its customers. The Company has 310 engineers dedicated to R&D and a significant long-term commitment to R&D. The Company has obtained over 3,000 patents in its history and currently has approximately 1,900 active domestic and foreign patents and patent applications, pending or under preparation. Throughout its history, the Company has been an innovative technology partner to the global automotive industry. The Company's engineering achievements include the single-plate manual clutch, a "silent" chain engine timing system, and high-volume HY-VO(R) chain for FWD and 4WD applications. In transmissions alone, the Company's engineering achievements include the first automatic transmission model sold worldwide and the world's first fully electronic continuously variable transmission. Products developed and produced by the Company include the TOD(TM) transfer case which allows vehicles to automatically shift from two-wheel drive to 4WD when electronic sensors indicate it is necessary. Other products include the MORSE GEMINI(TM) Transmission Chain System. Products expected to be introduced in future model years include a complete air and fluid system. In addition, the Company continues to develop integrated systems incorporating individual components, such as the one-way clutch and drum assembly developed for Ford. Continuous Process Improvements and Production Efficiencies. In recent years, automotive OEMs have reduced the number of their suppliers and transferred additional responsibility for design, engineering and quality control to their remaining suppliers. In addition, there has been substantial and continuing pressure from the major automotive OEMs to reduce costs, including costs associated with outside suppliers such as the Company. As a result, the OEMs have demanded annual selling price reductions from such suppliers. Annual price reductions granted in 1995 totaled approximately $8.0 million. Although the Company believes that it produces a technologically sophisticated product at a competitive cost, the Company must continually seek to control and reduce costs in order to maintain its gross margins in light of such price pressure. Continuing improvement in the efficiency of operations, including production processes, is therefore another significant component of the Company's strategy. Accordingly, the Company has adopted a "lean" manufacturing philosophy that seeks to eliminate waste and inefficiency in its operations. The Company's R&D staff works together throughout its worldwide operations sharing ideas and accumulated knowledge regarding powertrain applications and customer requirements. The Company also fosters an environment of continuous 28 31 improvement by critically comparing its products and processes against those of its competitors and customers in terms of quality, cost, safety, efficiency and delivery. Global Industry Trends. In the near term, the Company believes that it is well positioned to take advantage of certain trends in the global automotive industry that could permit the Company to increase sales and profits without long-term growth in the global automotive industry. These trends include: - The air and fluid management systems market is one in which the Company believes there are significant growth opportunities driven by increasingly stringent air emissions regulations both in the United States and overseas. - Light trucks and sport utility vehicles with four-wheel drive options are increasingly popular with vehicle purchasers. Since the Company is a major manufacturer of transfer cases and transmission chain for 4WD vehicles, the Company believes that it is well positioned to take advantage of this trend. - Fuel efficiency and customer demands are causing a shift from three-speed to four-speed and five-speed automatic transmissions as well as increasing demand for double overhead cam engines. Transmissions with a greater number of speeds require a higher content per transmission of the Company's automatic transmission components. Double overhead cam engines also require higher content per vehicle because they utilize complex timing systems as compared to pushrod engines. - The Company will seek to capitalize on the increasing tendency of the OEMs to purchase integrated systems rather than individual components. - Installations of automatic transmissions are projected to increase for automobiles sold in Europe and Asia. For example, in Europe, automatic transmissions are installed on only approximately 12% of the cars and light trucks sold as compared to approximately 80% installation on cars sold in North America. Because of the Company's experience in developing technologically advanced automatic transmission components, the Company believes it is well positioned to benefit from any such increase. Growth Through Joint Ventures and Acquisitions. In addition to internal growth, the Company expects to continue to grow through strategic joint ventures and selected acquisitions. In the last 18 months, the Company has acquired its partner's shares in its Regina-Warner joint venture to improve its engine timing business in Europe, has acquired the Precision Forged Products Division of Federal Mogul Corporation to enhance its systems capability in one-way clutches, has acquired SUM in France to provide a local manufacturing and engineering base for its air/fluid systems products in Europe and has acquired the Coltec Divisions to significantly expand its global air and fluid systems management business. The Company has also established joint ventures for transfer case and manual transmission manufacturing in India with Divgi Metalwares Private, Ltd. ("Divgi") and for manual transmissions in China with Shiyan Automotive Transmission Factory ("Shiyan"). RECENT DEVELOPMENTS On June 17, 1996, the Company acquired the operations and substantially all of the operating assets of the Coltec Divisions for $283 million in cash. The Coltec Divisions have a broad base of air and fluid management products, established OEM relationships, and three technologically advanced manufacturing facilities. These operations produced combined sales of $255 million in 1995. The Coltec Acquisition was financed with borrowings under the Company's revolving credit facility. See " -- Air/Fluid Systems" and "Prospectus Summary -- Pro Forma Financial Data." The Coltec Acquisition will provide the Company with a number of strategic benefits. The air and fluid management systems market is one in which the Company believes there are significant growth opportunities driven principally by increasingly stringent air emissions regulations both in the U.S. and in Europe. The Company also believes that since few suppliers control a large share of the growing air and fluid management market, the Company has additional opportunities to increase its market share because of its technological expertise and broad range of products. By combining the Coltec Divisions' component products with the Air/Fluid System's complementary system-based products, the Coltec Acquisition positions the Company to 29 32 capitalize on the high-growth air and fluid management systems market and to become a global supplier of complete, integrated air and fluid management systems. The Coltec Acquisition will also serve to better balance the Company's business mix by significantly expanding the Company's operations in the air and fluid management systems business as Air/Fluid Systems pro forma sales will represent approximately 22% of total consolidated sales, more than double the Air/Fluid Systems sales in 1995 of 8%. Moreover, the Coltec Acquisition will allow the Company to further strengthen its relationships with existing OEM customers, especially Chrysler. Additionally, with the Company's 1995 acquisition of SUM, it is well positioned to begin manufacturing air and fluid management systems in Europe. For 1996, the Company expects that the sales contribution from the Coltec Divisions will be less than their 1995 sales because of the timing of certain new and expiring programs. The Company also expects that there will be a similar impact with respect to the earnings contribution from these operations in 1996 because of lower volume, a change in the product mix of the businesses, and price reductions partially offset by cost reductions and productivity gains. This trend is expected to continue through 1997, after which new programs are expected to positively impact sales and earnings trends. One of the Company's strategic objectives has been to pursue strategic joint ventures and selected acquisitions in its existing or related lines of business. The Coltec Acquisition is evidence of the Company's commitment to the realization of this objective. The Company continues to monitor additional growth opportunities. The Coltec Divisions will add design and manufacturing capability in engine air intake management products and systems, emission air pumps, and oil pumps to the Company's Air/Fluid Systems existing product line. Complementary product lines in transmission, steering and suspension solenoids and proprietary wet friction materials and synchronizers have also been added to existing Company capabilities. Facilities acquired in the Coltec Acquisition are located in Warren, Michigan; Water Valley, Mississippi; Sallisaw, Oklahoma; Longview, Texas; and Kettering, United Kingdom. The Company plans to expand Coltec's historical focus on components for the North American market to systems throughout the world, especially in Europe. PRODUCTS The Company's products fall into four categories: Powertrain Systems, Automatic Transmission Systems, Morse TEC and Air/Fluid Systems. Net revenues by product grouping for the three years ended December 31, 1995 and the three month periods ended March 31, 1996 and 1995 are as follows (in millions of dollars):
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ---------------------------------- ----------------- 1993 1994 1995 1995 1996 -------- -------- -------- ------ ------ Powertrain Systems........................ $ 418.4 $ 529.9 $ 544.8 $140.4 $139.0 Automatic Transmission Systems............ 307.6 378.5 454.4 98.6 119.3 Morse TEC................................. 202.3 239.9 257.6 70.4 66.0 Air/Fluid Systems......................... 83.7 97.3 107.6 28.0 33.8 ------ -------- -------- ------ ------ 1,012.0 1,245.6 1,364.4 337.4 358.1 Interbusiness eliminations................ (26.6) (22.2) (35.3) (9.6) (9.2) ------ -------- -------- ------ ------ Net sales................................. $ 985.4 $1,223.4 $1,329.1 $327.8 $348.9 ====== ======== ======== ====== ======
The sales information presented above excludes the sales by the Company's unconsolidated joint ventures. See "-- Joint Ventures" below. Such sales totalled approximately $394 million in 1995, approximately $316 million in 1994, approximately $312 million in 1993, approximately $101 million for the three months ended March 31, 1995, and approximately $94 million for the three months ended March 31, 1996. 30 33 POWERTRAIN SYSTEMS The Company manufactures fully assembled transmission systems and components for automotive applications. Major products include 4WD and all-wheel drive transfer cases and manual transmissions. Transfer cases are installed 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. Shifting from two-wheel drive to 4WD can be accomplished mechanically through a lever or electronically through a push-button activated motor. The Company has designed and developed an exclusive 4WD TOD(TM) transfer case system, which allows vehicles to automatically shift from two-wheel drive to 4WD when electronic sensors indicate it is necessary. The TOD(TM) transfer case is a feature on the Ford Explorer, the best selling sport utility vehicle in the United States in 1995 and will be available on the Ford Expedition, a new sport utility vehicle. Sales of 4WD transfer cases represented 30%, 26% and 28% of the Company's total revenues for 1995, 1994 and 1993, respectively. The Company believes that it is the world's leading independent manufacturer of 4WD transfer cases, producing approximately 847,000 transfer cases in 1995. The Company's largest customer of 4WD transfer cases is Ford. The Company supplies substantially all of the 4WD transfer cases for Ford, including those installed in the Ford Explorer and the Ford F-150 pickup truck. The Company has entered into an agreement with Mercedes-Benz Project, Inc., a subsidiary of Mercedes-Benz AG, for the Company to supply transfer cases for a new 4WD vehicle, which will be produced beginning in 1997 at Mercedes-Benz's new United States passenger vehicle manufacturing facility. Under the five-year agreement, which has a three-year extension provision, the Company will develop the technology and supply Mercedes-Benz with new two-speed, electronically controlled, all-wheel drive transfer cases that are compatible with its anti-skid braking system. In 1995, the Company purchased a 211,000 sq. ft. facility in Seneca, South Carolina, to serve as the production facility for manufacture of the Mercedes-Benz transfer case. The Company also designs and manufactures five- and six-speed rear-wheel drive manual transmissions for passenger cars and light trucks. Sales of manual transmissions accounted for 11%, 14% and 10% of the Company's total sales in 1995, 1994 and 1993, respectively. The Company believes that it was the leading independent manufacturer of manual transmissions for cars and light trucks in North America in 1995. The Company's five-speed manual transmission is used in high performance cars such as the Ford Mustang, the Chevrolet Camaro and the Pontiac Firebird, and light trucks such as the Isuzu Rodeo and the SsangYong Musso. The Company's six-speed manual transmission is used in the Dodge Viper, the Camaro Z-28 and the Firebird Formula and Trans Am. The Company is the sole supplier of manual transmissions for these cars. In January 1996, the Company announced its intention to seek a buyer for its North American manual transmission business due to the decline in demand for such products in North America and rising in-house supply of manual transmissions by OEMs. See "Risk Factors -- Sale of Manual Transmission Business." The Company signed agreements to establish joint ventures in India and China in 1995 for the manufacture of 4WD transfer cases and manual transmissions. See " -- Joint Ventures." AUTOMATIC TRANSMISSION SYSTEMS The Company engineers and manufactures components for automatic transmissions, as well as the systems which combine such components, around the world. Principal product lines include friction plates, one-way clutches, transmission bands and torque converters for automatic transmissions. The Company manufactures over 100 different varieties of friction plates incorporating asbestos-free, organic friction paper linings. The Company offers over 20 proprietary friction material formulas, each developed to satisfy specific customer requirements. The quality of the friction surface results in high durability, smooth shifting quality, low noise and vibration and minimal drag. The Company also manufactures over 16 varieties of transmission bands used in automatic transmissions and over 100 types of one-way clutches for automotive and aircraft applications. The Company believes that, with the inclusion of its NSK-Warner joint venture, the Automatic Transmission Systems group is a leading manufacturer and supplier of 31 34 friction elements and one-way clutches in North America, Europe and Asia. The Company is a supplier to virtually every major automatic transmission manufacturer in the world. In 1995, the Company completed the purchase of PFPD. PFPD is a manufacturer of precision forged sintered metallurgy products, including races for one-way clutches and engine connecting rods which utilize powdered metal technology. This acquisition will allow the Company to incorporate products of PFPD with existing products to become a supplier of one-way clutch systems. MORSE TEC Morse TEC manufactures chain and chain systems, including HY-VO(R) FWD and 4WD chain, MORSE GEMINITM Transmission Chain Systems, timing chain and timing chain systems, crankshaft and camshaft sprockets, chain tensioners and snubbers. HY-VO(R) chain is used in FWD transmissions and for 4WD transfer case applications. The transmission chain is used to transfer power from the engine to the transmission. The Company's MORSE GEMINITM Transmission Chain System, which is used on Chrysler's LH models, emits significantly less chain pitch frequency noise than conventional transmission chain systems. In 1997, GM will be incorporating this system in its FWD vehicles. The chain in a transfer case distributes power between the front and rear output shafts which, in turn, drives the front and rear wheels. The Company believes it is the world's leading manufacturer of chain for FWD transmissions and 4WD transfer cases. The Company is an original equipment supplier to every major manufacturer who uses chain for such applications. The Company manufactures complete engine timing chain systems and accessory drives, including chain, sprockets, tensioners, snubbers, balance shaft gears and precision gearing. Timing chain is installed around the crankshaft and camshaft sprockets. The crankshaft turns and transfers power via the timing chain to the camshaft. The camshaft, in turn, operates the intake and exhaust valves in the engine cylinder head. The Company's timing chain system is used on Ford's new modular family of overhead cam engines, including the Duratech engine. The Company recently announced that it will be designing and producing a similar timing chain system for Chrysler's new overhead cam engines beginning in late 1997. The Company believes that it is the world's leading manufacturer of timing chain. AIR/FLUID SYSTEMS The Air/Fluid Systems business designs and manufactures sophisticated mechanical, electro-mechanical and electronic components and systems for engine air intake and exhaust management and fuel and vapor management, as well as for electronically-controlled automatic transmissions and steering and suspension systems. Key products for engine air intake management produced by the Company include throttle bodies, intake manifolds, throttle position sensors and complete engine induction systems. The Company's products for emissions control and improved 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. The Company also produces oil pumps and proprietary wet friction materials for synchronizers, transfer cases and manual transmissions. In 1995, the Company completed the purchase of SUM, a designer and manufacturer of electro-mechanical and electronic automotive components located in Tulle, Cedex, France. This acquisition provides a manufacturing and engineering base for the expansion of the Company's air and fluid management products in Europe. The Coltec Divisions add design and manufacturing capability in engine air intake management products and systems, emission air pumps, and oil pumps to the Company's Air/Fluid Systems product line. Complementary product lines in transmission, steering and suspension solenoids and proprietary wet friction materials and synchronizers have also been added to existing Company capabilities. Facilities acquired in the Coltec Acquisition are located in Warren, Michigan; Water Valley, Mississippi; Sallisaw, Oklahoma; Longview, Texas; and Kettering, U.K. The Company plans to expand Coltec's historical focus on components for the North American market to systems throughout the world, especially in Europe. See " -- Recent Developments." 32 35 JOINT VENTURES The Company has eight ventures in which it has a less-than-100% ownership interest. Results from three of these ventures, in which the Company is the majority owner, are consolidated as part of the Company's results. The Company's ownership interest in the remaining five joint ventures ranges from 20% to 50%. The results of NSK-Warner, Warner-Ishi Corporation, Beijing Warner Gear Co., Ltd. and Korea Powertrain Ltd. are reported using the equity method. In 1995, the Company entered into a joint venture with Divgi to produce transfer cases, manual transmissions and automatic locking hubs in India. The venture, Divgi-Warner, is expected to begin operations in the second half of 1996 and is 60%-owned by the Company and 40%-owned by Divgi. In 1995, the Company entered into a joint venture with Shiyan to produce manual transmissions in China. The venture, Huazhong Warner, is 60%-owned by the Company and 40%-owned by Shiyan. Management of the unconsolidated joint ventures is shared with the Company's respective joint venture partners. Certain information concerning the Company's joint ventures is set forth below:
PERCENTAGE FISCAL 1995 OWNED LOCATION SALES YEAR BY THE OF JOINT --------------- JOINT VENTURE PRODUCTS ORGANIZED COMPANY OPERATION VENTURE PARTNER - -------------------------- ------------------ --------- ---------- --------- ----------------- ($ IN MILLIONS) Unconsolidated NSK-Warner K.K.......... Friction products 1964 50% Japan Nippon Seiko K.K. $ 337 Warner-Ishi Corporation........... Turbochargers 1980 50% U.S. Ishikawajima- $ 15 Harima Heavy Industries Co., Ltd. Beijing Warner Gear Co., Ltd......... Manual 1992 39% China Beijing Gear $ 34 transmissions Works Korea Powertrain, Ltd................... Torque converters 1993 20% Korea Pyeong HWA $ 8 Clutch Industries Co. Ltd. Warner-Ishi Europe, S.P.A......... Turbochargers 1995 50% Italy Ishikawajima- N/A Harima Heavy Industries Co., Ltd. Consolidated Borg-Warner Automotive Korea, Inc..................... Friction products 1987 60% Korea Hyundai Motor $ 25 Company, NSK-Warner K.K. Divgi-Warner Private, Ltd.......... Transfer cases, 1995 60% India Divgi Metalworks N/A manual Private, Ltd. transmissions, and automatic locking hubs Huazhong Warner Transmission Company Ltd........... Manual 1995 60% China Shiyan Automotive N/A transmissions Transmission Factory
See Note 9 of the Notes to Consolidated Financial Statements on page 28 of the Company's Annual Report (incorporated herein by reference) for geographic information. See "Incorporation of Certain Information by Reference." 33 36 CUSTOMERS Approximately 86% of the Company's total sales in 1995 were to automotive OEMs, with the remaining 14% of the Company's sales to a diversified group of industrial, construction and agricultural vehicle manufacturers, auto parts manufacturers and to distributors of automotive aftermarket and replacement parts. The Company's worldwide sales in 1995 to Ford and GM constituted approximately 41% and 25%, respectively, of its 1995 consolidated sales. Sales to Chrysler constituted approximately 9% of total consolidated sales in 1995. The Coltec Acquisition would have increased Chrysler sales to approximately 13% of sales. Approximately 27% of consolidated sales for 1995 were outside the United States, including exports. However, a substantial portion of such sales were to foreign OEMs of vehicles that are, in turn, exported to the United States. See Note 9 of the Notes to Consolidated Financial Statements in the Company's Annual Report. If sales from unconsolidated joint ventures were included in 1995 consolidated sales, worldwide sales to Toyota would be approximately 10% of such sales. The Company's automotive products are sold directly to OEMs pursuant to the terms and conditions of the OEM's purchase orders, and deliveries are subject to periodic authorizations based upon the production schedules of the OEMs. The Company ships its products directly from its plants to the OEMs. SALES AND MARKETING Each of the Company's four business groups has its own sales function headed by a Vice-President of Sales. Account executives for each group are assigned to service specific OEM customers for one or more of a business group's products. Such account executives spend the majority of their time in direct contact with OEM purchasing employees and engineers and are responsible for servicing existing business and for identifying and obtaining new business. Because of their close relationship with the OEMs, account executives are able to identify and meet customers' needs based upon their knowledge of the Company's products and design and manufacturing capabilities. Upon securing a new order, account executives are responsible for negotiating the terms of the purchase contract. RESEARCH AND DEVELOPMENT Each of the Company's business groups has its own R&D organization. Approximately 310 employees, including engineers, mechanics and technicians, are engaged in R&D activities at Company facilities worldwide. The Company also operates testing facilities such as prototype, measurement and calibration, life testing and dynamometer laboratories. By working closely with the OEMs and anticipating their future product needs, the Company's R&D personnel conceive, design, develop and manufacture new proprietary automotive systems and components. R&D personnel also work to improve current products and production processes. The Company believes its commitment to R&D will allow it to obtain new orders from its OEM customers. Consistent with its strategy of developing technologically innovative products, the Company spent approximately $36.7 million, $33.8 million and $25.2 million in 1995, 1994 and 1993, respectively, on R&D activities. Not included in the reported R&D activities were customer-sponsored R&D activities that were approximately $11.3 million, $11.2 million and $16.1 million in 1995, 1994 and 1993, respectively. The Company makes a significant annual investment in R&D activities to develop new and improved products and manufacturing processes. There can be no assurance that R&D activities will yield new or improved products or products which will be purchased by the OEMs, or new and improved manufacturing processes. PATENTS AND LICENSES The Company has approximately 1,900 active domestic and foreign patents and patent applications, pending or under preparation, and receives royalties from licensing patent rights to others. While it considers its patents on the whole to be important, the Company does not consider any single patent, group of related patents or any single license essential to its operations in the aggregate. The expiration of the patents individually and in the aggregate is not expected to have a material effect on the Company's financial position 34 37 or future operating results. The Company owns numerous trademarks, some of which are valuable but none of which are essential to its business in the aggregate. The "Borg-Warner Automotive" trade name, and the housemark adopted in 1984 are material to the Company's business. During 1994, the Company and BW-Security entered into an Assignment of Trademarks and License Agreement (the "Trademark Agreement") whereby BW-Security assigned certain trademarks and trade names (including the "Borg-Warner Automotive" trade name) to the Company (which trademarks and trade names had been previously licensed to the Company) for use in the automotive field. Pursuant to the Trademark Agreement, the Company agreed to pay an additional $7.5 million to BW-Security upon the occurrence of certain events, including a change of control of the Company. COMPETITION The Company competes worldwide with a number of other manufacturers and distributors which produce and sell similar products. Price, quality and technological innovation are the primary elements of competition. The Company's competitors include vertically integrated units of the Company's major OEM customers, as well as a large number of independent domestic and international suppliers. Many of these companies are larger and have greater resources than the Company. A number of the Company's major OEM customers manufacture for their own use products which compete with the Company's products. Although these OEM customers have indicated that they will continue to rely on outside suppliers, the OEMs could elect to manufacture products to meet their own requirements or to compete with the Company. There can be no assurance that the Company's business will not be adversely affected by increased competition in the markets in which it operates. The competitive environment has changed dramatically over the past few years as the Company's traditional United States OEM customers, faced with intense international competition, have expanded their worldwide sourcing of components with the stated objective of better competing with lower-cost imports. As a result, the Company has experienced competition from suppliers in other parts of the world enjoying economic advantages such as lower labor costs, lower health care costs, and, in some cases, export subsidies and/or raw materials subsidies. EMPLOYEES As of December 31, 1995, the Company and its consolidated subsidiaries had approximately 8,600 salaried and hourly employees (as compared with 7,800 employees at December 31, 1994), of which approximately 7,100 were United States employees. The Coltec Acquisition, with 681 non-union employees in the Holley Automotive division, 221 non-union employees in the Coltec Automotive division, and 90 non-union employees in the Performance Friction Products division, increased the total number of the Company's employees worldwide to approximately 9,600. Approximately 50% of the Company's current domestic hourly workers are unionized. The Company's Muncie, Indiana plant has approximately 1,665 employees represented by the UAW. Approximately 810 hourly employees at the Company's Ithaca, New York, plant are represented by the International Association of Machinists. The collective bargaining agreement covering the Muncie, Indiana plant expires in March 1998 and the collective bargaining agreement covering the Ithaca, New York plant expires in October 1998. Pursuant to the requirements of the National Labor Relations Act, a union representation election involving approximately 630 hourly workers at the Company's Bellwood, Illinois facility was held on June 14, 1996. A majority of the hourly workers voting in the election voted against union representation. The labor organization appearing on the ballot was the UAW. The hourly workers at the Company's European facilities are also unionized. The Company believes its present relations with employees to be satisfactory. See "Risk Factors -- Labor Relations." RAW MATERIALS The Company believes that its supplies of raw materials for manufacturing requirements in 1996 are adequate and are available from multiple sources. It is common, however, for customers to require their prior approval before certain raw materials or components can be used, thereby reducing sources of supply that would otherwise be available. Manufacturing operations are dependent upon natural gas, fuel oil, propane and electricity. 35 38 ENVIRONMENTAL REGULATIONS AND PROCEEDINGS The Company's operations are subject to federal, state, local and foreign laws and regulations governing, among other things, emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of waste and other materials. The Company believes that its business, operations and facilities have been and are being operated in compliance in all material respects with applicable environmental and health and safety laws and regulations, many of which provide for substantial fines and criminal sanctions for violations. However, the operation of automotive parts manufacturing plants entails risks in these areas, and there can be no assurance that the Company 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, regulations or requirements that may be adopted or imposed in the future. The Company believes that the overall impact of compliance with regulations and legislation protecting the environment will not have a material effect on its financial position or future operating results, although no assurance can be given in this regard. Capital expenditures and expenses in 1995 attributable to compliance with such legislation were not material. 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 PRPs at 28 hazardous waste disposal sites under the Superfund and equivalent state laws and, as such, may be liable for the cost of clean-up and other remedial activities at these sites. Responsibility for clean-up and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula. The means of determining allocation among PRPs is generally set forth in a written agreement entered into by the PRPs at a particular site. An allocated share assigned to a PRP is often based on the PRP's volumetric contribution of waste to a site and the characteristics of the waste material. Based on information available to the Company which, in most cases, includes: an estimate of allocation of liability among PRPs; the probability that other PRPs, many of whom are large, solvent public companies, will fully pay the costs apportioned to them; currently available information from PRPs and/or federal or state environmental agencies concerning the scope of contamination and estimated remediation costs; estimated legal fees; and other factors, the Company has established a reserve for indicated environmental liabilities with a balance of approximately $11 million at March 31, 1996. The Company expects this amount to be expended over the next three to five years. In connection with the Spin-Off, the Company and BW-Security entered into a Distribution and Indemnity Agreement which provided for, among other matters, certain cross-indemnities designed principally to place financial responsibility for the liabilities of businesses conducted by BW-Security and its subsidiaries with BW-Security and financial responsibility for liabilities of the Company or related to its automotive businesses with the Company. The Company has been advised that BW-Security believes that the Company is responsible for certain liabilities relating to environmental matters retained by BW-Security at the time of the Spin-Off. BW-Security has requested indemnification from the Company for past costs of approximately $1.6 million and for future costs related to these environmental matters. At the time of the Spin-Off, BW-Security maintained a letter of credit for approximately $9 million with respect to the principal portion of such environmental matters. Although there can be no assurance, based upon information currently available to the Company, the Company does not believe that it is required to indemnify BW-Security under the Distribution and Indemnity Agreement with respect to such liabilities. In addition, the Company does not currently have information sufficient to determine what its liability would be if it is ultimately determined that it is required to indemnify BW-Security with respect to such liabilities. The Company believes that none of these matters, individually or in the aggregate, will have a material adverse effect on its financial position or future operating results, generally either because estimates of the maximum potential liability at a site are not large or because liability will be shared with other PRPs, although no assurance can be given with respect to the ultimate outcome of any such matter. PROPERTIES The Company's 36 manufacturing facilities are strategically located in the United States, with two facilities in Germany and one facility in each of Canada, France, Italy, Japan, Korea and Wales. The 36 39 Company also has numerous sales offices, warehouses and technical centers. The Company's executive offices, which are leased, are located in Chicago, Illinois. In general, the Company believes that its properties are in good condition and are adequate to meet its current and reasonably anticipated needs. In 1995, the Company purchased a 211,000 sq. ft. facility in Seneca, South Carolina, to establish the production facility for manufacture of the Mercedes-Benz transfer case. The Coltec Acquisition increased by three the number of manufacturing facilities the Company operates by adding new facilities in Mississippi, Oklahoma and Texas. See " -- Air/Fluid Systems." The following is additional information concerning the major manufacturing plants operated by the Company and its consolidated subsidiaries. Unless otherwise noted, these plants are owned by the Company.
1995 PERCENT OF CAPACITY LOCATIONS UTILIZATION(1)(2)(3) ---------------------------------------------------------------- -------------------- U.S.: Blytheville, Arkansas (leased); Bellwood, Dixon and Frankfort, Illinois; Muncie, Indiana; Sterling Heights, Coldwater, Livonia and Romulus, Michigan; Ithaca, New York (2 plants); Gallipolis, Ohio; and Cary, North Carolina.................................. 114% Non-U.S.: Canada, France, Germany (2 plants), Italy (leased), Japan, Korea and Wales....................................................... 83%
- --------------- (1) The figure shown in each case is a weighted average of the percentage utilization of each major plant within the category, with an individual plant weighted in proportion to the number of employees employed when such plant runs at 100% capacity. Capacity utilization at the 100% level is defined as operating five days per week, with two eight-hour shifts per day and normal vacation schedules. (2) During 1995, the Company acquired facilities in South Carolina, France, India, China and Taiwan and, in connection with the Coltec Acquisition, acquired facilities in Mississippi, Oklahoma and Texas from the Coltec Divisions, none of which are included in the capacity utilization. (3) Table excludes 50% or less owned joint ventures in China, Japan, Italy, Korea and Illinois. LEGAL PROCEEDINGS The Company is presently, and from time to time, subject to claims and suits arising in the ordinary course of its business. In certain such actions, plaintiffs request punitive or other damages that may not be covered by insurance. The Company believes that it has established adequate provisions for litigation liabilities in its financial statements in accordance with generally accepted accounting principles. These provisions include both legal fees and possible outcomes of legal proceedings. Centaur Insurance Company ("Centaur"), Old Borg-Warner's discontinued property and casualty insurance subsidiary and currently a wholly owned subsidiary of BW-Security, ceased writing insurance in 1984 and has been operating under rehabilitation since September 1987. Rehabilitation is a process supervised by the Illinois Director of Insurance to attempt to compromise liabilities at an aggregate level that is not in excess of Centaur's assets. In rehabilitation, Centaur's assets are currently being used to satisfy claim liabilities under direct insurance policies written by Centaur. Any remaining assets will be applied to Centaur's obligations to other insurance companies under reinsurance contracts. The foregoing has resulted in several lawsuits seeking substantial dollar amounts being filed against BW-Security, and in some cases the Company, for recovery of alleged damages from the failure of Centaur to satisfy its reinsurance obligations. All of these lawsuits, except one to which the Company is not currently a party, have been settled. The defense of this litigation is being managed by BW-Security and the Company is indemnified by BW-Security for any losses or expenses arising out of the litigation. It is the opinion of the Company that the various asserted claims and litigation in which the Company is currently involved will not materially affect its financial position or future operating results, although no assurance can be given with respect to the ultimate outcome for any such claim or litigation. 37 40 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS Set forth below are the names, ages, positions and certain other information concerning the executive officers of the Company as of June 30, 1996.
NAME AGE POSITION WITH COMPANY --------------------------------------- --- --------------------------------------- John F. Fiedler........................ 58 Chairman and Chief Executive Officer Robin J. Adams......................... 43 Vice President and Treasurer William C. Cline....................... 46 Vice President and Controller Gary P. Fukayama....................... 49 Executive Vice President Christopher A. Gebelein................ 50 Vice President -- Business Development Laurene H. Horiszny.................... 40 Vice President, Secretary and General Counsel Geraldine Kinsella..................... 48 Vice President -- Human Resources Fred M. Kovalik........................ 59 Executive Vice President Ronald M. Ruzic........................ 57 Executive Vice President Terry A. Schroeder..................... 48 Vice President Robert Welding......................... 47 Vice President Matthias B. Bowman..................... 47 Director Albert J. Fitzgibbons, III............. 50 Director Paul E. Glaske......................... 62 Director James J. Kerley........................ 73 Director Alexis P. Michas....................... 38 Director Donald C. Trauscht..................... 62 Director Ivan W. Gorr........................... 66 Director
Mr. Fiedler has been Chairman of the Board of Directors since March 1996 and has been Chief Executive Officer of the Company since January 1995. He was President of the Company from June 1994 to March 1996 and was Chief Operating Officer of the Company from June 1994 to December 1994. Mr. Fiedler was Executive Vice President of Goodyear Tire & Rubber Company in charge of the North American Tire division, from 1991 to 1994. He is a director of Navistar, Inc. Mr. Adams has been Vice President and Treasurer of the Company since May 1993. He was Assistant Treasurer of the Company from 1991 to 1993 and Assistant Treasurer of BW-Security from 1991 to 1993. Mr. Cline has been Vice President and Controller of the Company since May 1993. He was Assistant Controller of BW-Security from 1987 to 1993. Mr. Fukayama has been Executive Vice President of the Company since November 1992. He has been Group President of the Company and President of Borg-Warner Automotive Air/Fluid Systems Corporation since May 1996. He was President and General Manager of Borg-Warner Automotive Automatic Transmission Systems Corporation from January 1995 to May 1996. He was President and General Manager of Borg-Warner Automotive Transmission & Engine Components Corporation, Automatic Transmission Systems from November 1992 to December 1994. He was President and General Manager of the Friction Products Business Group of Borg-Warner Automotive Transmission & Engine Components Corporation from February 1991 to October 1992. Mr. Gebelein has been Vice President -- Business Development of the Company since January 1995. He was General Manager of Corporate Development of Inland Steel Industries from 1987 to 1994. Ms. Horiszny has been Vice President, Secretary and General Counsel of the Company since May 1993. She was Assistant General Counsel of the Company from December 1991 to 1993, and Senior Attorney of the Company from 1988 to December 1991. 38 41 Ms. Kinsella has been Vice President -- Human Resources of the Company since May 1993. She was Vice President -- Human Resources of Borg-Warner Automotive Transmission & Engine Components Corporation, Automatic Transmission Systems from November 1990 to May 1993. Mr. Kovalik has been Executive Vice President of the Company and President and General Manager of Borg-Warner Automotive Powertrain Systems Corporation since March 1994. He was General Manager of Heavy and Medium Duty Transmissions of Eaton Corporation from April 1992 to February 1994; Marketing Manager-Transmissions of Eaton Corporation from February 1991 to April 1992 and Manager-Manufacturing and Quality of Eaton Corporation from February 1989 to 1991. Mr. Ruzic has been Executive Vice President of the Company and President and General Manager of Borg-Warner Automotive Morse TEC Corporation since October 1992. He was President and General Manager of Borg-Warner Automotive Transmission & Engine Components Corporation, Morse Chain Systems from December 1989 to 1992. Mr. Schroeder has been Vice President of the Company since April 1995 and Vice President of Sales and Marketing of Borg-Warner Automotive Air/Fluid Systems Corporation since May 1996. He was President and General Manager of the Company's Control Systems Group from December 1993 to May 1996. Mr. Schroeder was Vice President and Director of Business Development for ITT Cannon ("Cannon") from February 1993 to November 1993, and General Manager of Cannon's Components Group in North America and Asia from 1991 to February 1993. Mr. Welding has been Vice President of the Company and President of Borg-Warner Automotive Automatic Transmission Systems Corporation since May 1996. He was Vice President -- Operations of Borg-Warner Automotive Automatic Transmissions System Corporation, Bellwood Plant, from November 1993 to May 1996. He was Vice President -- Operations of Borg-Warner Automotive Automatic Transmission Systems Corporation, Frankfort Plant, from November 1990 to October 1993. Mr. Bowman has been Vice Chairman of Investment Banking for Merrill Lynch Pierce, Fenner and Smith Incorporated ("MLPF&S") since 1993, and has been President and a Director of MLCP since 1994. He has been a Managing Director of the Investment Banking Division of MLPF&S since 1978. Mr. Fitzgibbons has been a Partner and a Director of Stonington Partners, Inc., an investment management firm, since 1993, and has been a Director of MLCP since 1988. He was a Partner of MLCP from 1993 to 1994 and Executive Vice President of MLCP from 1988 to 1993. He was also a Managing Director of the Investment Banking Division of MLPF&S from 1978 to July 1994. He is a Director of BW-Security, Dictaphone Corporation, Eckerd Corporation and United Artists Theatre Circuit, Inc. Mr. Glaske has been Chairman and Chief Executive Officer since April 1992 and President since July 1986 of Blue Bird Corporation, a leading manufacturer of school buses, motor homes and a variety of other vehicles. Mr. Glaske is also a Director of Trust Company Bank of Middle Georgia. Mr. Kerley was Chairman of the Board of Rohr, Inc. ("Rohr"), a manufacturer of aircraft engine components from January 1993 until his retirement from the Board in December 1994. Mr. Kerley was interim President and Chief Executive Officer of Rohr from January 1993 until May 1993. From September 1981 until his retirement in December 1985, he was Vice Chairman and Chief Financial Officer of Emerson Electric Company, a manufacturer of electronic, electrical and other products. Mr. Kerley is also a director of Sterling Chemicals, Inc., ESCO Electronics, Inc. and DT Industries, Inc. Mr. Michas has been a Partner and a Director of Stonington Partners, Inc., an investment management firm, since 1993, and has been a Director of MLCP since 1989. He was a Partner of MLCP from 1993 to 1994 and Senior Vice President of MLCP from 1989 to 1993. He was also a Managing Director of the Investment Banking Division of MLPF&S from 1991 to 1994 and a Director in the Investment Banking Division of MLPF&S from 1990 to 1991. He is also a Director of Blue Bird Corporation, BW-Security, Dictaphone Corporation, Eckerd Corporation, Pathmark Stores, Inc. and Supermarkets General Holding Corporation. Mr. Trauscht was Chairman of the Board from December 1992 until December 1995; Chief Executive Officer from January 1992 to October 1995; and President from January 1992 to April 1995 of BW-Security. 39 42 Mr. Trauscht was Chief Operating Officer and President from September 1991 to January 1992; Chief Operating Officer and Vice President from 1990 to 1991; and Vice President -- Finance and Strategy of BW-Security from 1987 to 1990. Mr. Trauscht was President of the Company from December 1990 and Chief Operating Officer from September 1991 to September 1992. Mr. Trauscht is also a Director of BW-Security, Baker Hughes Incorporated, ESCO Electronics Corporation, Thiokol Corporation, Blue Bird Corporation, and IMO Industries, Inc. Mr. Gorr was Chairman and CEO of Cooper Tire & Rubber Company from 1989 until his retirement in 1994 and President of the Company from 1982 until 1989. Mr. Gorr is a director of Amcast Industrial Corporation, Arvin Industries, Inc., Cooper Tire & Rubber Company, Fifth Third Bancorp and OHM Corporation. PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Common Stock as of June 30, 1996 by (i) directors of the Company, (ii) each of the named executive officers of the Company, (iii) each person known by the Company to be the beneficial owner of 5% or more of the outstanding Common Stock (based on publicly available information), (iv) all of the Company's directors and executive officers as a group, and (v) each Selling Stockholder. Unless otherwise indicated, the Company believes that the beneficial owner has sole voting and investment power over such shares. The table does not reflect the potential sale of additional shares if the Underwriters' over-allotment options are exercised. The percentage ownership has been calculated based on 23,570,068 shares of Common Stock outstanding as of June 30, 1996. The Selling Stockholders will participate proportionately in any sales pursuant to the over-allotment options based on their participation in the Offerings.
