e10vk

Indicate by check-mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

The aggregate market value of the voting stock of the registrant held by stockholders (not including voting stock held by directors and executive officers of the registrant) on March 7, 2003 was approximately $1.24 billion. As of March 7, 2003, the registrant had 26,707,063 shares of Common Stock outstanding.

Indicate by check-mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o

Portions of the following documents are incorporated herein by reference into the Part of the Form 10-K indicated.

BorgWarner Inc. (the “Company”), a Delaware corporation, was incorporated in 1987. The Company is a leading, global Tier I supplier of highly engineered systems and components, primarily for vehicle powertrain applications. These products are manufactured and sold worldwide, primarily to original equipment manufacturers (“OEMs”) of passenger cars, sport utility vehicles, trucks, and commercial transportation products. The Company operates manufacturing and technical facilities in 43 locations in 14 countries serving customers in North America, South America, Europe and Asia, and is an original equipment supplier to every major automotive OEM in the world.

Incorporated herein by reference is Note Fourteen of the Notes to Consolidated Financial Statements on pages 56 and 57 of the Company’s Annual Report for the year ended December 31, 2002 (the “Company’s Annual Report”) filed as an exhibit to this report.

Effective January 1, 2003, the Company will be reporting its results under its reorganized structure of two reportable operating segments: Driveline and Engine. The Driveline segment is primarily the combination of the TorqTransfer Systems and Transmission Systems segments. The Engine segment is primarily the combination of the Morse TEC, Air/ Fluid Systems, and Cooling Systems segments. For purposes of this report, the Company’s products fall into five reportable operating segments: Morse TEC, Air/ Fluid Systems, Cooling Systems, TorqTransfer Systems and Transmission Systems. Net revenues by segment for the three years ended December 31, 2002, 2001 and 2000, are as follows (in millions of dollars):

The sales information presented above excludes the sales by the Company’s unconsolidated joint ventures. (See “Joint Ventures” section). Such sales totaled approximately $318 million in 2002, $301 million in 2001 and $348 million in 2000. Divested operations and businesses held for sale include the fuel systems business which was sold in April 2001 and the HVAC business which was sold in 2000.

Morse TEC manufactures chain and chain systems, including HY-VO® front-wheel drive (“FWD”) transmission chain and four-wheel drive (“4WD”) chain, MORSE GEMINI® Chain Systems, timing chain and timing chain systems, crankshaft and camshaft sprockets, chain tensioners and snubbers and turbochargers for passenger car and commercial vehicle applications. These products are provided from facilities in North America, South America, Europe and Asia.

HY-VO® chain is used in transmissions and for 4WD transfer case applications. Transmission chain is used to transfer power from the engine to the transmission. The Company’s MORSE GEMINI® Chain System emits significantly less chain pitch frequency noise than conventional transmission chain systems. The chain in a transfer case distributes power between the front and rear output shafts which, in turn, drive 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’s timing chain system is used on Ford’s family of overhead cam engines, including the Duratech and Triton and new in-line 4 cylinder engines, as well as Chrysler’s 2.7 liter, 3.7 liter, 4.7 liter and 5.7 liter overhead cam engines. The Company has been selected to provide timing systems for a number of Japanese and European applications. The Company believes that it is the world’s leading manufacturer of timing chain systems.

Morse TEC also provides turbochargers for passenger car, commercial vehicle and industrial applications for diesel and gasoline engine manufacturers in Europe, North America, South America and Asia. Morse TEC has greatly benefited from the growth in turbocharger demand in Europe. This growth is linked to the increasing demand for diesel engine passenger cars. Benefits of turbochargers in both passenger car and commercial vehicle applications include increased power for a given engine size, improved fuel economy and significantly reduced emissions. The Company believes it is a leading manufacturer of turbochargers worldwide.

Air/ Fluid Systems designs and manufactures sophisticated electro-mechanical, mechanical and electronic components and systems used for automated transmissions, fluid pumps, engine air intake modules, engine emission controls and actuation systems. Key products for transmission controls include single function solenoids, complex solenoids and multi-function modules. The Company also manufactures a wide variety of fluid pumps, including engine hydraulic pumps for variable cam timing and engine lubrication. Key products for engine air intake management include throttle bodies, intake manifolds, throttle position sensors and complete engine induction systems. The Company also designs and manufactures products to control emissions and improve gas mileage such as electric air pumps, air control valves and exhaust gas recirculation valves. These products are provided from facilities in the United States and France.

Cooling Systems is a global provider of engine cooling solutions. The group manufactures and markets air sensing fan drives that can be mechanically controlled and electronically controlled fan drives that sense and respond to multiple cooling requirements simultaneously. Cooling Systems also manufactures and markets polymer fans for engine cooling systems. Product features provide improved vehicle fuel economy and reduced engine emissions while minimizing parasitic horsepower loss. These advanced cooling systems products are manufactured by facilities in the U.S., Germany, U.K., Brazil, Korea, and China. The Company is a leading global provider of such products, but competes with other large independent producers. This business serves the global light, medium, and heavy vehicle markets, as well as selected off-highway applications.

TorqTransfer Systems’ products include 4WD and all-wheel drive transfer cases and torque management systems to transfer torque within the drivetrain for rear wheel drive and FWD based vehicles. The main focus is on electronically controlled torque management devices and systems. TorqTransfer Systems’ products are manufactured in North America, Asia and Europe.

Transfer cases are installed primarily on light trucks and sport-utility vehicles (“SUVs”). 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. The Company has

designed and developed an exclusive 4WD TORQUE-ON-DEMAND® (“TOD”) transfer case system, which allows vehicles to automatically shift from two-wheel drive to 4WD when electronic sensors indicate it is necessary. The TOD® transfer case is available on the Ford Explorer, the best selling sport-utility vehicle in the United States in 2002, 2001 and 2000, and the Ford Expedition, Lincoln Navigator, Isuzu Trooper and SsangYong Musso. In 2001, this technology was also adopted by Hyundai for its Terracan SUV, and was launched on the Kia Sorento in 2002.

Sales of 4WD transfer cases represented approximately 22%, 20% and 19% of the Company’s total revenues for 2002, 2001 and 2000, respectively. The Company believes it is the world’s leading independent manufacturer of 4WD transfer cases, producing over one million transfer cases in 2002. The Company’s largest customer of 4WD transfer cases is Ford Motor Company. The Company supplies the majority of the 4WD transfer cases for Ford, including those installed in the Ford Explorer, the Ford Expedition, the Ford F-150 and Ranger pick-up trucks, the Mercury Mountaineer and the Lincoln Navigator. The Company also began supplying transfer cases to several new General Motors applications in 2002 including the Hummer H2, the Cadillac Escalade, the Chevrolet Tahoe and Suburban, along with the GMC Yukon and Yukon XL.

The Company’s newest four-wheel drive product is the INTERACTIVE TORQUE MANAGEMENT^TM (“ITM”) system. This product was introduced on the Acura MDX in 2000 and was launched on the new Honda Pilot in 2002. ITM^TM uses electronically controlled clutches to distribute power to the individual rear wheels when traction is required. The Company is actively involved in developing this technology for new applications in both front wheel drive based cross-over vehicles and passenger cars. A variant of this product, ITM 1^TM, which features a single clutch pack in front of the rear axle differential, was launched on the Hyundai Santa Fe in 2002.

The Company engineers and manufactures components for automatic transmissions and the systems that combine such components in North America, Asia and Europe. Principal product lines include friction plates, one-way clutches, transmission bands and torque converter lock-up clutches 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”), is a leading producer of friction plates and one-way clutches in Japan.

As of December 31, 2002, the Company had seven joint ventures in which it has a less-than-100% ownership interest. Results from five 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 NSK-Warner and Hitachi Warner is 50% each. Such interests are reported using the equity method of accounting.

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:

See Note Fourteen of the Notes to Consolidated Financial Statements on pages 56 and 57 of the Company’s Annual Report for geographic information.

Approximately 79% of the Company’s total sales in 2002 were to automotive OEMs, with the remaining 21% of the Company’s sales to a diversified group of industrial, construction and agricultural vehicle manufacturers, auto part manufacturers and to distributors of automotive aftermarket and replacement parts.

The Company’s worldwide sales in 2002 to Ford, DaimlerChrysler and General Motors Corporation constituted approximately 26%, 20% and 12%, respectively, of its 2002 consolidated sales. Approximately 32% of consolidated sales for 2002 were outside the United States, including exports. However, a substantial portion of such sales was to foreign OEMs of vehicles that are, in turn, exported to the United States. See Note Fourteen of the Notes to Consolidated Financial Statements on pages 56 and 57 of the Company’s Annual Report.

The Company’s automotive products are generally sold directly to OEMs substantially pursuant to either negotiated long-term supply agreements or terms and conditions as may be modified by the parties. 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.

Each of the Company’s operating segments has its own sales function headed by a vice president of sales. Account executives for each group are assigned to serve 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 and engineering employees 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 participate in product launch team activities as a key interface to the customers.

Each of the Company’s operating segments has its own research and development (“R&D”) organization. Five hundred and thirty-four 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 components and systems. 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 $109.1 million, $104.5 million and $112.0 million in 2002, 2001 and 2000, respectively, on R&D activities. Not included in the reported R&D activities were customer-sponsored R&D activities that were approximately $14.2 million, $20.0 million and $12.5 million in 2002, 2001 and 2000, respectively.

The Company has approximately 3,300 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 or to the operations of any of the Company’s business groups individually. The expiration of the patents individually and in the aggregate is not expected to have a material effect on the Company’s financial position 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 Company owns the “BorgWarner” and “Borg-Warner Automotive” trade names and housemarks, and variations thereof, which are material to the Company’s business.

Each of the Company’s operating segments 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. Competitors include vertically integrated units of the Company’s major OEM customers, as well as a large number of independent domestic and international suppliers, some of which were formerly part of the Company’s OEM customers. 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 and for others, 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.

For many of its products, the Company’s competitors include suppliers in other parts of the world that enjoy economic advantages such as lower labor costs, lower health care costs and, in some cases, export subsidies and/or raw materials subsidies.

As of December 31, 2002, the Company and its consolidated subsidiaries had approximately 14,000 salaried and hourly employees (as compared with approximately 13,000 employees at December 31, 2001), of which approximately 8,600 were U.S. employees. Approximately 28% of the Company’s domestic hourly workers are unionized. The hourly workers at the Company’s European facilities are also unionized. The Company believes its present relations with employees to be satisfactory.

Each of the Company’s operating segments believes that its supplies of raw materials for manufacturing requirements in 2003 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 for each of the Company’s operating segments are dependent upon natural gas, fuel oil, and electricity.

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 it has operated its business and facilities 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 even for a company complying with all laws, and there can be no assurance that the Company will not incur material costs or liabilities. In addition, through various acquisitions over the years, the Company has acquired a number of manufacturing facilities and there can be no assurance that the Company will not incur material costs and liabilities relating to activities which predate the Company’s ownership. 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 2002 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 potentially responsible parties (“PRPs”) at various hazardous waste disposal sites under the Comprehensive Environmental Response, Compensation and Liability Act (“Superfund”) and equivalent state laws and, as such, may presently be liable for the cost of cleanup and other remedial activities at 44 such sites. Responsibility for cleanup and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula.

Based on information available to the Company which, in most cases, includes: an estimate of allocation of liability among PRPs; the probability that other PRPs, many of whom are large, solvent public companies, will fully pay the costs apportioned to them; currently available information from PRPs and/or federal or state environmental agencies concerning the scope of contamination and estimated remediation costs; remediation alternatives; estimated legal fees; and other factors, the Company has established a reserve for indicated environmental liabilities in the aggregate amount of approximately $20.3 million at December 31, 2002. The Company expects this amount to be expended over the next three to five years.