OWNERSHIP PRIOR TO OWNERSHIP AFTER THE THE OFFERINGS OFFERINGS ------------------------- ------------------------- SHARES OF SHARES TO SHARES OF NAME COMMON STOCK PERCENTAGE BE SOLD COMMON STOCK PERCENTAGE - ---------------------------------- ------------ ---------- --------- ------------ ---------- ML Entities(1).................... 9,071,154 38.5% 4,500,000 4,571,154 19.4% FMR Corp.(2)...................... 1,637,400 6.9% -- 1,637,400 6.9% AIM Management Group Inc.(3)...... 1,198,000 5.1% -- 1,198,000 5.1% John F. Fiedler................... 25,000 * -- 25,000 * Fred M. Kovalik(4)................ 12,500 * -- 12,500 * Matthias B. Bowman(5)............. 0 * -- 0 * Donald C. Trauscht(6)............. 5,500 * -- 5,500 * James J. Kerley(7)................ 2,000 * -- 2,000 * Gary P. Fukayama(8)............... 56,000 * -- 56,000 * Ronald M. Ruzic(9)................ 73,668 * -- 73,668 * Albert J. Fitzgibbons, III(10).... 0 * -- 0 * Alexis P. Michas(11).............. 0 * -- 0 * Paul E. Glaske.................... 0 * -- 0 * Ivan W. Gorr...................... 0 * -- 0 * Terry Schroeder(12)............... 5,000 * -- 5,000 * All directors and executive officers of the Company as a group (18 persons)(13).......... 253,395 * -- 253,395 * All Management Investors as a group (10 persons).............. 66,835 * -- 66,835 *
- --------------- * Less than 1%. (1) Shares of Common Stock beneficially owned by ML Entities are owned of record as follows: 35,573 shares by Merrill Lynch KECALP L.P. 1986; 177,866 shares by Merrill Lynch KECALP L.P. 1987; 444,664 shares by Merchant Banking L.P. No. I; 444,664 shares by ML Venture Partners II, L.P.; 5,895,020 shares by Merrill Lynch Capital Appreciation Partnership No. VIII, 40 43 L.P.; 149,872 shares by ML Offshore LBO Partnership No. VIII; 146,543 shares by ML Employees LBO Partnership No. I, L.P.; and 1,776,952 shares by ML IBK Positions, Inc. MLCP is the general partner of Merrill Lynch LBO Partners No. II, L.P., which is the general partner of Merrill Lynch Capital Appreciation Partnership No. VIII, L.P., and the investment general partner of ML Offshore LBO Partnership No. VIII. Merrill Lynch Capital Appreciation Partnership No. VIII, L.P. and ML Offshore LBO Partnership No. VIII are record holders of shares of Common Stock. MLCP has a 0.4% economic interest in each of such record holders. Except for such economic interest, MLCP expressly disclaims beneficial ownership of such shares. (2) Information based upon a Schedule 13G dated February 14, 1996; in the Schedule 13G, FMR Corp. indicated that it had sole voting power with respect to 109,600 shares and sole dispositive power with respect to 1,637,400 shares. (3) Information based upon a Schedule 13G dated February 12, 1996; in the Schedule 13G, AIM Management Group indicated that it had shared voting power and shared dispositive power with respect to 1,198,000 shares. (4) Total includes 12,500 shares issuable upon the exercise of options within the next 60 days. (5) Mr. Bowman is a limited partner of the following ML Entities which, in the aggregate, are the holders of record of 6,699,686 shares: Merrill Lynch Capital Appreciation Partnership No. VIII, L.P., ML Employees LBO Partnership No. I, L.P., Merrill Lynch KECALP L.P. 1986, Merrill Lynch KECALP L.P. 1987 and Merchant Banking L.P. No. 1). In addition, Mr. Bowman is an advisor to or a director and/or an officer of the ultimate general partner of such ML Entities. Mr. Bowman expressly disclaims beneficial ownership of all shares held by such ML Entities. (6) Total includes 2,500 shares issuable upon the exercise of options within the next 60 days. (7) Total includes 1,000 shares issuable upon the exercise of options within the next 60 days. (8) Total includes 47,000 shares issuable upon the exercise of options within the next 60 days. (9) Total includes 58,000 shares issuable upon the exercise of options within the next 60 days. (10) Mr. Fitzgibbons is a director of the Company as well as MLCP, which manages Merrill Lynch Capital Appreciation Partnership No. VIII, L.P. and ML Offshore LBO Partnership No. VIII. Mr. Fitzgibbons disclaims beneficial ownership of shares beneficially owned by the partnerships identified in footnote 1, above, and Merrill Lynch & Co. ("ML&Co.") (11) Mr. Michas is a director of the Company as well as MLCP, which manages Merrill Lynch Capital Appreciation Partnership No. VIII, L.P. and ML Offshore LBO Partnership No. VIII. Mr. Michas disclaims beneficial ownership of shares beneficially owned by the partnership identified in footnote 1, above, and ML&Co. (12) Total includes 5,000 shares issuable upon the exercise of options within the next 60 days. (13) Total includes 220,006 shares issuable upon the exercise of options within the next 60 days. 41 44 DESCRIPTION OF CAPITAL STOCK GENERAL The Company has three authorized classes of capital stock: Preferred Stock, par value $.01 per share (the "Preferred Stock"); Common Stock; and Non-Voting Common Stock. The shares of such stock which are authorized and outstanding as of June 30, 1996 are as follows:
NUMBER OF NUMBER OF SHARES SHARES AUTHORIZED OUTSTANDING* ---------- ------------ Common Stock.................................................... 50,000,000 23,450,124 Non-Voting Common Stock......................................... 25,000,000 122,644 Preferred Stock................................................. 5,000,000 0
- --------------- * Shares subject to exercisable but unexercised options are not treated as outstanding. COMMON STOCK The Common Stock and the Non-Voting Common Stock have the same terms except as to voting rights and certain conversion features. Each share of Common Stock entitles the holder thereof to one vote in the election of directors and all other matters submitted to a vote of the Company's stockholders. Holders of Common Stock do not have cumulative voting rights. The Non-Voting Common Stock has no voting rights, other than those required by law. As to conversion rights, certain 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 the 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 certain circumstances as permitted by the applicable regulatory requirements. Subject to any preferential rights of any outstanding shares of Preferred Stock, holders of shares of Common Stock and Non-Voting Common Stock, treated as a single class, are entitled to receive, pro rata based on the number of shares held, cash dividends when, as and if declared by the Board of Directors of the Company from funds legally available for such purpose. See "Dividend Policy." In the event of a liquidation of the Company, holders of shares of Common Stock and Non-Voting Common Stock, treated as a single class, are entitled to receive, pro rata 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 then outstanding. Holders of shares of Common Stock and Non-Voting Common Stock have no preemptive rights to subscribe to additional shares of any such class or other securities of the Company. All outstanding shares of Common Stock and Non-Voting Common Stock are fully paid and non-assessable. The Shares being offered in the Offerings are fully paid and non-assessable and are not subject to any future call or assessment. The transfer agent and registrar for the Common Stock is Chase Mellon Shareholder Services. REGISTRATION RIGHTS AGREEMENT The Company is a party to a registration rights agreement (the "Registration Rights Agreement") with holders of approximately 10,919,777 shares and substantially all of the currently outstanding Non-Voting Common Stock. Stockholders who are parties to the Registration Rights Agreement and who also hold at least 15% of the "registrable securities," but in no event less than 1,000,000 shares of Common Stock, will have the right to demand, on up to four occasions, that the Company effect the registration of such securities under the Securities Act of 1933, as amended (the "Securities Act"). One such demand has previously been exercised and this Offering will constitute the second of these four demands. The Registration Rights Agreement also provides for incidental registration rights in circumstances in which the Company is registering securities 42 45 under the Securities Act and the concurrent registration of registrable securities can be accomplished, in the good faith judgment of the Company, without an adverse effect on the Company. For purposes of the Registration Rights Agreement, "registrable securities" means Common Stock received in the Spin-Off, or obtained upon conversion of securities received in the Spin-Off, that has not been previously transferred pursuant to a registration under the Securities Act or pursuant to Rule 144. The Registration Rights Agreement contains customary provisions with respect to the timing of registrations required thereunder, the allocation of registration expenses and indemnification. The Registration Rights Agreement terminates pursuant to its terms on July 27, 2002. Pursuant to the Registration Rights Agreement, each holder of at least 1% of the outstanding shares of Common Stock who is a party thereto is required to agree for a period beginning seven days before, and ending 180 days after, the effective date of the Registration Statement of which this Prospectus is a part, not to effect any public sale or distribution, including any sale pursuant to Rule 144 under the Securities Act, of Common Stock or any securities convertible into or exchangeable for Common Stock, or any rights or warrants to acquire Common Stock. In addition, the Company and each of the executive officers and directors of the Company, as well as certain other stockholders, will agree, for a period beginning seven days before, and ending 180 days after the effective date of the Registration Statement of which this Prospectus is a part, not to sell or otherwise dispose of any shares of Common Stock or securities convertible into or exchangeable or exercisable for Common Stock, or any rights or warrants to acquire Common Stock without the prior written consent of the Representatives. Upon consummation of the Offering, it is expected that the lock-up agreements will cover an aggregate of approximately 6,369,495 shares of Common Stock. PREFERRED STOCK The Certificate of Incorporation authorizes the Board of Directors to establish one or more series of Preferred Stock and to determine, with respect to any series of Preferred Stock, the terms and rights of such series, including (i) the designation of the series, (ii) the number of shares of the series, which number the Board may thereafter (except where otherwise provided in the Preferred Stock designation) increase or decrease (but not below the number of shares thereof then outstanding), (iii) whether dividends, if any, will be cumulative or non-cumulative and the dividend rate of the series, (iv) the dates at which dividends, if any, will be payable, (v) the redemption rights and price or prices, if any, for shares of the series, (vi) the terms and amounts of any sinking fund provided for the purchase or redemption of shares of the series, (vii) the amounts payable on shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the affairs of the Company, (viii) whether the shares of the series will be convertible into shares of any other class or series, or any other security, of the Company or any other corporation, and, if so, the specification of such other class or series or such other security, the conversion price or prices or rate or rates, any adjustments thereof, the date or dates as of which such shares shall be convertible and all other terms and conditions upon which such conversion may be made, (ix) restrictions on the issuance of shares of the same series or of any other class or series, and (x) the voting rights, if any, of the holders of such series. The authorized shares of Preferred Stock, as well as shares of Common Stock, will be available for issuance without further action by the Company's stockholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which the Company's securities may be listed or traded. Although the Board has no intention at the present time of doing so, it could issue a series of Preferred Stock that could, depending on the terms of such series, impede the completion of a merger, tender offer or other takeover attempt. The Board will make any determination to issue such shares based on its judgment as to the best interests of the Company and its stockholders. The Board, in so acting, could issue Preferred Stock having terms that could discourage an acquisition attempt or other transaction that some, or a majority, of the Company's stockholders might believe to be in their best interests or in which stockholders might receive a premium for their stock over the then current market price of such stock. THE DELAWARE GENERAL CORPORATION LAW The Company is a Delaware corporation subject to Section 203 of the Delaware General Corporation Law (the "DGCL"). Section 203 provides that, subject to certain exceptions specified therein, a corporation 43 46 shall not engage in any business combination with any "interested stockholder" for a three-year period following the time that such stockholder became an interested stockholder unless (i) prior to such time, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder, (ii) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding certain shares), or (iii) at or subsequent to such time, the business combination is approved by the board of directors of the corporation and by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. Except as specified in Section 203 of the DGCL, an interested stockholder is defined to include (x) any person that is the owner of 15% or more of the outstanding voting stock of the corporation, or is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation, at any time within three years immediately prior to the relevant date and (y) the affiliates and associates of any such person. Under certain circumstances, Section 203 of the DGCL makes it more difficult for an "interested stockholder" to effect various business combinations with a corporation for a three-year period, although the stockholders may elect to exclude a corporation from the restrictions imposed thereunder. The Certificate of Incorporation does not exclude the Company from the restrictions imposed under Section 203 of the DGCL. CERTIFICATE OF INCORPORATION; BYLAWS The Certificate of Incorporation and the Bylaws contain certain provisions that could make more difficult the acquisition of the Company by means of a tender offer, a proxy contest or otherwise. Classified Board. The Certificate of Incorporation and Bylaws provide that the Company's Board of Directors will be divided into three classes of directors, with the classes to be as nearly equal in number as possible. As a result, approximately one-third of the Board of Directors will be elected each year. The classification of directors will have the effect of making it more difficult for stockholders to change the composition of the Company's Board. The Certificate of Incorporation provides that, subject to any rights of holders of Preferred Stock to elect additional directors under specified circumstances, the number of directors will be fixed in the manner provided in the Bylaws. The Bylaws provide that, subject to any rights of holders of Preferred Stock to elect directors under specified circumstances, the number of directors will be fixed from time to time exclusively pursuant to a resolution adopted by directors constituting a majority of the total number of directors that the Company would have if there were no vacancies on the Board, but must consist of not more than seventeen nor less than three directors. In addition, the Certificate of Incorporation provides that, subject to any rights of holders of Preferred Stock, and unless the Board otherwise determines, any vacancies will be filled only by the affirmative vote of a majority of the remaining directors, though less than a quorum. Removal of Directors. Under the DGCL, unless otherwise provided in the Certificate of Incorporation, directors serving on a classified board may be removed by the stockholders only for cause. In addition, the Certificate of Incorporation and the Bylaws provide that directors may be removed only for cause and only upon the affirmative vote of holders of at least 80% of the voting power of all the then outstanding shares of stock entitled to vote generally in the election of directors ("Voting Stock"), voting together as a single class. Stockholders Action. The Certificate of Incorporation and the Bylaws provide that, subject to the rights of any holders of Preferred Stock to elect additional directors under specified circumstances, stockholder action can be taken only at an annual or special meeting of stockholders and may not be taken by written consent in lieu of a meeting. The Bylaws provide that, subject to the rights of holders of any series of Preferred Stock to elect additional directors under specified circumstances, special meetings of stockholders can be called only by the Board pursuant to a resolution adopted by a majority of the total number of directors. Stockholders are not permitted to call a special meeting or to require that the Board call a special meeting of stockholders. Moreover, the business permitted to be conducted at any special meeting of stockholders is limited to the business brought before the meeting pursuant to the notice of meeting given by the Company. Advance Notice Procedures. The Bylaws establish an advance notice procedure for stockholders to make nominations of candidates for election as directors, or bring other business before an annual meeting of 44 47 stockholders of the Company (the "Stockholders Notice Procedure"). The Stockholders Notice Procedure provides that only persons who are nominated by, or at the direction of, the Board, or by a stockholder who has given timely written notice to the Secretary of the Company prior to the meeting at which directors are to be elected, will be eligible for election as directors of the Company. The Stockholders Notice Procedure also provides that at an annual meeting only such business may be conducted as has been brought before the meeting by, or at the direction of, the Chairman of the Board or by a stockholder who has given timely written notice to the Secretary of the Company of such stockholder's intention to bring such business before such meeting. Under the Stockholders Notice Procedure, for notice of stockholder nominations to be made at an annual meeting to be timely, such notice must be received by the Company not less than 60 days nor more than 90 days prior to the first anniversary of the previous year's annual meeting (or, if the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, not earlier than the 90th day prior to such meeting and not later than the later of (x) the 60th day prior to such meeting and (y) the 10th day after public announcement of the date of such meeting is first made). Notwithstanding the foregoing, in the event that the number of directors to be elected is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Company at least 70 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice will be timely, but only with respect to nominees for any new positions created by such increase, if it is received by the Company not later than the 10th day after such public announcement is first made by the Company. Under the Stockholders Notice Procedure, for notice of a stockholder nomination to be made at a special meeting at which directors are to be elected to be timely, such notice must be received by the Company not earlier than the 90th day before such meeting and not later than the later of (x) the 60th day prior to such meeting and (y) the 10th day after the public announcement of the date of such meeting is first made. In addition, under the Stockholders Notice Procedure, a stockholder's notice to the Company proposing to nominate a person for election as a director or relating to the conduct of business other than the nomination of directors must contain certain specified information. If the Chairman of the Board or other officer presiding at a meeting determines that a person was not nominated, or other business was not brought before the meeting, in accordance with the Stockholders Notice Procedure, such person will not be eligible for election as a director, or such business will not be conducted at such meeting, as the case may be. Liability of Directors; Indemnification. The Certificate of Incorporation provides that a director will not be personally liable for monetary damages to the Company or its stockholders for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for paying a dividend or approving a stock repurchase or redemption in violation of Section 174 of the DGCL, or (iv) for any transaction from which the director derived an improper personal benefit. The Certificate of Incorporation also provides that each current or former director, officer, employee or agent of the Company, or each such person who is or was serving or who had agreed to serve at the request of the Company 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 such person), will be indemnified by the Company to the full extent permitted by the DGCL, as the same exists or may in the future be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than said law permitted the Company to provide prior to such amendment). The Certificate of Incorporation also specifically authorizes the Company to enter into agreements with any person providing for indemnification greater or different than that provided by the Certificate of Incorporation. Amendment. The Certificate of Incorporation provides that the affirmative vote of the holders of at least 80% of the voting power of the outstanding shares of Voting Stock, voting together as a single class, is required to amend provisions of the Certificate of Incorporation relating to the prohibition of stockholder action without a meeting; the number, election and term of the Company's directors; and the removal of directors. The Certificate of Incorporation further provides that the Bylaws may be amended by the Board or by the affirmative vote of the holders of at least 80% of the outstanding shares of Voting Stock, voting together as a single class. 45 48 The description set forth above is intended as a summary only and is qualified in its entirety by reference to the forms of the Certificate of Incorporation and the Bylaws, copies of which have been filed as exhibits to the Registration Statement of which this Prospectus is a part. See "Available Information." CERTAIN UNITED STATES TAX CONSEQUENCES FOR NON-U.S. SHAREHOLDERS The following is a general discussion of certain United States federal income and estate tax consequences of the ownership and disposition of shares of Common Stock by a person that is a "Non-U.S. Shareholder." For purposes of this discussion, a "Non-U.S. Shareholder" means any person other than (i) an individual who is a citizen or resident of the United States, (ii) a corporation, partnership or other entity created or organized in or under the laws of the United States or of any political subdivision thereof, or (iii) an estate or trust the income of which is subject to United States federal income taxation regardless of its source. This discussion is for general information only and does not consider all aspects of United States federal tax consequences that may be relevant to a particular Non-U.S. Shareholder in light of such shareholder's particular tax position, and does not deal with state, local or foreign tax consequences. This discussion is based on the Internal Revenue Code of 1986, as amended, existing (and where noted, proposed) Treasury regulations, and judicial and administrative interpretations as of the date hereof, all of which are subject to change. Prospective investors are urged to consult their own tax advisors with respect to the United States federal, state and local tax consequences of owning and disposing of the Common Stock, as well as any tax consequences arising under the laws of any other taxing jurisdiction. Proposed Treasury Regulations that are proposed to be effective after December 31, 1997 would change in certain respects some of the certification and reporting requirements discussed below. It is not certain whether, or in what form, such proposed regulations will be finalized. DIVIDENDS In the event that dividends are paid on the Common Stock, any such dividends paid to a Non-U.S. Shareholder will be subject to withholding of United States federal income tax at a rate of 30% of the amount of the dividend (or a lower rate prescribed by an applicable income tax treaty). However, if the dividend is effectively connected with the conduct of a United States trade or business by the Non-U.S. Shareholder and the Non-U.S. Shareholder properly files Internal Revenue Service Form 4224 (or such other applicable form required by the Internal Revenue Service) with the Company or its dividend-paying agent, then the dividend (i) will not be subject to income tax withholding, and (ii) except to the extent that an applicable income tax treaty provides otherwise, will be subject to United States federal income tax at progressive rates of tax. In the case of a Non-U.S. Shareholder that is a corporation, such effectively connected dividend income may also be subject to the branch profits tax (which is generally imposed on a foreign corporation on the repatriation from the United States of effectively connected earnings and profits) at a 30% rate (or a lower rate prescribed by an applicable income tax treaty). A Non-U.S. Shareholder that is eligible for a reduced rate of United States withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts currently withheld by filing an appropriate claim for refund with the Internal Revenue Service. The Company is required to report annually to the Internal Revenue Service and each Non-U.S. Shareholder the amount of dividends paid to, and the income tax withheld with respect to, such shareholder. Such information may also be made available by the Internal Revenue Service to the tax authorities of the country in which the Non-U.S. Shareholder resides. DISPOSITION OF COMMON STOCK Generally, a Non-U.S. Shareholder will not be subject to United States federal income tax on the gain realized upon the disposition of such shareholder's shares of Common Stock unless (i) the Company is or has been a "U.S. real property holding corporation" for federal income tax purposes (which the Company does not believe that it is or is likely to become) and the Non-U.S. Shareholder held, directly or indirectly, at any time during the five-year period ending on the date of disposition, more than 5% of any class of stock of the Company that is regularly traded on an established securities market within the meaning of the applicable 46 49 Treasury regulations, (ii) the gain is effectively connected with a United States trade or business carried on by the Non-U.S. Shareholder and, if an income tax treaty applies, attributable to a United States permanent establishment maintained by the Non-U.S. Shareholder, (iii) the Non-U.S. Shareholder is an individual who holds the Common Stock as a capital asset, such shareholder is present in the United States for 183 days or more in the taxable year of the disposition and either the Non-U.S. Shareholder has a "tax home" in the United States for United States federal income tax purposes or the sale is attributable to an office or other fixed place of business maintained by the Non-U.S. Shareholder in the United States; or (iv) the Non-U.S. Shareholder is subject to tax pursuant to the provisions of United States tax law applicable to certain United States expatriates. ESTATE TAX Shares of Common Stock owned or treated as owned by an individual who is not a citizen or resident (as specifically defined for United States federal estate tax purposes) of the United States at the time of his or her death will be includable in the individual's gross estate for United States federal estate tax purposes and thus subject to United States federal estate tax, unless an applicable estate tax treaty provides otherwise. UNITED STATES INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX United States information reporting requirements (other than the reporting of dividend payments for purposes of the 30% income tax withholding discussed under "-- Dividends") and backup withholding tax generally will not apply to a dividend payment made outside the United States to a Non-U.S. Shareholder, if the dividend either is subject to the 30% withholding discussed above or is subject to a reduced rate of such withholding tax under an applicable income tax treaty. Otherwise, information reporting and backup withholding tax at a 31% rate may apply to dividends paid on the Common Stock to a Non-U.S. Shareholder who fails to certify its non-U.S. status under penalties of perjury in the manner required by United States law or otherwise fails to establish an exemption. In addition, the payment of the proceeds of the sale of shares of Common Stock to or through the United States office of a broker will be subject to information reporting and possible 31% backup withholding unless the owner certifies its non-U.S. status under penalties of perjury or otherwise establishes an exemption. The payment of the proceeds of the sale of shares of Common Stock to or through the foreign office of a broker generally will not be subject to this backup withholding tax. In the case of the payment of proceeds from the disposition of shares of Common Stock through a foreign office of a broker that is a United States person or a "U.S. related person," existing regulations require information reporting but not backup withholding on the payment unless the broker has documentary evidence in its files that the owner is a Non-U.S. Shareholder and the broker has no actual knowledge to the contrary. For this purpose, a "U.S. related person" is (i) a "controlled foreign corporation" for United States federal income tax purposes, or (ii) a foreign person, 50% or more of whose gross income from all sources for the three-year period ending with the close of its taxable year preceding the payment (or for such part of the period that the broker has been in existence) is derived from activities that are effectively connected with the conduct of a United States trade or business. Proposed Treasury regulations which have not been finally adopted contain a similar rule with respect to information reporting by a broker that is a United States person or a "U.S. related person." However, under the proposed regulations, such a person may only rely on documentary evidence to avoid information reporting if the foreign office "effects" the sale at such foreign office. Any amounts withheld under the backup withholding rules from a payment to a Non-U.S. Shareholder will be allowed as a refund or a credit against such Non-U.S. Shareholder's United States federal income tax, provided that the required information is furnished to the Internal Revenue Service. These information reporting and backup withholding rules are under review by the Internal Revenue Service, and their application to the Common Stock could be changed by future regulations. 47 50 UNDERWRITING Subject to the terms and conditions set forth in a purchase agreement (the "U.S. Purchase Agreement") among the Company, the Selling Stockholders, and each of the underwriters named below (the "U.S. Underwriters") and concurrently with the sale of 900,000 Shares to the International Underwriters (as defined below), the Selling Stockholders have agreed to sell to each of the U.S. Underwriters, and each of the U.S. Underwriters has severally agreed to purchase, the aggregate number of Shares set forth opposite its name below.
NUMBER OF UNDERWRITERS SHARES - ---------------------------------------------------------------------------------- --------- Merrill Lynch, Pierce, Fenner & Smith Incorporated......................................................... Lehman Brothers Inc............................................................... Morgan Stanley & Co. Incorporated................................................. --------- Total................................................................... 3,600,000 =========
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), Lehman Brothers Inc. and Morgan Stanley & Co. Incorporated are acting as representatives (the "U.S. Representatives") of the several U.S. Underwriters. The Company and the Selling Stockholders have also entered into a purchase agreement (the "International Purchase Agreement") with certain underwriters outside the United States and Canada (the "International Underwriters" and, together with the U.S. Underwriters, the "Underwriters") for whom Merrill Lynch International, Lehman Brothers International (Europe) and Morgan Stanley & Co. International Limited are acting as representatives (the "International Representatives" and, together with the U.S. Representatives, the "Representatives"). Subject to the terms and conditions set forth in the International Purchase Agreement, and concurrently with the sale of 3,600,000 Shares to the U.S. Underwriters, the Selling Stockholders have agreed to sell to the International Underwriters, and the International Underwriters severally have agreed to purchase, an aggregate of 900,000 Shares. The public offering price per Share and the underwriting discount per Share are identical under the U.S. Purchase Agreement and the International Purchase Agreement. In the U.S. Purchase Agreement, the several U.S. Underwriters have agreed, subject to the terms and conditions set forth therein, to purchase all of the Shares being sold pursuant to each such Agreement if any of the Shares being sold pursuant to such Agreement are purchased and in the International Purchase Agreement the several International Underwriters have agreed, subject to the terms and conditions set forth therein, to purchase all the Shares being sold pursuant to such agreement if any of the Shares being sold pursuant to such agreement are purchased. Under certain circumstances, the commitments of non-defaulting Underwriters may be increased. The closings with respect to the sale of the Shares to be purchased by the U.S. Underwriters and the International Underwriters are conditioned upon one another. The U.S. Underwriters propose initially to offer the Shares to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers (who may include U.S. Underwriters) at such price less a concession not in excess of $ per Share. The U.S. Underwriters may allow, and such dealers may re-allow, a discount not in excess of $ per Share to certain other dealers. After the initial public offering, the public offering price, concession and discount may be changed. The Selling Stockholders have granted to the U.S. Underwriters options to purchase up to an aggregate of 540,000 additional Shares, and the International Underwriters options to purchase up to an aggregate of 135,000 Shares, in each case exercisable for 30 days after the date hereof, to cover over-allotments, if any, at the public offering price, less the underwriting discount. To the extent that the U.S. Underwriters exercise these options, each of the U.S. Underwriters will have a firm commitment, subject to certain conditions, to purchase approximately the same percentage of such Shares that the number of Shares to be purchased by it 48 51 shown in the foregoing table bears to the total number of Shares initially offered to the U.S. Underwriters hereby. The U.S. Underwriters and the International Underwriters have entered into an Intersyndicate Agreement (the "Intersyndicate Agreement") that provides for the coordination of their activities. Pursuant to the Intersyndicate Agreement, sales may be made between the U.S. Underwriters and the International Underwriters of such number of Shares as may be mutually agreed. The price of any Shares so sold shall be the public offering price, less an amount not greater than the selling concession. Under the terms of the Intersyndicate Agreement, the U.S. Underwriters and any dealer to whom they sell Shares will not offer to sell or sell Shares to persons who are non-United States or non-Canadian persons or to persons they believe intend to resell to persons who are non-United States or non-Canadian persons, and the International Underwriters and any dealer to whom they sell Shares will not offer to sell or sell Shares to United States or Canadian persons or to persons they believe intend to resell to United States or Canadian persons, except, in each case, for transactions pursuant to the Intersyndicate Agreement. The Common Stock is listed on the NYSE under the symbol "BWA." Because the Company is an affiliate of MLPF&S, one of the Underwriters, the U.S. Offering is being conducted in accordance with the applicable provisions of Schedule E ("Schedule E") of the By-Laws of the National Association of Securities Dealers, Inc. (the "NASD"). In accordance with Schedule E, no NASD member participating in the distribution is permitted to confirm sales to accounts over which it exercises discretionary authority without prior specific written consent. In addition, under the rules of the NYSE, MLPF&S is precluded from issuing research reports that make recommendations with respect to the Common Stock for so long as the Company is an affiliate of MLPF&S. Pursuant to the Registration Rights Agreement, each holder of at least 1% of the outstanding shares of Common Stock who is a party thereto is required to agree, for a period beginning seven days before, and ending 180 days after, the effective date of the Registration Statement of which this Prospectus is a part, not to effect any public sale or distribution, including any sale pursuant to Rule 144 under the Securities Act, of Common Stock or any securities convertible into or exchangeable for Common Stock, or any rights or warrants to acquire Common Stock. See "Risk Factors -- Shares Eligible for Future Sale." In addition, each of the Company and the executive officers and directors of the Company, as well as certain other stockholders, will agree, for a period beginning seven days before, and ending 180 days after the effective date of the Registration Statement of which this Prospectus is a part, not to sell or otherwise dispose of any Common Stock or securities convertible into or exchangeable or exercisable for Common Stock, or any rights or warrants to acquire Common Stock without the prior written consent of the U.S. Representatives. Upon consummation of the Offering, it is expected that the lock-up agreements will cover an aggregate of approximately 6,369,495 shares of Common Stock. The Company and the Selling Stockholders have agreed to indemnify the U.S. Underwriters and the International Underwriters against certain civil liabilities, including liabilities under the Securities Act. Each of the U.S. Representatives or their affiliates from time-to-time performs investment banking and other financial services for the Company. Lehman Brothers Inc. is currently acting as financial advisor to the Company in connection with the disposition of the North American manual transmission business. For information regarding the ownership by the ML Entities of Common Stock and the representation of affiliates of ML&Co. on the Board of Directors of the Company, see "Management" and "Principal and Selling Stockholders." LEGAL MATTERS The validity of the Shares offered hereby and certain other legal matters relating to the Offerings will be passed upon for the Company by Wachtell, Lipton, Rosen & Katz, New York, New York. Certain legal matters will be passed upon for the Underwriters by Shearman & Sterling, New York, New York. Wachtell, Lipton, Rosen & Katz and Shearman & Sterling occasionally act as counsel to MLCP and other affiliates of ML&Co. 49 52 EXPERTS The consolidated financial statements of the Company and its subsidiaries incorporated in this Prospectus by reference from the Company's Annual Report for each of the three years in the period ended December 31, 1995 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 as of March 31, 1996 and 1995, and for each of the years in the three-year period ended March 31, 1996, have been incorporated by reference herein in reliance upon the report of KPMG Peat Marwick, independent certified public accountants, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. The combined financial statements of the Coltec Automotive OEM Business Group as of December 31, 1995 and 1994 and for each of the two years in the period ended December 31, 1995, incorporated by reference in this Prospectus from the Company's Form 8-K dated June 17, 1996, have been audited by Arthur Andersen LLP, as indicated by their report, which is incorporated herein by reference. The audited financial statements incorporated by reference have been so incorporated in reliance upon the report of Arthur Andersen LLP given upon the authority of said firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). The Registration Statement, such reports, proxy statements and other information, may be inspected and copied at the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549; and at the regional offices of the Commission at 7 World Trade Center (13th Floor), New York, New York 10048; and Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661. Copies of such material can be obtained at prescribed rates from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission also maintains an internet web site at http://www.sec.gov that contains reports, proxy statements and other information. Additionally, reports, proxy statements and other information concerning the Company filed pursuant to the Exchange Act are available for inspection at the NYSE, on which the Common Stock is listed, located at 20 Broad Street, New York, New York, 10005. The Company has filed with the Commission a Registration Statement on Form S-3 under the Securities Act, with respect to the shares of Common Stock being offered in the Offerings. The Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits thereto. For further information with respect to the Company and the Common Stock, reference is hereby made to such Registration Statement and the exhibits thereto. INCORPORATION OF CERTAIN INFORMATION BY REFERENCE Incorporated herein by reference are (i) the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (including the portions of the Company's annual report to stockholders incorporated by reference therein), as amended by the Form 10-K/A (Amendment No. 1) filed on June 28, 1996, as further amended by the Form 10-K/A (Amendment No. 2) filed on July 1, 1996; (ii) the Company's proxy statement dated March 22, 1996 for its Annual Meeting of Stockholders held on April 23, 1996 (other than the sections entitled "Compensation Committee Report on Executive Compensation" and "Performance Graph" which shall not be so incorporated); (iii) the Company's Form 10-Q for the quarter ended March 31, 1996; and (iv) the Company's Current Reports on Form 8-K dated January 19, 1996 and June 17, 1996. All reports and other documents filed by the Company pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the Offerings shall be deemed to be incorporated by reference in this Prospectus and to be a part hereof from the date of filing such documents. Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein, or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein, modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. 50 53 The Company will furnish, without charge, to each person to whom a Prospectus is delivered, upon written or oral request, a copy of any or all of the foregoing documents incorporated herein by reference other than exhibits to such documents (unless such exhibits are specifically incorporated by reference therein). Requests for such documents should be submitted in writing to Borg-Warner Automotive, Inc., 200 South Michigan Avenue, Chicago, Illinois 60604, Attention: Leslie Cleveland Hague, Director of Communications/Investor Relations, or by telephone at (312) 322-8607 or (312) 322-8547. 51 54 [Top half of page: Chart listing the Company's headquarters and advanced engineering centers in North America, Europe and Asia for each of the Company's four operating groups (Powertrain Systems, Automatic Transmission Systems, Morse TEC and Air/Fluid Systems).] [Bottom half of page: Pictures of the vehicles comprising the Company's Top Vehicle Programs including the Ford Explorer, Mercedes S-Class, Ford Taurus, Ford F-150, SsangYong Musso, Chrysler FWD Cars and Mini-Vans, Chrysler FWD LH Vehicles and Range Rover.] 55 - ------------------------------------------------------ - ------------------------------------------------------ NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, NOT CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFERING MADE HEREBY, AND INFORMATION OR REPRESENTATIONS NOT HEREIN CONTAINED, IF GIVEN OR MADE, MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THE SHARES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, SHARES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 Risk Factors.......................... 11 Use of Proceeds....................... 15 Price Range of Common Stock........... 15 Dividend Policy....................... 15 Capitalization........................ 16 Selected Historical Financial Data.... 17 Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 18 Business.............................. 26 Management............................ 37 Principal and Selling Stockholders.... 39 Description of Capital Stock.......... 41 Certain United States Tax Consequences for Non-U.S. Shareholders........... 45 Underwriting.......................... 47 Legal Matters......................... 48 Experts............................... 49 Available Information................. 49 Incorporation of Certain Information by Reference........................ 49
============================================ ============================================ 4,500,000 SHARES [BORG WARNER AUTOMOTIVE LOGO] COMMON STOCK ------------------------ PROSPECTUS ------------------------ MERRILL LYNCH & CO. LEHMAN BROTHERS MORGAN STANLEY & CO. INCORPORATED JULY , 1996 ============================================ 56 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED JULY 22, 1996 PROSPECTUS 4,500,000 SHARES LOGO COMMON STOCK ------------------------ All of the shares of Common Stock offered hereby will be sold by certain stockholders (the "Selling Stockholders") of Borg-Warner Automotive, Inc. (the "Company"). See "Principal and Selling Stockholders." The Company will not receive any proceeds from the sale of the shares offered hereby. Of the 4,500,000 shares of Common Stock offered hereby, 900,000 shares are being offered outside the United States and Canada by the International Underwriters (the "International Offering") and 3,600,000 shares are being offered in a concurrent offering in the United States and Canada by the U.S. Underwriters (the "U.S. Offering" and, together with the International Offering, the "Offerings"). The public offering price and the underwriting discount per share are identical for the Offerings. See "Underwriting." The Common Stock is listed on the New York Stock Exchange, Inc. (the "NYSE") under the symbol "BWA." On July 22, 1996, the last reported sale price of the Common Stock on the New York Stock Exchange was $36.75 per share. See "Price Range of Common Stock." FOR INFORMATION CONCERNING CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS, SEE "RISK FACTORS" COMMENCING ON PAGE 11. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- PROCEEDS TO PRICE TO UNDERWRITING SELLING PUBLIC DISCOUNT(1) STOCKHOLDERS(2) - ----------------------------------------------------------------------------------------------------------- Per Share................................... $ $ $ - ----------------------------------------------------------------------------------------------------------- Total(3).................................... $ $ $ - ----------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the several Underwriters against certain liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) The Company has agreed to pay certain expenses of the Offerings estimated at $1,000,000. (3) The Selling Stockholders have granted the International Underwriters and the U.S. Underwriters options exercisable within 30 days after the date hereof to purchase up to 135,000 and 540,000 additional shares of Common Stock, respectively, solely to cover over-allotments, if any. If such options are exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Selling Stockholders will be $ , $ , and $ , respectively. See "Underwriting." ------------------------ The shares of Common Stock are offered by the several Underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the shares of Common Stock will be made in New York, New York on or about July , 1996. ------------------------ MERRILL LYNCH INTERNATIONAL LEHMAN BROTHERS MORGAN STANLEY & CO. INTERNATIONAL ------------------------ The date of this Prospectus is July , 1996. 57 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] UNDERWRITING Subject to the terms and conditions set forth in a purchase agreement (the "International Purchase Agreement") among the Company, the Selling Stockholders, MLCP and each of the underwriters named below (the "International Underwriters") and concurrently with the sale of 3,600,000 Shares to the U.S. Underwriters (as defined below), the Selling Stockholders have agreed to sell to each of the International Underwriters, and each of the International Underwriters has severally agreed to purchase, the aggregate number of Shares set forth opposite its name below.