The Company believes that none of these matters, individually or in the aggregate, will have a material adverse effect on its financial position or future operating results, generally either because estimates of the maximum potential liability at a site are not large or because liability will be shared with other PRPs, although no assurance can be given with respect to the ultimate outcome of any such matter.

In connection with the sale of Kuhlman Electric Corporation, the Company agreed to indemnify the buyer and Kuhlman Electric for certain environmental liabilities relating to the past operations of Kuhlman Electric. During 2000, Kuhlman Electric notified the Company that it discovered potential environmental contamination at its Crystal Springs, Mississippi plant while undertaking an expansion of the plant.

The Company has been working with the Mississippi Department of Environmental Quality and Kuhlman Electric to investigate the extent of the contamination. The investigation has revealed the presence of polychlorinated biphenyls (“PCBs”) in portions of the soil at the plant and neighboring areas. Kuhlman Electric and others, including the Company, were sued in several related lawsuits, which claim personal and property damage. The Company has moved to be dismissed from some of these lawsuits.

The Company’s lawsuit against Kuhlman Electric seeking declaration of the scope of the Company’s contractual indemnity has been amicably resolved and dismissed. The Company believes that the reserve for environmental liabilities is sufficient to cover any liability associated with this matter. However, due to the nature of environmental liability matters, there can be no assurance that the actual amount of environmental liabilities will not exceed the amount reserved.

Through its website (www.bwauto.com), the Company makes available, free of charge, the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, and other filings with the Securities and Exchange Commission, as soon as reasonably practicable after they are filed.

Set forth below are the names, ages, positions and certain other information concerning the executive officers of the Company as of March 7, 2003.

Mr. Manganello has been Chief Executive Officer since February 2003 and President of the Company since February 2002. He was also President and Chief Operating Officer of the Company from February 2002 until February 2003. He was Executive Vice President from June 2001 until February, 2002. He was Vice President of the Company from February 1999 to June 2001 and President and General Manager of BorgWarner TorqTransfer Systems Inc. from February 1999 until February 2001. He was Vice President, Operations of BorgWarner TorqTransfer Systems Inc., Muncie Plant from December 1995 until January 1999.

Mr. Strickler has been Executive Vice President and Chief Financial Officer of the Company since March 2001. He was Executive Vice President and Chief Financial Officer of Lake West Group, a retail consulting firm, from December 1999 to March 2001. He was Corporate Vice President of Goodyear Tire & Rubber Co. and Vice President — Finance of the North America Tire Division from 1996 to September 1999.

Mr. Welding has been Group President of the Driveline Group since December 2002, Executive Vice President of the Company since November 1999, and President of BorgWarner Transmission Systems Inc. since May 1996. He was Vice President of the Company from May 1996 until October 1999.

Ms. Dickens has been Vice President, Human Resources of the Company since February 2002. She was Vice President, Human Resources, BorgWarner Transmission Systems Inc. from June 1999 until February 2002. She was Manager, Human Resources, of BorgWarner Transmission Systems Inc.’s Bellwood Plant from June 1994 until June 1999.

Mr. Hensel has been Vice President of the Company since July 2002. He was Vice President — Finance of BorgWarner Morse TEC Inc. from July 1999 to June 2002. He was the Finance Director of 3K Warner Turbo Systems from September 1998 to June 1999. He was Plant Controller of BorgWarner Transmission Systems Inc.’s Bellwood Plant from October 1996 to August 1998.

Ms. Horiszny has been Vice President, Secretary and General Counsel of the Company since May 1993.

Mr. Kalina has been Vice President, Chief Information Officer of the Company since January 1999. He was an Executive IT Consultant for IBM from August 1997 until January 1999 and was Chief Information Officer for Walbro Corporation from September 1995 until December 1996.

Mr. McGill has been President and General Manager of BorgWarner TorqTransfer Systems Inc. since December 2002 and Vice President of the Company since October 1999. He was President and General Manager of BorgWarner Cooling Systems Inc. from October 1999 until December 2002. He was General Manager of Eaton’s Fluid Power Division from January 1998 to October 1999.

Mr. Obermayer has been Vice President and Treasurer of the Company since December 1999. He was Acting Treasurer from June 1999 until December 1999 and Vice President, Finance & Business Development — BorgWarner Transmission Systems Inc. from April 1999 until December 1999. He was Vice President and Controller of BorgWarner Transmission Systems Inc. from October 1996 until April 1999 and was Director, Financial Planning & Investments of the Company from January 1994 until September 1996.

Mr. Weber has been Vice President of the Company since July 2002 and has been the President and General Manager of BorgWarner Emissions/ Thermal Systems since December 2002. He was President and General Manager of BorgWarner Air/ Fluid Systems Inc. from July 2002 until December 2002. He was Vice President, Passenger Car Operations, of BorgWarner Turbo Systems Inc. from January 1999 to June 2002. He was Plant Manager of the BorgWarner Turbo Systems Inc., Kirchheimbolanden, Germany Plant, from 1994 to December 1998.

Mr. Wilson has been Vice President of the Company and President and General Manager of BorgWarner Turbo Systems Inc. since January 2000. He was a Director for Allied Signal Aerospace (n/k/a Honeywell) for various product lines from October 1997 to December 1999. From January 1996 until September 1997, he was Product Director — Commercial Diesel Turbochargers Worldwide for Allied Signal Aerospace.

Mr. Wood has been Vice President of the Company and President of BorgWarner Morse TEC Inc. since January 2001. He was Vice President of Business Development of BorgWarner TorqTransfer Systems Inc. from September 1999 to January 2001. From January 1999 until September 1999, he was Vice President — Operations, Transmission Components of BorgWarner Morse TEC Inc. and from January 1996 until December 1998, he was Vice President — Operations, Engine Timing Components of BorgWarner Morse TEC Inc.

As of December 31, 2002, the Company had 43 manufacturing and technical facilities strategically located throughout the United States and worldwide. In addition to its domestic manufacturing facilities, the Company has four facilities in each of Germany and India, three facilities in the United Kingdom, two facilities in each of Brazil, China, and Korea and one facility in each of Canada, France, Hungary, Italy, Japan, Mexico, and Taiwan. The Company also has several 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.

The following is additional information concerning the headquarters and the major manufacturing plants operated by the Company and its consolidated subsidiaries. Unless otherwise noted, these plants are owned by the Company.


(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. With the exception of the Company’s Bellwood, Illinois plant, capacity utilization at the 100% level is defined as operating five days per week, with two eight-hour shifts per day and normal vacation hours. Capacity utilization at the 100% level at the Company’s Bellwood, Illinois plant is defined as operating five days per week, with three eight-hour shifts per day and normal vacation hours.

(2)	The table excludes joint ventures owned 50% or less.

Patent infringement actions were filed against the Company’s turbocharger unit in Europe in late 2001 and in 2002 by Honeywell International. The Dusseldorf District Court in Germany entered a preliminary injunction against the Company on July 9, 2002 limiting the Company’s ability to manufacture and sell a certain variable turbine geometry (“VTG”) turbocharger in Germany until a patent hearing, then scheduled for December 2002.

In order to continue uninterrupted service to its customer, the Company paid Honeywell $25 million in July 2002 so that it could continue to make and deliver disputed car turbochargers through June of 2003. The agreement with Honeywell partially settles litigation, suspends the July 2002 preliminary injunction and provides for a license to deliver until June 2003. As part of the agreement,

Honeywell agreed not to seek damages for deliveries made before June 30, 2003. The Company appealed the granting of the July preliminary injunction, but Honeywell withdrew the preliminary injunction before the Company’s appeal could be heard. In January 2003, the Dusseldorf District Court decided that the Company’s current design of VTG turbocharger infringes the patent asserted by Honeywell. The Company continues to believe that its current production designs do not violate the Honeywell patent and are not covered by their lawsuit and plans to challenge the District Court’s decision. The Company has informed its customers of it inability to deliver the current design VTG turbocharger after June 30, 2003. The Company continues to develop a new generation VTG turbocharger to replace the current model and expects to begin delivery of the new generation VTG turbocharger by July 1, 2003 if approved by the customers.

There have been no significant developments in the New Venture Gear legal proceedings first disclosed in the Company’s Form 10-Q for the quarter ended March 31, 2001. In addition, the Company is presently, and is from time to time, subject to other 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 accounting principles generally accepted in the United States of America. These provisions include both legal fees and possible outcomes of legal proceedings.

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.

There were no matters submitted to the security holders of the Company during the fourth quarter of 2002.

The Company’s Common Stock is listed for trading on the New York Stock Exchange under the symbol BWA. As of March 7, 2003, there were approximately 3,000 holders of record of Common Stock.

The Company has paid cash dividends of $0.15 per share on its Common Stock during each quarter for the last two fiscal years. In December 2002, the Company announced its intention to increase the quarterly cash dividend to $0.18 per share. While the Company currently expects that comparable quarterly 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.

High and low sales prices (as reported on the New York Stock Exchange composite tape) for the Common Stock for each quarter in 2001 and 2002 were:

The Selected Financial Data for the five years ended December 31, 2002 with respect to the following line items set forth on page 59 of the Company’s Annual Report is incorporated herein by reference and made a part of this report: net sales; net earnings; net earnings per share; total assets; total debt; and cash dividend declared per share. See the material incorporated herein by reference in response to Item 7 of this report for a discussion of the factors that materially affect the comparability of the information contained in such data.

The Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth on pages 29 through 38 in the Company’s Annual Report are incorporated herein by reference and made a part of this report.

Information with respect to interest rate risk and foreign currency exchange risk is contained on page 38 of the Company’s Annual Report and is incorporated herein by reference. Information with respect to the levels of indebtedness subject to interest rate fluctuation is contained in Note Six of the Notes to Consolidated Financial Statements on page 49 of the Company’s Annual Report and is incorporated herein by reference. Information with respect to the Company’s level of business outside the United States which is subject to foreign currency exchange rate market risk is contained in Note Fourteen of the Notes to Consolidated Financial Statements on page 56 under the caption “Geographic Information” and is incorporated herein by reference.

The Consolidated Financial Statements (including the notes thereto, except as noted below) of the Company and the Independent Auditors’ Report as set forth on pages 39 through 59 in the Company’s Annual Report are incorporated herein by reference and made a part of this report. Supplementary financial information regarding quarterly results of operations (unaudited) for the years ended December 31, 2002 and 2001 is set forth on page 58 of the Company’s Annual Report. For a list of financial statements filed as part of this report, see Item 15, “Exhibits, Financial Statement Schedules, and Reports on Form 8-K” beginning on page 16.

Information with respect to directors and nominees for election as directors of the Company under the caption “Election of Directors” on pages 1 through 3 of the Company’s Proxy Statement and information under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” on page 5 of the Company’s Proxy Statement is incorporated herein by reference and made a part of this report. Information with respect to executive officers of the Company is set forth in Part I of this report.

Information with respect to compensation of executive officers and directors of the Company under the captions “Compensation of Directors” on page 4 of the Company’s Proxy Statement and “Executive Compensation,” “Stock Options,” “Long-Term Incentive Plans,” and “Employment Agreements” on pages 6 through 9 of the Company’s Proxy Statement is incorporated herein by reference and made a part of this report.

As of December 31, 2002, the number of stock options outstanding under our equity compensation plans, the weighted average exercise price of outstanding options, and the number of securities remaining available for issuance were as follows:

Information with respect to certain relationships and related transactions under the caption “Certain Relationships and Related Transactions” on pages 15 through 16 of the Company’s Proxy Statement is incorporated herein by reference and made a part of this report.