NUMBER OF UNDERWRITERS SHARES - --------------------------------------------------------------------------------- --------- Merrill Lynch International...................................................... Lehman Brothers International (Europe)........................................... Morgan Stanley & Co. International Limited....................................... --------- Total.................................................................. 900,000 ========
Merrill Lynch International, Lehman Brothers International (Europe) and Morgan Stanley & Co. International Limited are acting as representatives (the "International Representatives") of the several International Underwriters. The Company, the Selling Stockholders and MLCP have also entered into a purchase agreement (the "U.S. Purchase Agreement") with certain underwriters inside the United States and Canada (the "U.S. Underwriters" and, together with the International Underwriters, the "Underwriters") for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), Lehman Brothers Inc. and Morgan Stanley & Co. Incorporated are acting as representatives (the "U.S. Representatives" and, together with the International Representatives, the "Representatives"). Subject to the terms and conditions set forth in the U.S. Purchase Agreement, and concurrently with the sale of 900,000 Shares to the International Underwriters, the Selling Stockholders have agreed to sell to the U.S. Underwriters and the U.S. Underwriters severally have agreed to purchase, an aggregate of 3,600,000 Shares. The public offering price per Share and the underwriting discount per Share are identical under the U.S. Purchase Agreement and the International Purchase Agreement. In the International Purchase Agreement, the several International Underwriters have agreed, subject to the terms and conditions set forth therein, to purchase all of the Shares being sold pursuant to each such Agreement if any of the Shares being sold pursuant to such Agreement are purchased and in the U.S. Purchase Agreement the several U.S. Underwriters have agreed, subject to the terms and conditions set forth therein, to purchase all the Shares being sold pursuant to such agreement if any of the Shares being sold pursuant to such agreement are purchased. Under certain circumstances, the commitments of non-defaulting Underwriters may be increased. The closings with respect to the sale of the Shares to be purchased by the U.S. Underwriters and the International Underwriters are conditioned upon one another. The International Underwriters propose initially to offer the Shares to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers (who may include U.S. Underwriters) at such price less a concession not in excess of $ per Share. The International Underwriters may allow, and such dealers may reallow, a discount not in excess of $ per Share to certain other dealers. After the initial public offering, the public offering price, concession and discount may be changed. 48 58 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] The Selling Stockholders have granted to the U.S. Underwriters options to purchase up to an aggregate of 540,000 additional Shares, and the International Underwriters options to purchase up to an aggregate of 135,000 Shares, in each case exercisable for 30 days after the date hereof, to cover over-allotments, if any, at the public offering price, less the underwriting discount. To the extent that the International Underwriters exercise these options, each of the International Underwriters will have a firm commitment, subject to certain conditions, to purchase approximately the same percentage of such Shares that the number of Shares to be purchased by it shown in the foregoing table bears to the total number of Shares initially offered to the International Underwriters hereby. The U.S. Underwriters and the International Underwriters have entered into an Intersyndicate Agreement (the "Intersyndicate Agreement") that provides for the coordination of their activities. Pursuant to the Intersyndicate Agreement, sales may be made between the U.S. Underwriters and the International Underwriters of such number of Shares as may be mutually agreed. The price of any Shares so sold shall be the public offering price, less an amount not greater than the selling concession. Under the terms of the Intersyndicate Agreement the U.S. Underwriters and any dealer to whom they sell Shares will not offer to sell or sell Shares to persons who are non-United States or non-Canadian persons or to persons they believe intend to resell to persons who are non-United States or non-Canadian persons, and the International Underwriters and any dealer to whom they sell Shares will not offer to sell or sell Shares to United States or Canadian persons or to persons they believe intend to resell to United States or Canadian persons, except, in each case, for transactions pursuant to the Intersyndicate Agreement. Each International Underwriter has agreed that (i) it has not offered or sold and, prior to the date six months after the date of issue of the Common Stock, will not offer to sell any Common Stock to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995 (the "Regulations"), (ii) it has complied and will comply with all applicable provisions of the Financial Services Act of 1986 and the Regulations with respect to anything done by it in relation to the Common Stock, in form or otherwise involving the United Kingdom, and (iii) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issue of the Common Stock to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995 or is a person to whom such document may otherwise lawfully be issued or passed on. The Common Stock is listed on the NYSE under the symbol "BWA." Because the Company is an affiliate of MLPF&S, one of the underwriters, the U.S. Offering is being conducted in accordance with the applicable provisions of Schedule E ("Schedule E") of the By-Laws of the National Association of Securities Dealers, Inc. (the "NASD"). In accordance with Schedule E, no NASD member participating in the distribution is permitted to confirm sales to accounts over which it exercises discretionary authority without prior specific written consent. In addition, under the rules of the NYSE, MLPF&S is precluded from issuing research reports that make recommendations with respect to the Common Stock for so long as the Company is an affiliate of MLPF&S. Pursuant to the Registration Rights Agreement, each holder of at least 1% of the outstanding shares of Common Stock who is a party thereto is required to agree, for a period beginning seven days before, and ending 180 days after, the effective date of the Registration Statement of which this Prospectus is a part, not to effect any public sale or distribution, including any sale pursuant to Rule 144 under the Securities Act, of Common Stock or any securities convertible into or exchangeable for Common Stock or any rights or warrants to acquire Common Stock. See "Risk Factors -- Shares Eligible for Future Sale." In addition, each of the Company and the executive officers and directors of the Company, as well as certain other stockholders, will agree, for a period beginning seven days before, and ending 180 days after the effective date of the Registration Statement of which this Prospectus is a part, not to sell or otherwise dispose of any Common Stock or 49 59 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] securities convertible into or exchangeable or exercisable for Common Stock, or any rights or warrants to acquire Common Stock without the prior written consent of the U.S. Representatives. Upon consummation of the Offering, it is expected that the lock-up agreements will cover an aggregate of approximately 6,369,495 shares of Common Stock. The Company and the Selling Stockholders have agreed to indemnify the U.S. Underwriters and the International Underwriters against certain civil liabilities, including liabilities under the Securities Act. Each of the U.S. Representatives or their affiliates from time-to-time performs investment banking and other financial services for the Company. Lehman Brothers Inc. is currently acting as financial advisor to the Company in connection with the disposition of the North American manual transmission business. For information regarding the ownership by the ML Entities of Common Stock and the representation of affiliates of ML&Co. on the Board of Directors of the Company, see "Management" and "Principal and Selling Stockholders." LEGAL MATTERS The validity of the Shares offered hereby and certain other legal matters relating to the Offerings will be passed upon for the Company by Wachtell, Lipton, Rosen & Katz, New York, New York. Certain legal matters will be passed upon for the Underwriters by Shearman & Sterling, New York, New York. Wachtell, Lipton, Rosen & Katz and Shearman & Sterling occasionally act as counsel to MLCP and other affiliates of ML&Co. EXPERTS The consolidated financial statements of the Company and its subsidiaries incorporated in this Prospectus by reference from the Company's Annual Report for each of the three years in the period ended December 31, 1995 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 as of March 31, 1996 and 1995, and for each of the years in the three-year period ended March 31, 1996, have been incorporated by reference herein in reliance upon the report of KPMG Peat Marwick, independent certified public accountants, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. The combined financial statements of the Coltec Automotive OEM Business Group as of December 31, 1995 and 1994 and for each of the two years in the period ended December 31, 1995, incorporated by reference in this Prospectus from the Company's Form 8-K dated June 17, 1996, have been audited by Arthur Andersen LLP, as indicated by their report, which is incorporated herein by reference. The audited financial statements incorporated by reference have been so incorporated in reliance upon the report of Arthur Andersen LLP given upon the authority of said firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). The Registration Statement, such reports, proxy statements and other information, may be inspected and copied at the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549; and at the regional offices of the Commission at 7 World Trade Center (13th Floor), New York, New York 10048; and Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661. Copies of such material can be obtained at prescribed rates from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission also maintains an internet web site at http://www.sec.gov that contains reports, proxy statements and other information. Additionally, reports, proxy statements and other information concerning the Company filed pursuant to the Exchange Act are available for inspection at the NYSE, on which the Common Stock is listed, located at 20 Broad Street, New York, New York, 10005. 50 60 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] The Company has filed with the Commission a Registration Statement on Form S-3 under the Securities Act, with respect to the shares of Common Stock being offered in the Offerings. The Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits thereto. For further information with respect to the Company and the Common Stock, reference is hereby made to such Registration Statement and the exhibits thereto. No action has been taken or will be taken in any jurisdiction by the Company or any Underwriter that would permit a public offering of the Shares or possession or distribution of this Prospectus in any jurisdiction where action for that purpose is required, other than the United States. Persons into whose possession this Prospectus comes are required by the Company and the Underwriters to inform themselves about and to observe any restrictions as to the offering of the Shares and the distribution of this Prospectus. INCORPORATION OF CERTAIN INFORMATION BY REFERENCE Incorporated herein by reference are (i) the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (including the portions of the Company's annual report to stockholders incorporated by reference therein), as amended by the Form 10-K/A (Amendment No. 1) filed on June 28, 1996, as further amended by the Form 10-K/A (Amendment No. 2) filed on July 1, 1996; (ii) the Company's proxy statement dated March 22, 1996 for its Annual Meeting of Stockholders held on April 23, 1996 (other than the sections entitled "Compensation Committee Report on Executive Compensation" and "Performance Graph" which shall not be so incorporated); (iii) the Company's Form 10-Q for the quarter ended March 31, 1996; and (iv) the Company's Current Reports on Form 8-K dated January 19, 1996 and June 17, 1996. All reports and other documents filed by the Company pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the Offerings shall be deemed to be incorporated by reference in this Prospectus and to be a part hereof from the date of filing such documents. Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein, or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein, modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will furnish, without charge, to each person to whom a Prospectus is delivered, upon written or oral request, a copy of any or all of the foregoing documents incorporated herein by reference other than exhibits to such documents (unless such exhibits are specifically incorporated by reference therein). Requests for such documents should be submitted writing to Borg-Warner Automotive, Inc., 200 South Michigan Avenue, Chicago, Illinois 60604, Attention: Leslie Cleveland Hague, Director of Communications/Investor Relations, or by telephone at (312) 322-8607 or (312) 322-8547. 51 61 [Top half of page: Chart listing the Company's headquarters and advanced engineering centers in North America, Europe and Asia for each of the Company's four operating groups (Powertrain Systems, Automatic Transmission Systems, Morse TEC and Air/Fluid Systems).] [Bottom half of page: Pictures of the vehicles comprising the Company's Top Vehicle Programs including the Ford Explorer, Mercedes S-Class, Ford Taurus, Ford F-150, SsangYong Musso, Chrysler FWD Cars and Mini-Vans, Chrysler FWD LH Vehicles and Range Rover.] 62 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] - ------------------------------------------------------ - ------------------------------------------------------ NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, NOT CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFERING MADE HEREBY, AND INFORMATION OR REPRESENTATIONS NOT HEREIN CONTAINED, IF GIVEN OR MADE, MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THE SHARES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, SHARES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. IN THIS PROSPECTUS, REFERENCE TO "DOLLARS" AND "$" ARE TO UNITED STATES DOLLARS UNLESS STATED OTHERWISE. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 Risk Factors.......................... 11 Use of Proceeds....................... 15 Price Range of Common Stock........... 15 Dividend Policy....................... 15 Capitalization........................ 16 Selected Historical Financial Data.... 17 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 18 Business.............................. 26 Management............................ 37 Principal and Selling Stockholders.... 39 Description of Capital Stock.......... 41 Certain United States Tax Consequences for Non-U.S. Shareholders........... 45 Underwriting.......................... 47 Legal Matters......................... 49 Experts............................... 49 Available Information................. 49 Incorporation of Certain Information by Reference........................ 50
- ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ 4,500,000 SHARES LOGO COMMON STOCK ------------------------ PROSPECTUS ------------------------ MERRILL LYNCH INTERNATIONAL LEHMAN BROTHERS MORGAN STANLEY & CO. INTERNATIONAL JULY , 1996 - ------------------------------------------------------ - ------------------------------------------------------ 63 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following are the estimated expenses of the issuance and distribution of the securities being registered, all of which will be paid by the Registrant. Registration fee............................................ $ 73,164.31 NASD filing fee............................................. 21,717.50 Blue Sky fees and expenses.................................. 20,000.00 Printing and related expenses............................... 400,000.00 Legal fees and expenses..................................... 250,000.00 Accounting fees and expenses................................ 125,000.00 Miscellaneous............................................... 110,618.19 ------------- Total.................................................. $1,000,000.00 ============
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law ("DGCL") provides that a corporation has the power to indemnify its officers and directors against the expenses, including attorney's fees, judgments, fines or settlement amounts actually and reasonably incurred by them in connection with the defense of any action by reason of being or having been directors or officers, if such person shall have acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation, except that if such action shall be in the right of the corporation, no such indemnification shall be provided as to any claim, issue or matter as to which such person shall have been judged to have been liable to the corporation unless and to the extent that the Court of Chancery of the State of Delaware, or another court in which the suit was brought, shall determine upon application that, in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnity. As permitted by Section 102 of the DGCL, the Registrant's Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") provides that no director shall be liable to the Registrant or its stockholders for monetary damages for breach of fiduciary duty as a director other than (i) for breaches of the director's duty of loyalty to the Registrant and its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for the unlawful payment of dividends or unlawful stock purchases or redemptions under Section 174 of the DGCL, and (iv) for any transaction from which the director derived an improper personal benefit. The Certificate of Incorporation provides for indemnification of its directors and officers to the fullest extent permitted by the DGCL, and allows the Registrant to advance or reimburse litigation expenses upon submission by the director, officer or employee of an undertaking to repay such advances or reimbursements if it is ultimately determined that indemnification is not available to such director or officer. ITEM 16. EXHIBITS. The following documents are filed as a part of this Registration Statement. Those exhibits previously filed and incorporated herein by reference are identified below. For each such exhibit there is shown below the registration statement number or periodic report and exhibit number of the document in the previous filing. The registration statements were filed by Registrant unless otherwise indicated. II-1 64
EXHIBIT NO. DESCRIPTION OF DOCUMENT - ------- --------------------------------------------------------------------------------- 1.1 -- Form of U.S. Purchase Agreement among the Company, the Selling Stockholders, and the U.S. Underwriters. 1.2 -- Form of International Purchase Agreement among the Company, the Selling Stockholders, and the International Underwriters. 3.1 -- Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit No. 3.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993). 3.2 -- By-laws of the Company (incorporated by reference to Exhibit No. 3.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993). 5 -- Opinion of Wachtell, Lipton, Rosen & Katz.+ 23.1 -- Consent of Deloitte & Touche LLP. 23.2 -- Consent of Wachtell, Lipton, Rosen & Katz (contained in Exhibit 5).+ 23.3 -- Consent of KPMG Peat Marwick. 23.4 -- Consent of Arthur Andersen LLP. 24 -- Powers of Attorney.+
- --------------- + Previously filed. ITEM 17. UNDERTAKINGS. (a), (c)-(e), (g), (j) Not applicable (b) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, as amended (the "Securities Act"), each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (f) The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. (h) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission (the "Commission") such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (i) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and II-2 65 contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of registration statement as of the time it was declared effective. (2) For the purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 66 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED IN THE CITY OF CHICAGO, STATE OF ILLINOIS, ON JULY 22, 1996. BORG-WARNER AUTOMOTIVE, INC. By: /s/ JOHN F. FIEDLER JOHN F. FIEDLER Chairman and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THEIR CAPACITIES ON JULY 22, 1996.
SIGNATURE TITLE - ----------------------------------------------- -------------------------------------------- /s/ JOHN F. Chairman, Chief Executive Officer, and FIEDLER Director (Principal Executive Officer) JOHN F. FIEDLER * Vice President and Treasurer (Principal ROBIN J. ADAMS Financial Officer) * Vice President and Controller (Principal WILLIAM C. CLINE Accounting Officer) * Director DONALD C. TRAUSCHT * Director ALEXIS P. MICHAS * Director ALBERT J. FITZGIBBONS III * Director MATTHIAS B. BOWMAN * Director PAUL E. GLASKE * Director JAMES J. KERLEY * Director IVAN W. GORR /s/ JOHN F. As attorney-in-fact for the officers and/or FIEDLER directors marked by an asterisk. JOHN F. FIEDLER
II-4 67 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF DOCUMENT ------- ----------------------------------------------------------------------------- 1.1 -- Form of U.S. Purchase Agreement among the Company, the Selling Stockholders, and the U.S. Underwriters. 1.2 -- Form of International Purchase Agreement among the Company, the Selling Stockholders, and the International Underwriters. 23.1 -- Consent of Deloitte & Touche LLP 23.3 -- Consent of KPMG Peat Marwick 23.4 -- Consent of Arthur Andersen LLP
EX-1.1 2 U.S. PURCHASE AGREEMENT 1 ================================================================================ BORG-WARNER AUTOMOTIVE, INC. (a Delaware corporation) 3,600,000 Shares of Common Stock U.S. PURCHASE AGREEMENT Dated: July __, 1996 ================================================================================ 2 S&S DRAFT 07/22/9 BORG-WARNER AUTOMOTIVE, INC. (a Delaware corporation) 3,600,000 Shares of Common Stock (Par Value $.01 Per Share) U.S. PURCHASE AGREEMENT July __, 1996 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated LEHMAN BROTHERS INC. MORGAN STANLEY & CO. INCORPORATED As Representatives of the several U.S. Underwriters c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated Merrill Lynch World Headquarters North Tower World Financial Center New York, New York 10281-1201 Ladies and Gentlemen: The stockholders of Borg-Warner Automotive, Inc., a Delaware corporation (the "Company"), named in Schedule A (collectively, the "Selling Stockholders") propose to sell severally and not jointly to the underwriters named in Schedule B (collectively, the "U.S. Underwriters", which shall also include any person substituted for a U.S. Underwriter under Section 11 hereof), for whom you are acting as representatives (the "U.S. Representatives"), an aggregate of 3,600,000 outstanding shares of Common Stock of the Company, par value $.01 per share (shares of which class of stock of the Company are hereinafter referred to as "Common Stock"). Such shares of Common Stock are to be sold to each U.S. Underwriter, acting severally and not jointly, in such amounts as are set forth in Schedule B hereto opposite the name of such U.S. Underwriter. The Selling Stockholders also grant to the 3 2 U.S. Underwriters, severally and not jointly, the option described in Section 2 to purchase all or any part of 540,000 additional shares of Common Stock to cover over-allotments. The aforesaid 3,600,000 shares of Common Stock (the "Initial U.S. Shares"), together with all or any part of the 540,000 additional shares of Common Stock subject to the option described in Section 2 (the "U.S. Option Shares"), are collectively herein called the "U.S. Shares". The U.S. Shares are more fully described in the U.S. Prospectus referred to below. It is understood that the Company is concurrently entering into an agreement, dated the date hereof (the "International Purchase Agreement"), providing for the sale by the Selling Stockholders of 900,000 shares of Common Stock (the "Initial International Shares") through arrangements with certain underwriters outside the United States and Canada (the "International Underwriters"), for whom Merrill Lynch International, Morgan Stanley & Co. International Limited and Lehman Brothers International (Europe) are acting as representatives (the "International Representatives"). It is further understood that the Selling Stockholders are concurrently granting the International Underwriters an option to purchase all or any part of 135,000 additional shares of Common Stock (the "International Option Shares") from the Selling Stockholders to cover over-allotments. The International Shares and the International Option Shares are hereinafter collectively referred to as the "International Shares". The U.S. Shares and the International Shares are hereinafter collectively referred to as the "Shares". The Company understands that the U.S. Underwriters will simultaneously enter into an agreement with the International Underwriters dated the date hereof (the "Intersyndicate Agreement") providing for the coordination of certain transactions among the U.S. Underwriters and the International Underwriters, under the direction of Merrill Lynch, Pierce, Fenner & Smith Incorporated. You have advised us that you and the other U.S. Underwriters, acting severally and not jointly, desire to purchase the U.S. Shares and that you have been authorized by the other U.S. Underwriters to execute this Agreement and the U.S. Price Determination Agreement referred to below on their behalf. The price to the public per share for the U.S. Shares and the purchase price per share for the U.S. Shares shall be agreed upon by the Selling Stockholders and the U.S. Representatives, acting on behalf of the several U.S. Underwriters, and such agreement shall be set forth in a separate written instrument substantially in the form of Exhibit A hereto (the "U.S. Price Determination Agreement"). The U.S. Price Determination Agreement may take the form of an exchange of any standard form of written telecommunication between the Selling Stockholders and the U.S. Representatives and shall specify such applicable information as is indicated in Exhibit A hereto. The offering of the U.S. Shares will be governed by this Agreement, as supplemented by the U.S. Price Determination Agreement. From and after the date of the execution and delivery of the U.S. Price Determination 4 3 Agreement, this Agreement shall be deemed to incorporate, and all reference herein to "this Agreement" shall be deemed to include, the U.S. Price Determination Agreement. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-3 (Registration No. 333-06041) covering the registration of the Shares under the Securities Act of 1933, as amended (the "1933 Act"), including the related preliminary prospectuses, and either (A) has prepared and proposes to file, prior to the effective date of such registration statement, an amendment to such registration statement, including final prospectuses, or (B) if the Company has elected to rely upon Rule 430A ("Rule 430A") of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations"), will prepare and file prospectuses, in accordance with the provisions of Rule 430A and Rule 424(b) ("Rule 424(b)") of the 1933 Act Regulations, promptly after execution and delivery of the U.S. Price Determination Agreement. Two forms of prospectus are to be used in connection with the offering and sale of the Shares: one relating to the U.S. Shares (the "Form of U.S. Prospectus") and one relating to the International Shares (the "Form of International Prospectus"). The Form of International Prospectus is identical to the Form of U.S. Prospectus, except for the front cover page, inside front cover page, the sections captioned "Underwriting" and "Available Information" and the back cover page. Additionally, if the Company has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations, the Company will prepare and file a term sheet (a "Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b), promptly after execution and delivery of the U.S. Price Determination Agreement. The information, if any, included in such prospectuses that was omitted from any prospectuses included in such registration statement at the time it becomes effective but that is deemed, (i) pursuant to paragraph (b) of Rule 430A, to be part of such registration statement at the time it becomes effective is referred to herein as the "Rule 430A Information", and (ii) pursuant to paragraph (d) of Rule 434, to be part of such registration statement at the time it becomes effective is referred to herein as "Rule 434 Information". Each Form of U.S. Prospectus and Form of International Prospectus used before the time such registration statement becomes effective, and any Form of U.S. Prospectus and Form of International Prospectus that omits the Rule 430A Information or the Rule 434 Information, if applicable, that is used after such effectiveness and prior to the execution and delivery of the U.S. Price Determination Agreement or the International Price Determination Agreement, is herein called a "preliminary prospectus". Such registration statement, including the exhibits thereto and the documents incorporated by reference therein pursuant to Item 12 of Form S-3 under the 1933 Act ("Item 12"), as amended, and Rule 412 of the 1933 Act Regulations ("Rule 412") at the time it becomes effective and including, if applicable, the Rule 430A Information or the Rule 434 Information, is herein called the "Original Registration Statement". Any registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b) Registration Statement", and the Original Registration Statement and any Rule 462(b) Registration Statement are herein referred to collectively as the "Registration Statement". The Form of 5 4 U.S. Prospectus and Form of International Prospectus, including the documents incorporated by reference therein pursuant to Item 12 and Rule 412, included in the Original Registration Statement at the time it becomes effective, are herein called the "U.S. Prospectus" and the "International Prospectus", respectively, and, collectively, the "Prospectuses", and, individually, a "Prospectus", except that, (i) if the final U.S. Prospectus or International Prospectus, as the case may be, first furnished to the U.S. Underwriters or the International Underwriters after the execution of the U.S. Price Determination Agreement or the International Price Determination Agreement for use in connection with the offering of the Shares differs from the prospectuses included in the Original Registration Statement at the time it becomes effective (whether or not such prospectus is required to be filed pursuant to Rule 424(b)), the terms "U.S. Prospectus", "International Prospectus", "Prospectuses" and "Prospectus" shall refer to the final U.S. Prospectus or International Prospectus first furnished to the U.S. Underwriters or the International Underwriters, as the case may be, for such use, and (ii) if Rule 434 is relied upon, the terms "U.S. Prospectus", "International Prospectus", "Prospectuses" and "Prospectus" shall refer to the preliminary U.S. Prospectus or International Prospectus last furnished to the U.S. Underwriters or the International Underwriters, as the case may be, in connection with the offering of the Shares, in each case together with the Term Sheet. The Company and the Selling Stockholders understand that the U.S. Underwriters propose to make a public offering of the U.S. Shares as soon as you deem advisable after the Registration Statement becomes effective and the U.S. Price Determination Agreement has been executed and delivered. Section 1. Representations and Warranties. (a) The Company represents and warrants to and agrees with each of the U.S. Underwriters and each of the Selling Stockholders that: (i) The Company meets the requirements for use of Form S-3 under the 1933 Act and when the Registration Statement or any post-effective amendment thereto shall become effective and at all times subsequent thereto up to the Closing Time referred to below (and, if any U.S. Option Shares are purchased, up to the Date of Delivery referred to below), (A) the Registration Statement and the Prospectuses, including any amendments and supplements thereto, will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations; (B) neither the Registration Statement nor any amendment or supplement thereto will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (C) neither of the Prospectuses nor any amendment or supplement thereto will include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (D) if Rule 434 is relied upon, the Prospectuses 6 5 shall not be "materially different", as such term is used in Rule 434, from the prospectuses included in the Registration Statement at the time it becomes effective; except that this representation and warranty does not apply to statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of any U.S. Underwriter or International Underwriter through you or the International Representatives expressly for use in the Registration Statement or the Prospectuses or any amendment or supplement thereof. (ii) The documents incorporated by reference in the Prospectuses pursuant to Item 12 of Form S-3 under the 1933 Act, at the time they were filed with the Commission, complied in all material respects with the requirements of the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the rules and regulations of the Commission thereunder (the "1934 Act Regulations"), and, when read together and with the other information in the Prospectus, at the time the Registration Statement becomes effective and at all times subsequent thereto up to the Closing Time (as hereinafter defined) (and, if any Option Shares are purchased, up to the Date of Delivery (as hereinafter defined)), will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading. (iii) (A) Deloitte & Touche LLP, who have certified the financial statements of the Company and the schedules included or incorporated by reference in the Registration Statement and Prospectuses, (B) KPMG Peat Marwick, who have certified the financial statements of NSK-Warner K.K. ("NSK-Warner") included or incorporated by reference in the Registration Statement and the Prospectuses and (C) Arthur Andersen LLP, who have certified the financial statements of Holley Automotive Inc, Holley Automotive Group, Ltd., Holley Automotive Systems GmbH, Coltec Automotive Inc, and Performance Friction Products, a division of Stemco Inc, an indirect, wholly-owned subsidiary of Coltec Industries Inc. (collectively, the "Coltec Subsidiaries"), included or incorporated by reference in the Registration Statement and the Prospectuses, are independent public accountants as required by the 1933 Act and the 1933 Act Regulations. (iv) The Company has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement; and this Agreement has been duly authorized, executed and delivered by the Company. (v) The consolidated financial statements and the related notes of the Company and its Subsidiaries (as defined below) (other than the Coltec Subsidiaries) included or incorporated by reference in the Registration Statement present fairly the consolidated financial position of the Company and its Subsidiaries as of the dates indicated and the consolidated results of operations and cash flows of the Company 7 6 and its Subsidiaries for the periods specified. Such financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved (except as set forth in the notes thereto) and subject, in the case of any interim statements, to normal year-end audit adjustments. The financial statement schedules, if any, included in the Registration Statement present fairly the information required to be stated therein. The selected financial data included or incorporated by reference in the Prospectuses present fairly the information shown therein and have been compiled on a basis consistent with that of the audited consolidated financial statements included or incorporated by reference in the Registration Statement. The pro forma financial information included in the Prospectuses present fairly the information shown therein, has been prepared in accordance with the applicable requirements of Rule 11-02 of Regulation S-X, has been properly compiled on the pro forma bases described therein, and, in the opinion of the Company, the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions or circumstances referred to therein. (vi) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware with corporate power and authority under such laws to own, lease and operate its properties and conduct its business as described in the Prospectuses. The Company is duly qualified to transact business as a foreign corporation and is in good standing in each other jurisdiction in which it owns or leases property of a nature, or transacts business of a type, that would make such qualification necessary, except to the extent that the failure to so qualify or be in good standing would not have a material adverse effect on the Company and the Subsidiaries, considered as one enterprise. (vii) The Company's only subsidiaries are set forth in Exhibit B hereto (each such corporation is referred to herein as a "Subsidiary" and, collectively, the "Subsidiaries"). Each Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation with corporate power and authority under such laws to own, lease and operate its properties and conduct its business; and each Subsidiary is duly qualified to transact business as a foreign corporation and is in good standing in each other jurisdiction in which it owns or leases property of a nature, or transacts business of a type, that would make such qualification necessary, except to the extent that the failure to so qualify or be in good standing would not have a material adverse effect on the Company and the Subsidiaries, considered as one enterprise. All of the outstanding shares of capital stock of each Subsidiary have been duly authorized and validly issued and are fully paid and non-assessable and are owned by the Company, directly or through one or more of the Subsidiaries, in the percentages set forth in Exhibit B hereto, free and 8 7 clear of any pledge, lien, security interest, charge, claim, equity or encumbrance of any kind. (viii) The Company had at the date indicated a duly authorized and outstanding capitalization as set forth in the Prospectuses under the caption "Capitalization". (ix) The Shares have been duly authorized and validly issued and are fully paid and non-assessable; no holder thereof will be subject to personal liability by reason of being such a holder; and such Shares are not subject to the preemptive rights of any stockholder of the Company. (x) All of the other outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable; no holder thereof is or will be subject to personal liability by reason of being such a holder; and none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive rights of any stockholder of the Company. (xi) Since the respective dates as of which information is given in the Registration Statement and the Prospectuses, except as described in the Registration Statement or any amendment or supplement thereto, there has not been (A) any material adverse change in the condition (financial or otherwise), results of operations, business affairs or business prospects of the Company and the Subsidiaries, considered as one enterprise, whether or not arising in the ordinary course of business, (B) any transaction entered into by the Company or any Subsidiary, other than in the ordinary course of business, that is material to the Company and the Subsidiaries, considered as one enterprise, or (C) any dividend or distribution of any kind declared, paid or made by the Company on its capital stock, other than regular quarterly cash dividends declared or paid on its Common Stock. (xii) Neither the Company nor any of its Subsidiaries is in violation of its certificate of incorporation or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any indenture, mortgage, loan agreement, note, lease or other agreement or instrument to which it is a party or by which it may be bound or to which any of its properties may be subject, except for such defaults that would not have a material adverse effect on the condition (financial or otherwise), results of operations, business affairs or business prospects of the Company and the Subsidiaries, considered as one enterprise. The execution and delivery of this Agreement and the International Purchase Agreement by the Company, the consummation by the Company of the transactions contemplated in this Agreement, the International Purchase Agreement, and the Registration Statement and compliance by the Company with the terms of this Agreement and the International 9 8 Purchase Agreement have been duly authorized by all necessary corporate action on the part of the Company and do not violate and will not result in any violation of the certificate of incorporation or by-laws of the Company or any Subsidiary, and do not and will not conflict with, or result in a breach of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any Subsidiary under (A) any indenture, mortgage, loan agreement, note, lease or other agreement or instrument to which the Company or any Subsidiary is a party or by which any of them may be bound or to which any of their properties may be subject, except for such conflicts, breaches or defaults or liens, charges or encumbrances that in the aggregate would not have a material adverse effect on the condition (financial or otherwise), results of operations, business affairs or business prospects of the Company and the Subsidiaries, considered as one enterprise or (B) any existing applicable law, rule, regulation, judgment, order or decree of any government, governmental instrumentality or court, domestic or foreign, having jurisdiction over the Company or any Subsidiary or any of their respective properties, except for such conflicts, breaches or defaults or liens, charges or encumbrances that in the aggregate would not have a material adverse effect on the condition (financial or otherwise), results of operations, business affairs or business prospects of the Company and the Subsidiaries, considered as one enterprise. (xiii) No authorization, approval, consent or license of, or any material filing with, any government, governmental instrumentality or court, domestic or foreign (other than under the 1933 Act and the 1933 Act Regulations and the securities or Blue Sky laws of the various states, the securities laws of Canada and its provinces and the securities laws of any jurisdiction outside the United States in which International Shares are offered or sold by the International Underwriters pursuant to the International Purchase Agreement), is legally required for the valid authorization, issuance, sale and delivery of the Shares. (xiv) Except as disclosed or incorporated by reference in the Prospectuses, there is no action, suit or proceeding before or by any government, governmental instrumentality or court, domestic or foreign, now pending or, to the knowledge of the Company, threatened against the Company or any Subsidiary that is required to be disclosed in the Prospectuses or that could result in any material adverse change in the condition (financial or otherwise), results of operations, business affairs or business prospects of the Company and its Subsidiaries, considered as one enterprise, or that could reasonably be expected to adversely affect the consummation of the transactions contemplated by this Agreement and the International Purchase Agreement. 10 9 (xv) There are no contracts or documents of a character required pursuant to the 1933 Act to be described in the Registration Statement or the Prospectuses or to be filed as exhibits to the Registration Statement that are not described and filed as required. (xvi) Each of the Company and the Subsidiaries has good and marketable title to all properties and assets described in the Prospectuses as owned by it, free and clear of all liens, charges, encumbrances or restrictions, except such as (A) are described in the Prospectuses or (B) are neither material in amount nor materially significant in relation to the business of the Company and the Subsidiaries, considered as one enterprise; all of the leases and subleases material to the business of the Company and the Subsidiaries, considered as one enterprise, and under which the Company or any Subsidiary holds properties described in the Prospectuses, are in full force and effect, and neither the Company nor any Subsidiary has any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or any Subsidiary under any of the leases or subleases mentioned above, or affecting or questioning the rights of such corporation to the continued possession of the leased or subleased premises under any such lease or sublease. (xvii) The Company and the Subsidiaries each owns, possesses or has obtained all material governmental licenses, permits, certificates, consents, orders, approvals and other authorizations, and has made all filings with all governmental authorities, necessary to own or lease, as the case may be, and to operate its properties and to carry on its business as presently conducted, and neither the Company nor any Subsidiary has received any notice of proceedings relating to revocation or modification of any such licenses, permits, certificates, consents, orders, approvals or authorizations, which, singly or in the aggregate, if not so owned, possessed or obtained or the subject of an unfavorable ruling, decision or finding, could materially adversely affect the condition (financial or otherwise), results of operations, business affairs or business prospects of the Company and the Subsidiaries, considered as one enterprise. (xviii) The Company and the Subsidiaries each owns or possesses, or can acquire on reasonable terms, adequate patents, patent licenses, trademarks, service marks and trade names necessary to carry on its business as presently conducted, and neither the Company nor any Subsidiary has received any notice of infringement of or conflict with asserted rights of others with respect to any patents, patent licenses, trademarks, service marks or trade names that in the aggregate, if the subject of an unfavorable decision, ruling or finding, could reasonably be expected to materially adversely affect the condition (financial or otherwise), results of operations, business affairs or business prospects of the Company and the Subsidiaries, considered as one enterprise. 11 10 (xix) Except as disclosed in the Prospectuses, to the best knowledge of the Company, no labor problem exists with its employees or with employees of the Subsidiaries or is imminent that could reasonably be expected to materially adversely affect the Company and the Subsidiaries, considered as one enterprise and, to the knowledge of the Company, except as disclosed in the Prospectuses, the Company is not aware of any material existing or imminent labor dispute by the employees of any of its or the Subsidiaries' principal customers that could be expected to materially adversely affect the Company and the Subsidiaries, considered as one enterprise. (xx) The Company has not taken and will not take, directly or indirectly, any action designed to, or that might be reasonably expected to, cause or result in stabilization or manipulation of the price of the Common Stock. (xxi) Except as disclosed in the Registration Statement and except as would not individually or in the aggregate have a material adverse effect on the condition (financial or otherwise), results of operations, business affairs or business prospects of the Company and the Subsidiaries, considered as one enterprise, (A) the Company and the Subsidiaries are each in compliance with all applicable Environmental Laws, (B) the Company and the Subsidiaries have all permits, authorizations and approvals required under any applicable Environmental Laws and are each in compliance with their requirements, (C) there are no pending or threatened Environmental Claims against the Company or any Subsidiary, and (D) there are no circumstances with respect to any property or operations of the Company or the Subsidiaries that could reasonably be anticipated to form the basis of an Environmental Claim against the Company or the Subsidiaries. For purposes of this Agreement, the following terms shall have the following meanings: "Environmental Law" means any United States (or other applicable jurisdiction's) federal, state, local or municipal statute, law, rule, regulation, ordinance, code, policy or rule of common law and any judicial or administrative interpretation thereof including any judicial or administrative order, consent decree or judgment, relating to the environment, health, safety or any chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority. "Environmental Claims" means any and all administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigations or proceedings relating in any way to any Environmental Law. (xxii) All United States federal income tax returns of the Company (and any of the Subsidiaries, if not included in the Company's U.S. consolidated federal income tax return) required by law to be filed have been properly prepared and filed, and all taxes shown on such returns or otherwise assessed which are due and payable 12 11 have been paid. All of the Company's United States federal tax returns (and any of the Subsidiaries' tax returns, if applicable) for taxable periods through and including the 1992 federal taxable year have been audited by the Internal Revenue Service or the statute of limitations for such taxable years has run and thus, all taxes for such periods have been finally determined (excluding the effect of any net operating loss or credit carryovers to such periods). All other tax returns of the Company and the Subsidiaries required to be filed pursuant to applicable foreign, state, local or other law have been filed, except insofar as the failure to file such returns would not have a material adverse effect on the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and the Subsidiaries, considered as one enterprise. The Company and the Subsidiaries have paid (or there has been paid on their behalf) all taxes which are due and for which no tax return is required. There are no liens on any of the Company's or the Subsidiaries' assets for taxes, other than for taxes which have accrued but which are not yet due and payable. Neither the Company nor any Subsidiary is liable for any taxes that are imposed on any other person or corporation (other than for taxes imposed on the Company or the Subsidiaries), except as set forth in Treasury Regulation 1.1502-6 with respect to prior consolidated groups of which the Company or its subsidiaries were members. (xxiii) With respect to each employee benefit plan, program and arrangement (including, without limitation, any "employee benefit plan" as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) maintained or contributed to by the Company or any Subsidiary, or with respect to which the Company or any Subsidiary could incur any liability under ERISA (collectively, the "Benefit Plans"), no event has occurred and, to the best knowledge of the Company, there exists no condition or set of circumstances, in connection with which the Company or any Subsidiary could be subject to any liability under the terms of such Benefit Plans, applicable law (including, without limitation, ERISA and the Internal Revenue Code of 1986, as amended (the "Code")) or any applicable agreement (including, without limitation, the agreement dated as of January 14, 1993 (the "PBGC Agreement"), among the Pension Benefit Guaranty Corporation (the "PBGC"), the Company and Borg-Warner Security Corporation ("BWSC")), that could materially adversely affect the condition (financial or otherwise), results of operations, business affairs or business prospects of the Company and the Subsidiaries, considered as one enterprise. The Company is in compliance in all respects with its obligations under the PBGC Agreement. (xxiv) The Company has obtained the written agreement, in the form previously furnished to you, of (A) each holder of at least 1% of the outstanding shares of Common Stock who is a party to the Registration Rights Agreement dated as of January 27, 1993 among the Company and the Stockholders who are parties thereto (the "Registration Rights Agreement") that for a period beginning seven days 13 12 before, and ending 180 days after, the effective date of the Registration Statement, not to effect any public sale or distribution, including any sale pursuant to Rule 144 under the 1933 Act, of Common Stock or any securities convertible into or exchangeable for Common Stock, or any rights or warrants to acquire Common Stock and (B) executive officers and directors of the Company that for a period beginning seven days before, and ending 180 days after, the effective date of the Registration Statement, such holders will not, without your prior written consent, directly or indirectly, sell, offer to sell, grant any option for the sale of, or otherwise dispose of, any Common Stock or securities convertible into or exchangeable or exercisable for Common Stock. (xxv) There are no persons, corporations, partnerships or other entities with registration or other similar rights to have any securities registered pursuant to the Registration Statement, except as disclosed or incorporated by reference in the Prospectuses. (xxvi) The Shares have been approved for listing on the New York Stock Exchange, Inc. (b) Each of the Selling Stockholders severally represents and warrants to and agrees with each of the U.S. Underwriters as follows: (i) When the Registration Statement or any post-effective amendment thereto shall become effective, and at all times subsequent thereto up to the Closing Time (and, if any U.S. Option Shares are purchased, at the Date of Delivery), (A) neither the Registration Statement nor any amendment or supplement thereto will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (B) neither of the Prospectuses nor any amendment or supplement thereto will include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that, as to each Selling Stockholder, the representations and warranties in this subsection (b)(i) apply only to statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of such Selling Stockholder, in its capacity as such, expressly for use in the Registration Statement or the Prospectuses. (ii) No authorization, approval, consent or license of, or any material filing with, any government, governmental instrumentality or court, domestic or foreign (other than under the 1933 Act and the 1933 Act Regulations and the securities or Blue Sky laws of the various states, the securities laws of Canada and its 14 13 provinces and the securities laws of any jurisdiction outside the United States in which the International Shares are offered and sold by the International Underwriters pursuant to the International Purchase Agreement), is required for the consummation by such Selling Stockholder of the transactions contemplated in this Agreement or the International Purchase Agreement, including, without limitation, the sale and delivery of the Shares. (iv) The execution and delivery of this Agreement and the International Purchase Agreement and the consummation of the transactions contemplated in this Agreement and the International Purchase Agreement will not result in (a) a breach by such Selling Stockholder of, or constitute a default by such Selling Stockholder under, any agreement or instrument or any decree, judgment or order to which such Selling Stockholder is a party or by which such Selling Stockholder is bound or the properties of such Selling Stockholder are subject or (b) violate (1) any provision of the certificate of incorporation, by-law, partnership agreement or comparable governing documents of such Selling Stockholder or any law, rule or regulation applicable to such Selling Stockholder or (2) to which its properties are subject (other than for the securities or Blue Sky laws of the various states, the securities laws of Canada and its provinces and the securities laws of any jurisdiction outside the United States in which the International Shares are offered or sold by the International Underwriters pursuant to the International Purchase Agreement). (v) Such Selling Stockholder has good and marketable title to the Shares to be sold by such Selling Stockholder pursuant to this Agreement and the International Purchase Agreement, free and clear of any pledge, lien, security interest, charge, claim, equity or encumbrance of any kind, other than pursuant to this Agreement, the International Purchase Agreement, the Registration Rights Agreement, [the Management Stockholders Agreement, dated January 27, 1993, the Investors Stockholders Agreement, dated January 27, 1993, the Management Stock Subscription Agreement, dated as of July 27, 1987, as amended as of January 1, 1989 and as of January 27, 1993, and the Replacement Stock Pledge Agreement, dated as of February 1, 1993]; and such Selling Stockholder will at the Closing Time and, if any Option Shares are to be purchased on the Date of Delivery, have good and marketable title to the Shares to be sold by such Selling Stockholder pursuant to this Agreement and the International Purchase Agreement, free and clear of any pledge, lien, security interest, charge, claim, equity or encumbrance of any kind; such Selling Stockholder has full right, power and authority to sell, transfer and deliver such Shares pursuant to this Agreement or the International Purchase Agreement; and, upon delivery of such Shares and payment of the purchase price therefor as contemplated in this Agreement and the International Purchase Agreement, each of the U.S. Underwriters and the International Underwriters, as the case may be, will receive good and marketable title to the Shares purchased by it from such Selling Stockholder, free and 15 14 clear of any pledge, lien, security interest, charge, claim, equity or encumbrance of any kind. (vi) Certificates for all of the shares of Common Stock, or with respect to Selling Stockholders that own shares of the Company's Non-Voting Common Stock, par value $.01 per share, (the "Non-Voting Stock"), certificates for all of the Shares of Non-Voting Stock (accompanied by a written notice requesting conversion of such shares, which notice shall comply with Section 2(4)(iii) of the Company's Restated Certificate of Incorporation), to be sold by such Selling Stockholder pursuant to this Agreement and the International Purchase Agreement, in suitable form for transfer by delivery or accompanied by duly executed instruments of transfer or assignment executed in blank, are available for delivery pursuant to this Agreement and the International Purchase Agreement. (vii) Such Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to, or that might be reasonably expected to, cause or result in stabilization or manipulation of the price of the Common Stock; and such Selling Stockholder has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the Shares other than any preliminary prospectus filed with the Commission or the Prospectuses or other material permitted by the 1933 Act or the 1933 Act Regulations. (viii) Such Selling Stockholder, if such Selling Stockholder is not a natural person, is duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization, as the case may be, with all necessary power and authority to enter into and perform each of this Agreement and the International Purchase Agreement and to sell and deliver the Shares to the U.S. Underwriters and the International Underwriters, as the case may be, in accordance with each of this Agreement and the International Purchase Agreement. (c) Any certificate signed by any officer of the Company or any Subsidiary and delivered to you or to counsel for the U.S. Underwriters shall be deemed a representation and warranty by the Company to each U.S. Underwriter as to the matters covered thereby; and any certificate signed by or on behalf of the Selling Stockholders as such and delivered to you or to counsel for the U.S. Underwriters shall be deemed a representation and warranty by the Selling Stockholders to each U.S. Underwriter as to the matters covered thereby. Section 2. Sale and Delivery to the U.S. Underwriters; Closing. (a) On the basis of the representations and warranties herein contained, and subject to the terms and conditions herein set forth, each Selling Stockholder agrees, severally and not jointly, to sell to each U.S. Underwriter the number of Initial U.S. Shares set forth opposite the name of 16 15 such Selling Stockholder on Schedule A, and each U.S. Underwriter agrees, severally and not jointly, to purchase from each Selling Stockholder, at the purchase price per share for the Initial U.S. Shares to be agreed upon by the U.S. Representatives and the Selling Stockholders, in accordance with Section 2(b) or 2(c) hereof, and set forth in the U.S. Price Determination Agreement, the number of Initial U.S. Shares that bears the same relation to 3,600,000 as the number of Initial U.S. Shares set forth opposite the name of such U.S. Underwriter in Schedule B bears to the total number of Initial U.S. Shares (such proportion is hereinafter referred to as such U.S. Underwriter's "underwriting obligation proportion"), subject to such adjustments as you in your discretion, shall make to eliminate any sales or purchases of fractional shares. If the Company elects to rely on Rule 430A, Schedules A and B may be attached to the U.S. Price Determination Agreement. (b) If the Company has elected not to rely upon Rule 430A, the price to the public per share for the Initial U.S. Shares and the purchase price per share for the Initial U.S. Shares to be paid by the several U.S. Underwriters shall be agreed upon and set forth in the U.S. Price Determination Agreement, dated the date hereof, and an amendment to the Original Registration Statement containing such per share price information will be filed before the Original Registration Statement becomes effective. (c) If the Company has elected to rely upon Rule 430A, the price to the public per share for the Initial U.S. Shares and the purchase price per share for the Initial U.S. Shares to be paid by the several U.S. Underwriters shall be agreed upon and set forth in the U.S. Price Determination Agreement. In the event that the U.S. Price Determination Agreement has not been executed by the close of business on the fourteenth business day following the later of the date on which the Original Registration Statement and any Rule 462(b) Registration Statement becomes effective, this Agreement shall terminate forthwith, without liability of any party to any other party except that Sections 7, 8 and 9 shall remain in effect. (d) In addition, on the basis of the representations and warranties herein contained, and subject to the terms and conditions herein set forth, the Selling Stockholders hereby grant an option to the U.S. Underwriters, severally and not jointly, to purchase up to an aggregate of 540,000 additional U.S. Option Shares, as set forth opposite such Selling Stockholder's name on Schedule A, at the same purchase price per share as shall be applicable to the Initial U.S. Shares. The option hereby granted will expire 30 days after the later of the date upon which the Original Registration Statement and any Rule 462(b) Registration Statement becomes effective or, if the Company has elected to rely upon Rule 430A, the date of the U.S. Price Determination Agreement, and may be exercised, in whole or in part (but not more than once), only for the purpose of covering over-allotments that may be made in connection with the offering and distribution of the Initial U.S. Shares upon notice by the U.S. Representatives to the Selling Stockholders setting forth the aggregate number of U.S. Option Shares as to which the several U.S. Underwriters are exercising the 17 16 option, and the time and date of payment and delivery thereof. Such time and date of delivery (the "Date of Delivery") shall be determined by the U.S. Representatives but shall not be later than seven full business days after the exercise of such option, nor in any event prior to the Closing Time. If the option is exercised as to only a portion of the U.S. Option Shares, the Selling Stockholders will sell their pro rata portion of the U.S. Option Shares to be purchased by the U.S. Underwriters. If the option is exercised as to all or any portion of the U.S. Option Shares, the U.S. Option Shares as to which the option is exercised shall be purchased by the U.S. Underwriters, severally and not jointly, in their respective underwriting obligation proportions except as otherwise provided in the U.S. Price Determination Agreement, subject to such adjustments as the U.S. Underwriters, in their discretion, shall make to eliminate any sales or purchases of fractional shares. (e) Payment of the purchase price for, and delivery of certificates for, the Initial U.S. Shares shall be made at the offices of Shearman & Sterling, 599 Lexington Avenue or 153 East 53rd Street, New York, New York 10022, or at such other place as shall be agreed upon by the Company, the Selling Stockholders and you, at 10:00 A.M. either (i) on the third full business day after the later of the effective date of the Original Registration Statement and any Rule 462(b) Registration Statement (or, if pricing of the Shares occurs after 4:30 P.M. Eastern time, on the fourth full business day thereafter), or (ii) if the Company has elected to rely upon Rule 430A, on the third full business day after execution of the U.S. Price Determination Agreement (or, if pricing of the Shares occurs after 4:30 P.M. Eastern time, on the fourth full business day thereafter) (unless, in either case, postponed pursuant to Section 11 or 12), or at such other time not more than ten full business days thereafter as you, the Selling Stockholders and the Company shall determine (such date and time of payment and delivery being herein called the "Closing Time"). In addition, in the event that any or all of the U.S. Option Shares are purchased by the U.S. Underwriters, payment of the purchase price for, and delivery of certificates for, such U.S. Option Shares shall be made at the offices of Shearman & Sterling, 599 Lexington Avenue or 153 East 53rd Street, New York, New York 10022, or at such other place as the Company, the Selling Stockholders and you shall determine, on the Date of Delivery as specified in the notice from you to the Company. Payment shall be made to the Selling Stockholders by wire transfer in immediately available funds against delivery to you for the respective accounts of the several U.S. Underwriters of certificates for the U.S. Shares to be purchased by them. (f) Certificates for the Initial U.S. Shares and U.S. Option Shares to be purchased by the U.S. Underwriters shall be in such denominations and registered in such names as you may request in writing at least two full business days before the Closing Time or the Date of Delivery, as the case may be. The certificates for the Initial U.S. Shares and U.S. Option Shares will be made available in New York City for examination and packaging by you not later than 10:00 A.M. on the business day prior to the Closing Time or the Date of Delivery, as the case may be. 18 17 (g) It is understood that each U.S. Underwriter has authorized you, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the U.S. Shares that it has agreed to purchase. You, individually and not as U.S. Representatives, may (but shall not be obligated to) make payment of the purchase price for the Initial U.S. Shares, or U.S. Option Shares, to be purchased by any U.S. Underwriter whose check or checks shall not have been received by the Closing Time or the Date of Delivery, as the case may be. Section 3. Certain Covenants of the Company. The Company covenants with each U.S. Underwriter as follows: (a) The Company will use its best efforts to cause the Registration Statement to become effective and, if the Company elects to rely upon Rule 430A and subject to Section 3(b) hereof, will comply with the requirements of Rule 430A and will notify the U.S. Representatives immediately (i) when the Registration Statement, or any post-effective amendment to the Registration Statement, shall have become effective, or any supplement to the Prospectuses or any amended Prospectuses shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission to amend the Registration Statement or amend or supplement any Prospectus or for additional information and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, or of the institution or threatening of any proceedings for any of such purposes. The Company will use every reasonable effort to prevent the issuance of any such stop order or of any order preventing or suspending such use and, if any such order is issued, to obtain the lifting thereof at the earliest possible moment. (b) The Company will not at any time file or make any amendment to the Registration Statement, (including any filing under Rule 462(b)), file a Term Sheet or file or make any amendment or supplement (i) if the Company has not elected to rely upon Rule 430(A), to the Prospectuses (including amendments of the documents incorporated by reference into the Prospectuses) or (ii) if the Company has elected to rely upon Rule 430A, to either the prospectuses included in the Original Registration Statement at the time it becomes effective or to the Prospectuses (including amendments of the documents incorporated by reference into the Prospectuses or to the Prospectuses pursuant to Item 12 and Rule 412), of which you shall not have previously been advised and furnished a copy, or to which you or counsel for the U.S. Underwriters shall reasonably object in writing. (c) The Company has furnished or will furnish to you and counsel for the U.S. Underwriters, without charge, as many copies of the Registration Statement as 19 18 originally filed and of all amendments thereto, whether filed before or after the Registration Statement becomes effective, copies of all exhibits and documents filed therewith (including documents incorporated by reference into the Prospectuses pursuant to Item 12 and Rule 412) and signed copies of all consents and certificates of experts, as you may reasonably request and has furnished or will furnish to you, for each other U.S. Underwriter, one conformed copy of the Registration Statement as originally filed and of each amendment thereto (including documents incorporated by reference into the Prospectus but without exhibits). (d) The Company will deliver to each U.S. Underwriter, without charge, from time to time until the later of the effective date of the Original Registration Statement and any Rule 462(b) Registration Statement (or, if the Company has elected to rely upon Rule 430A, until the time the U.S. Price Determination Agreement is executed and delivered), as many copies of each preliminary prospectus as such U.S. Underwriter may reasonably request, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will deliver to each U.S. Underwriter, without charge, as soon as the Registration Statement shall have become effective (or, if the Company has elected to rely upon Rule 430A, as soon as practicable after the U.S. Price Determination Agreement has been executed and delivered) and thereafter from time to time as requested during the period when the Prospectus is required to be delivered under the 1933 Act, such number of copies of the Prospectuses (as supplemented or amended) as such U.S. Underwriter may reasonably request. (e) The Company will comply in all material respects with the 1933 Act and the 1933 Act Regulations and the 1934 Act and the 1934 Act Regulations so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and in the Prospectuses. If at any time when a prospectus is required by the 1933 Act or the 1933 Act Regulations to be delivered in connection with sales of the Shares any event shall occur or condition exist as a result of which it is necessary, in the opinion of counsel for the U.S. Underwriters or counsel for the Company, to amend the Registration Statement or amend or supplement any Prospectus in order that the Prospectuses will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if it shall be necessary, in the opinion of either such counsel, at any such time to amend the Registration Statement or amend or supplement any Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company will promptly upon becoming aware of such event or condition prepare and file with the Commission, subject to Section 3(b) hereof, such amendment or supplement as may be necessary to correct such untrue statement or omission or to make the Registration Statement or the Prospectuses comply with such requirements. 20 19 (f) The Company will use its best efforts, in cooperation with the U.S. Underwriters, to qualify the Shares for offering and sale under the applicable securities laws of such states and other jurisdictions as you may designate and to maintain such qualifications in effect for a period of not less than one year from the later of the effective date of the Original Registration Statement and any Rule 462(b) Registration Statement; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. The Company will file such statements and reports as may be required by the laws of each jurisdiction in which the Shares have been qualified as above provided. (g) The Company will make generally available to its security holders as soon as practicable, but not later than 90 days after the close of the period covered thereby, an earnings statement of the Company (in form complying with the provisions of Rule 158 of the 1933 Act Regulations), covering a period of 12 months beginning after the later of the effective date of the Original Registration Statement and any Rule 462(b) Registration Statement and covering a period of 12 months beginning after the effective date of any post-effective amendment to the Registration Statement but not later than the first day of the Company's fiscal quarter next following such respective effective dates. (h) The Company, during the period when the Prospectuses are required to be delivered under the 1933 Act, will file promptly all documents required to be filed with the Commission pursuant to Section 13 or 14 of the 1934 Act subsequent to the time the Registration Statement becomes effective. (i) For a period of two years after the Closing Time, the Company will furnish to you and, upon request, to each U.S. Underwriter, copies of all annual reports, quarterly reports and current reports filed with the Commission on Forms 10-K, 10-Q and 8-K, or such other similar forms as may be designated by the Commission, and such other documents, reports and information as shall be furnished by the Company to its stockholders generally. (j) For a period of 180 days from the date hereof, the Company will not, without your prior written consent, directly or indirectly, sell, offer to sell, grant any option for the sale of, or otherwise dispose of, any Common Stock or securities convertible into Common Stock, other than to the U.S. Underwriters pursuant to this Agreement and the International Underwriters pursuant to the International Purchase Agreement (except for options to purchase shares of Common Stock granted to the Company's officers, directors or employees in the ordinary course of business, 21 20 consistent with past practice, or the exercise of such options and similar options currently outstanding). (k) If the Company has elected to rely upon Rule 430A, it will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. (l) If the Company has elected to rely on Rule 434, it will comply with the requirements of Rule 434, and the Prospectuses will not be "materially different," as such term is used in Rule 434, from the prospectus included in the Registration Statement at the time it becomes effective. (m) If the Company elects to rely upon Rule 462(b), the Company shall both file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) and pay the applicable fees in accordance with Rule 111 of the 1933 Act Regulations by the earlier of (i) 10:00 P.M. Eastern time on the date of the U.S. Price Determination Agreement and (ii) the time confirmations are sent or given, as specified by Rule 462(b). (n) If applicable, the Company will comply with all the provisions of Florida H.B. 1771, codified as Section 517.075 of the Florida statutes, and all regulations promulgated thereunder relating to issuers doing business in Cuba. Section 4. Payment of Expenses. The Company will pay and bear all costs and expenses incident to the performance of the obligations of the Company and of the Selling Stockholders under this Agreement, including (a) the preparation, printing and filing of the Registration Statement (including financial statements and exhibits), as originally filed and as amended, the preliminary prospectuses and the Prospectuses and any amendments or supplements thereto, and the cost of furnishing copies thereof to the U.S. Underwriters, (b) the preparation, printing and distribution of this Agreement (except for the U.S. Price Determination Agreement), the Intersyndicate Agreement among the U.S. Underwriters and International Underwriters, the Agreement Among International Underwriters and the Blue Sky Survey (which shall not be typeset), (c) the delivery of the certificates for the U.S. Shares to the U.S. Underwriters (except for any stock transfer taxes payable upon the sale of the U.S. Shares to the U.S. Underwriters, which shall be paid by the Selling Stockholders), (d) the fees and disbursements of the Company's counsel and accountants and the Selling Stockholders' counsel, (e) the qualification of the U.S. Shares under the applicable securities laws in accordance with Section 3(f) and any filing for review of the offering with the NASD, including filing fees and reasonable fees and disbursements of Shearman & Sterling as counsel for the U.S. Underwriters solely in connection therewith, and in connection with 22 21 the Blue Sky Survey and (f) the listing fees and expenses incurred in connection with listing the Shares on the New York Stock Exchange. If this Agreement is terminated by you in accordance with the provisions of Section 5, 10(a)(i) or 12, the Company shall reimburse the U.S. Underwriters for all their out-of-pocket expenses, including the reasonable fees and disbursements of Shearman & Sterling as counsel for the U.S. Underwriters. Section 5. Conditions of U.S. Underwriters' Obligations. In addition to the execution and delivery of the U.S. Price Determination Agreement, the obligations of the several U.S. Underwriters to purchase and pay for the U.S. Shares that they have respectively agreed to purchase pursuant to this Agreement (including any U.S. Option Shares as to which the option granted in Section 2 has been exercised and the Date of Delivery determined by you is the same as the Closing Time) are subject to the accuracy of the representations and warranties of the Company and the Selling Stockholders contained herein (including those contained in the U.S. Price Determination Agreement) or in certificates of any officer of the Company or any Subsidiary or certificates by or on behalf of the Selling Stockholders delivered pursuant to the provisions hereof, to the performance by the Company and the Selling Stockholders of their obligations hereunder, and to the following further conditions: (a) The Original Registration Statement shall have become effective not later than 5:30 P.M. on the date of this Agreement or, with your consent, at a later time and date not later, however, than 5:30 P.M. on the first business day following the date hereof and if the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration Statement shall have become effective not later than the earlier of (i) 9:00 A.M. Eastern time on the day following the date of the U.S. Price Determination Agreement, and (ii) the time confirmations are sent or given, as specified by Rule 462(b), or, with respect to the Original Registration Statement, at such later time or on such later date as you may agree to in writing with the approval of a majority in interest of the several U.S. Underwriters; and at the Closing Time no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act and no proceedings for that purpose shall have been instituted or shall be pending or, to your knowledge or the knowledge of the Company, shall be contemplated by the Commission, and any request made to the Company on the part of the Commission for additional information with respect to the Registration Statement shall have been complied with to the satisfaction of Shearman & Sterling as counsel for the U.S. Underwriters. If the Company has elected to rely upon Rule 430A, prospectuses containing the Rule 430A Information shall have been filed with the Commission in accordance with Rule 424(b) (or a post-effective amendment providing such information shall have been filed and declared effective in accordance with the requirements of Rule 430A). If the 23 22 Company has elected to rely upon Rule 434, a Term Sheet, which together with the preliminary prospectus last furnished to the U.S. Underwriters in connection with the offering of the Shares shall not be "materially different," as such term is used in Rule 434, from the prospectus included in the Original Registration Statement at the time it becomes effective, shall have been filed with the Commission in accordance with Rule 424(b). (b) At the Closing Time, you shall have received a signed opinion of Wachtell, Lipton, Rosen & Katz, special counsel for the Company, dated as of the Closing Time, together with signed or reproduced copies of such opinion for each of the other U.S. Underwriters, in form and substance reasonably satisfactory to counsel for the U.S. Underwriters, in the form set forth in Exhibit C hereto. (c) At the Closing Time, you shall have received a signed opinion of Laurene H. Horiszny, Esq., Vice President, Secretary and General Counsel for the Company, dated as of the Closing Time, together with signed or reproduced copies of such opinion for each of the other U.S. Underwriters, in form and substance reasonably satisfactory to counsel for the U.S. Underwriters, in the form set forth in Exhibit D hereto. (d) At the Closing Time, you shall have received a signed opinion of NSK-Warner's Japanese counsel, dated as of the Closing Time, together with signed or reproduced copies of such opinion for each of the other U.S. Underwriters, in form and substance reasonably satisfactory to counsel for the U.S. Underwriters, in the form set forth in Exhibit E hereto. (e) At the Closing Time you shall have received a signed opinion of the attorneys listed on Schedule C attached hereto for the Selling Stockholders specified opposite such attorney's name, each dated as of the Closing Time, together with signed or reproduced copies of such opinion for each of the other U.S. Underwriters, in form and substance reasonably satisfactory to counsel for the U.S. Underwriters, each, with respect to the Selling Stockholders that such counsel represents, in the form set forth in Exhibit F hereto. (f) At the Closing Time, you shall have received the favorable opinion of Shearman & Sterling, counsel for the U.S. Underwriters, dated as of the Closing Time, together with signed or reproduced copies of such opinion for each of the other U.S. Underwriters, to the effect that the opinions delivered pursuant to Sections 5(b), 5(c), 5(d) and 5(e) hereof appear on their face to be appropriately responsive to the requirements of this Agreement except, specifying the same, to the extent waived by you, and with respect to the incorporation and legal existence of the Company, this Agreement, the Registration Statement, the Prospectuses and such other related 24 23 matters as you may require. In giving such opinion such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York, the federal law of the United States and the General Corporation Law of the State of Delaware, upon the opinions of counsel satisfactory to you. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and the Subsidiaries and the Selling Stockholders and certificates of public officials. (g) At the Closing Time, (i) the Registration Statement and the Prospectuses, as they may then be amended or supplemented, shall comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations, the Company shall have complied in all material respects with Rule 430A (if it shall have elected to rely thereon) and Rule 434 (if it shall have elected to rely thereon) and neither the Registration Statement nor the Prospectuses, as they may then be amended or supplemented, shall contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) there shall not have been, since the respective dates as of which information is given in the Registration Statement, any material adverse change in the condition (financial or otherwise), results of operations, business affairs or business prospects of the Company and the Subsidiaries, considered as one enterprise, whether or not arising in the ordinary course of business, (iii) no action, suit or proceeding at law or in equity shall be pending or, to the knowledge of the Company, threatened against the Company or any Subsidiary that would be required to be set forth in the Prospectuses other than as set forth therein and no proceedings shall be pending or, to the knowledge of the Company, threatened against the Company or any Subsidiary before or by any federal, state or other commission, board or administrative agency wherein an unfavorable decision, ruling or finding could materially adversely affect the condition (financial or otherwise), results of operations, business affairs or business prospects of the Company and the Subsidiaries, considered as one enterprise, other than as set forth in the Prospectuses, (iv) the Company shall have complied with all agreements and satisfied all conditions set forth in this Agreement on its part to be performed or satisfied at or prior to the Closing Time and (v) the other representations and warranties of the Company set forth in Section 1(a) shall be accurate as though expressly made at and as of the Closing Time. At the Closing Time, you shall have received a certificate of the President or a Vice President, and the Treasurer or an Assistant Treasurer, of the Company, dated as of the Closing Time, to such effect. (h) At the Closing Time, the representations and warranties of each Selling Stockholder set forth in Section 1(b) shall be accurate as though expressly made at and as of the Closing Time. At the Closing Time, you shall have received a 25 24 certificate of or on behalf of each Selling Stockholder, dated as of the Closing Time, to such effect with respect to such Selling Stockholder. (i) At the time that this Agreement is executed by the Company, you shall have received from Deloitte & Touche LLP a letter, dated such date, in form and substance satisfactory to you, together with signed or reproduced copies of such letter for each of the other U.S. Underwriters, confirming that they are independent public accountants with respect to the Company within the meaning of the 1933 Act and the applicable published 1933 Act Regulations, and stating in effect that: (i) in their opinion, the audited financial statements and the related financial statement schedules included or incorporated by reference in the Registration Statement and the Prospectuses comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the 1933 Act Regulations; (ii) on the basis of procedures (but not an examination in accordance with generally accepted auditing standards) consisting of a reading of the unaudited interim consolidated financial statements of the Company included or incorporated by reference in the Registration Statement and the Prospectuses (collectively, the "10-Q Financials"), a reading of the latest available unaudited interim consolidated financial statements of the Company, a reading of the minutes of all meetings of the stockholders and directors of the Company and the Subsidiaries and each Committee of the Company's Board of Directors and of each Committee of the Board of Directors of any Subsidiary since January 1, 1996, inquiries of certain officials of the Company and the Subsidiaries responsible for financial and accounting matters, and such other inquiries and procedures as may be specified in such letter, nothing came to their attention that caused them to believe that: (A) the 10-Q Financials incorporated by reference in the Registration Statement and the Prospectuses do not comply as to form in all material respects with the accounting requirements of the 1934 Act and the 1934 Act Regulations applicable to unaudited financial statements included in Form 10-Q or any material modifications should be made to the 10-Q Financials included or incorporated by reference in the Registration Statement and the Prospectuses for them to be in conformity with generally accepted accounting principles; (B) at May 31, 1996 and at a specified date not more than five days prior to the date of this Agreement, there was any change in the capital stock of the Company and the Subsidiaries or any decrease 26 25 in the consolidated net current assets or stockholders' equity of the Company and the Subsidiaries or any increase in long-term debt of the Company and the Subsidiaries, in each case as compared with amounts shown in the latest consolidated balance sheet included in the Registration Statement, except in each case for changes, decreases or increases that the Registration Statement discloses have occurred or may occur; or (C) for the period from April 1, 1996 to May 31, 1996 and for the period from April 1, 1996 to a specified date not more than five days prior to the date of this Agreement, there was any decrease in net sales, equity in affiliate earnings and other income, earnings before interest and finance charges and income taxes or net earnings, in each case as compared with the comparable period in the preceding year; (iii) based upon the procedures set forth in clause (ii) above and a reading of the Selected Historical Financial Data included in the Registration Statement and a reading of the financial statements from which certain of such data were derived, nothing has come to their attention that gives them reason to believe that the Selected Historical Financial Data included in the Registration Statement do not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the 1933 Act Regulations, that the information set forth therein is not fairly stated in relation to the financial statements from which it was derived or that the financial statements not included in the Registration Statement from which certain of such data were derived are not in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included in the Registration Statement; and (iv) they are unable to and do not express any opinion on the Pro Forma Financial Data (the "Pro Forma Statement") included in the Registration Statement or on the pro forma adjustments applied to the historical amounts included in the Pro Forma Statement; however, for purposes of such letter they have: (A) read the Pro Forma Statement; (B) made inquiries of certain officials of the Company and of the Coltec Subsidiaries who have responsibility for financial and accounting matters about the basis for their determination of the pro forma adjustments and whether the Pro Forma Statement complies as 27 26 to form in all material respects with the applicable accounting requirements of Rule 11-02 of Regulation S-X; and (C) proved the arithmetic accuracy of the application of the pro forma adjustments to the historical amounts in the Pro Forma Statement; and on the basis of such procedures, and such other inquiries and procedures as may be specified in such letter, nothing came to their attention that caused them to believe that the Pro Forma Statement included in the Registration Statement does not comply as to form in all material respects with the applicable requirements of Rule 11-02 of Regulation S-X or that the pro forma adjustments have not been properly applied to the historical amounts in the compilation of those statements; (v) in addition to the procedures referred to in clause (ii) above, they have performed other specified procedures, not constituting an audit, with respect to certain amounts, percentages, numerical data and financial information appearing in the Registration Statement, which have previously been specified by you and which shall be specified in such letter, and have compared certain of such items with, and have found such items to be in agreement with, the accounting and financial records of the Company. (j) At the time that this Agreement is executed by the Company, you shall have received from KPMG Peat Marwick a letter, dated such date, in form and substance satisfactory to you, together with signed or reproduced copies of such letter for each of the other International Underwriters, confirming that they are independent public accountants with respect to the NSK-Warner within the meaning of the 1933 Act and applicable published 1933 Act Regulations, and stating in effect that: (i) in their opinion, the audited financial statements and the related financial statement schedules for NSK-Warner included or incorporated by reference in the Registration Statement and the Prospectuses comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the 1933 Act Regulations; (ii) they have read the latest available unaudited interim consolidated financial statements of NSK-Warner, the minutes of all meetings of the stockholders and directors of NSK-Warner and each Committee of the Board of Directors since April 1, 1996, inquired of certain officials of NSK-Warner responsible for financial and accounting matters, and made such other inquiries 28 27 and performed such other procedures as may be specified in such letter, and officials of NSK-Warner stated that: (A) at June 30, 1996 and at a specified date not more than five days prior to the date of this Agreement, there was no change in the common stock of NSK-Warner or decrease in the net current assets or stockholders' equity of NSK-Warner or increase in the notes payable or long-term debt of NSK-Warner, in each case as compared with amounts shown in the latest balance sheet included or incorporated by reference in the Registration Statement; or (B) for the period from April 1, 1996 to June 30, 1996 and for the period from June 30, 1996 to a specified date not more than five days prior to the date of this Agreement, there was no decrease in sales, earnings before income taxes or net earnings, in each case as compared with the corresponding period in the preceding year. (k) At the time that this Agreement is executed, you shall have received from Arthur Andersen LLP a letter, dated such date, in form and substance satisfactory to you, together with signed or reproduced copies of such letter for each of the other U.S. Underwriters, confirming that they are independent public accountants with respect to the Coltec Subsidiaries and the Company within the meaning of the 1933 Act and applicable published 1933 Act Regulations, and stating in effect that: (i) in their opinion, the audited financial statements and the related financial statement schedules for the Coltec Subsidiaries included or incorporated by reference in the Registration Statement and the Prospectuses comply as to form in all material respects with the applicable accounting requirements of the 1933 Act, the 1934 Act, the 1933 Act Regulations and the 1934 Act Regulations; [(ii) they have read the latest available unaudited interim consolidated financial statements of the Coltec Subsidiaries, the minutes of all meetings of the stockholders and directors of the Coltec Subsidiaries and each Committee of the Board of Directors since April 1, 1996, inquired of certain officials of the Coltec Subsidiaries responsible for financial and accounting matters, and made such other inquiries and performed such other procedures as may be specified in such letter, and officials of the Coltec Subsidiaries stated that]: (A) at June 17, 1996, there was no change in the capital stock of the Coltec Subsidiaries or any decrease in the consolidated net 29 28 current assets or stockholders' equity of the Coltec Subsidiaries or any increase in long-term debt of the Coltec Subsidiaries, in each case as compared with amounts shown in the latest consolidated balance sheet included or incorporated by reference in the Registration Statement, except in each case for changes, decreases or increases that the Registration Statement discloses have occurred or may occur; or (B) for the period from April 1, 1996 to May 31, 1996, there was no decrease in net sales, earnings before income taxes or net earnings, in each case as compared with the comparable period in the preceding year, except in each case for any decreases that the Registration Statement discloses have occurred or may occur; and (iii) based upon the procedures set forth in clause (ii) above, nothing has come to their attention that gives them reason to believe that the information set forth in the latest available unaudited interim consolidated financial statements of the Coltec Subsidiaries is not fairly stated in relation to the financial statements from which it was derived or that the financial statements not included in the Registration Statement from which certain of such data were derived are not in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included in the Registration Statement. (l) At the Closing Time, you shall have received from each of Deloitte & Touche LLP, KPMG Peat Marwick and Arthur Andersen LLP a letter, in form and substance satisfactory to you and dated as of the Closing Time, to the effect that they reaffirm the statements made in the letters furnished pursuant to Sections 5(i), 5(j) and 5(k), respectively, except that the specified date referred to shall be a date not more than five days prior to the Closing Time. (m) At the Closing Time, counsel for the U.S. Underwriters shall have been furnished with all such documents, certificates and opinions as they may reasonably request for the purpose of enabling them to pass upon the sale of the Shares as contemplated in this Agreement and the matters referred to in Section 5(f) and in order to evidence the accuracy and completeness of any of the representations, warranties or statements of the Company and the Selling Stockholders, the performance of any of the covenants of the Company, or the fulfillment of any of the conditions herein contained; and all proceedings taken by the Company and the Selling Stockholders at or prior to the Closing Time in connection with the sale of the Shares as contemplated in this Agreement shall be reasonably satisfactory in form and substance to you and to counsel for the U.S. Underwriters. 