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of disclosure controls pursuant to Exchange Act Rule 13a-14 within the 90-day period prior to the filing of this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this report has been made known to them in a timely fashion. There have been no significant changes in internal controls or in other factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and the Chief Financial Officer completed their evaluation.


	(a) 1. The following consolidated financial statements of the Company on pages 39 through 59 of the Company’s Annual Report are incorporated herein by reference:


	2. Certain schedules for which provisions are made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.

	3. The exhibits filed in response to Item 601 of Regulation S-K are listed in the Exhibit Index on page A-1.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	By:	/s/ TIMOTHY M. MANGANELLO



	Timothy M. Manganello
	President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on this 21st day of March, 2003.

I, Timothy M. Manganello, President and Chief Executive Officer of BorgWarner Inc., certify that:

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operation and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:


	a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

	b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

	c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):


	a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


	/s/ TIMOTHY M. MANGANELLO

	Timothy M. Manganello
	President and Chief Executive Officer

I, George E. Strickler, Executive Vice President and Chief Financial Officer of BorgWarner Inc., certify that:


	a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

	b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

	c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.


	a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


	/s/ GEORGE E. STRICKLER

	George E. Strickler
	Executive Vice President and
	Chief Financial Officer


†	Indicates a management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c).

A-3 EX-10.15 3 c75405exv10w15.txt EX-10.15 SEVENTH AMENDMENT TO LOAN AGREEMENT EXHIBIT 10.15 Seventh Amendment to Receivables Loan Agreement This Seventh Amendment (the "Amendment"), dated as of February 19, 2002, is entered into among BWA Receivables Corporation (the "Borrower"), BorgWarner Inc. ("BWI" and in its capacity as Collection Agent, the "Collection Agent"), Windmill Funding Corporation, a Delaware corporation ("Windmill"), ABN AMRO Bank N.V., as Windmill's program letter of credit provider (the "Program LOC Provider"), the Bank listed on the signature page hereof (the "Bank") and ABN AMRO Bank N.V., as agent for Windmill, the Program LOC Provider and the Bank (the "Agent"); Witnesseth: Whereas, the Borrower, Collection Agent, Windmill, Program LOC Provider, the Bank and Agent have heretofore executed and delivered an Amended and Restated Receivables Loan Agreement, dated as of December 23, 1998 (as amended, supplemented or otherwise modified through the date hereof, the "Loan Agreement"), Whereas, the parties hereto desire to amend the Loan Agreement as provided herein; Now, therefore, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree that the Loan Agreement shall be and is hereby amended as follows: Section 1. (a) The defined term "Aggregate Bank Commitment" appearing in Article I to the Loan Agreement is hereby amended in its entirety and as so amended shall read as follows: "Aggregate Bank Commitment" shall mean an amount equal to One Hundred Ten Million One Hundred Sixty Thousand Dollars ($110,160,000), as such amount may be reduced pursuant to Section 2.6. (b) The defined term "Aggregate Commitment" appearing in Article I to the Loan Agreement is hereby amended in its entirety and as so amended shall read as follows: "Aggregate Commitment" shall mean an amount equal to One Hundred Twenty-Two Million Four Hundred Thousand Dollars ($122,400,000), as such amount may be reduced pursuant to Section 2.6. (c) The defined term "Approved Obligor Limit" appearing in Article I of the Loan Agreement is amended in its entirety and as so amended shall read as follows: "Approved Obligor Limit" means (i) for any Obligor with a long-term unsecured debt rating (a "Rating") of A- or higher by S&P and A3 or higher by Moody's, 50% of the Outstanding Balance of all Eligible Receivables, (ii) for any Obligor with a Rating of at least BBB+ by S&P and at least Baa1 by Moody's, 30 % of the Outstanding Balance of all Eligible Receivables, (iii) for any Obligor with a Rating of at least BBB by S&P and at least Baa2 by Moody's, 15% of the Outstanding Balance of all Eligible Receivables, (iv) for any Obligor with a Rating of at least BBB- by S&P and at least Baa3 by Moody's, 7.5% of the Outstanding Balance of all Eligible Receivables, (v) for any Obligor with a Rating lower than BBB- by S&P or lower than Baa3 by Moody's, or for any Obligor for which S&P or Moody's has withdrawn or suspended its Rating, 3.33% of Outstanding Balance of all Eligible Receivables. The Receivables of Unrated Affiliates may be treated as Receivables of the Related Rated Entities for purposes of this definition provided that the aggregate Outstanding Balance of Receivables so treated shall not exceed 10% of the Outstanding Balance of all Eligible Receivables. Notwithstanding the foregoing, for so long as a majority of the equity in New Venture Gear is owned by Daimler Chrysler Corporation the "Approved Obligor Limit" for New Venture Gear shall be the greater of (i) the Approved Obligor Limit then applicable to Daimler Chrysler Corporation less the Outstanding Balance of all Eligible Receivables owned by Daimler Chrysler, and (ii) 3.33% of the Outstanding Balance of all Eligible Receivables. For purposes of this definition the term "Unrated Affiliate" means an entity that is an Affiliate of an entity described in clause (i) of the definition of Related Rated Entity or 100% of the equity in which is owned by an entity described in clause (ii) of the definition of Related Rated Entity, and "Related Rated Entity" means (i) an Obligor that has Ratings, or (ii) an organization that is organized under the laws of a foreign country that has Ratings. (d) The date "February 19, 2002" appearing in clause (iv) of the defined term "Bank Termination Date" appearing in Article I to the Loan Agreement is deleted and replaced with the date "February 18, 2003." (e) Clause (i) of the defined term "Eligible Receivable" appearing in Article I of the