30 29 (n) The "lock-up" letters which are substantially in the form of Exhibit G attached hereto from (a) each executive officer or director of the Company and (b) each stockholder of the Company who (i) owns at least 1% of the outstanding shares of Common Stock and (ii) who is a party to the Registration Rights Agreement have been delivered to you on or before the date hereof. If any of the conditions specified in this Section 5 shall not have been fulfilled when and as required by this Agreement, this Agreement may be terminated by you on notice to the Company and the Selling Stockholders at any time at or prior to the Closing Time, and such termination shall be without liability of any party to any other party, except as provided in Section 4 hereof. Notwithstanding any such termination, the provisions of Sections 7, 8 and 9 herein shall remain in effect. Section 6. Conditions to Purchase of U.S. Option Shares. In the event that the U.S. Underwriters exercise their option granted in Section 2 hereof to purchase all or any of the U.S. Option Shares and the Date of Delivery determined by you pursuant to Section 2 hereof is later than the Closing Time, the obligations of the several U.S. Underwriters to purchase and pay for the U.S. Option Shares that they shall have respectively agreed to purchase pursuant to this Agreement are subject to the accuracy of the representations and warranties of the Company and the Selling Stockholders herein contained, to the performance by the Company and the Selling Stockholders of their obligations hereunder and to the following further conditions: (a) The Registration Statement shall remain effective at the Date of Delivery, and, at the Date of Delivery, no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act and no proceedings for that purpose shall have been instituted or shall be pending or, to your knowledge or the knowledge of the Company, shall have been threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel for the U.S. Underwriters. (b) At the Date of Delivery, the provisions of Sections 5(g)(i) through 5(g)(v) shall have been complied with at and as of the Date of Delivery and, at the Date of Delivery, you shall have received a certificate of the President or a Vice President, and the Treasurer or an Assistant Treasurer, of the Company, dated as of the Date of Delivery, to such effect. (c) At the Date of Delivery, you shall have received the favorable opinions of Wachtell, Lipton, Rosen & Katz, special counsel for the Company, Laurene H. Horiszny, General Counsel of the Company, NSK-Warner's Japanese counsel and counsel for the Selling Stockholders, together with signed or reproduced 31 30 copies of such opinions for each of the other U.S. Underwriters, in each case in form and substance reasonably satisfactory to counsel for the U.S. Underwriters, dated as of the Date of Delivery, relating to the U.S. Option Shares and otherwise to the same effect as the opinions required by Section 5(b), 5(c), 5(d) and 5(e), respectively. (d) At the Date of Delivery, you shall have received the favorable opinion of Shearman & Sterling, counsel for the U.S. Underwriters, dated as of the Date of Delivery, relating to the U.S. Option Shares and otherwise to the same effect as the opinion required by Section 5(f). (e) At the Date of Delivery, you shall have received a letter from each of Deloitte & Touche LLP, KPMG Peat Marwick and Arthur Andersen LLP, in form and substance satisfactory to you and dated as of the Date of Delivery, to the effect that they reaffirm the statements made in the letters furnished pursuant to Section 5(i), 5(j) and 5(k), respectively, except that the specified date referred to shall be a date not more than five days prior to the Date of Delivery. (f) At the Date of Delivery, you shall have received from each of the Selling Stockholders (or on their behalf) certificates substantially in the form of the certificates furnished to you pursuant to Section 5(h), except that such certificates shall be as of the Date of Delivery. (g) At the Date of Delivery, the representations and warranties of each Selling Stockholder set forth in Section 1(b) hereof shall be accurate as though expressly made at and as of the Date of Delivery. (h) At the Date of Delivery, counsel for the U.S. Underwriters shall have been furnished with all such documents, certificates and opinions as they may reasonably request for the purpose of enabling them to pass upon the sale of the U.S. Option Shares as contemplated in this Agreement and the matters referred to in Section 6(d) and in order to evidence the accuracy and completeness of any of the representations, warranties or statements of the Company or the Selling Stockholders, the performance of any of the covenants of the Company, or the fulfillment of any of the conditions herein contained; and all proceedings taken by the Company and the Selling Stockholders at or prior to the Date of Delivery in connection with the sale of the U.S. Option Shares as contemplated in this Agreement shall be reasonably satisfactory in form and substance to you and to counsel for the U.S. Underwriters. Section 7. Indemnification. (a) The Company agrees to indemnify and hold harmless each U.S. Underwriter and each person, if any, who controls any U.S. Underwriter within the meaning of Section 15 of the 1933 Act to the extent and in the manner set forth in clauses (i), (ii) and (iii) below. In addition, each Selling Stockholder, severally and not 32 31 jointly (but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto) in reliance upon and in conformity with written information furnished by such Selling Stockholder, expressly for use in the Registration Statement (or any amendment thereto) or any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto), a copy of which written information shall have been previously delivered to you), agrees to indemnify and hold harmless each U.S. Underwriter and each person, if any, who controls any U.S. Underwriter within the meaning of Section 15 of the 1933 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of an untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, and all documents incorporated therein by reference, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of an untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto) or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if Rule 434 is used, if the Prospectus is "materially different", as such term is used in Rule 434, from the prospectus included in the Original Registration Statement at the time it becomes effective; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, if such settlement is effected with the written consent of the Company and the Selling Stockholders; and (iii) against any and all expense whatsoever, as incurred (including, subject to Section 7(c) hereof, fees and disbursements of counsel chosen by you), reasonably incurred in investigating, preparing or defending against any litigation, or investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under subparagraph (i) or (ii) above; provided, however, that this indemnity agreement does not apply to any loss, liability, claim, damage or expense to the extent arising out of an untrue statement or omission or alleged 33 32 untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by any U.S. Underwriter through you expressly for use in the Registration Statement (or any amendment thereto) including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto); provided further that the liability of a Selling Stockholder pursuant to this Section 7 is limited to the amount of the net proceeds of the offering of the U.S. Shares (after deducting the underwriting discount, but before deducting expenses) received by such Selling Stockholder. Insofar as this indemnity agreement may permit indemnification for liabilities under the 1933 Act of any person who is a partner of a U.S. Underwriter or who controls a U.S. Underwriter within the meaning of Section 15 of the 1933 Act and who, at the date of this Agreement, is a director, officer or controlling person of the Company, such indemnity agreement is subject to the undertaking of the Company in the Registration Statement under Item 17 thereof. (b) Each U.S. Underwriter severally agrees to indemnify and hold harmless the Company, its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act and each Selling Stockholder and each person, if any, who controls any Selling Stockholder within the meaning of Section 15 of the 1933 Act, against any and all loss, liability, claim, damage and expense described in the indemnity contained in Section 7(a), as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto) including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such U.S. Underwriter through you expressly for use in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or such preliminary prospectus or the Prospectuses (or any amendment or supplement thereto). (c) The Company agrees to indemnify and hold harmless, to the extent permitted by law, each Selling Stockholder, its directors and officers or general and limited partners (and the directors and officers thereof), and each other person, if any, who controls such Selling Stockholder within the meaning of the 1933 Act, against any and all losses, claims, damages or liabilities, joint or several, and expenses (including any amounts paid in any settlement effected with the Company's consent) to which such Selling Stockholder, any such director or officer or general or limited partner or controlling person may become subject under the 1933 Act, common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the 34 33 Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, and all documents incorporated therein by reference, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, together with the documents incorporated by reference therein (as amended or supplemented if the Company shall have filed with Commission any amendment thereof or supplemented thereto), if used prior to the effective date of the Registration Statement, or contained in the Prospectus (as amended or supplemented if the Company shall have filed with the Commission any amendment thereof or supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading or (iii) any violation by the Company of any federal, state or common law rule or regulation applicable to the Company and relating to action required of or inaction by the Company in connection with the offering, and the Company will reimburse each such Selling Stockholder and each such director, officer, general or limited partner, and controlling person for any legal or any other expenses reasonably incurred by any of them in connection with investigating or defending any such loss, claim, liability, action or proceeding; provided, that the Company shall not be liable to such Selling Stockholder or any such director, officer, general or limited partner or controlling person in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such Registration Statement (or any amendment or supplement thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or in any such preliminary prospectus or the Prospectuses (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Selling Stockholder or any such director, officer, general or limited partner or controlling person, specifically stating that it is for use in the preparation thereof. (d) Each Selling Stockholder agrees to indemnify and hold harmless (in the same manner and to the same extent as set forth in Section 7(c)) the Company and its directors and officers and each person controlling the Company within the meaning of the 1933 Act and all other Selling Stockholders and their directors, officers, general and limited partners and respective controlling persons with respect to any statement or alleged statement in or omission or alleged omission from the Registration Statement (or any amendment or supplement thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto), if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company or its representatives by or on behalf of the undersigned specifically stating that it is for use in the 35 34 preparation of the Registration Statement (or any amendment or supplement thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, preliminary prospectus or the Prospectuses (or any amendment or supplement thereto), or a document incorporated by reference into any of the foregoing; provided, however, that the liability of each Selling Stockholder pursuant to this Section 7(d) is limited to the proceeds received by such Selling Stockholder from the sale of the Shares pursuant to this Agreement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any of the other Selling Stockholders or any of its respective directors, officers, general or limited partners or controlling persons and shall survive the transfer of the Shares by each Selling Stockholder. (e) Each indemnified party shall give prompt notice to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. An indemnifying party may participate at its own expense in the defense of such action. In no event shall the indemnifying party or parties be liable for the fees and expenses of more than one counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. If it so elects within a reasonable time after receipt of such notice, an indemnifying party, jointly with any other indemnifying parties receiving such notice, may assume the defense of such action with counsel chosen by it and approved by the indemnified parties defendant in such action, unless such indemnified parties reasonably object to such assumption on the ground that there may be legal defenses available to them which are different from or are in addition to those available to such indemnifying party. If an indemnifying party assumes the defense of such action, the indemnifying parties shall not be liable for any fees and expenses of counsel for the indemnified parties incurred thereafter in connection with such action. Section 8. Contribution. In order to provide for just and equitable contribution in circumstances under which the indemnity provided for in Section 7 is for any reason held to be unenforceable by the indemnified parties although applicable in accordance with its terms, the Company, the Selling Stockholders and the U.S. Underwriters shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by such indemnity agreement incurred by the Company, the Selling Stockholders and one or more of the U.S. Underwriters, as incurred, in such proportions that (a) the U.S. Underwriters are responsible for that portion represented by the percentage that the underwriting discount appearing on the cover page of the Prospectuses or, if Rule 434 is used, the corresponding location on the Term Sheet, bears to the offering price appearing thereon and (b) the Company and the Selling Stockholders are severally responsible for the balance on the same basis as each of them would have been obligated to provide indemnification pursuant to Section 7; provided, however, that no person guilty of fraudulent 36 35 misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section, each person, if any, who controls a U.S. Underwriter within the meaning of Section 15 of the 1933 Act shall have the same rights to contribution as such U.S. Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company or a Selling Stockholder within the meaning of Section 15 of the 1933 Act shall have the same rights to contribution as the Company or a Selling Stockholder, as the case may be. Section 9. Representations, Warranties and Agreements to Survive Delivery. The representations, warranties, indemnities, agreements and other statements of the Company or its officers or the Selling Stockholders set forth in or made pursuant to this Agreement will remain operative and in full force and effect regardless of any investigation made by or on behalf of the Selling Stockholders, the Company, any U.S. Underwriter or any person who controls a Selling Stockholder or any U.S. Underwriter within the meaning of Section 15 of the 1933 Act, and will survive delivery of and payment for the U.S. Shares. Section 10. Termination of Agreement. (a) You may terminate this Agreement, by notice to the Company and the Selling Stockholders, at any time at or prior to the Closing Time (i) if there has been, since the respective dates as of which information is given in the Registration Statement, any material adverse change in the condition (financial or otherwise), results of operations, business affairs or business prospects of the Company and the Subsidiaries, considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets in the United States, or any outbreak of hostilities or escalation thereof or other calamity or crisis the effect of which on the financial markets of the United States is such as to make it, in your judgment, impracticable to market the Shares or enforce contracts for the sale of the Shares or (iii) if trading in any securities of the Company has been suspended by the Commission, or if trading generally on the New York Stock Exchange or in the over-the-counter market has been suspended, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices for securities have been required, by such exchange or by order of the Commission, the New York Stock Exchange or any other governmental authority or (iv) if a banking moratorium has been declared by either federal, New York or Illinois authorities. (b) If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party, except to the extent provided in Section 4. Notwithstanding any such termination, the provisions of Sections 7 and 8 shall remain in effect. (c) This Agreement may also terminate pursuant to the provisions of Section 2(c), with the effect stated in such Section. 37 36 Section 11. Default by One or More of the U.S. Underwriters. If one or more of the U.S. Underwriters shall fail at the Closing Time to purchase the Initial U.S. Shares that it or they are obligated to purchase pursuant to this Agreement (the "Defaulted U.S. Shares"), you shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting U.S. Underwriters, or any other U.S. Underwriters, to purchase all, but not less than all, of the Defaulted U.S. Shares in such amounts as may be agreed upon and upon the terms set forth in this Agreement; if, however, you have not completed such arrangements within such 24-hour period, then: (a) if the number of Defaulted U.S. Shares does not exceed 10% of the total number of Initial U.S. Shares, the non-defaulting U.S. Underwriters shall be obligated to purchase the full amount thereof in the proportions that their respective Initial U.S. Share underwriting obligation proportions bear to the underwriting obligations of all non-defaulting U.S. Underwriters; or (b) if the number of Defaulted U.S. Shares exceeds 10% of the total number of Initial U.S. Shares, this Agreement shall terminate without liability on the part of any non-defaulting U.S. Underwriter. No action taken pursuant to this Section shall relieve any defaulting U.S. Underwriter from liability in respect of its default. In the event of any such default that does not result in a termination of this Agreement, either you or the Company shall have the right to postpone the Closing Time for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectuses or in any other documents or arrangements. As used herein, the term "U.S. Underwriter" includes any person substituted for a U.S. Underwriter under this Section 11. Section 12. Default by a Selling Stockholder. If any Selling Stockholder shall fail at the Closing Time to sell and deliver the number of Initial U.S. Shares that such Selling Stockholder is obligated to sell, then the U.S. Underwriters may, at your option, by notice from you to the Company and the Selling Stockholders, either (a) terminate this Agreement without any liability on the part of any non-defaulting party, except to the extent provided in Section 4 and except that the provisions of Sections 7 and 8 shall remain in effect or (b) elect to purchase the Initial U.S. Shares that the remaining Selling Stockholders have agreed to sell pursuant to this Agreement. In the event of any such default under this Section that does not result in a termination of this Agreement, either you or the Company shall have the right to postpone the Closing Time for a period not exceeding seven days in order to effect any required 38 37 changes in the Registration Statement or Prospectuses or in any other documents or arrangements. No action taken pursuant to this Section 12 shall relieve any Selling Stockholder so defaulting from liability, if any, in respect of such default. Section 13. Notices. All notices and other communications under this Agreement shall be in writing and shall be deemed to have been duly given if delivered, mailed or transmitted by any standard form of telecommunication. Notices to you or the U.S. Underwriters shall be directed to you, c/o Merrill Lynch, Pierce, Fenner & Smith Incorporated, at Merrill Lynch World Headquarters, North Tower, World Financial Center, New York, New York 10281, attention of Samuel R. Chapin; notices to the Company shall be directed to it at 200 South Michigan Avenue, Chicago, Illinois 60604, Attention: General Counsel and notices to the Selling Stockholders shall be directed to James V. Caruso, Merrill Lynch & Co., Inc., South Tower, World Financial Center, New York, New York 10080-6123. Section 14. Parties. This Agreement is made solely for the benefit of the several U.S. Underwriters, the Company and the Selling Stockholders and, to the extent expressed, any person controlling the Company, any Selling Stockholder or any of the U.S. Underwriters, and the directors of the Company, its officers who have signed the Registration Statement, and their respective executors, administrators, successors and assigns and, subject to the provisions of Section 11, no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include any purchaser, as such purchaser, from any of the several U.S. Underwriters of the U.S. Shares. All of the obligations of the U.S. Underwriters hereunder are several and not joint. Section 15. Representation of U.S. Underwriters. You will act for the several U.S. Underwriters in connection with this financing, and any action under or in respect of this Agreement taken by you as U.S. Representatives will be binding upon all U.S. Underwriters. Section 16. Governing Law and Time. This Agreement shall be governed by the laws of the State of New York. Specified times of the day refer to New York City time. Section 17. Counterparts. This Agreement may be executed in one or more counterparts, and when a counterpart has been executed by each party, all such counterparts taken together shall constitute one and the same agreement. 39 38 If the foregoing is in accordance with your understanding of our agreement, please sign and return to us a counterpart hereof, whereupon this instrument will become a binding agreement between the Company, the Selling Stockholders and the several U.S. Underwriters in accordance with its terms. Very truly yours, BORG-WARNER AUTOMOTIVE, INC. By: ----------------------------- Name: Title: SELLING STOCKHOLDERS NAMED IN SCHEDULE A By: ----------------------------- Name: Title: Confirmed and accepted as of the date first above written: MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated LEHMAN BROTHERS INC. MORGAN STANLEY & CO. INCORPORATED By: Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated By ----------------------------------------------- Name: Title: Investment Banking Group For themselves and as U.S. Representatives of the other U.S. Underwriters named in Schedule B. 40 SCHEDULE A
NUMBER OF NUMBER OF INITIAL U.S. U.S. OPTION SELLING STOCKHOLDER SHARES TO BE SOLD SHARES TO BE SOLD - ------------------- ------------------ ----------------- Merrill Lynch KECALP L.P. 1986 Merrill Lynch KECALP L.P. 1987 Merchant Banking L.P. No. I ML Venture Partners II, L.P. Merrill Lynch Capital Appreciation Partnership No. VIII, L.P. ML Offshore LBO Partnership No. VIII ML Employees LBO Partnership No. I, L.P. ML IBK Positions, Inc. ________ _______ Total [ ] [ ] ================= =============
41 SCHEDULE B
NUMBER OF INITIAL U.S. SHARES U.S. UNDERWRITER TO BE PURCHASED ---------------- ------------------- Merrill Lynch, Pierce, Fenner & Smith Incorporated Lehman Brothers Inc. Morgan Stanley & Co. Incorporated ----------- Total [ ] =============
42 SCHEDULE C
ATTORNEY SELLING STOCKHOLDER - -------- ------------------- Marcia L. Tu, Esq. o ML IBK Positions, Inc. o Merrill Lynch Capital Appreciation Partnership No. VIII, L.P. o ML Employees LBO Partnership No. I, L.P. o ML Venture Partners II, L.P. Margaret E. Nelson, Esq. o Merrill Lynch KECALP L.P. 1986 o Merrill Lynch KECALP L.P. 1987 o Merchant Banking L.P. No. I Carl Ruggiero, Esq. o ML Offshore LBO Partnership No. VIII
43 Exhibit A BORG-WARNER AUTOMOTIVE, INC. (a Delaware corporation) 3,600,000 Shares of Common Stock U.S. PRICE DETERMINATION AGREEMENT July __, 1996 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated LEHMAN BROTHERS INC. MORGAN STANLEY & CO. INCORPORATED As Representatives of the several U.S. Underwriters c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated Merrill Lynch World Headquarters North Tower World Financial Center New York, New York 10281-1201 Ladies and Gentlemen: Reference is made to the U.S. Purchase Agreement dated July __, 1996 (the "U.S. Purchase Agreement") among Borg-Warner Automotive, Inc. (the "Company"), the Selling Stockholders named in Schedule A thereto (the "Selling Stockholders") and the several U.S. Underwriters named in Schedule B thereto or hereto (the "U.S. Underwriters"), for whom Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Lehman Brothers Inc. and Morgan Stanley & Co. Incorporated are acting as representatives (the "U.S. Representatives"). The U.S. Purchase Agreement provides for the purchase by the U.S. Underwriters from the Selling Stockholders, subject to the terms and conditions set forth therein, of an aggregate of 3,600,000 shares (the "Initial U.S. Shares") of the Company's common stock, par value $.01 per share. This Agreement is the U.S. Price Determination Agreement referred to in the U.S. Purchase Agreement. Terms not defined herein are used herein as defined in the U.S. Purchase Agreement. 44 A-2 Pursuant to Section 2 of the U.S. Purchase Agreement, the Company and the Selling Stockholders agree with the U.S. Representatives as follows: 1. The price to the public per share for the Initial U.S. Shares shall be $[____]. 2. The purchase price per share for the Initial U.S. Shares to be paid by the several U.S. Underwriters shall be $[_____], representing an amount equal to the public offering price set forth above, less $[____] per share. The Company represents and warrants to each of the U.S. Underwriters that the representations and warranties of the Company set forth in Section 1(a) of the U.S. Purchase Agreement are accurate as though expressly made at and as of the date hereof. Additionally, if the Company elects to rely on Rule 462(b), the Company convenants to each of the U.S. Underwriters that: (a) the Company will file a Rule 462(b) Registration Statement in compliance with, and that is effective upon filing pursuant to, Rule 462(b) prior to the time confirmations are sent or given, as specified in Rule 462(b) of the 1933 Act; and (b) the Company will give irrevocable instructions for transmission of the applicable filing fee in connection with the filing of the Rule 462(b) Registration Statement, in compliance with Rule 111 of the 1933 Act Regulations or the Commission will have received payment of such filing fee upon filing of the Rule 462(b) Registration Statement. Each Selling Stockholder represents and warrants to each of the U.S. Underwriters that the representations and warranties of such Selling Stockholder set forth in Section 1(b) of the U.S. Purchase Agreement are accurate as though expressly made at and as of the date hereof. As contemplated by Section 2 of the U.S. Purchase Agreement, attached as Schedule A is a completed list of the Selling Stockholders and attached as Schedule B is a complete list of the several U.S. Underwriters, which shall be a part of this Agreement and the U.S. Purchase Agreement. This Agreement shall be governed by the laws of the State of New York. If the foregoing is in accordance with the understanding of the U.S. Representatives of the agreement between the U.S. Underwriters, the Company and the Selling Stockholders, please sign and return to the Company a counterpart hereof, whereupon this instrument, along with all counterparts and together with the U.S. Purchase Agreement, shall be a 45 A-3 binding agreement between the U.S. Underwriters, the Company and the Selling Stockholders in accordance with its terms and the terms of the U.S. Purchase Agreement. Very truly yours, BORG-WARNER AUTOMOTIVE, INC. By: ------------------------------- Name: Title: SELLING STOCKHOLDERS NAMED IN SCHEDULE A By: ------------------------------- Name: Title: Confirmed and accepted as of the date first above written: MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated LEHMAN BROTHERS INC. MORGAN STANLEY & CO. INCORPORATED By: Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated By ---------------------------------------- Name: Title: Investment Banking Group For themselves and as U.S. Representatives of the other U.S. Underwriters named in Schedule B. 46 Exhibit B SUBSIDIARIES
Percent of Capital Stock Beneficially Owned by Borg-Warner Automotive, Name of Subsidiary Inc. or the Subsidiaries - ------------------ ------------------------------ Borg-Warner Automotive Powertrain Systems Corporation 100 Borg-Warner Automotive South Asia Corporation 100 Divgi-Warner Pvt., Ltd. 60 Huazhong Warner Transmission Company 60 Borg-Warner Automotive Powertrain Service Center Corporation 100 Borg-Warner Automotive Powdered Metals Corporation 100 Borg-Warner Automotive Diversified Transmission Products Corporation 100 Borg-Warner Automotive Air/Fluid Systems Corporation 100 Borg-Warner Automotive Air/Fluid Systems Corporation of Michigan 100 Borg-Warner Automotive Control Systems Holding Corporation 100 Borg-Warner Automotive Control Systems Europe S.A.S. 90 Societe de l'Usine de la Marque 100 BW Syntelligence Corporation 100 Borg-Warner Automotive Morse TEC Corporation 100 Borg-Warner Automotive (Canada) Ltd. 100 Borg-Warner Automotive Japan Corporation 100 Borg-Warner Automotive K.K. 100 Borg-Warner Automotive Taiwan Co., Ltd. 100 B.W. Componentes Mexicanos de Transmissiones S.A. de C.V. 86 Morse TEC Europe, Sp.A 100 Borg-Warner Automotive Foreign Sales Corporation 100
47 B-2 Borg-Warner Automotive Automatic Transmission Systems Corporation 100 Borg-Warner Automotive Europe Corporation 100 Borg-Warner Automotive GmbH 100 Borg & Beck Torque Systems, Inc. 100 Borg-Warner Automotive-NW Corporation 100 Borg-Warner Automotive Korea, Inc. 60 Creon Insurance Agency, Ltd. 100 Creon Trustees, Ltd. 100
48 Exhibit C Pursuant to Section 5(b) of the U.S. Purchase Agreement, Wachtell, Lipton, Rosen & Katz, special counsel for the Company, shall furnish to the U.S. Underwriters an opinion to the effect that: (i) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware with corporate power and authority under such laws to own, lease and operate its properties and conduct its business as described in the Prospectuses. (ii) The Shares have been duly authorized and validly issued and are fully paid and non-assessable, and no holder thereof is or will be subject to personal liability by reason of being such a holder; such Shares are not subject to the preemptive rights of any stockholder of the Company. (iii) The Shares conform in all material respects as to legal matters to the description thereof contained in the Prospectuses. (iv) This Agreement and the International Purchase Agreement have been duly authorized, executed and delivered by the Company. (v) The execution and delivery of this Agreement, the International Purchase Agreement, the consummation by the Company of the transactions contemplated in this Agreement, in the International Purchase Agreement, and in the Registration Statement and compliance by the Company with the terms of this Agreement and the International Purchase Agreement have been duly authorized by all necessary corporate action on the part of the Company and do not violate and will not result in any violation of the certificate of incorporation or by-laws of the Company. (vi) The Registration Statement is effective under the 1933 Act; any required filing of the Prospectuses or any supplement thereto pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and, to the best of the knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or are contemplated under the 1933 Act. (vii) The Registration Statement (including the Rule 430A Information and the Rule 434 Information, if applicable) and the Prospectuses, excluding the documents incorporated by reference therein, and each amendment or supplement thereto (except for the financial statements and other financial or statistical data included therein or omitted therefrom, as to which such counsel need express no opinion), as of their respective effective or issue dates, complied as to form in all material respects to the requirements of the 1933 Act and the 1933 Act Regulations. 49 C-2 (viii) The documents incorporated by reference in the Prospectus (except for the financial statements and other financial or statistical data included therein or omitted therefrom, as to which such counsel need express no opinion, and except to the extent that any statement therein is modified or superseded in the Prospectuses), as of the dates they were filed with the Commission, complied as to form in all material respects to the requirements of the 1934 Act and the 1934 Act Regulations. (ix) Assuming that each of the U.S. Underwriters and International Underwriters acquires the certificates representing the U.S. Shares and the International Shares, respectively, in good faith and without notice of any adverse claims, as defined in Section 8-302 of the Uniform Commercial Code as in effect in the State of New York (the "UCC"), upon delivery of the certificates to the person designated by the U.S. Underwriters and the International Underwriters, respectively, in the State of New York, either registered in the name of the U.S. Underwriters or the International Underwriters, as the case may be, endorsed to the U.S. Underwriters or the International Underwriters, as the case may be, or endorsed in blank, the U.S. Underwriters or the International Underwriters, as the case may be, will acquire all of the Selling Stockholders' rights in the certificates, free of any adverse claims (within the meaning of Section 8-302 of the UCC). (x) Such counsel have participated in the preparation of the Registration Statement and Prospectuses except for the documents incorporated by reference in the Registration Statement and the Prospectuses and in conferences with officers and other representatives of the Company, representatives of the independent public accountants for the Company, and with your representatives and your counsel at which the contents of the Registration Statement, the Prospectuses, and related matters were discussed and have reviewed the documents incorporated by reference in the Registration Statement and Prospectuses and, although such counsel need not pass upon or assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectuses and the documents incorporated by reference in the Prospectuses (except for the opinions set forth in clause (iii), and based on the foregoing, no facts have come to the attention of such counsel to lead such counsel to believe (A) that the Registration Statement or any amendment thereto (except for the financial statements and other financial or statistical data included therein or omitted therefrom, as to which such counsel need express no opinion), at the time the Registration Statement or any such amendment became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or (B) that the Prospectuses or any amendment or supplement thereto (except for the financial statements and other financial or statistical data included therein or omitted therefrom, as to which such counsel need express no opinion), at the time any Prospectus was issued, at the time any such amended or supplemented prospectus was issued or at the Closing Time, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances 50 C-3 under which they were made, not misleading. Such opinion shall be to such further effect with respect to other legal matters relating to this Agreement, the U.S. Price Determination Agreement and the sale of the U.S. Shares pursuant to this Agreement as counsel for the U.S. Underwriters may reasonably request. In giving such opinion, such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York, the federal law of the United States and the corporate law of the State of Delaware, either upon opinions of other counsel, who shall be counsel reasonably satisfactory to counsel for the U.S. Underwriters, in which case the opinion shall state that they believe the U.S. Underwriters and they are entitled to so rely, or upon unofficial compilations of the laws of such jurisdictions. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and its Subsidiaries and certificates of public officials. 51 Exhibit D Pursuant to Section 5(c) of the U.S. Purchase Agreement, Laurene H. Horiszny, Esq., Vice President, Secretary and General Counsel for the Company, shall furnish to the U.S. Underwriters an opinion to the effect that: (i) Each Subsidiary listed on Schedule 1 hereto (the "Material Subsidiaries") is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation with corporate power and authority under such laws to own, lease and operate its properties and conduct its business. (ii) Each of the Company and the Material Subsidiaries is duly qualified to transact business as a foreign corporation and is in good standing in each other jurisdiction in which it owns or leases property of a nature, or transacts business of a type, that would make such qualification necessary, except to the extent that the failure to so qualify or be in good standing would not have a material adverse effect on the Company and the Subsidiaries, considered as one enterprise. (iii) All of the outstanding shares of capital stock of each Material Subsidiary have been duly authorized and validly issued and are fully paid and non-assessable; all of the shares of capital stock of such Material Subsidiary are owned by the Company, directly or through one or more of the Subsidiaries, in the percentages set forth in Schedule 1 hereto and the shares of capital stock of NSK-Warner owned by the Company are owned by the Company directly or through one or more of the Subsidiaries, free and clear of any consensual pledge, lien, security interest, charge, claim, equity or encumbrance of any kind except as provided in or pursuant to the Credit Agreement; no holder thereof is subject to personal liability by reason of being such a holder and none of such shares was issued in violation of the preemptive rights of any stockholder of the Material Subsidiaries. (iv) The Shares have been duly authorized and validly issued and are fully paid and non-assessable, and no holder thereof is or will be subject to personal liability by reason of being such a holder; such Shares are not subject to the preemptive rights of any stockholder of the Company. (v) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectuses under the heading "Capitalization". (vi) Such counsel does not know of any statutes or regulations, or any pending or threatened legal or governmental proceedings, required under the 1933 Act to be described in the Prospectuses that are not described as so required, nor of any contracts or documents of a character required under the 1933 Act or 1933 Act Regulations to be described or referred to in the Registration Statement or 52 D-2 Prospectuses or to be filed as exhibits to the Registration Statement that are not described, referred to or filed as required. (vii) Except with respect to financial covenants, (as to which such counsel need express no opinion) no default exists in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, loan agreement, note, lease or other agreement or instrument that is described or referred to in the Registration Statement or the Prospectuses or filed as an exhibit to the Registration Statement (except for such defaults that would not have a material adverse effect on the condition (financial or otherwise), results of operations, business affairs or business prospects of the Company and its Subsidiaries, considered as one enterprise). (viii) The execution and delivery of this Agreement and the International Purchase Agreement and the consummation by the Company of the other transactions contemplated in this Agreement, the International Purchase Agreement and in the Registration Statement and compliance by the Company with the terms of this Agreement and the International Purchase Agreement do not violate and will not result in any violation of the certificate of incorporation or by-laws of any Material Subsidiary and do not and will not conflict with, or result in a breach of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any Material Subsidiary under (i) any existing applicable law, rule or regulation (other than the securities or Blue Sky laws of the various states, as to which such counsel is not requested to express an opinion), (ii) any judgment, order or decree of any government, governmental instrumentality or court, domestic or foreign, having jurisdiction over the Company or any Subsidiary or any of its properties, or (iii) any indenture, mortgage or loan agreement, or any other agreement or instrument known to such counsel, to which the Company or any Material Subsidiary is a party or by which it may be bound or to which any of its properties may be subject, including the Formation Agreement between Borg-Warner Corporation and Nippon Seiko, K.K., dated as of April 18, 1964, and any agreements related thereto, including but not limited to the Shareholders Agreement Concerning the Management of NSK-Warner, dated September 25, 1964, between Borg-Warner Corporation and Nippon Seiko, K.K. (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not have a material adverse effect on the condition (financial or otherwise), results of operations, business affairs or business prospects of the Company and its Subsidiaries, considered as one enterprise). (ix) The descriptions in the Prospectuses of the statutes, regulations, legal or governmental proceedings, contracts and other documents therein described are accurate and fairly summarize the information required to be shown. 53 D-3 (x) No authorization, approval, consent or license of any U.S. government, governmental instrumentality or U.S. court (other than under the 1933 Act or 1933 Act Regulations and the securities or Blue Sky laws of the various states and the securities laws of any jurisdiction outside the United States in which International Shares are offered or sold by the International Underwriters pursuant to the International Purchase Agreement) is required for the valid authorization, issuance, sale and delivery of the Shares. (xi) To the best knowledge of such counsel, each Selling Stockholder is the registered holder of title to the Shares to be sold by such Selling Stockholder pursuant to the U.S. Purchase Agreement and the International Purchase Agreement. Such counsel has participated in the preparation of the Registration Statement and Prospectuses, in the preparation of the documents incorporated by reference in the Registration Statement and the Prospectuses and in conferences with officers and other representatives of the Company, representatives of the independent public accountants for the Company, and with your representatives and your counsel at which the contents of the Registration Statement, the Prospectuses and the documents incorporated by reference in the Prospectuses and related matters were discussed and, although such counsel need not pass upon or assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectuses and the documents incorporated by reference in the Prospectuses (except for the opinion set forth in clause (ix)), and based upon the foregoing, no facts have come to the attention of such counsel to lead her to believe (A) that the Registration Statement (including the Rule 430A Information and the Rule 434 Information, if applicable) or any amendment thereto (except for the financial statements and other financial or statistical data included therein or omitted therefrom, as to which such counsel need express no opinion), at the time the Registration Statement or any such amendment became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (B) that the Prospectuses or any amendment or supplement thereto (except for the financial statements and other financial or statistical data included therein or omitted therefrom, as to which such counsel need express no opinion), at the time any Prospectus was issued, at the time any such amended or supplemented prospectus was issued or at the Closing Time, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or (C) that the documents incorporated by reference in the Prospectuses (except for the financial statements and other financial or statistical data included therein or omitted therefrom, as to which such counsel need express no opinion, and except to the extent that any statement therein is modified or superseded in the Prospectuses), as of the dates they were filed with the Commission, contained an untrue statement of a material fact or omitted to state a material fact. 54 D-4 In giving such opinion, such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of Illinois, the Federal law of the United States and the corporate law of the State of Delaware, upon opinions of other counsel, who shall be counsel reasonably satisfactory to counsel for the U.S. Underwriters, in which case the opinion shall state that they believe the U.S. Underwriters and they are entitled to so rely. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and the Subsidiaries and certificates of public officials. 55 Schedule 1 to Exhibit D Material Subsidiaries
Percent of Capital Stock Beneficially Owned by Borg-Warner Automotive, Inc. or the Subsidiaries ------------ Material Subsidiary - ------------------- Borg-Warner Automotive Diversified Transmission Products Corporation 100 Borg-Warner Automotive Electronic & Mechanical Systems Corporation 100 Borg-Warner Automotive Europe Corporation 100 Borg-Warner Automotive GmbH 100 Borg-Warner Automotive Japan Corporation 100 Borg-Warner Automotive K.K. 100 Borg-Warner Automotive NW Corporation 100 Borg-Warner Automotive Transmission & Engine Components Corporation 100
56 Exhibit E Pursuant to Section 5(d) of the U.S. Purchase Agreement, NSK-Warner's Japanese counsel shall furnish to the U.S. Underwriters an opinion substantially to the effect that: (i) NSK-Warner is a corporation duly organized, validly existing and in good standing under the laws of Japan with corporate power and authority under such laws to own, lease and operate its properties and conduct its business. (ii) All of the outstanding shares of capital stock of NSK-Warner have been duly authorized and validly issued and are fully paid and non-assessable. 57 Exhibit F Pursuant to Section 5(e) of the U.S. Purchase Agreement, each of the attorneys listed on Schedule C attached thereto for the Selling Stockholders specified opposite such attorney's name, shall furnish to the U.S. Underwriters an opinion to the effect that: (i) This Agreement and the International Purchase Agreement have been authorized, duly executed and delivered by each of the Selling Stockholders. (ii) No authorization, approval, consent or license of any government, governmental instrumentality or court is required under the laws of the United States or the State of New York (other than under the 1933 Act, under Blue Sky or state securities law or the securities laws of foreign jurisdictions) for the consummation by the Selling Stockholders of the transactions contemplated by this Agreement and the International Purchase Agreement. (iii) The execution and delivery of this Agreement and the International Purchase Agreement by the Selling Stockholders and the compliance by the Selling Stockholders with the terms thereof do not conflict with or result in a violation of (a) the certificate of incorporation, the by-laws, the partnership agreement or similar governing document of any of the Selling Stockholders or (b) any existing applicable law, rule or regulation (other than under the 1933 Act, under Blue Sky or state securities law or the securities laws of foreign jurisdictions or the rules and regulations of the NASD) or any judgment, order or decree known to such counsel of any government, governmental instrumentality or court, domestic or foreign, having jurisdiction over the Selling Stockholders. (iv) The Selling Stockholders, as the case may be, have been duly organized and are validly existing and in good standing as corporations or partnerships under the laws of the jurisdiction of their incorporation or organization with all necessary power and authority under such laws to execute, deliver and perform this Agreement and the International Purchase Agreement. (v) Assuming that each of the U.S. Underwriters acquires the certificates representing the Shares to be sold by the Selling Stockholders in good faith and without notice of any adverse claims, as defined in Section 8-302 of the Uniform Commercial Code as in effect in the State of New York (the "UCC"), upon delivery of the certificates representing such Shares to the person designated by the U.S. Underwriters in the State of New York, registered in the name of the U.S. Underwriters, endorsed to the U.S. Underwriters, or endorsed in blank, the U.S. Underwriters will acquire all of the Selling Stockholders' rights in the certificates representing such Shares free of any adverse claims (within the meaning of Section 8-302 of the UCC). 58 F-2 Such opinion shall be to such further effect with respect to other legal matters relating to this Agreement and the sale of the Shares pursuant to this Agreement as counsel for the U.S. Underwriters may reasonably request. In giving such opinion, such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York, the federal law of the United States and the corporate and partnership law of the State of Delaware, solely upon opinions of other counsel, who shall be counsel reasonably satisfactory to counsel for the U.S. Underwriters (it being understood that in-house counsel of any Selling Stockholder shall be so satisfactory), in which case the opinion shall also be addressed to the U.S. Underwriters and state that such other counsel believes you and they are entitled to so rely. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and the Subsidiaries, certificates of officers or partners, as the case may be, of such Selling Stockholders and on certificates of public officials. 59 Exhibit G FORM OF LOCK-UP LETTER AGREEMENT July __, 1996 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated LEHMAN BROTHERS INC. MORGAN STANLEY & CO. INCORPORATED As Representatives of the several U.S. Underwriters c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated Merrill Lynch World Headquarters North Tower World Financial Center New York, New York 10281-1201 MERRILL LYNCH INTERNATIONAL LEHMAN BROTHERS INTERNATIONAL (EUROPE) MORGAN STANLEY & CO. INTERNATIONAL LIMITED As Representatives of the several International Underwriters c/o Merrill Lynch International 25 Ropemaker Street London EC2Y 9LY England Ladies and Gentlemen: The undersigned stockholder of Borg-Warner Automotive, Inc., a Delaware corporation (the "Company"), understands that (i) a U.S. Purchase Agreement (the "U.S. Purchase Agreement") will be executed by the Company, the Selling Stockholders named therein (the "Selling Stockholders") and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Lehman Brothers Inc. and Morgan Stanley & Co. Incorporated, as representatives (the "U.S. Representatives") of the several underwriters named therein (the "U.S. Underwriters"), pursuant to which the Selling Stockholders will sell to the U.S. Underwriters 3,600,000 shares of the Common Stock, par value $.01 per 60 G-2 share (the "Common Stock"), of the Company and up to 540,000 additional shares of Common Stock pursuant to an option granted by the Selling Stockholders, solely to cover over-allotments as set forth in the U.S. Purchase Agreement and (ii) an International Purchase Agreement (the "International Purchase Agreement", and together with the U.S. Purchase Agreement, the "Purchase Agreements") will be executed by the Company, the Selling Stockholders named therein (the "Selling Stockholders") and Merrill Lynch International, Lehman Brothers International (Europe) and Morgan Stanley & Co. International Limited, as representatives (the "International Representatives", and together with the U.S. Representatives, the "Representatives") of the several underwriters named therein (the "International Underwriters", and together with the U.S. Underwriters, the "Underwriters"), pursuant to which the Selling Stockholders will sell to the International Underwriters 900,000 shares of the Common Stock of the Company and up to 135,000 additional shares of Common Stock pursuant to an option granted by the Selling Stockholders, solely to cover over-allotments as set forth in the International Purchase Agreement. The undersigned is a party to that certain Registrations Rights Agreement (the "Registration Rights Agreement"), dated as of January 27, 1993, by and among the Company and the stockholders named therein. This Lock-Up Letter Agreement is being entered into in accordance with Section 7(a) of the Registration Rights Agreement at the request of the Underwriters. The undersigned also understands that the Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-3 (File No. 333-06041, the "Registration Statement") in connection with the public offering (the "Offering") of shares of its Common Stock. In consideration of the Underwriters' agreement to purchase the Common Stock and undertake the Offering, and for other good and valuable consideration, receipt of which is hereby acknowledged, the undersigned agrees [that, without the prior written consent of the Representatives, which consent shall not be unreasonably withheld, the undersigned will] not[,] [to] directly or indirectly[,] effect any public sale or distribution, including any sale pursuant to Rule 144 under the Securities Act of 1933, as amended, of any shares of Common Stock (including, without limitation, shares of Common Stock which may be deemed to be beneficially owned by such stockholder in accordance with the rules and regulations of the Commission and shares of Common Stock which may be issued upon exercise of any option or warrant) or any securities convertible or exchangeable for shares of Common Stock for a period commencing 7 days prior to the date the Registration Statement is declared effective by the Commission (the "Effective Date") and ending 180 days after the Effective Date, other than the Shares sold to the Underwriters pursuant to the Purchase Agreements. The undersigned understands that the Company expects the Effective Date to occur as early as ______, 1996. The 61 G-3 undersigned understands that the Effective Date may, however, be earlier or later than _____, 1996. In addition, the undersigned agrees that the undersigned will, promptly following the execution of this Lock-Up Letter Agreement and in any event prior to the execution of the Purchase Agreements, (i) with respect to any shares of Common Stock for which the undersigned is the record holder, cause the transfer agent for the Company to note stop transfer instructions with respect to such shares of Common Stock on the transfer books and records of the Company and (ii) with respect to any shares of Common Stock for which the undersigned is the beneficial holder but not the record holder (other than the shares of Common Stock owned of record by persons or entities that are not affiliates of the undersigned and shares of Common Stock which may be issued upon exercise of any option or warrant), cause the record holder of such shares to cause the transfer agent for the Company to note stop transfer instructions with respect to such shares of Common Stock on the transfer books and records of the Company. The undersigned understands that the Company, the Selling Stockholders and the Underwriters will proceed with the Offering in reliance on this Lock-Up Letter Agreement. The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this Lock-Up Letter Agreement and that, upon request, the undersigned will execute any additional documents necessary or desirable in connection with the enforcement hereof. Any obligations of the undersigned shall be binding upon the successors and assigns of the undersigned. 62 G-4 This Lock-Up Letter Agreement has been entered into on the date first written above. Very truly yours, ---------------------------------------- Name of Stockholder/Officer/Director By: ------------------------------------- Name: Title: EX-1.2 3 INTERNATIONAL PURCHASE AGREEMENT 1 ================================================================================ BORG-WARNER AUTOMOTIVE, INC. (a Delaware corporation) 900,000 Shares of Common Stock INTERNATIONAL PURCHASE AGREEMENT Dated: July __, 1996 ================================================================================ 2 BORG-WARNER AUTOMOTIVE, INC. (a Delaware corporation) 900,000 Shares of Common Stock (Par Value $.01 Per Share) INTERNATIONAL PURCHASE AGREEMENT July __, 1996 MERRILL LYNCH INTERNATIONAL LEHMAN BROTHERS INTERNATIONAL (EUROPE) MORGAN STANLEY & CO. INTERNATIONAL LIMITED As Representatives of the several International Underwriters c/o Merrill Lynch International Ropemaker Place 25 Ropemaker Street London EC2 Y9LY Ladies and Gentlemen: The stockholders of Borg-Warner Automotive, Inc., a Delaware corporation (the "Company"), named in Schedule A (collectively, the "Selling Stockholders") propose to sell severally and not jointly to the underwriters named in Schedule B (collectively, the "International Underwriters", which shall also include any person substituted for an International Underwriter under Section 11 hereof), for whom you are acting as representatives (the "International Representatives"), an aggregate of 900,000 outstanding shares of Common Stock of the Company, par value $.01 per share (shares of which class of stock of the Company are hereinafter referred to as "Common Stock"). Such shares of Common Stock are to be sold to each International Underwriter, acting severally and not jointly, in such amounts as are set forth in Schedule B hereto opposite the name of such International Underwriter. The Selling Stockholders also grant to the International Underwriters, severally and not jointly, the option described in Section 2 to purchase all or any part of 135,000 additional shares of Common Stock to cover over-allotments. The aforesaid 900,000 shares of Common Stock (the "Initial International Shares"), together with 3 2 all or any part of the 135,000 additional shares of Common Stock subject to the option described in Section 2 (the "International Option Shares"), are collectively herein called the "International Shares". The International Shares are more fully described in the International Prospectus referred to below. It is understood that the Company is concurrently entering into an agreement, dated the date hereof (the "U.S. Purchase Agreement"), providing for the sale by the Selling Stockholders of 3,600,000 shares of Common Stock (the "Initial U.S. Shares") through arrangements with certain underwriters within the United States and Canada (the "U.S. Underwriters"), for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated, Lehman Brothers Inc. and Morgan Stanley & Co. Incorporated are acting as representatives (the "U.S. Representatives"). It is further understood that the Selling Stockholders are concurrently granting the U.S. Underwriters an option to purchase all or any part of 540,000 additional shares of Common Stock (the "U.S. Option Shares") from the Selling Stockholders to cover over-allotments. The U.S. Shares and the U.S. Option Shares are hereinafter collectively referred to as the "U.S. Shares". The International Shares and the U.S. Shares are hereinafter collectively referred to as the "Shares". The Company understands that the International Underwriters will simultaneously enter into an agreement with the U.S. Underwriters dated the date hereof (the "Intersyndicate Agreement") providing for the coordination of certain transactions among the International Underwriters and the U.S. Underwriters, under the direction of Merrill Lynch, Pierce, Fenner & Smith Incorporated. You have advised us that you and the other International Underwriters, acting severally and not jointly, desire to purchase the International Shares and that you have been authorized by the other International Underwriters to execute this Agreement and the International Price Determination Agreement referred to below on their behalf. The price to the public per share for the International Shares and the purchase price per share for the International Shares shall be agreed upon by the Selling Stockholders and the International Representatives, acting on behalf of the several International Underwriters, and such agreement shall be set forth in a separate written instrument substantially in the form of Exhibit A hereto (the "International Price Determination Agreement"). The International Price Determination Agreement may take the form of an exchange of any standard form of written telecommunication between the Selling Stockholders and the International Representatives and shall specify such applicable information as is indicated in Exhibit A hereto. The offering of the International Shares will be governed by this Agreement, as supplemented by the International Price Determination Agreement. From and after the date of the execution and delivery of the International Price Determination Agreement, this Agreement shall be deemed to incorporate, and all reference 4 3 herein to "this Agreement" shall be deemed to include, the International Price Determination Agreement. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-3 (Registration No. 333-06041) covering the registration of the Shares under the Securities Act of 1933, as amended (the "1933 Act"), including the related preliminary prospectuses, and either (A) has prepared and proposes to file, prior to the effective date of such registration statement, an amendment to such registration statement, including final prospectuses, or (B) if the Company has elected to rely upon Rule 430A ("Rule 430A") of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations"), will prepare and file prospectuses, in accordance with the provisions of Rule 430A and Rule 424(b) ("Rule 424(b)") of the 1933 Act Regulations, promptly after execution and delivery of the U.S. Price Determination Agreement. Two forms of prospectus are to be used in connection with the offering and sale of the Shares: one relating to the International Shares (the "Form of International Prospectus") and one relating to the U.S. Shares (the "Form of U.S. Prospectus"). The Form of U.S. Prospectus is identical to the Form of International. Prospectus, except for the front cover page, inside front cover page, the section captioned "Underwriting" and the back cover page. Additionally, if the Company has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations, the Company will prepare and file a term sheet (a "Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b), promptly after execution and delivery of the International Price Determination Agreement. The information, if any, included in such prospectuses that was omitted from any prospectuses included in such registration statement at the time it becomes effective but that is deemed, (i) pursuant to paragraph (b) of Rule 430A, to be part of such registration statement at the time it becomes effective is referred to herein as the "Rule 430A Information", and (ii) pursuant to paragraph (d) of Rule 434, to be part of such registration statement at the time it becomes effective is referred to herein as "Rule 434 Information". Each Form of International Prospectus and Form of U.S. Prospectus used before the time such registration statement becomes effective, and any Form of International Prospectus and Form of U.S. Prospectus that omits the Rule 430A Information or the Rule 434 Information, if applicable, that is used after such effectiveness and prior to the execution and delivery of the International Price Determination Agreement or the U.S. Price Determination Agreement, is herein called a "preliminary prospectus". Such registration statement, including the exhibits thereto and the documents incorporated by reference therein pursuant to Item 12 of Form S-3 under the 1933 Act ("Item 12"), as amended, and Rule 412 of the 1933 Act Regulations ("Rule 412") at the time it becomes effective and including, if applicable, the Rule 430A Information or the Rule 434 Information, is herein called the "Original Registration Statement". Any registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b) Registration Statement", and the Original Registration Statement and any Rule 462(b) Registration Statement are herein referred to collectively as the "Registration Statement". The Form of International 5 4 Prospectus and Form of U.S. Prospectus, including the documents incorporated by reference therein pursuant to Item 12 and Rule 412, included in the Original Registration Statement at the time it becomes effective, are herein called the "International Prospectus" and the "U.S. Prospectus", respectively, and, collectively, the "Prospectuses", and, individually, a "Prospectus", except that, (i) if the final International Prospectus or U.S. Prospectus, as the case may be, first furnished to the International Underwriters or the U.S. Underwriters after the execution of the International Price Determination Agreement or the U.S. Price Determination Agreement for use in connection with the offering of the Shares differs from the prospectuses included in the Original Registration Statement at the time it becomes effective (whether or not such prospectus is required to be filed pursuant to Rule 424(b)), the terms "International Prospectus", "U.S. Prospectus", "Prospectuses" and "Prospectus" shall refer to the final International Prospectus or U.S. Prospectus first furnished to the International Underwriters or the U.S. Underwriters, as the case may be, for such use, and (ii) if Rule 434 is relied upon, the terms "International Prospectus", "U.S. Prospectus", "Prospectuses" and "Prospectus" shall refer to the preliminary International Prospectus or U.S. Prospectus last furnished to the International Underwriters or the U.S. Underwriters, as the case may be, in connection with the offering of the Shares, in each case together with the Term Sheet. The Company and the Selling Stockholders understand that the International Underwriters propose to make a public offering of the International Shares as soon as you deem advisable after the Registration Statement becomes effective and the International Price Determination Agreement has been executed and delivered. Section 1. Representations and Warranties. (a) The Company represents and warrants to and agrees with each of the International Underwriters and each of the Selling Stockholders that: (i) The Company meets the requirements for use of Form S-3 under the 1933 Act and when the Registration Statement or any post-effective amendment thereto shall become effective and at all times subsequent thereto up to the Closing Time referred to below (and, if any International Option Shares are purchased, up to the Date of Delivery referred to below), (A) the Registration Statement and the Prospectuses, including any amendments and supplements thereto, will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations; (B) neither the Registration Statement nor any amendment or supplement thereto will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (C) neither of the Prospectuses nor any amendment or supplement thereto will include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (D) if Rule 434 is relied upon, the Prospectuses 6 5 shall not be "materially different", as such term is used in Rule 434, from the prospectuses included in the Registration Statement at the time it becomes effective; except that this representation and warranty does not apply to statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of any International Underwriter or U.S. Underwriter through you or the U.S. Representatives expressly for use in the Registration Statement or the Prospectuses or any amendment or supplement thereof. (ii) The documents incorporated by reference in the Prospectuses pursuant to Item 12 of Form S-3 under the 1933 Act, at the time they were filed with the Commission, complied in all material respects with the requirements of the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the rules and regulations of the Commission thereunder (the "1934 Act Regulations"), and, when read together and with the other information in the Prospectus, at the time the Registration Statement becomes effective and at all times subsequent thereto up to the Closing Time (as hereinafter defined) (and, if any Option Shares are purchased, up to the Date of Delivery (as hereinafter defined)), will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading. (iii) (A) Deloitte & Touche LLP, who have certified the financial statements of the Company and the schedules included or incorporated by reference in the Registration Statement and Prospectuses, (B) KPMG Peat Marwick, who have certified the financial statements of NSK-Warner K.K. ("NSK-Warner") included or incorporated by reference in the Registration Statement and the Prospectuses and (C) Arthur Andersen LLP, who have certified the financial statements of Holley Automotive Inc, Holley Automotive Group, Ltd., Holley Automotive Systems GmbH, Coltec Automotive Inc, and Performance Friction Products, a division of Stemco Inc, an indirect, wholly-owned subsidiary of Coltec Industries Inc. (collectively, the "Coltec Subsidiaries"), included or incorporated by reference in the Registration Statement and the Prospectuses, are independent public accountants as required by the 1933 Act and the 1933 Act Regulations. (iv) The Company has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement; and this Agreement has been duly authorized, executed and delivered by the Company. (v) The consolidated financial statements and the related notes of the Company, its Subsidiaries (as defined below) and the Coltec Subsidiaries included or incorporated by reference in the Registration Statement present fairly the consolidated financial position of the Company, its Subsidiaries and the Coltec Subsidiaries as of the dates indicated and the consolidated results of operations and cash flows of the 7 6 Company, its Subsidiaries and the Coltec Subsidiaries for the periods specified. Such financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved (except as set forth in the notes thereto) and subject, in the case of any interim statements, to normal year-end audit adjustments. The financial statement schedules, if any, included in the Registration Statement present fairly the information required to be stated therein. The selected financial data included or incorporated by reference in the Prospectuses present fairly the information shown therein and have been compiled on a basis consistent with that of the audited consolidated financial statements included or incorporated by reference in the Registration Statement. The pro forma financial information included in the Prospectuses present fairly the information shown therein, has been prepared in accordance with the applicable requirements of Rule 11-02 of Regulation S-X, has been properly compiled on the pro forma bases described therein, and, in the opinion of the Company, the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions or circumstances referred to therein. (vi) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware with corporate power and authority under such laws to own, lease and operate its properties and conduct its business as described in the Prospectuses. The Company is duly qualified to transact business as a foreign corporation and is in good standing in each other jurisdiction in which it owns or leases property of a nature, or transacts business of a type, that would make such qualification necessary, except to the extent that the failure to so qualify or be in good standing would not have a material adverse effect on the Company and the Subsidiaries, considered as one enterprise. (vii) The Company's only subsidiaries are set forth in Exhibit B hereto (each such corporation is referred to herein as a "Subsidiary" and, collectively, the "Subsidiaries"). Each Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation with corporate power and authority under such laws to own, lease and operate its properties and conduct its business; and each Subsidiary is duly qualified to transact business as a foreign corporation and is in good standing in each other jurisdiction in which it owns or leases property of a nature, or transacts business of a type, that would make such qualification necessary, except to the extent that the failure to so qualify or be in good standing would not have a material adverse effect on the Company and the Subsidiaries, considered as one enterprise. All of the outstanding shares of capital stock of each Subsidiary have been duly authorized and validly issued and are fully paid and non-assessable and are owned by the Company, directly or through one or more of the Subsidiaries, in the percentages set forth in Exhibit B hereto, free and 8 7 clear of any pledge, lien, security interest, charge, claim, equity or encumbrance of any kind. (viii) The Company had at the date indicated a duly authorized and outstanding capitalization as set forth in the Prospectuses under the caption "Capitalization". (ix) The Shares have been duly authorized and validly issued and are fully paid and non-assessable; no holder thereof will be subject to personal liability by reason of being such a holder; and such Shares are not subject to the preemptive rights of any stockholder of the Company. (x) All of the other outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable; no holder thereof is or will be subject to personal liability by reason of being such a holder; and none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive rights of any stockholder of the Company. (xi) Since the respective dates as of which information is given in the Registration Statement and the Prospectuses, except as described in the Registration Statement or any amendment or supplement thereto, there has not been (A) any material adverse change in the condition (financial or otherwise), results of operations, business affairs or business prospects of the Company and the Subsidiaries, considered as one enterprise, whether or not arising in the ordinary course of business, (B) any transaction entered into by the Company or any Subsidiary, other than in the ordinary course of business, that is material to the Company and the Subsidiaries, considered as one enterprise, or (C) any dividend or distribution of any kind declared, paid or made by the Company on its capital stock, other than regular quarterly cash dividends declared or paid on its Common Stock. (xii) Neither the Company nor any of its Subsidiaries is in violation of its certificate of incorporation or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any indenture, mortgage, loan agreement, note, lease or other agreement or instrument to which it is a party or by which it may be bound or to which any of its properties may be subject, except for such defaults that would not have a material adverse effect on the condition (financial or otherwise), results of operations, business affairs or business prospects of the Company and the Subsidiaries, considered as one enterprise. The execution and delivery of this Agreement and the U.S. Purchase Agreement by the Company, the consummation by the Company of the transactions contemplated in this Agreement, the U.S. Purchase Agreement, and the Registration Statement and compliance by the Company with the terms of this Agreement and the U.S. Purchase Agreement have 9 8 been duly authorized by all necessary corporate action on the part of the Company and do not violate and will not result in any violation of the certificate of incorporation or by-laws of the Company or any Subsidiary, and do not and will not conflict with, or result in a breach of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any Subsidiary under (A) any indenture, mortgage, loan agreement, note, lease or other agreement or instrument to which the Company or any Subsidiary is a party or by which any of them may be bound or to which any of their properties may be subject, except for such conflicts, breaches or defaults or liens, charges or encumbrances that in the aggregate would not have a material adverse effect on the condition (financial or otherwise), results of operations, business affairs or business prospects of the Company and the Subsidiaries, considered as one enterprise or (B) any existing applicable law, rule, regulation, judgment, order or decree of any government, governmental instrumentality or court, domestic or foreign, having jurisdiction over the Company or any Subsidiary or any of their respective properties, except for such conflicts, breaches or defaults or liens, charges or encumbrances that in the aggregate would not have a material adverse effect on the condition (financial or otherwise), results of operations, business affairs or business prospects of the Company and the Subsidiaries, considered as one enterprise. (xiii) No authorization, approval, consent or license of, or any material filing with, any government, governmental instrumentality or court, domestic or foreign (other than under the 1933 Act and the 1933 Act Regulations and the securities or Blue Sky laws of the various states, the securities laws of Canada and its provinces and the securities laws of any jurisdiction outside the United States in which International Shares are offered or sold by the International Underwriters pursuant to this Agreement), is legally required for the valid authorization, issuance, sale and delivery of the Shares. (xiv) Except as disclosed or incorporated by reference in the Prospectuses, there is no action, suit or proceeding before or by any government, governmental instrumentality or court, domestic or foreign, now pending or, to the knowledge of the Company, threatened against the Company or any Subsidiary that is required to be disclosed in the Prospectuses or that could result in any material adverse change in the condition (financial or otherwise), results of operations, business affairs or business prospects of the Company and its Subsidiaries, considered as one enterprise, or that could reasonably be expected to adversely affect the consummation of the transactions contemplated by this Agreement and the U.S. Purchase Agreement. (xv) There are no contracts or documents of a character required pursuant to the 1933 Act to be described in the Registration Statement or the Prospectuses or to 10 9 be filed as exhibits to the Registration Statement that are not described and filed as required. (xvi) Each of the Company and the Subsidiaries has good and marketable title to all properties and assets described in the Prospectuses as owned by it, free and clear of all liens, charges, encumbrances or restrictions, except such as (A) are described in the Prospectuses or (B) are neither material in amount nor materially significant in relation to the business of the Company and the Subsidiaries, considered as one enterprise; all of the leases and subleases material to the business of the Company and the Subsidiaries, considered as one enterprise, and under which the Company or any Subsidiary holds properties described in the Prospectuses, are in full force and effect, and neither the Company nor any Subsidiary has any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or any Subsidiary under any of the leases or subleases mentioned above, or affecting or questioning the rights of such corporation to the continued possession of the leased or subleased premises under any such lease or sublease. (xvii) The Company and the Subsidiaries each owns, possesses or has obtained all material governmental licenses, permits, certificates, consents, orders, approvals and other authorizations, and has made all filings with all governmental authorities, necessary to own or lease, as the case may be, and to operate its properties and to carry on its business as presently conducted, and neither the Company nor any Subsidiary has received any notice of proceedings relating to revocation or modification of any such licenses, permits, certificates, consents, orders, approvals or authorizations, which, singly or in the aggregate, if not so owned, possessed or obtained or the subject of an unfavorable ruling, decision or finding, could materially adversely affect the condition (financial or otherwise), results of operations, business affairs or business prospects of the Company and the Subsidiaries, considered as one enterprise. (xviii) The Company and the Subsidiaries each owns or possesses, or can acquire on reasonable terms, adequate patents, patent licenses, trademarks, service marks and trade names necessary to carry on its business as presently conducted, and neither the Company nor any Subsidiary has received any notice of infringement of or conflict with asserted rights of others with respect to any patents, patent licenses, trademarks, service marks or trade names that in the aggregate, if the subject of an unfavorable decision, ruling or finding, could reasonably be expected to materially adversely affect the condition (financial or otherwise), results of operations, business affairs or business prospects of the Company and the Subsidiaries, considered as one enterprise. 11 10 (xix) Except as disclosed in the Prospectuses, to the best knowledge of the Company, no labor problem exists with its employees or with employees of the Subsidiaries or is imminent that could reasonably be expected to materially adversely affect the Company and the Subsidiaries, considered as one enterprise and, to the knowledge of the Company, except as disclosed in the Prospectuses, the Company is not aware of any material existing or imminent labor dispute by the employees of any of its or the Subsidiaries' principal customers that could be expected to materially adversely affect the Company and the Subsidiaries, considered as one enterprise. (xx) The Company has not taken and will not take, directly or indirectly, any action designed to, or that might be reasonably expected to, cause or result in stabilization or manipulation of the price of the Common Stock. (xxi) Except as disclosed in the Registration Statement and except as would not individually or in the aggregate have a material adverse effect on the condition (financial or otherwise), results of operations, business affairs or business prospects of the Company and the Subsidiaries, considered as one enterprise, (A) the Company and the Subsidiaries are each in compliance with all applicable Environmental Laws, (B) the Company and the Subsidiaries have all permits, authorizations and approvals required under any applicable Environmental Laws and are each in compliance with their requirements, (C) there are no pending or threatened Environmental Claims against the Company or any Subsidiary, and (D) there are no circumstances with respect to any property or operations of the Company or the Subsidiaries that could reasonably be anticipated to form the basis of an Environmental Claim against the Company or the Subsidiaries. For purposes of this Agreement, the following terms shall have the following meanings: "Environmental Law" means any United States (or other applicable jurisdiction's) federal, state, local or municipal statute, law, rule, regulation, ordinance, code, policy or rule of common law and any judicial or administrative interpretation thereof including any judicial or administrative order, consent decree or judgment, relating to the environment, health, safety or any chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority. "Environmental Claims" means any and all administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigations or proceedings relating in any way to any Environmental Law. (xxii) All United States federal income tax returns of the Company (and any of the Subsidiaries, if not included in the Company's U.S. consolidated federal income tax return) required by law to be filed have been properly prepared and filed, and all taxes shown on such returns or otherwise assessed which are due and payable 12 11 have been paid. All of the Company's United States federal tax returns (and any of the Subsidiaries' tax returns, if applicable) for taxable periods through and including the 1990 federal taxable year have been audited by the Internal Revenue Service or the statute of limitations for such taxable years has run and thus, all taxes for such periods have been finally determined (excluding the effect of any net operating loss or credit carryovers to such periods). All other tax returns of the Company and the Subsidiaries required to be filed pursuant to applicable foreign, state, local or other law have been filed, except insofar as the failure to file such returns would not have a material adverse effect on the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and the Subsidiaries, considered as one enterprise. The Company and the Subsidiaries have paid (or there has been paid on their behalf) all taxes which are due and for which no tax return is required. There are no liens on any of the Company's or the Subsidiaries' assets for taxes, other than for taxes which have accrued but which are not yet due and payable. Neither the Company nor any Subsidiary is liable for any taxes that are imposed on any other person or corporation (other than for taxes imposed on the Company or the Subsidiaries), except as set forth in Treasury Regulation 1.1502-6 with respect to prior consolidated groups of which the Company or its subsidiaries were members. (xxiii) With respect to each employee benefit plan, program and arrangement (including, without limitation, any "employee benefit plan" as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) maintained or contributed to by the Company or any Subsidiary, or with respect to which the Company or any Subsidiary could incur any liability under ERISA (collectively, the "Benefit Plans"), no event has occurred and, to the best knowledge of the Company, there exists no condition or set of circumstances, in connection with which the Company or any Subsidiary could be subject to any liability under the terms of such Benefit Plans, applicable law (including, without limitation, ERISA and the Internal Revenue Code of 1986, as amended (the "Code")) or any applicable agreement (including, without limitation, the agreement dated as of January 14, 1993 (the "PBGC Agreement"), among the Pension Benefit Guaranty Corporation (the "PBGC"), the Company and Borg-Warner Security Corporation ("BWSC")), that could materially adversely affect the condition (financial or otherwise), results of operations, business affairs or business prospects of the Company and the Subsidiaries, considered as one enterprise. The Company is in compliance in all respects with its obligations under the PBGC Agreement. (xxiv) The Company has obtained the written agreement, in the form previously furnished to you, of (A) each holder of at least 1% of the outstanding shares of Common Stock who is a party to the Registration Rights Agreement dated as of January 27, 1993 among the Company and the Stockholders who are parties thereto (the "Registration Rights Agreement") that for a period beginning seven days 13 12 before, and ending 180 days after, the effective date of the Registration Statement, not to effect any public sale or distribution, including any sale pursuant to Rule 144 under the 1933 Act, of Common Stock or any securities convertible into or exchangeable for Common Stock, or any rights or warrants to acquire Common Stock and (B) executive officers and directors of the Company that for a period beginning seven days before, and ending 180 days after, the effective date of the Registration Statement, such holders will not, without your prior written consent, directly or indirectly, sell, offer to sell, grant any option for the sale of, or otherwise dispose of, any Common Stock or securities convertible into or exchangeable or exercisable for Common Stock. (xxv) There are no persons, corporations, partnerships or other entities with registration or other similar rights to have any securities registered pursuant to the Registration Statement, except as disclosed in the Prospectuses. (xxvi) The Shares have been approved for listing on the New York Stock Exchange, Inc. (b) Each of the Selling Stockholders severally represents and warrants to and agrees with each of the International Underwriters as follows: (i) When the Registration Statement or any post-effective amendment thereto shall become effective, and at all times subsequent thereto up to the Closing Time (and, if any International Option Shares are purchased, at the Date of Delivery), (A) neither the Registration Statement nor any amendment or supplement thereto will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (B) neither of the Prospectuses nor any amendment or supplement thereto will include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that, as to each Selling Stockholder, the representations and warranties in this subsection (b)(i) apply only to statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of such Selling Stockholder, in its capacity as such, expressly for use in the Registration Statement or the Prospectuses. (ii) No authorization, approval, consent or license of, or any material filing with, any government, governmental instrumentality or court, domestic or foreign (other than under the 1933 Act and the 1933 Act Regulations and the securities or Blue Sky laws of the various states, the securities laws of Canada and its provinces and the securities laws of any jurisdiction outside the United States in which 14 13 the International Shares are offered and sold by the International Underwriters pursuant to this Agreement), is required for the consummation by such Selling Stockholder of the transactions contemplated in this Agreement or the U.S. Purchase Agreement, including, without limitation, the sale and delivery of the Shares. (iv) The execution and delivery of this Agreement and the U.S. Purchase Agreement and the consummation of the transactions contemplated in this Agreement and the U.S. Purchase Agreement will not result in (a) a breach by such Selling Stockholder of, or constitute a default by such Selling Stockholder under, any agreement or instrument or any decree, judgment or order to which such Selling Stockholder is a party or by which such Selling Stockholder is bound or the properties of such Selling Stockholder are subject or (b) violate (1) any provision of the certificate of incorporation, by-law, partnership agreement or comparable governing documents of such Selling Stockholder or any law, rule or regulation applicable to such Selling Stockholder or (2) to which its properties are subject (other than for the securities or Blue Sky laws of the various states, the securities laws of Canada and its provinces and the securities laws of any jurisdiction outside the United States in which the International Shares are offered or sold by the International Underwriters pursuant to this Agreement). (v) Such Selling Stockholder has good and marketable title to the Shares to be sold by such Selling Stockholder pursuant to this Agreement and the U.S. Purchase Agreement, free and clear of any pledge, lien, security interest, charge, claim, equity or encumbrance of any kind, other than pursuant to this Agreement, the U.S. Purchase Agreement, the Registration Rights Agreement, the Management Stockholders Agreement, dated January 27, 1993, the Investors Stockholders Agreement, dated January 27, 1993, the Management Stock Subscription Agreement, dated as of July 27, 1987, as amended as of January 1, 1989 and as of January 27, 1993, and the Replacement Stock Pledge Agreement, dated as of February 1, 1993; and such Selling Stockholder will at the Closing Time and, if any Option Shares are to be purchased on the Date of Delivery, have good and marketable title to the Shares to be sold by such Selling Stockholder pursuant to this Agreement and the U.S. Purchase Agreement, free and clear of any pledge, lien, security interest, charge, claim, equity or encumbrance of any kind; such Selling Stockholder has full right, power and authority to sell, transfer and deliver such Shares pursuant to this Agreement or the U.S. Purchase Agreement; and, upon delivery of such Shares and payment of the purchase price therefor as contemplated in this Agreement and the U.S. Purchase Agreement, each of the International Underwriters and the U.S. Underwriters, as the case may be, will receive good and marketable title to the Shares purchased by it from such Selling Stockholder, free and clear of any pledge, lien, security interest, charge, claim, equity or encumbrance of any kind. 15 14 (vi) Certificates for all of the shares of Common Stock, or with respect to Selling Stockholders that own shares of the Company's Non-Voting Common Stock, par value $.01 per share, (the "Non-Voting Stock"), certificates for all of the Shares of Non-Voting Stock (accompanied by a written notice requesting conversion of such shares, which notice shall comply with Section 2(4)(iii) of the Company's Restated Certificate of Incorporation), to be sold by such Selling Stockholder pursuant to this Agreement and the U.S. Purchase Agreement, in suitable form for transfer by delivery or accompanied by duly executed instruments of transfer or assignment executed in blank, are available for delivery pursuant to this Agreement and the U.S. Purchase Agreement. (vii) Such Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to, or that might be reasonably expected to, cause or result in stabilization or manipulation of the price of the Common Stock; and such Selling Stockholder has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the Shares other than any preliminary prospectus filed with the Commission or the Prospectuses or other material permitted by the 1933 Act or the 1933 Act Regulations. (viii) Such Selling Stockholder, if such Selling Stockholder is not a natural person, is duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization, as the case may be, with all necessary power and authority to enter into and perform each of this Agreement and the U.S. Purchase Agreement and to sell and deliver the Shares to the International Underwriters and the U.S. Underwriters, as the case may be, in accordance with each of this Agreement and the U.S. Purchase Agreement. (c) Any certificate signed by any officer of the Company or any Subsidiary and delivered to you or to counsel for the International Underwriters shall be deemed a representation and warranty by the Company to each International Underwriter as to the matters covered thereby; and any certificate signed by or on behalf of the Selling Stockholders as such and delivered to you or to counsel for the International Underwriters shall be deemed a representation and warranty by the Selling Stockholders to each International Underwriter as to the matters covered thereby. Section 2. Sale and Delivery to the U.S. Underwriters; Closing. (a) On the basis of the representations and warranties herein contained, and subject to the terms and conditions herein set forth, each Selling Stockholder agrees, severally and not jointly, to sell to each International Underwriter the number of Initial International Shares set forth opposite the name of such Selling Stockholder on Schedule A, and each International Underwriter agrees, severally and not jointly, to purchase from each Selling Stockholder, at the purchase price per share for the Initial International Shares to be agreed upon by the U.S. 16 15 Representatives and the Selling Stockholders, in accordance with Section 2(b) or 2(c) hereof, and set forth in the International Price Determination Agreement, the number of Initial International Shares that bears the same relation to 900,000 as the number of Initial International Shares set forth opposite the name of such International Underwriter in Schedule B bears to the total number of Initial International Shares (such proportion is hereinafter referred to as