Loan Agreement is amended in its entirety and as so amended shall read as follows: "(i) the Obligor of which: (a) if a natural person, is a resident of the USA or, if a corporation or other business organization, (1) is organized under the laws of the USA and has its chief executive office in the USA or (2) does not have its chief executive office in the USA or is not organized under the laws of the USA but (i) is organized under the laws of and has its chief executive office in a member country of the Organization of Economic Cooperation and Development, and (ii) the parent of such Obligor has its chief executive office in the USA and is organized under the laws of the USA (a "Permitted Foreign Obligor"); (b) is not an Affiliate of any of the parties hereto; (c) is a Designated Obligor; and (d) is not a government or governmental subdivision or agency." (f) The date "February 19, 2002" appearing in clause (i) of the defined term "Loan Amortization Date" appearing in Article I of the Loan Agreement is deleted and replaced with the date "February 18, 2003." (g) The defined term "Loan Limit" appearing in Schedule I to the Loan Agreement is hereby amended in its entirety and as so amended shall read as follows "Loan Limit" means $120,000,000. (h) The defined term "Net Receivables Balance" appearing in Article I to the Loan Agreement is hereby amended in its entirety and as so amended shall read as follows: "Net Receivables Balance" shall mean, at any time, the Outstanding Balance of all Eligible Receivables at such time reduced by the sum of (a) the amount by which the Outstanding Balance of all Eligible Receivables of any Obligor (other than an Approved Obligor) and its Affiliates exceeds the Concentration Factor at such time, plus (b) the amount by which the Outstanding Balance of all Eligible Receivables of any Approved Obligor and its Affiliates exceeds its Approved Obligor Limit, plus (c) to the extent not already included in (a) or (b) above, the amount by which the Outstanding Balance of all Eligible Receivables of all Permitted Foreign Obligors exceeds 10% of the Outstanding Balance of all Receivables. (i) A new defined term "Permitted Foreign Obligor" shall be added to Article I to the Loan Agreement which shall read in its entirety as follows: "Permitted Foreign Obligor" is defined in the definition of Eligible Receivables. (j) The defined term "Program LOC Provider Commitment" appearing in Article I to the Loan Agreement is hereby amended in its entirety and as so amended shall read as follows: "Program LOC Provider Commitment" shall mean an amount equal to Twelve Million Two Hundred Forty Thousand Dollars ($12,240,000), as such amount may be reduced pursuant to Section 2.6. (k) The date "February 19, 2002" appearing in clause (c) of the defined term "Program LOC Provider Termination Date" appearing in Article I of the Loan Agreement is deleted and replaced with the date "February 18, 2003." (l) The percentage "ten percent (10%)" appearing in clause (a) of the defined term "Reserve Percentage" appearing in Article I of the Loan Agreement is deleted and replaced with the percentage "thirty percent (30%)." Section 2. Schedule I to the Loan Agreement is hereby amended in its entirety and as so amended shall read as set forth as Schedule I to this Amendment. Section 3. The effectiveness of this Amendment is subject to the satisfaction of all of the following conditions precedent: (a) Each of the parties hereto shall have accepted this Amendment in the spaces provided for that purpose below. (b) All other legal matters incident to the execution and delivery hereof and to the transactions contemplated hereby shall be satisfactory to the Agent. Section 4. The Loan Agreement, as amended and supplemented hereby or as contemplated herein, and all rights and powers created thereby and thereunder or under the other Transaction Documents (as defined in the Loan Agreement) and all other documents executed in connection therewith, is in all respects ratified and confirmed. From and after the date hereof, the Loan Agreement shall be amended and supplemented as herein provided, and, except as so amended and supplemented, the Loan Agreement, each of the other Transaction Documents and all other documents executed in connection therewith shall remain in full force and effect. Section 5. This Amendment may be executed in two or more counterparts, each of which shall constitute an original but both or all of which, when taken together, shall constitute but one instrument. Section 6. This Amendment shall be governed and construed in accordance with the internal laws of the State of Illinois. In Witness Whereof, the parties have caused this Amendment to be executed and delivered by their duly authorized officers as of the date first above written. ABN AMRO Bank N.V., as the Agent, as a Bank and as the Program LOC Provider By: Title: By: Title: Windmill Funding Corporation By: Title: BWA Receivables Corporation By: Title: BorgWarner Inc. By: Title: Schedule I Liquidity Providers and Commitments of Committed Purchasers Name of Liquidity Provider Commitment - -------------------------- ---------- ABN AMRO Bank N.V. $110,160,000 Program LOC Provider - -------------------------- ABN AMRO Bank N.V. $12,240,000 EX-10.16 4 c75405exv10w16.txt EX-10.16 EIGHTH AMENDMENT TO LOAN AGREEMENT EXHIBIT 10.16 EIGHTH AMENDMENT TO RECEIVABLES LOAN AGREEMENT THIS EIGHTH AMENDMENT (the "Amendment"), dated as of February 18, 2003, is entered into among BWA Receivables Corporation (the "Borrower"), BorgWarner Inc. ("BWI" and in its capacity as Collection Agent, the "Collection Agent"), Windmill Funding Corporation, a Delaware corporation ("Windmill"), ABN AMRO Bank N.V., as Windmill's program letter of credit provider (the "Program LOC Provider"), the Bank listed on the signature page hereof (the "Bank") and ABN AMRO Bank N.V., as agent for Windmill, the Program LOC Provider and the Bank (the "Agent"); WITNESSETH: WHEREAS, the Borrower, Collection Agent, Windmill, Program LOC Provider, the Bank and Agent have heretofore executed and delivered an Amended and Restated Receivables Loan Agreement, dated as of December 23, 1998 (as amended, supplemented or otherwise modified through the date hereof, the "Loan Agreement"), WHEREAS, the parties hereto desire to amend the Loan Agreement as provided herein; NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree that the Loan Agreement shall be and is hereby amended as follows: Section 1. (a) The defined term "Aggregate Bank Commitment" appearing in Article I to the Loan Agreement