such International Underwriter's "underwriting obligation proportion"), subject to such adjustments as you in your discretion, shall make to eliminate any sales or purchases of fractional shares. If the Company elects to rely on Rule 430A, Schedules A and B may be attached to the International Price Determination Agreement. (b) If the Company has elected not to rely upon Rule 430A, the price to the public per share for the Initial International Shares and the purchase price per share for the Initial International Shares to be paid by the several International Underwriters shall be agreed upon and set forth in the International Price Determination Agreement, dated the date hereof, and an amendment to the Original Registration Statement containing such per share price information will be filed before the Original Registration Statement becomes effective. (c) If the Company has elected to rely upon Rule 430A, the price to the public per share for the Initial International Shares and the purchase price per share for the Initial International Shares to be paid by the several International Underwriters shall be agreed upon and set forth in the International Price Determination Agreement. In the event that the International Price Determination Agreement has not been executed by the close of business on the fourteenth business day following the later of the date on which the Original Registration Statement and any Rule 462(b) Registration Statement becomes effective, this Agreement shall terminate forthwith, without liability of any party to any other party except that Sections 7, 8 and 9 shall remain in effect. (d) In addition, on the basis of the representations and warranties herein contained, and subject to the terms and conditions herein set forth, the Selling Stockholders hereby grant an option to the International Underwriters, severally and not jointly, to purchase up to an aggregate of 135,000 additional International Option Shares, as set forth opposite such Selling Stockholder's name on Schedule A, at the same purchase price per share as shall be applicable to the Initial International Shares. The option hereby granted will expire 30 days after the later of the date upon which the Original Registration Statement and any Rule 462(b) Registration Statement becomes effective or, if the Company has elected to rely upon Rule 430A, the date of the International Price Determination Agreement, and may be exercised, in whole or in part (but not more than once), only for the purpose of covering over-allotments that may be made in connection with the offering and distribution of the Initial International Shares upon notice by the International Representatives to the Selling Stockholders setting forth the aggregate number of International Option Shares as to which the several International Underwriters are exercising the option, and the time and date of payment and delivery thereof. Such time and date of delivery (the "Date of Delivery") shall 17 16 be determined by the International Representatives but shall not be later than seven full business days after the exercise of such option, nor in any event prior to the Closing Time. If the option is exercised as to only a portion of the International Option Shares, the Selling Stockholders will sell their pro rata portion of the International Option Shares to be purchased by the International Underwriters. If the option is exercised as to all or any portion of the International Option Shares, the International Option Shares as to which the option is exercised shall be purchased by the International Underwriters, severally and not jointly, in their respective underwriting obligation proportions except as otherwise provided in the International Price Determination Agreement, subject to such adjustments as the International Underwriters, in their discretion, shall make to eliminate any sales or purchases of fractional shares. (e) Payment of the purchase price for, and delivery of certificates for, the Initial International Shares shall be made at the offices of Shearman & Sterling, 599 Lexington Avenue or 153 East 53rd Street, New York, New York 10022, or at such other place as shall be agreed upon by the Company, the Selling Stockholders and you, at 10:00 A.M. either (i) on the third full business day after the later of the effective date of the Original Registration Statement and any Rule 462(b) Registration Statement (or, if pricing of the Shares occurs after 4:30 P.M. Eastern time, on the fourth full business day thereafter), or (ii) if the Company has elected to rely upon Rule 430A, on the third full business day after execution of the International Price Determination Agreement (or, if pricing of the Shares occurs after 4:30 P.M. Eastern time, on the fourth full business day thereafter) (unless, in either case, postponed pursuant to Section 11 or 12), or at such other time not more than ten full business days thereafter as you, the Selling Stockholders and the Company shall determine (such date and time of payment and delivery being herein called the "Closing Time"). In addition, in the event that any or all of the International Option Shares are purchased by the International Underwriters, payment of the purchase price for, and delivery of certificates for, such International Option Shares shall be made at the offices of Shearman & Sterling, 599 Lexington Avenue or 153 East 53rd Street, New York, New York 10022, or at such other place as the Company, the Selling Stockholders and you shall determine, on the Date of Delivery as specified in the notice from you to the Company. Payment shall be made to the Selling Stockholders by wire transfer in immediately available funds against delivery to you for the respective accounts of the several International Underwriters of certificates for the International Shares to be purchased by them. (f) Certificates for the Initial International Shares and International Option Shares to be purchased by the International Underwriters shall be in such denominations and registered in such names as you may request in writing at least two full business days before the Closing Time or the Date of Delivery, as the case may be. The certificates for the Initial International Shares and International Option Shares will be made available in New York City for examination and packaging by you not later than 10:00 A.M. on the business day prior to the Closing Time or the Date of Delivery, as the case may be. 18 17 (g) It is understood that each International Underwriter has authorized you, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the International Shares that it has agreed to purchase. You, individually and not as International Representatives, may (but shall not be obligated to) make payment of the purchase price for the Initial International Shares, or International Option Shares, to be purchased by any International Underwriter whose check or checks shall not have been received by the Closing Time or the Date of Delivery, as the case may be. Section 3. Certain Covenants of the Company. The Company covenants with each International Underwriter as follows: (a) The Company will use its best efforts to cause the Registration Statement to become effective and, if the Company elects to rely upon Rule 430A and subject to Section 3(b) hereof, will comply with the requirements of Rule 430A and will notify the International Representatives immediately (i) when the Registration Statement, or any post-effective amendment to the Registration Statement, shall have become effective, or any supplement to the Prospectuses or any amended Prospectuses shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission to amend the Registration Statement or amend or supplement any Prospectus or for additional information and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, or of the institution or threatening of any proceedings for any of such purposes. The Company will use every reasonable effort to prevent the issuance of any such stop order or of any order preventing or suspending such use and, if any such order is issued, to obtain the lifting thereof at the earliest possible moment. (b) The Company will not at any time file or make any amendment to the Registration Statement, (including any filing under Rule 462(b)), file a Term Sheet or file or make any amendment or supplement (i) if the Company has not elected to rely upon Rule 430(A), to the Prospectuses (including amendments of the documents incorporated by reference into the Prospectuses) or (ii) if the Company has elected to rely upon Rule 430A, to either the prospectuses included in the Original Registration Statement at the time it becomes effective or to the Prospectuses (including amendments of the documents incorporated by reference into the Prospectuses or to the Prospectuses pursuant to Item 12 and Rule 412), of which you shall not have previously been advised and furnished a copy, or to which you or counsel for the International Underwriters shall reasonably object in writing. (c) The Company has furnished or will furnish to you and counsel for the International Underwriters, without charge, as many signed copies of the Registration 19 18 Statement as originally filed and of all amendments thereto, whether filed before or after the Registration Statement becomes effective, copies of all exhibits and documents filed therewith (including documents incorporated by reference into the Prospectuses pursuant to Item 12 and Rule 412) and signed copies of all consents and certificates of experts, as you may reasonably request and has furnished or will furnish to you, for each other International Underwriter, one conformed copy of the Registration Statement as originally filed and of each amendment thereto (including documents incorporated by reference into the Prospectus but without exhibits). (d) The Company will deliver to each International Underwriter, without charge, from time to time until the later of the effective date of the Original Registration Statement and any Rule 462(b) Registration Statement (or, if the Company has elected to rely upon Rule 430A, until the time the International Price Determination Agreement is executed and delivered), as many copies of each preliminary prospectus as such International Underwriter may reasonably request, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will deliver to each International Underwriter, without charge, as soon as the Registration Statement shall have become effective (or, if the Company has elected to rely upon Rule 430A, as soon as practicable after the International Price Determination Agreement has been executed and delivered) and thereafter from time to time as requested during the period when the Prospectus is required to be delivered under the 1933 Act, such number of copies of the Prospectuses (as supplemented or amended) as such International Underwriter may reasonably request. (e) The Company will comply in all material respects with the 1933 Act and the 1933 Act Regulations and the 1934 Act and the 1934 Act Regulations so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and in the Prospectuses. If at any time when a prospectus is required by the 1933 Act or the 1933 Act Regulations to be delivered in connection with sales of the Shares any event shall occur or condition exist as a result of which it is necessary, in the opinion of counsel for the International Underwriters or counsel for the Company, to amend the Registration Statement or amend or supplement any Prospectus in order that the Prospectuses will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if it shall be necessary, in the opinion of either such counsel, at any such time to amend the Registration Statement or amend or supplement any Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company will promptly upon becoming aware of such event or condition prepare and file with the Commission, subject to Section 3(b) hereof, such amendment or supplement as may be necessary to correct such untrue 20 19 statement or omission or to make the Registration Statement or the Prospectuses comply with such requirements. (f) The Company will use its best efforts, in cooperation with the International Underwriters, to qualify the Shares for offering and sale under the applicable securities laws of such states and other jurisdictions as you may designate and to maintain such qualifications in effect for a period of not less than one year from the later of the effective date of the Original Registration Statement and any Rule 462(b) Registration Statement; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. The Company will file such statements and reports as may be required by the laws of each jurisdiction in which the Shares have been qualified as above provided. (g) The Company will make generally available to its security holders as soon as practicable, but not later than 90 days after the close of the period covered thereby, an earnings statement of the Company (in form complying with the provisions of Rule 158 of the 1933 Act Regulations), covering a period of 12 months beginning after the later of the effective date of the Original Registration Statement and any Rule 462(b) Registration Statement and covering a period of 12 months beginning after the effective date of any post-effective amendment to the Registration Statement but not later than the first day of the Company's fiscal quarter next following such respective effective dates. (h) The Company, during the period when the Prospectuses are required to be delivered under the 1933 Act, will file promptly all documents required to be filed with the Commission pursuant to Section 13 or 14 of the 1934 Act subsequent to the time the Registration Statement becomes effective. (i) For a period of two years after the Closing Time, the Company will furnish to you and, upon request, to each International Underwriter, copies of all annual reports, quarterly reports and current reports filed with the Commission on Forms 10-K, 10-Q and 8-K, or such other similar forms as may be designated by the Commission, and such other documents, reports and information as shall be furnished by the Company to its stockholders generally. (j) For a period of 180 days from the date hereof, the Company will not, without your prior written consent, directly or indirectly, sell, offer to sell, grant any option for the sale of, or otherwise dispose of, any Common Stock or securities convertible into Common Stock, other than to the International Underwriters pursuant 21 20 to this Agreement and the U.S. Underwriters pursuant to the U.S. Purchase Agreement (except for options to purchase shares of Common Stock granted to the Company's officers, directors or employees in the ordinary course of business, consistent with past practice, or the exercise of such options and similar options currently outstanding). (k) If the Company has elected to rely upon Rule 430A, it will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. (l) If the Company has elected to rely on Rule 434, it will comply with the requirements of Rule 434, and the Prospectuses will not be "materially different," as such term is used in Rule 434, from the prospectus included in the Registration Statement at the time it becomes effective. (m) If the Company elects to rely upon Rule 462(b), the Company shall both file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) and pay the applicable fees in accordance with Rule 111 of the 1933 Act Regulations by the earlier of (i) 10:00 P.M. Eastern time on the date of theInternational Price Determination Agreement and (ii) the time confirmations are sent or given, as specified by Rule 462(b). (n) If applicable, the Company has complied and will comply with all the provisions of Florida H.B. 1771, codified as Section 517.075 of the Florida statutes, and all regulations promulgated thereunder relating to issuers doing business in Cuba. Section 4. Payment of Expenses. The Company will pay and bear all costs and expenses incident to the performance of the obligations of the Company and of the Selling Stockholders under this Agreement, including (a) the preparation, printing and filing of the Registration Statement (including financial statements and exhibits), as originally filed and as amended, the preliminary prospectuses and the Prospectuses and any amendments or supplements thereto, and the cost of furnishing copies thereof to the International Underwriters, (b) the preparation, printing and distribution of this Agreement (except for the International Price Determination Agreement), the Intersyndicate Agreement among the International Underwriters and U.S. Underwriters, the Agreement Among International Underwriters and the Blue Sky Survey (which shall not be typeset), (c) the delivery of the certificates for the International Shares to the International Underwriters (except for any stock transfer taxes payable upon the sale of the International Shares to the International Underwriters, which shall be paid by the Selling Stockholders), (d) the fees and disbursements of the Company's counsel and accountants and the Selling Stockholders' counsel, (e) the qualification of the International Shares under the applicable securities laws 22 21 in accordance with Section 3(f) and any filing for review of the offering with the NASD, including filing fees and reasonable fees and disbursements of Shearman & Sterling as counsel for the International Underwriters in connection therewith, and in connection with the Blue Sky Survey and (f) the listing fees and expenses incurred in connection with listing the Shares on the New York Stock Exchange. If this Agreement is terminated by you in accordance with the provisions of Section 5, 10(a)(i) or 12, the Company shall reimburse the International Underwriters for all their out-of-pocket expenses, including the reasonable fees and disbursements of Shearman & Sterling as counsel for the International Underwriters. Section 5. Conditions of International Underwriters' Obligations. In addition to the execution and delivery of the International Price Determination Agreement, the obligations of the several International Underwriters to purchase and pay for the International Shares that they have respectively agreed to purchase pursuant to this Agreement (including any International Option Shares as to which the option granted in Section 2 has been exercised and the Date of Delivery determined by you is the same as the Closing Time) are subject to the accuracy of the representations and warranties of the Company and the Selling Stockholders contained herein (including those contained in the International Price Determination Agreement) or in certificates of any officer of the Company or any Subsidiary or certificates by or on behalf of the Selling Stockholders delivered pursuant to the provisions hereof, to the performance by the Company and the Selling Stockholders of their obligations hereunder, and to the following further conditions: (a) The Original Registration Statement shall have become effective not later than 5:30 P.M. on the date of this Agreement or, with your consent, at a later time and date not later, however, than 5:30 P.M. on the first business day following the date hereof and if the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration Statement shall have become effective not later than the earlier of (i) 9:00 A.M. Eastern time on the day following the date of the International Price Determination Agreement, and (ii) the time confirmations are sent or given, as specified by Rule 462(b), or, with respect to the Original Registration Statement, at such later time or on such later date as you may agree to in writing with the approval of a majority in interest of the several International Underwriters; and at the Closing Time no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act and no proceedings for that purpose shall have been instituted or shall be pending or, to your knowledge or the knowledge of the Company, shall be contemplated by the Commission, and any request made to the Company on the part of the Commission for additional information with respect to the Registration Statement shall have been complied with to the satisfaction of Shearman & Sterling as counsel for the International Underwriters. If the Company has elected to rely upon Rule 430A, prospectuses containing the Rule 430A 23 22 Information shall have been filed with the Commission in accordance with Rule 424(b) (or a post-effective amendment providing such information shall have been filed and declared effective in accordance with the requirements of Rule 430A). If the Company has elected to rely upon Rule 434, a Term Sheet, which together with the preliminary prospectus last furnished to the International Underwriters in connection with the offering of the Shares shall not be "materially different," as such term is used in Rule 434, from the prospectus included in the Original Registration Statement at the time it becomes effective, shall have been filed with the Commission in accordance with Rule 424(b). (b) At the Closing Time, you shall have received a signed opinion of Wachtell, Lipton, Rosen & Katz, special counsel for the Company, dated as of the Closing Time, together with signed or reproduced copies of such opinion for each of the other International Underwriters, in form and substance reasonably satisfactory to counsel for the International Underwriters, in the form set forth in Exhibit C hereto. (c) At the Closing Time, you shall have received a signed opinion of Laurene H. Horiszny, Esq., Vice President, Secretary and General Counsel for the Company, dated as of the Closing Time, together with signed or reproduced copies of such opinion for each of the other International Underwriters, in form and substance reasonably satisfactory to counsel for the International Underwriters, in the form set forth in Exhibit D hereto. (d) At the Closing Time, you shall have received a signed opinion of NSK-Warner's Japanese counsel, dated as of the Closing Time, together with signed or reproduced copies of such opinion for each of the other International Underwriters, in form and substance reasonably satisfactory to counsel for the International Underwriters, in the form set forth in Exhibit E hereto. (e) At the Closing Time you shall have received a signed opinion of the attorneys listed on Schedule C attached hereto for the Selling Stockholders specified opposite such attorney's name, each dated as of the Closing Time, together with signed or reproduced copies of such opinion for each of the other International Underwriters, in form and substance reasonably satisfactory to counsel for the International Underwriters, each, with respect to the Selling Stockholders that such counsel represents, in the form set forth in Exhibit F hereto. (f) At the Closing Time, you shall have received the favorable opinion of Shearman & Sterling, counsel for the International Underwriters, dated as of the Closing Time, together with signed or reproduced copies of such opinion for each of the other International Underwriters, to the effect that the opinions delivered pursuant to Sections 5(b), 5(c), 5(d) and 5(e) hereof appear on their face to be appropriately 24 23 responsive to the requirements of this Agreement except, specifying the same, to the extent waived by you, and with respect to the incorporation and legal existence of the Company, this Agreement, the Registration Statement, the Prospectuses and such other related matters as you may require. In giving such opinion such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York, the federal law of the United States and the General Corporation Law of the State of Delaware, upon the opinions of counsel satisfactory to you. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and the Subsidiaries and the Selling Stockholders and certificates of public officials. (g) At the Closing Time, (i) the Registration Statement and the Prospectuses, as they may then be amended or supplemented, shall comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations, the Company shall have complied in all material respects with Rule 430A (if it shall have elected to rely thereon) and Rule 434 (if it shall have elected to rely thereon) and neither the Registration Statement nor the Prospectuses, as they may then be amended or supplemented, shall contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) there shall not have been, since the respective dates as of which information is given in the Registration Statement, any material adverse change in the condition (financial or otherwise), results of operations, business affairs or business prospects of the Company and the Subsidiaries, considered as one enterprise, whether or not arising in the ordinary course of business, (iii) no action, suit or proceeding at law or in equity shall be pending or, to the knowledge of the Company, threatened against the Company or any Subsidiary that would be required to be set forth in the Prospectuses other than as set forth therein and no proceedings shall be pending or, to the knowledge of the Company, threatened against the Company or any Subsidiary before or by any federal, state or other commission, board or administrative agency wherein an unfavorable decision, ruling or finding could materially adversely affect the condition (financial or otherwise), results of operations, business affairs or business prospects of the Company and the Subsidiaries, considered as one enterprise, other than as set forth in the Prospectuses, (iv) the Company shall have complied with all agreements and satisfied all conditions set forth in this Agreement on its part to be performed or satisfied at or prior to the Closing Time and (v) the other representations and warranties of the Company set forth in Section 1(a) shall be accurate as though expressly made at and as of the Closing Time. At the Closing Time, you shall have received a certificate of the President or a Vice President, and the Treasurer or an Assistant Treasurer, of the Company, dated as of the Closing Time, to such effect. 25 24 (h) At the Closing Time, the representations and warranties of each Selling Stockholder set forth in Section 1(b) shall be accurate as though expressly made at and as of the Closing Time. At the Closing Time, you shall have received a certificate of or on behalf of each Selling Stockholder, dated as of the Closing Time, to such effect with respect to such Selling Stockholder. (i) At the time that this Agreement is executed by the Company, you shall have received from Deloitte & Touche LLP a letter, dated such date, in form and substance satisfactory to you, together with signed or reproduced copies of such letter for each of the other International Underwriters, confirming that they are independent public accountants with respect to the Company within the meaning of the 1933 Act and the applicable published 1933 Act Regulations, and stating in effect that: (i) in their opinion, the audited financial statements and the related financial statement schedules included or incorporated by reference in the Registration Statement and the Prospectuses comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the 1933 Act Regulations; (ii) on the basis of procedures (but not an examination in accordance with generally accepted auditing standards) consisting of a reading of the unaudited interim consolidated financial statements of the Company included or incorporated by reference in the Registration Statement and the Prospectuses (collectively, the "10-Q Financials"), a reading of the latest available unaudited interim consolidated financial statements of the Company, a reading of the minutes of all meetings of the stockholders and directors of the Company and the Subsidiaries and each Committee of the Company's Board of Directors and of each Committee of the Board of Directors of any Subsidiary since January 1, 1996, inquiries of certain officials of the Company and the Subsidiaries responsible for financial and accounting matters, and such other inquiries and procedures as may be specified in such letter, nothing came to their attention that caused them to believe that: (A) the 10-Q Financials incorporated by reference in the Registration Statement and the Prospectuses do not comply as to form in all material respects with the accounting requirements of the 1934 Act and the 1934 Act Regulations applicable to unaudited financial statements included in Form 10-Q or any material modifications should be made to the 10-Q Financials included or incorporated by reference in the Registration Statement and the Prospectuses for them to be in conformity with generally accepted accounting principles; 26 25 (B) at May 31, 1996 and at a specified date not more than five days prior to the date of this Agreement, there was any change in the common stock of the Company and the Subsidiaries or any decrease in the consolidated net current assets or stockholders' equity of the Company and the Subsidiaries or any increase in long-term debt of the Company and the Subsidiaries, in each case as compared with amounts shown in the latest consolidated balance sheet included in the Registration Statement, except in each case for changes, decreases or increases that the Registration Statement discloses have occurred or may occur; or (C) for the period from April 1, 1996 to May 31, 1996 and for the period from April 1, 1996 to a specified date not more than five days prior to the date of this Agreement, there was any decrease in net sales, equity in affiliate earnings and other income, earnings before interest and finance charges and income taxes or net earnings, in each case as compared with the comparable period in the preceding year; (iii) based upon the procedures set forth in clause (ii) above and a reading of the Selected Historical Financial Data included in the Registration Statement and a reading of the financial statements from which certain of such data were derived, nothing has come to their attention that gives them reason to believe that the Selected Historical Financial Data included in the Registration Statement do not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the 1933 Act Regulations, that the information set forth therein is not fairly stated in relation to the financial statements from which it was derived or that the financial statements not included in the Registration Statement from which certain of such data were derived are not in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included in the Registration Statement; and (iv) they are unable to and do not express any opinion on the Pro Forma Financial Data (the "Pro Forma Statement") included in the Registration Statement or on the pro forma adjustments applied to the historical amounts included in the Pro Forma Statement; however, for purposes of such letter they have: (A) read the Pro Forma Statement; 27 26 (B) made inquiries of certain officials of the Company and of the Coltec Subsidiaries who have responsibility for financial and accounting matters about the basis for their determination of the pro forma adjustments and whether the Pro Forma Statement complies as to form in all material respects with the applicable accounting requirements of Rule 11-02 of Regulation S-X; and (C) proved the arithmetic accuracy of the application of the pro forma adjustments to the historical amounts in the Pro Forma Statement; and on the basis of such procedures, and such other inquiries and procedures as may be specified in such letter, nothing came to their attention that caused them to believe that the Pro Forma Statement included in the Registration Statement does not comply as to form in all material respects with the applicable requirements of Rule 11-02 of Regulation S-X or that the pro forma adjustments have not been properly applied to the historical amounts in the compilation of those statements; (v) in addition to the procedures referred to in clause (ii) above, they have performed other specified procedures, not constituting an audit, with respect to certain amounts, percentages, numerical data and financial information appearing in the Registration Statement, which have previously been specified by you and which shall be specified in such letter, and have compared certain of such items with, and have found such items to be in agreement with, the accounting and financial records of the Company. (j) At the time that this Agreement is executed by the Company, you shall have received from KPMG Peat Marwick a letter, dated such date, in form and substance satisfactory to you, together with signed or reproduced copies of such letter for each of the other International Underwriters, confirming that they are independent public accountants with respect to the NSK-Warner within the meaning of the 1933 Act and applicable published 1933 Act Regulations, and stating in effect that: (i) in their opinion, the audited financial statements and the related financial statement schedules for NSK-Warner included or incorporated by reference in the Registration Statement and the Prospectuses comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the 1933 Act Regulations; (ii) they have read the latest available unaudited interim consolidated financial statements of NSK-Warner, the minutes of all meetings of the 28 27 stockholders and directors of NSK-Warner and each Committee of the Board of Directors since April 1, 1996, inquired of certain officials of NSK-Warner responsible for financial and accounting matters, and made such other inquiries and performed such other procedures as may be specified in such letter, and officials of NSK-Warner stated that: (A) at June 30, 1996 and at a specified date not more than five days prior to the date of this Agreement, there was no change in the common stock of NSK-Warner or decrease in the net current assets or stockholders' equity of NSK-Warner or increase in the notes payable or long-term debt of NSK-Warner, in each case as compared with amounts shown in the latest balance sheet included or incorporated by reference in the Registration Statement; or (B) for the period from April 1, 1996 to June 30, 1996 and for the period from June 30, 1996 to a specified date not more than five days prior to the date of this Agreement, there was no decrease in sales, earnings before income taxes or net earnings, in each case as compared with the corresponding period in the preceding year. (k) At the time that this Agreement is executed, you shall have received from Arthur Andersen LLP a letter, dated such date, in form and substance satisfactory to you, together with signed or reproduced copies of such letter for each of the other U.S. Underwriters, confirming that they are independent public accountants with respect to the Coltec Subsidiaries and the Company within the meaning of the 1933 Act and applicable published 1933 Act Regulations, and stating in effect that: (i) in their opinion, the audited financial statements and the related financial statement schedules for the Coltec Subsidiaries included or incorporated by reference in the Registration Statement and the Prospectuses comply as to form in all material respects with the applicable accounting requirements of the 1933 Act, the 1934 Act, the 1933 Act Regulations and the 1934 Act Regulations; [(ii) they have read the latest available unaudited interim consolidated financial statements of the Coltec Subsidiaries, the minutes of all meetings of the stockholders and directors of the Coltec Subsidiaries and each Committee of the Board of Directors since April 1, 1996, inquired of certain officials of the Coltec Subsidiaries responsible for financial and accounting matters, and made such other inquiries and performed such other procedures as may be specified in such letter, and officials of the Coltec Subsidiaries stated that]: 29 28 (A) at June 17, 1996, there was no change in the capital stock of the Coltec Subsidiaries or any decrease in the consolidated net current assets or stockholders' equity of the Coltec Subsidiaries or any increase in long-term debt of the Coltec Subsidiaries, in each case as compared with amounts shown in the latest consolidated balance sheet included or incorporated by reference in the Registration Statement, except in each case for changes, decreases or increases that the Registration Statement discloses have occurred or may occur; or (B) for the period from April 1, 1996 to May 31, 1996, there was no decrease in net sales, earnings before income taxes or net earnings, in each case as compared with the comparable period in the preceding year, except in each case for any decreases that the Registration Statement discloses have occurred or may occur; and (iii) based upon the procedures set forth in clause (ii) above, nothing has come to their attention that gives them reason to believe that the information set forth in the latest available unaudited interim consolidated financial statements of the Coltec Subsidiaries is not fairly stated in relation to the financial statements from which it was derived or that the financial statements not included in the Registration Statement from which certain of such data were derived are not in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included in the Registration Statement. (l) At the Closing Time, you shall have received from each of Deloitte & Touche LLP, KPMG Peat Marwick and Arthur Andersen LLP a letter, in form and substance satisfactory to you and dated as of the Closing Time, to the effect that they reaffirm the statements made in the letters furnished pursuant to Sections 5(i), 5(j) and 5(k), respectively, except that the specified date referred to shall be a date not more than five days prior to the Closing Time. (m) At the Closing Time, counsel for the International Underwriters shall have been furnished with all such documents, certificates and opinions as they may reasonably request for the purpose of enabling them to pass upon the sale of the Shares as contemplated in this Agreement and the matters referred to in Section 5(f) and in order to evidence the accuracy and completeness of any of the representations, warranties or statements of the Company and the Selling Stockholders, the performance of any of the covenants of the Company, or the fulfillment of any of the conditions herein contained; and all proceedings taken by the Company and the Selling Stockholders at or prior to the Closing Time in connection with the sale of the 30 29 Shares as contemplated in this Agreement shall be reasonably satisfactory in form and substance to you and to counsel for the International Underwriters. (n) The "lock-up" letters which are substantially in the form of Exhibit G attached hereto from (a) each executive officer or director of the Company and (b) each stockholder of the Company who (i) owns at least 1% of the outstanding shares of Common Stock and (ii) who is a party to the Registration Rights Agreement have been delivered to you on or before the date hereof. If any of the conditions specified in this Section 5 shall not have been fulfilled when and as required by this Agreement, this Agreement may be terminated by you on notice to the Company and the Selling Stockholders at any time at or prior to the Closing Time, and such termination shall be without liability of any party to any other party, except as provided in Section 4 hereof. Notwithstanding any such termination, the provisions of Sections 7, 8 and 9 herein shall remain in effect. Section 6. Conditions to Purchase of International Option Shares. In the event that the International Underwriters exercise their option granted in Section 2 hereof to purchase all or any of the International Option Shares and the Date of Delivery determined by you pursuant to Section 2 hereof is later than the Closing Time, the obligations of the several International Underwriters to purchase and pay for the U.S. Option Shares that they shall have respectively agreed to purchase pursuant to this Agreement are subject to the accuracy of the representations and warranties of the Company and the Selling Stockholders herein contained, to the performance by the Company and the Selling Stockholders of their obligations hereunder and to the following further conditions: (a) The Registration Statement shall remain effective at the Date of Delivery, and, at the Date of Delivery, no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act and no proceedings for that purpose shall have been instituted or shall be pending or, to your knowledge or the knowledge of the Company, shall have been threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel for the International Underwriters. (b) At the Date of Delivery, the provisions of Sections 5(g)(i) through 5(g)(v) shall have been complied with at and as of the Date of Delivery and, at the Date of Delivery, you shall have received a certificate of the President or a Vice President, and the Treasurer or an Assistant Treasurer, of the Company, dated as of the Date of Delivery, to such effect. 31 30 (c) At the Date of Delivery, you shall have received the favorable opinions of Wachtell, Lipton, Rosen & Katz, special counsel for the Company, Laurene H. Horiszny, General Counsel of the Company, NSK-Warner's Japanese counsel and counsel for the Selling Stockholders, together with signed or reproduced copies of such opinions for each of the other International Underwriters, in each case in form and substance reasonably satisfactory to counsel for the International Underwriters, dated as of the Date of Delivery, relating to the International Option Shares and otherwise to the same effect as the opinions required by Section 5(b), 5(c), 5(d) and 5(e), respectively. (d) At the Date of Delivery, you shall have received the favorable opinion of Shearman & Sterling, counsel for the International Underwriters, dated as of the Date of Delivery, relating to the International Option Shares and otherwise to the same effect as the opinion required by Section 5(f). (e) At the Date of Delivery, you shall have received a letter from each of Deloitte & Touche LLP, KPMG Peat Marwick and Arthur Andersen LLP, in form and substance satisfactory to you and dated as of the Date of Delivery, to the effect that they reaffirm the statements made in the letters furnished pursuant to Section 5(i), 5(j) and 5(k), respectively, except that the specified date referred to shall be a date not more than five days prior to the Date of Delivery. (f) At the Date of Delivery, you shall have received from each of the Selling Stockholders (or on their behalf) certificates substantially in the form of the certificates furnished to you pursuant to Section 5(h), except that such certificates shall be as of the Date of Delivery. (g) At the Date of Delivery, the representations and warranties of each Selling Stockholder set forth in Section 1(b) hereof shall be accurate as though expressly made at and as of the Date of Delivery. (h) At the Date of Delivery, counsel for the International Underwriters shall have been furnished with all such documents, certificates and opinions as they may reasonably request for the purpose of enabling them to pass upon the sale of the International Option Shares as contemplated in this Agreement and the matters referred to in Section 6(d) and in order to evidence the accuracy and completeness of any of the representations, warranties or statements of the Company or the Selling Stockholders, the performance of any of the covenants of the Company, or the fulfillment of any of the conditions herein contained; and all proceedings taken by the Company and the Selling Stockholders at or prior to the Date of Delivery in connection with the sale of the International Option Shares as contemplated in this 32 31 Agreement shall be reasonably satisfactory in form and substance to you and to counsel for the International Underwriters. Section 7. Indemnification. (a) The Company agrees to indemnify and hold harmless each International Underwriter and each person, if any, who controls any International Underwriter within the meaning of Section 15 of the 1933 Act to the extent and in the manner set forth in clauses (i), (ii) and (iii) below. In addition, each Selling Stockholder, severally and not jointly (but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto) in reliance upon and in conformity with written information furnished by such Selling Stockholder, expressly for use in the Registration Statement (or any amendment thereto) or any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto), a copy of which written information shall have been previously delivered to you), agrees to indemnify and hold harmless each International Underwriter and each person, if any, who controls any International Underwriter within the meaning of Section 15 of the 1933 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of an untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, and all documents incorporated therein by reference, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of an untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto) or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if Rule 434 is used, if the Prospectus is "materially different", as such term is used in Rule 434, from the prospectus included in the Original Registration Statement at the time it becomes effective; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, if such settlement is effected with the written consent of the Company and the Selling Stockholders; and (iii) against any and all expense whatsoever, as incurred (including, subject to Section 7(c) hereof, fees and disbursements of counsel chosen by you), reasonably 33 32 incurred in investigating, preparing or defending against any litigation, or investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under subparagraph (i) or (ii) above; provided, however, that this indemnity agreement does not apply to any loss, liability, claim, damage or expense to the extent arising out of an untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by any International Underwriter through you expressly for use in the Registration Statement (or any amendment thereto) including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto); provided further that the liability of a Selling Stockholder pursuant to this Section 7 is limited to the amount of the net proceeds of the offering of the International Shares (after deducting the underwriting discount, but before deducting expenses) received by such Selling Stockholder. Insofar as this indemnity agreement may permit indemnification for liabilities under the 1933 Act of any person who is a partner of a International Underwriter or who controls a International Underwriter within the meaning of Section 15 of the 1933 Act and who, at the date of this Agreement, is a director, officer or controlling person of the Company, such indemnity agreement is subject to the undertaking of the Company in the Registration Statement under Item 17 thereof. (b) Each International Underwriter severally agrees to indemnify and hold harmless the Company, its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act and each Selling Stockholder and each person, if any, who controls any Selling Stockholder within the meaning of Section 15 of the 1933 Act, against any and all loss, liability, claim, damage and expense described in the indemnity contained in Section 7(a), as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto) including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such International Underwriter through you expressly for use in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or such preliminary prospectus or the Prospectuses (or any amendment or supplement thereto). (c) The Company agrees to indemnify and hold harmless, to the extent permitted by law, each Selling Stockholder, its directors and officers or general and limited 34 33 partners (and the directors and officers thereof), and each other person, if any, who controls such Selling Stockholder within the meaning of the 1933 Act, against any and all losses, claims, damages or liabilities, joint or several, and expenses (including any amounts paid in any settlement effected with the Company's consent) to which such Selling Stockholder, any such director or officer or general or limited partner or controlling person may become subject under the 1933 Act, common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, and all documents incorporated therein by reference, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, together with the documents incorporated by reference therein (as amended or supplemented if the Company shall have filed with Commission any amendment thereof or supplemented thereto), if used prior to the effective date of the Registration Statement, or contained in the Prospectus (as amended or supplemented if the Company shall have filed with the Commission any amendment thereof or supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading or (iii) any violation by the Company of any federal, state or common law rule or regulation applicable to the Company and relating to action required of or inaction by the Company in connection with the offering, and the Company will reimburse each such Selling Stockholder and each such director, officer, general or limited partner, and controlling person for any legal or any other expenses reasonably incurred by any of them in connection with investigating or defending any such loss, claim, liability, action or proceeding; provided, that the Company shall not be liable to such Selling Stockholder or any such director, officer, general or limited partner or controlling person in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such Registration Statement (or any amendment or supplement thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or in any such preliminary prospectus or the Prospectuses (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Selling Stockholder or any such director, officer, general or limited partner or controlling person, specifically stating that it is for use in the preparation thereof. (d) Each Selling Stockholder agrees to indemnify and hold harmless (in the same manner and to the same extent as set forth in Section 7(c)) the Company and its directors and officers and each person controlling the Company within the meaning of the 35 34 1933 Act and all other Selling Stockholders and their directors, officers, general and limited partners and respective controlling persons with respect to any statement or alleged statement in or omission or alleged omission from the Registration Statement (or any amendment or supplement thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto), if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company or its representatives by or on behalf of the undersigned specifically stating that it is for use in the preparation of the Registration Statement (or any amendment or supplement thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, preliminary prospectus or the Prospectuses (or any amendment or supplement thereto), or a document incorporated by reference into any of the foregoing; provided, however, that the liability of each Selling Stockholder pursuant to this Section 7(d) is limited to the proceeds received by such Selling Stockholder from the sale of the Shares pursuant to this Agreement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any of the other Selling Stockholders or any of its respective directors, officers, general or limited partners or controlling persons and shall survive the transfer of the Shares by each Selling Stockholder. (e) Each indemnified party shall give prompt notice to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. An indemnifying party may participate at its own expense in the defense of such action. In no event shall the indemnifying party or parties be liable for the fees and expenses of more than one counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. If it so elects within a reasonable time after receipt of such notice, an indemnifying party, jointly with any other indemnifying parties receiving such notice, may assume the defense of such action with counsel chosen by it and approved by the indemnified parties defendant in such action, unless such indemnified parties reasonably object to such assumption on the ground that there may be legal defenses available to them which are different from or are in addition to those available to such indemnifying party. If an indemnifying party assumes the defense of such action, the indemnifying parties shall not be liable for any fees and expenses of counsel for the indemnified parties incurred thereafter in connection with such action. Section 8. Contribution. In order to provide for just and equitable contribution in circumstances under which the indemnity provided for in Section 7 is for any reason held to be unenforceable by the indemnified parties although applicable in accordance with its terms, the Company, the Selling Stockholders and the International Underwriters shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the 36 35 nature contemplated by such indemnity agreement incurred by the Company, the Selling Stockholders and one or more of the International Underwriters, as incurred, in such proportions that (a) the International Underwriters are responsible for that portion represented by the percentage that the underwriting discount appearing on the cover page of the Prospectuses or, if Rule 434 is used, the corresponding location on the Term Sheet, bears to the offering price appearing thereon and (b) the Company and the Selling Stockholders are severally responsible for the balance on the same basis as each of them would have been obligated to provide indemnification pursuant to Section 7; provided, however, that no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section, each person, if any, who controls a International Underwriter within the meaning of Section 15 of the 1933 Act shall have the same rights to contribution as such International Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company or a Selling Stockholder within the meaning of Section 15 of the 1933 Act shall have the same rights to contribution as the Company or a Selling Stockholder, as the case may be. Section 9. Representations, Warranties and Agreements to Survive Delivery. The representations, warranties, indemnities, agreements and other statements of the Company or its officers or the Selling Stockholders set forth in or made pursuant to this Agreement will remain operative and in full force and effect regardless of any investigation made by or on behalf of the Selling Stockholders, the Company, any International Underwriter or any person who controls a Selling Stockholder or any International Underwriter within the meaning of Section 15 of the 1933 Act, and will survive delivery of and payment for the International Shares. Section 10. Termination of Agreement. (a) You may terminate this Agreement, by notice to the Company and the Selling Stockholders, at any time at or prior to the Closing Time (i) if there has been, since the respective dates as of which information is given in the Registration Statement, any material adverse change in the condition (financial or otherwise), results of operations, business affairs or business prospects of the Company and the Subsidiaries, considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets in the United States, or any outbreak of hostilities or escalation thereof or other calamity or crisis the effect of which on the financial markets of the United States is such as to make it, in your judgment, impracticable to market the Shares or enforce contracts for the sale of the Shares or (iii) if trading in any securities of the Company has been suspended by the Commission, or if trading generally on the New York Stock Exchange or in the over-the-counter market has been suspended, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices for securities have been required, by such exchange or by order of the Commission, the New York Stock Exchange or any other 37 36 governmental authority or (iv) if a banking moratorium has been declared by either federal, New York or Illinois authorities. (b) If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party, except to the extent provided in Section 4. Notwithstanding any such termination, the provisions of Sections 7 and 8 shall remain in effect. (c) This Agreement may also terminate pursuant to the provisions of Section 2(c), with the effect stated in such Section. Section 11. Default by One or More of the International Underwriters. If one or more of the International Underwriters shall fail at the Closing Time to purchase the Initial International Shares that it or they are obligated to purchase pursuant to this Agreement (the "Defaulted International Shares"), you shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting International Underwriters, or any other International Underwriters, to purchase all, but not less than all, of the Defaulted International Shares in such amounts as may be agreed upon and upon the terms set forth in this Agreement; if, however, you have not completed such arrangements within such 24-hour period, then: (a) if the number of Defaulted International Shares does not exceed 10% of the total number of Initial International Shares, the non-defaulting International Underwriters shall be obligated to purchase the full amount thereof in the proportions that their respective Initial International Share underwriting obligation proportions bear to the underwriting obligations of all non-defaulting International Underwriters; or (b) if the number of Defaulted International Shares exceeds 10% of the total number of Initial International Shares, this Agreement shall terminate without liability on the part of any non-defaulting International Underwriter. No action taken pursuant to this Section shall relieve any defaulting International Underwriter from liability in respect of its default. In the event of any such default that does not result in a termination of this Agreement, either you or the Company shall have the right to postpone the Closing Time for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectuses or in any other documents or arrangements. As used herein, the term "International Underwriter" includes any person substituted for a International Underwriter under this Section 11. 38 37 Section 12. Default by a Selling Stockholder. If any Selling Stockholder shall fail at the Closing Time to sell and deliver the number of Initial International Shares that such Selling Stockholder is obligated to sell, then the International Underwriters may, at your option, by notice from you to the Company and the Selling Stockholders, either (a) terminate this Agreement without any liability on the part of any non-defaulting party, except to the extent provided in Section 4 and except that the provisions of Sections 7 and 8 shall remain in effect or (b) elect to purchase the Initial International Shares that the remaining Selling Stockholders have agreed to sell pursuant to this Agreement. In the event of any such default under this Section that does not result in a termination of this Agreement, either you or the Company shall have the right to postpone the Closing Time for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectuses or in any other documents or arrangements. No action taken pursuant to this Section 12 shall relieve any Selling Stockholder so defaulting from liability, if any, in respect of such default. Section 13. Notices. All notices and other communications under this Agreement shall be in writing and shall be deemed to have been duly given if delivered, mailed or transmitted by any standard form of telecommunication. Notices to you or the International Underwriters shall be directed to you, c/o Merrill Lynch International, Ropemaker Place, 25 Ropemaker Street, London EC2 Y9LY, attention of _______________; notices to the Company shall be directed to it at 200 South Michigan Avenue, Chicago, Illinois 60604, Attention: General Counsel and notices to the Selling Stockholders shall be directed to James V. Caruso, Merrill Lynch & Co., Inc., South Tower, World Financial Center, New York, New York 10080-6123. Section 14. Parties. This Agreement is made solely for the benefit of the several International Underwriters, the Company and the Selling Stockholders and, to the extent expressed, any person controlling the Company, any Selling Stockholder or any of the International Underwriters, and the directors of the Company, its officers who have signed the Registration Statement, and their respective executors, administrators, successors and assigns and, subject to the provisions of Section 11, no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include any purchaser, as such purchaser, from any of the several International Underwriters of the International Shares. All of the obligations of the International Underwriters hereunder are several and not joint. Section 15. Representation of International Underwriters. You will act for the several International Underwriters in connection with this financing, and any action under 39 38 or in respect of this Agreement taken by you as International Representatives will be binding upon all International Underwriters. Section 16. Governing Law and Time. This Agreement shall be governed by the laws of the State of New York. Specified times of the day refer to New York City time. Section 17. Counterparts. This Agreement may be executed in one or more counterparts, and when a counterpart has been executed by each party, all such counterparts taken together shall constitute one and the same agreement. 40 39 If the foregoing is in accordance with your understanding of our agreement, please sign and return to us a counterpart hereof, whereupon this instrument will become a binding agreement between the Company, the Selling Stockholders and the several International Underwriters in accordance with its terms. Very truly yours, BORG-WARNER AUTOMOTIVE, INC. By: -------------------------------- Name: Title: SELLING STOCKHOLDERS NAMED IN SCHEDULE A By: -------------------------------- Name: Title: Confirmed and accepted as of the date first above written: MERRILL LYNCH INTERNATIONAL LEHMAN BROTHERS INTERNATIONAL (EUROPE) MORGAN STANLEY & CO. INTERNATIONAL LIMITED By: Merrill Lynch International By: ------------------------------------------ Name: Title: For themselves and as International Representatives of the other International Underwriters named in Schedule B. 41 SCHEDULE A
NUMBER OF NUMBER OF INITIAL INTERNATIONAL INTERNATIONAL OPTION SELLING STOCKHOLDER SHARES TO BE SOLD SHARES TO BE SOLD - ------------------- ------------------ ----------------- Merrill Lynch KECALP L.P. 1986 Merrill Lynch KECALP L.P. 1987 Merchant Banking L.P. No. I ML Venture Partners II, L.P. Merrill Lynch Capital Appreciation Partnership No. VIII, L.P. ML Offshore LBO Partnership No. VIII ML Employees LBO Partnership No. I, L.P. ML IBK Positions, Inc. ________ _______ Total [ ] [ ] ================= =============
42 SCHEDULE B
NUMBER OF INITIAL INTERNATIONAL SHARES INTERNATIONAL UNDERWRITER TO BE PURCHASED ------------------------- ------------------------ Merrill Lynch International . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lehman Brothers International (Europe). . . . . . . . . . . . . . . . . . . . . . . Morgan Stanley & Co. International Limited . . . . . . . . . . . . . . . . . . . . ----------- Total [ ] =============
43 SCHEDULE C
ATTORNEY SELLING STOCKHOLDER - -------- ------------------- Marcia L. Tu, Esq. - ML IBK Positions, Inc. - Merrill Lynch Capital Appreciation Partnership No. VIII, L.P. - ML Employees LBO Partnership No. I, L.P. - ML Venture Partners II, L.P. Margaret E. Nelson, Esq. - Merrill Lynch KECALP L.P. 1986 - Merrill Lynch KECALP L.P. 1987 - Merchant Banking L.P. No. I Carl Ruggiero, Esq. - ML Offshore LBO Partnership No. VIII
44 Exhibit A BORG-WARNER AUTOMOTIVE, INC. (a Delaware corporation) 900,000 Shares of Common Stock INTERNATIONAL PRICE DETERMINATION AGREEMENT July __, 1996 MERRILL LYNCH INTERNATIONAL LEHMAN BROTHERS INTERNATIONAL (EUROPE) MORGAN STANLEY & CO. INTERNATIONAL LIMITED As Representatives of the several International Underwriters c/o Merrill Lynch International Ropemaker Place 25 Ropemaker Street London EC2 Y9LY Ladies and Gentlemen: Reference is made to the International Purchase Agreement dated July __, 1996 (the "International Purchase Agreement") among Borg-Warner Automotive, Inc. (the "Company"), the Selling Stockholders named in Schedule A thereto (the "Selling Stockholders") and the several International Underwriters named in Schedule B thereto or hereto (the "International Underwriters"), for whom Merrill Lynch International Limited, Lehman Brothers International (Europe) and Morgan Stanley & Co. International Limited are acting as representatives (the "International Representatives"). The International Purchase Agreement provides for the purchase by the International Underwriters from the Selling Stockholders, subject to the terms and conditions set forth therein, of an aggregate of 900,000 shares (the "Initial International Shares") of the Company's common stock, par value $.01 per share. This Agreement is the International Price Determination Agreement referred to in the International Purchase Agreement. Terms not defined herein are used herein as defined in the International Purchase Agreement. 45 A-2 Pursuant to Section 2 of the International Purchase Agreement, the Company and the Selling Stockholders agree with the International Representatives as follows: 1. The price to the public per share for the Initial International Shares shall be $[____]. 2. The purchase price per share for the Initial International Shares to be paid by the several International Underwriters shall be $[_____], representing an amount equal to the public offering price set forth above, less $[____] per share. The Company represents and warrants to each of the International Underwriters that the representations and warranties of the Company set forth in Section 1(a) of the International Purchase Agreement are accurate as though expressly made at and as of the date hereof. Additionally, if the Company elects to rely on Rule 462(b), the Company convenants to each of the International Underwriters that: (a) the Company will file a Rule 462(b) Registration Statement in compliance with, and that is effective upon filing pursuant to, Rule 462(b) prior to the time confirmations are sent or given, as specified in Rule 462(b) of the 1933 Act; and (b) the Company will give irrevocable instructions for transmission of the applicable filing fee in connection with the filing of the Rule 462(b) Registration Statement, in compliance with Rule 111 of the 1933 Act Regulations or the Commission will have received payment of such filing fee upon filing of the Rule 462(b) Registration Statement. Each Selling Stockholder represents and warrants to each of the International Underwriters that the representations and warranties of such Selling Stockholder set forth in Section 1(b) of the International Purchase Agreement are accurate as though expressly made at and as of the date hereof. As contemplated by Section 2 of the International Purchase Agreement, attached as Schedule A is a completed list of the Selling Stockholders and attached as Schedule B is a complete list of the several International Underwriters, which shall be a part of this Agreement and the International Purchase Agreement. This Agreement shall be governed by the laws of the State of New York. If the foregoing is in accordance with the understanding of the International Representatives of the agreement between the International Underwriters, the Company and the Selling Stockholders, please sign and return to the Company a counterpart hereof, whereupon this instrument, along with all counterparts and together with the International 46 A-3 Purchase Agreement, shall be a binding agreement between the International Underwriters, the Company and the Selling Stockholders in accordance with its terms and the terms of the International Purchase Agreement. Very truly yours, BORG-WARNER AUTOMOTIVE, INC. By: ---------------------------------- Name: Title: SELLING STOCKHOLDERS NAMED IN SCHEDULE A By: ---------------------------------- Name: Title: Confirmed and accepted as of the date first above written: MERRILL LYNCH INTERNATIONAL LEHMAN BROTHERS INTERNATIONAL (EUROPE) MORGAN STANLEY & CO. INTERNATIONAL LIMITED By: Merrill Lynch International By: ---------------------------------------------------------------- Name: Title: For themselves and as International Representatives of the other International Underwriters named in Schedule B. 47 Exhibit B SUBSIDIARIES
Percent of Capital Stock Beneficially Owned by Borg-Warner Automotive, Name of Subsidiary Inc. or the Subsidiaries - ------------------ ------------------------------ Borg-Warner Automotive Powertrain Systems Corporation 100 Borg-Warner Automotive South Asia Corporation 100 Divgi-Warner Pvt., Ltd. 60 Huazhong Warner Transmission Company 60 Borg-Warner Automotive Powertrain Service Center Corporation 100 Borg-Warner Automotive Powdered Metals Corporation 100 Borg-Warner Automotive Diversified Transmission Products Corporation 100 Borg-Warner Automotive Air/Fluid Systems Corporation 100 Borg-Warner Automotive Air/Fluid Systems Corporation of Michigan 100 Borg-Warner Automotive Control Systems Holding Corporation 100 Borg-Warner Automotive Control Systems Europe S.A.S. 90 Societe de l'Usine de la Marque 100 BW Syntelligence Corporation 100 Borg-Warner Automotive Morse TEC Corporation 100 Borg-Warner Automotive (Canada) Ltd. 100 Borg-Warner Automotive Japan Corporation 100 Borg-Warner Automotive K.K. 100 Borg-Warner Automotive Taiwan Co., Ltd. 100 B.W. Componentes Mexicanos de Transmissiones S.A. de C.V. 86 Morse TEC Europe, Sp.A 100 Borg-Warner Automotive Foreign Sales Corporation 100
48 B-2 Borg-Warner Automotive Automatic Transmission Systems Corporation 100 Borg-Warner Automotive Europe Corporation 100 Borg-Warner Automotive GmbH 100 Borg & Beck Torque Systems, Inc. 100 Borg-Warner Automotive-NW Corporation 100 Borg-Warner Automotive Korea, Inc. 60 Creon Insurance Agency, Ltd. 100 Creon Trustees, Ltd. 100
49 Exhibit C Pursuant to Section 5(b) of the International Purchase Agreement, Wachtell, Lipton, Rosen & Katz, special counsel for the Company, shall furnish to the International Underwriters an opinion to the effect that: (i) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware with corporate power and authority under such laws to own, lease and operate its properties and conduct its business as described in the Prospectuses. (ii) The Shares have been duly authorized and validly issued and are fully paid and non-assessable, and no holder thereof is or will be subject to personal liability by reason of being such a holder; such Shares are not subject to the preemptive rights of any stockholder of the Company. (iii) The Shares conform in all material respects as to legal matters to the description thereof contained in the Prospectuses. (iv) This Agreement and the U.S. Purchase Agreement have been duly authorized, executed and delivered by the Company. (v) The execution and delivery of this Agreement and the U.S. Purchase Agreement, the consummation by the Company of the transactions contemplated in this Agreement, the U.S. Purchase Agreement and in the Registration Statement and compliance by the Company with the terms of this Agreement and the U.S. Purchase Agreement have been duly authorized by all necessary corporate action on the part of the Company and do not violate and will not result in any violation of the certificate of incorporation or by-laws of the Company. (vi) The Registration Statement is effective under the 1933 Act; any required filing of the Prospectuses or any supplement thereto pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and, to the best of the knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or are contemplated under the 1933 Act. (vii) The Registration Statement (including the Rule 430A Information and the Rule 434 Information, if applicable) and the Prospectuses, excluding the documents incorporated by reference therein, and each amendment or supplement thereto (except for the financial statements and other financial or statistical data included therein or omitted therefrom, as to which such counsel need express no 50 C-2 opinion), as of their respective effective or issue dates, complied as to form in all material respects to the requirements of the 1933 Act and the 1933 Act Regulations. (viii) The documents incorporated by reference in the Prospectus (except for the financial statements and other financial or statistical data included therein or omitted therefrom, as to which such counsel need express no opinion, and except to the extent that any statement therein is modified or superseded in the Prospectuses), as of the dates they were filed with the Commission, complied as to form in all material respects to the requirements of the 1934 Act and the 1934 Act Regulations. (ix) Assuming that each of the International Underwriters and U.S. Underwriters acquires the certificates representing the International Shares and the U.S. Shares, respectively, in good faith and without notice of any adverse claims, as defined in Section 8-302 of the Uniform Commercial Code as in effect in the State of New York (the "UCC"), upon delivery of the certificates to the person designated by the International Underwriters and the U.S. Underwriters, respectively, in the State of New York, either registered in the name of the International Underwriters or the U.S. Underwriters, as the case may be, endorsed to the International Underwriters or the U.S. Underwriters, as the case may be, or endorsed in blank, the International Underwriters or the U.S. Underwriters, as the case may be, will acquire all of the Selling Stockholders' rights in the certificates, free of any adverse claims (within the meaning of Section 8-302 of the UCC). (x) Such counsel have participated in the preparation of the Registration Statement and Prospectuses except for the documents incorporated by reference in the Registration Statement and the Prospectuses and in conferences with officers and other representatives of the Company, representatives of the independent public accountants for the Company, and with your representatives and your counsel at which the contents of the Registration Statement, the Prospectuses, and related matters were discussed and have reviewed the documents incorporated by reference in the Registration Statement and Prospectuses and, although such counsel need not pass upon or assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectuses and the documents incorporated by reference in the Prospectuses (except for the opinions set forth in clause (iii), and based on the foregoing, no facts have come to the attention of such counsel to lead such counsel to believe (A) that the Registration Statement or any amendment thereto (except for the financial statements and other financial or statistical data included therein or omitted therefrom, as to which such counsel need express no opinion), at the time the Registration Statement or any such amendment became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or (B) that the Prospectuses or any amendment or supplement 51 C-3 thereto (except for the financial statements and other financial or statistical data included therein or omitted therefrom, as to which such counsel need express no opinion), at the time any Prospectus was issued, at the time any such amended or supplemented prospectus was issued or at the Closing Time, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Such opinion shall be to such further effect with respect to other legal matters relating to this Agreement, the International Price Determination Agreement and the sale of the International Shares pursuant to this Agreement as counsel for the International Underwriters may reasonably request. In giving such opinion, such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York, the federal law of the United States and the corporate law of the State of Delaware, either upon opinions of other counsel, who shall be counsel reasonably satisfactory to counsel for the International Underwriters, in which case the opinion shall state that they believe the International Underwriters and they are entitled to so rely, or upon unofficial compilations of the laws of such jurisdictions. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and its Subsidiaries and certificates of public officials. 52 Exhibit D Pursuant to Section 5(c) of the International Purchase Agreement, Laurene H. Horiszny, Esq., Vice President, Secretary and General Counsel for the Company, shall furnish to the International Underwriters an opinion to the effect that: (i) Each Subsidiary listed on Schedule 1 hereto (the "Material Subsidiaries") is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation with corporate power and authority under such laws to own, lease and operate its properties and conduct its business. (ii) Each of the Company and the Material Subsidiaries is duly qualified to transact business as a foreign corporation and is in good standing in each other jurisdiction in which it owns or leases property of a nature, or transacts business of a type, that would make such qualification necessary, except to the extent that the failure to so qualify or be in good standing would not have a material adverse effect on the Company and the Subsidiaries, considered as one enterprise. (iii) All of the outstanding shares of capital stock of each Material Subsidiary have been duly authorized and validly issued and are fully paid and non-assessable; all of the shares of capital stock of such Material Subsidiary are owned by the Company, directly or through one or more of the Subsidiaries, in the percentages set forth in Schedule 1 hereto and the shares of capital stock of NSK-Warner owned by the Company are owned by the Company directly or through one or more of the Subsidiaries, free and clear of any consensual pledge, lien, security interest, charge, claim, equity or encumbrance of any kind except as provided in or pursuant to the Credit Agreement; no holder thereof is subject to personal liability by reason of being such a holder and none of such shares was issued in violation of the preemptive rights of any stockholder of the Material Subsidiaries. (iv) The Shares have been duly authorized and validly issued and are fully paid and non-assessable, and no holder thereof is or will be subject to personal liability by reason of being such a holder; such Shares are not subject to the preemptive rights of any stockholder of the Company. (v) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectuses under the heading "Capitalization". (vi) Such counsel does not know of any statutes or regulations, or any pending or threatened legal or governmental proceedings, required under the 1933 Act to be described in the Prospectuses that are not described as so required, nor of 53 D-2 any contracts or documents of a character required under the 1933 Act or 1933 Act Regulations to be described or referred to in the Registration Statement or Prospectuses or to be filed as exhibits to the Registration Statement that are not described, referred to or filed as required. (vii) Except with respect to financial covenants, (as to which such counsel need express no opinion) no default exists in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, loan agreement, note, lease or other agreement or instrument that is described or referred to in the Registration Statement or the Prospectuses or filed as an exhibit to the Registration Statement (except for such defaults that would not have a material adverse effect on the condition (financial or otherwise), results of operations, business affairs or business prospects of the Company and its Subsidiaries, considered as one enterprise). (viii) The execution and delivery of this Agreement and the U.S. Purchase Agreement and the consummation by the Company of the other transactions contemplated in this Agreement, the U.S. Purchase Agreement and in the Registration Statement and compliance by the Company with the terms of this Agreement and the U.S. Purchase Agreement do not violate and will not result in any violation of the certificate of incorporation or by-laws of any Material Subsidiary and do not and will not conflict with, or result in a breach of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any Material Subsidiary under (i) any existing applicable law, rule or regulation (other than the securities or Blue Sky laws of the various states, as to which such counsel is not requested to express an opinion), (ii) any judgment, order or decree of any government, governmental instrumentality or court, domestic or foreign, having jurisdiction over the Company or any Subsidiary or any of its properties, or (iii) any indenture, mortgage or loan agreement, or any other agreement or instrument known to such counsel, to which the Company or any Material Subsidiary is a party or by which it may be bound or to which any of its properties may be subject, including the Formation Agreement between Borg-Warner Corporation and Nippon Seiko, K.K., dated as of April 18, 1964, and any agreements related thereto, including but not limited to the Shareholders Agreement Concerning the Management of NSK-Warner, dated September 25, 1964, between Borg-Warner Corporation and Nippon Seiko, K.K. (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not have a material adverse effect on the condition (financial or otherwise), results of operations, business affairs or business prospects of the Company and its Subsidiaries, considered as one enterprise). 54 D-3 (ix) The descriptions in the Prospectuses of the statutes, regulations, legal or governmental proceedings, contracts and other documents therein described are accurate and fairly summarize the information required to be shown. (x) No authorization, approval, consent or license of any U.S. government, governmental instrumentality or U.S. court (other than under the 1933 Act or 1933 Act Regulations and the securities or Blue Sky laws of the various states and the securities laws of any jurisdiction outside the United States in which International Shares are offered or sold by the International Underwriters pursuant to this Agreement) is required for the valid authorization, issuance, sale and delivery of the Shares. (xi) To the best knowledge of such counsel, each Selling Stockholder is the registered holder of title to the Shares to be sold by such Selling Stockholder pursuant to the International Purchase Agreement and the U.S. Purchase Agreement. Such counsel has participated in the preparation of the Registration Statement and Prospectuses, in the preparation of the documents incorporated by reference in the Registration Statement and the Prospectuses and in conferences with officers and other representatives of the Company, representatives of the independent public accountants for the Company, and with your representatives and your counsel at which the contents of the Registration Statement, the Prospectuses and the documents incorporated by reference in the Prospectuses and related matters were discussed and, although such counsel need not pass upon or assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectuses and the documents incorporated by reference in the Prospectuses (except for the opinion set forth in clause (ix)), and based upon the foregoing, no facts have come to the attention of such counsel to lead her to believe (A) that the Registration Statement (including the Rule 430A Information and the Rule 434 Information, if applicable) or any amendment thereto (except for the financial statements and other financial or statistical data included therein or omitted therefrom, as to which such counsel need express no opinion), at the time the Registration Statement or any such amendment became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (B) that the Prospectuses or any amendment or supplement thereto (except for the financial statements and other financial or statistical data included therein or omitted therefrom, as to which such counsel need express no opinion), at the time any Prospectus was issued, at the time any such amended or supplemented prospectus was issued or at the Closing Time, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which 55 D-4 they were made, not misleading, or (C) that the documents incorporated by reference in the Prospectuses (except for the financial statements and other financial or statistical data included therein or omitted therefrom, as to which such counsel need express no opinion, and except to the extent that any statement therein is modified or superseded in the Prospectuses), as of the dates they were filed with the Commission, contained an untrue statement of a material fact or omitted to state a material fact. In giving such opinion, such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of Illinois, the Federal law of the United States and the corporate law of the State of Delaware, upon opinions of other counsel, who shall be counsel reasonably satisfactory to counsel for the U.S. Underwriters, in which case the opinion shall state that they believe the U.S. Underwriters and they are entitled to so rely. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and the Subsidiaries and certificates of public officials. 56 Schedule 1 to Exhibit D Material Subsidiaries
Percent of Capital Stock Beneficially Owned by Borg-Warner Automotive, Inc. or the Subsidiaries ------------ Material Subsidiary - ------------------- Borg-Warner Automotive Diversified Transmission Products Corporation 100 Borg-Warner Automotive Electronic & Mechanical Systems Corporation 100 Borg-Warner Automotive Europe Corporation 100 Borg-Warner Automotive GmbH 100 Borg-Warner Automotive Japan Corporation 100 Borg-Warner Automotive K.K. 100 Borg-Warner Automotive NW Corporation 100 Borg-Warner Automotive Transmission & Engine Components Corporation 100
57 Exhibit E Pursuant to Section 5(d) of the International Purchase Agreement, NSK-Warner's Japanese counsel shall furnish to the International Underwriters an opinion substantially to the effect that: (i) NSK-Warner is a corporation duly organized, validly existing and in good standing under the laws of Japan with corporate power and authority under such laws to own, lease and operate its properties and conduct its business. (ii) All of the outstanding shares of capital stock of NSK-Warner have been duly authorized and validly issued and are fully paid and non-assessable. 58 Exhibit F Pursuant to Section 5(e) of the International Purchase Agreement, each of the attorneys listed on Schedule C attached thereto for the Selling Stockholders specified opposite such attorney's name, shall furnish to the International Underwriters an opinion to the effect that: (i) This Agreement and the U.S. Purchase Agreement have been authorized, duly executed and delivered by each of the Selling Stockholders. (ii) No authorization, approval, consent or license of any government, governmental instrumentality or court is required under the laws of the United States or the State of New York (other than under the 1933 Act, under Blue Sky or state securities law or the securities laws of foreign jurisdictions) for the consummation by the Selling Stockholders of the transactions contemplated by this Agreement and the U.S. Purchase Agreement. (iii) The execution and delivery of this Agreement and the U.S. Purchase Agreement by the Selling Stockholders and the compliance by the Selling Stockholders with the terms thereof does not conflict with or result in a violation of (a) the certificate of incorporation, the by-laws, the partnership agreement or similar governing document of any of the Selling Stockholders or (b) any existing applicable law, rule or regulation (other than under the 1933 Act, under Blue Sky or state securities law or the securities laws of foreign jurisdictions or the rules and regulations of the NASD) or any judgment, order or decree known to such counsel of any government, governmental instrumentality or court, domestic or foreign, having jurisdiction over the Selling Stockholders. (iv) The Selling Stockholders, as the case may be, have been duly organized and are validly existing and in good standing as corporations or partnerships under the laws of the jurisdiction of their incorporation or organization with all necessary power and authority under such laws to execute, deliver and perform this Agreement and the U.S. Purchase Agreement. (v) Assuming that each of the International Underwriters acquires the certificates representing the Shares to be sold by the Selling Stockholders in good faith and without notice of any adverse claims, as defined in Section 8-302 of the Uniform Commercial Code as in effect in the State of New York (the "UCC"), upon delivery of the certificates representing such Shares to the person designated by the International Underwriters in the State of New York, registered in the name of the International Underwriters, endorsed to the International Underwriters, or endorsed in blank, the International Underwriters will acquire all of the Selling Stockholders' rights in the certificates representing such Shares free of any adverse claims (within the meaning of Section 8-302 of the UCC). 59 F-2 Such opinion shall be to such further effect with respect to other legal matters relating to this Agreement and the sale of the Shares pursuant to this Agreement as counsel for the International Underwriters may reasonably request. In giving such opinion, such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York, the federal law of the United States and the corporate and partnership law of the State of Delaware, solely upon opinions of other counsel, who shall be counsel reasonably satisfactory to counsel for the International Underwriters (it being understood that in-house counsel of any Selling Stockholder shall be so satisfactory), in which case the opinion shall also be addressed to the International Underwriters and state that such other counsel believes you and they are entitled to so rely. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and the Subsidiaries, certificates of officers or partners, as the case may be, of such Selling Stockholders and on certificates of public officials. 60 Exhibit G FORM OF LOCK-UP LETTER AGREEMENT July __, 1996 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated LEHMAN BROTHERS INC. MORGAN STANLEY & CO. INCORPORATED As Representatives of the several U.S. Underwriters c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated Merrill Lynch World Headquarters North Tower World Financial Center New York, New York 10281-1201 MERRILL LYNCH INTERNATIONAL LEHMAN BROTHERS INTERNATIONAL (EUROPE) MORGAN STANLEY & CO. INTERNATIONAL LIMITED As Representatives of the several International Underwriters c/o Merrill Lynch International 25 Ropemaker Street London EC2Y 9LY England Ladies and Gentlemen: The undersigned stockholder of Borg-Warner Automotive, Inc., a Delaware corporation (the "Company"), understands that (i) a U.S. Purchase Agreement (the "U.S. Purchase Agreement") will be executed by the Company, the Selling Stockholders named therein (the "Selling Stockholders") and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Lehman Brothers Inc. and Morgan Stanley & Co. Incorporated, as representatives (the "U.S. Representatives") of the several underwriters named therein (the "U.S. Underwriters"), pursuant to which the Selling Stockholders will sell to the U.S. Underwriters 3,600,000 shares of the Common Stock, par value $.01 per 61 G-2 share (the "Common Stock"), of the Company and up to 540,000 additional shares of Common Stock pursuant to an option granted by the Selling Stockholders, solely to cover over-allotments as set forth in the U.S. Purchase Agreement and (ii) an International Purchase Agreement (the "International Purchase Agreement", and together with the U.S. Purchase Agreement, the "Purchase Agreements") will be executed by the Company, the Selling Stockholders named therein (the "Selling Stockholders") and Merrill Lynch International, Lehman Brothers International (Europe) and Morgan Stanley & Co. International Incorporated, as representatives (the "International Representatives", and together with the U.S. Representatives, the "Representatives") of the several underwriters named therein (the "International Underwriters", and together with the U.S. Underwriters, the "Underwriters"), pursuant to which the Selling Stockholders will sell to the International Underwriters 900,000 shares of the Common Stock of the Company and up to 135,000 additional shares of Common Stock pursuant to an option granted by the Selling Stockholders, solely to cover over-allotments as set forth in the International Purchase Agreement. The undersigned is a party to that certain Registrations Rights Agreement (the "Registration Rights Agreement"), dated as of January 27, 1993, by and among the Company and the stockholders named therein. This Lock-Up Letter Agreement is being entered into in accordance with Section 7(a) of the Registration Rights Agreement at the request of the Underwriters. The undersigned also understands that the Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-3 (File No. 333-06041, the "Registration Statement") in connection with the public offering (the "Offering") of shares of its Common Stock. In consideration of the Underwriters' agreement to purchase the Common Stock and undertake the Offering, and for other good and valuable consideration, receipt of which is hereby acknowledged, the undersigned agrees [that, without the prior written consent of the Representatives, which consent shall not be unreasonably withheld, the undersigned will] not[,] [to] directly or indirectly[,] effect any public sale or distribution, including any sale pursuant to Rule 144 under the Securities Act of 1933, as amended, of any shares of Common Stock (including, without limitation, shares of Common Stock which may be deemed to be beneficially owned by such stockholder in accordance with the rules and regulations of the Commission and shares of Common Stock which may be issued upon exercise of any option or warrant) or any securities convertible or exchangeable for shares of Common Stock for a period commencing 7 days prior to the date the Registration Statement is declared effective by the Commission (the "Effective Date") and ending 180 days after the Effective Date, other than the Shares sold to the Underwriters pursuant to the Purchase Agreements. The undersigned understands that the Company expects the Effective Date to occur as early as ______, 1996. The 62 G-3 undersigned understands that the Effective Date may, however, be earlier or later than _____, 1996. In addition, the undersigned agrees that the undersigned will, promptly following the execution of this Lock-Up Letter Agreement and in any event prior to the execution of the Purchase Agreements, (i) with respect to any shares of Common Stock for which the undersigned is the record holder, cause the transfer agent for the Company to note stop transfer instructions with respect to such shares of Common Stock on the transfer books and records of the Company and (ii) with respect to any shares of Common Stock for which the undersigned is the beneficial holder but not the record holder (other than the shares of Common Stock owned of record by persons or entities that are not affiliates of the undersigned and shares of Common Stock which may be issued upon exercise of any option or warrant), cause the record holder of such shares to cause the transfer agent for the Company to note stop transfer instructions with respect to such shares of Common Stock on the transfer books and records of the Company. The undersigned understands that the Company, the Selling Stockholders and the Underwriters will proceed with the Offering in reliance on this Lock-Up Letter Agreement. The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this Lock-Up Letter Agreement and that, upon request, the undersigned will execute any additional documents necessary or desirable in connection with the enforcement hereof. Any obligations of the undersigned shall be binding upon the successors and assigns of the undersigned. 63 G-4 This Lock-Up Letter Agreement has been entered into on the date first written above. Very truly yours, ----------------------------------------- Name of Stockholder/Officer/Director By: -------------------------------------- Name: Title: EX-23.1 4 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in this Amendment No. 2 to Registration Statement No. 333-06041 of Borg-Warner Automotive, Inc. on Form S-3 of our report dated January 31, 1996 incorporated by reference in the Annual Report on Form 10-K of Borg-Warner Automotive, Inc. for the year ended December 31, 1995 and to the reference to us under the heading "Experts" in the Prospectus, which is part of such Registration Statement. DELOITTE & TOUCHE LLP Chicago, Illinois July 22, 1996 EX-23.3 5 CONSENT OF KPMG PEAT MARWICK 1 [LETTERHEAD OF KPMG PEAT MARWICK] EXHIBIT 23.3 The Board of Directors NSK-WARNER KABUSHIKI KAISHA INDEPENDENT AUDITORS' CONSENT We consent to incorporation by reference in this Amendment No. 2 to Registration Statement No. 333-06041 on Form S-3 of Borg-Warner Automotive, Inc. of our report dated April 26, 1996 relating to the balance sheets of NSK-Warner Kabushiki Kaisha as of March 31, 1996 and 1995, and the related statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended March 31, 1996 incorporated by reference in the Annual Report on Form 10-K for the year ended December 31, 1995, and to the reference to us under the heading "Experts" in the Prospectus, which is part of such Registration Statement. KPMG PEAT MARWICK Tokyo, Japan July 22, 1996 EX-23.4 6 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Amendment No. 2 to Registration Statement No. 333-06041 of Borg-Warner Automotive, Inc. on Form S-3 of our report dated June 14, 1996 on the combined financial statements of the Coltec Automotive OEM Business Group as of December 31, 1995 and 1994 and for the two years in the period ended December 31, 1995 included in Borg-Warner Automotive Inc.'s current report on Form 8-K dated June 17, 1996 and to the reference to us under the heading "Experts" in the Prospectus, which is part of this Registration Statement. ARTHUR ANDERSEN LLP Detroit, Michigan, July 22, 1996. -----END PRIVACY-ENHANCED MESSAGE-----