is hereby amended in its entirety and as so amended shall read as follows: "Aggregate Bank Commitment" shall mean an amount equal to Eighty Two Million Six Hundred Twenty Thousand Dollars ($82,620,000), as such amount may be reduced pursuant to Section 2.6. (b) The defined term "Aggregate Commitment" appearing in Article I to the Loan Agreement is hereby amended in its entirety and as so amended shall read as follows: "Aggregate Commitment" shall mean an amount equal to Ninety One Million Eight Hundred Thousand Dollars ($91,800,000), as such amount may be reduced pursuant to Section 2.6. (c) The date "February 18, 2003" appearing in clause (iv) of the defined term "Bank Termination Date" appearing in Article I to the Loan Agreement is deleted and replaced with the date "February 17, 2004". (d) The date "February 18, 2003" appearing in clause (i) of the defined term "Loan Amortization Date" appearing in Article I of the Loan Agreement is deleted and replaced with the date "February 17, 2004". (e) The defined term "Loan Limit" appearing in Schedule I to the Loan Agreement is hereby amended in its entirety and as so amended shall read as follows "Loan Limit" means $90,000,000. (f) The defined term "Program LOC Provider Commitment" appearing in Article I to the Loan Agreement is hereby amended in its entirety and as so amended shall read as follows: "Program LOC Provider Commitment" shall mean an amount equal to Nine Million One Hundred Eighty Thousand Dollars ($9,180,000), as such amount may be reduced pursuant to Section 2.6. (g) The date "February 18, 2003" appearing in clause (c) of the defined term "Program LOC Provider Termination Date" appearing in Article I of the Loan Agreement is deleted and replaced with the date "February 17, 2004". (h) The defined term "Coverage Percentage" appearing in Article I to the Loan Agreement is hereby amended in its entirety and as so amended shall read as follows: "Coverage Percentage" shall mean at any time a percentage equal to the sum of (i) one hundred percent (100%), plus (ii) the Reserve Percentage, redetermined each time the Eligible Receivables Balance is redetermined. (i) The defined term "Reserve" appearing in Article I to the Loan Agreement is hereby amended in its entirety and as so amended shall read as follows: "Reserve" shall for each Lender mean, at any time that such Lender's Loan Amount is greater than zero, an amount equal to the product of (a) the Reserve Percentage at such time, multiplied by (b) an amount obtained by multiplying (i) a fraction the numerator of which is such Lender's Loan Amount and the denominator of which is the Loan Amount of all Lenders by (ii) the Net Receivables Balance. (j) Section 8.1(i) of the Loan Agreement is hereby amended in its entirety and as so amended shall read as follows: (i) the Secured Interest (expressed as a percentage) multiplied by the Net Receivables Balance at any time exceeds 100% at such time and such failure shall continue for one (1) day after the Borrower has knowledge thereof; or Section 2. Exhibit C to the Loan Agreement is hereby amended in its entirety and as so amended shall read as set forth as Exhibit C to this Amendment. -2- Section 3. Schedule I to the Loan Agreement is hereby amended in its entirety and as so amended shall read as set forth as Schedule I to this Amendment. Section 4. The effectiveness of this Amendment is subject to the satisfaction of all of the following conditions precedent: (a) Each of the parties hereto shall have accepted this Amendment in the spaces provided for that purpose below. (b) The Agent shall have received executed counterparts of the Second Amendment to Second Amended and Restated Fee Letter. Section 5. The Loan Agreement, as amended and supplemented hereby or as contemplated herein, and all rights and powers created thereby and thereunder or under the other Transaction Documents (as defined in the Loan Agreement) and all other documents executed in connection therewith, is in all respects ratified and confirmed. From and after the date hereof, the Loan Agreement shall be amended and supplemented as herein provided, and, except as so amended and supplemented, the Loan Agreement, each of the other Transaction Documents and all other documents executed in connection therewith shall remain in full force and effect. Section 6. This Amendment may be executed in two or more counterparts, each of which shall constitute an original but both or all of which, when taken together, shall constitute but one instrument. Section 7. This Amendment shall be governed and construed in accordance with the internal laws of the State of Illinois. -3- IN WITNESS WHEREOF, the parties have caused this Amendment to be executed and delivered by their duly authorized officers as of the date first above written. ABN AMRO BANK N.V., as the Agent, as a Bank and as the Program LOC Provider By: Title: By: Title: WINDMILL FUNDING CORPORATION By: Title: BWA RECEIVABLES CORPORATION By: Title: BORGWARNER INC. By: Title: -4- SCHEDULE I LIQUIDITY PROVIDERS AND COMMITMENTS OF COMMITTED PURCHASERS NAME OF LIQUIDITY PROVIDER COMMITMENT - -------------------------- ---------- ABN AMRO Bank N.V. $82,620,000 PROGRAM LOC PROVIDER - -------------------------- ABN AMRO Bank N.V. $9,180,000 EX-10.23 5 c75405exv10w23.txt EX-10.23 DEFERRED COMPENSATION PLAN EXHIBIT 10.23 BORG-WARNER AUTOMOTIVE, INC. BOARD OF DIRECTORS DEFERRED COMPENSATION PLAN BORG-WARNER AUTOMOTIVE, INC. BOARD OF DIRECTORS DEFERRED COMPENSATION PLAN I. PURPOSE The purpose of the Borg-Warner Automotive, Inc. Board of Directors Deferred Compensation Plan (the "Plan") is to enhance the Company's ability to attract and retain qualified non-employee Directors. The Plan was established effective January 1, 1995, and has subsequently been amended to permit allocation of deferred amounts to Borg-Warner Automotive Stock Unit Accounts. The effective date of this amendment is April 18, 1995. II. DEFINITIONS Where appropriate, references in this Plan to the masculine shall include the feminine, and references to the singular shall include the plural. 2.1. "Beneficiary" means the person or persons so designated by a Participant pursuant to Section 6.3. 2.2. "Board of Directors" means the Board of Directors of Borg-Warner Automotive, Inc. 2.3. "BWA Stock Unit" means a measure of participation under the Plan which has a value based on the Market Value of Common Stock. 2.4. "BWA Stock Unit Account" means the stock unit account described in Section 5.4 to which a Participant may elect to allocate a portion of his annual Retainer Fee each Deferral Year. 2.5. "Committee" means the committee of the Company appointed by the Board of Directors to manage and administer the Plan. This Committee shall consist of all or a portion of those members of the Board of Directors who are employees of the Company. 2.6. "Common Stock" means Borg-Warner Automotive, Inc.'s $0.01 par value common stock. 2.7. "Company" means Borg-Warner Automotive, Inc. 2.8. "Deferral Election" means the Borg-Warner Automotive, Inc. Board of Directors Deferred Compensation Plan Election Agreement filed with the Committee by a Participant pursuant to the requirements of Article IV. The Deferral Election shall indicate the percentage of the annual Retainer Fee that a Participant is deferring, an allocation of the annual Retainer Fee deferral among the Moody's Money Credit Account, the Prime Rate Money Credit Account and the BWA Stock Unit Account, and an election as to the time and form of payment of the amounts deferred and associated earnings or losses. 2.9. "Deferral Year" means any calendar year with respect to which a Participant files a Deferral Election, beginning as of January 1, 1995, and continuing until this Plan is terminated. 2.10. "Deferred Benefit Account" means the account maintained on the books of the Company for each Deferral Election of a Participant pursuant to Article IV. 2.11. "Disability" shall have the same meaning as under the Company- sponsored long-term disability plan then in effect. 2.12. "Effective Date" means January 1, 1995. However, the Effective Date with respect to the addition of the BWA Stock Unit Account and related amendments to the Plan shall be April 18, 1995. 2.13. "Market Value" is defined in Section 5.4(c). 2.14. "Moody's Interest Yield" means an annual interest rate equal to the average yield to maturity of the Moody's Corporate AAA Bond Index for the 12 months preceding the relevant Valuation Date. If a distribution is to be made on a date that is not a January 1, the Moody's Interest Yield shall be prorated as appropriate and shall be based on the average yield to maturity of the Moody's Corporate AAA Bond Index for the months since the immediately preceding Valuation Date. 2.15. "Moody's Money Credit Account" means the fixed income money credit account described in Section 5.2 to which a Participant may elect to allocate a portion of his Retainer Fee that is deferred for each Deferral Year. 2.16. "Participant" means a member of the Board of Directors of the Company (a) who is not an employee of the Company, (b) who is designated to be eligible to participate in the Plan pursuant to Article III and (c) who has made an initial Deferral Election pursuant to Article IV. A director who has deferred a percentage of his Retainer Fee under the Plan shall continue as a Participant until he has received payment of all amounts deferred by him pursuant to his Deferral Elections under the Plan. 2.17. "Participant Account" means the account established for each Participant to reflect the total liability of the Company to him for all Deferred Benefit Accounts, as provided in Section 5.1. 2.18. "Plan" means this Borg-Warner Automotive, Inc. Board of Directors Deferred Compensation Plan, as amended from time to time. 2.19. "Prime Rate Interest Yield" means an annual interest rate equal to the average of the prime lending rate for the 12 months preceding the relevant Valuation Date, as published on the first business day of each month in the Wall Street Journal. If a distribution is to be made on a date that is not a January 1, the Prime Rate Interest Yield shall be prorated as appropriate and shall be based on the prime lending rate for the months since the immediately preceding Valuation Date. 2.20. "Prime Rate Money Credit Account" means the fixed income money credit account described in Section 5.3 to which a Participant may elect to allocate a portion of his Retainer Fee that is deferred for each Deferral Year. 2.21. "Retainer Fee" means the annual Retainer Fee payable during the relevant Deferral Year to a Participant for services rendered as a member of the Board of Directors of the Company. The Retainer Fee does not include payments of any specific service fees (such as meeting fees, chairperson fees, etc.), to members of the Board of Directors. 2.22. "Termination of Service" means the Participant's cessation of service with the Board of Directors for any reason whatsoever, whether voluntary or involuntary, including by reason of death or Disability. 2.23. "Unforeseeable Financial Emergency" means a severe financial hardship to the Participant resulting from a sudden and unexpected illness of the Participant or a dependent of the Participant, the Participant's Disability, loss of the Participant's property due to a casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. The Committee shall determine, in its sole discretion, whether an Unforeseeable Financial Emergency exists. 2.24. "Unscheduled Withdrawal" is defined in Section 6.7. 2.25. "Valuation Date" means the date on which the value of a Participant's Deferred Benefit Account is determined, as provided in Article V hereof. The first day of each Deferral Year shall be a Valuation Date, and other Valuation Dates with respect to a particular Participant may be established by the Committee (i) in order to credit dividends to Participants' BWA Stock Unit Accounts on each dividend payment date, as provided in Section 5.6, (ii) in the case of an Unforeseeable Financial Emergency, as provided in Section 6.6, (iii) in the event of termination of the Plan pursuant to Section 9.2, and (iv) at any other time it deems necessary for the prudent administration of the Plan, including any other dates specifically mentioned in the Plan. III. ELIGIBILITY AND PARTICIPATION Participation in the Plan shall be limited to all non-employee members of the Board of Directors who elect to participate in the Plan by filing a Deferral Election with the Committee pursuant to Article IV. A Participant who has made a Deferral Election for one or more Deferral Years but does not make a Deferral Election (or elects not to defer a percentage of his annual Retainer Fee) in a subsequent Deferral Year shall continue as a Participant until all benefits under the Plan have been distributed to him. IV. DEFERRAL ELECTIONS 4.1. Time of Election. Deferral Elections made with respect to the Deferral Year commencing on the initial Effective Date shall be made within 30 days following that Effective Date. Deferral Elections made for subsequent Deferral Years shall be made no later than 30 days prior to the commencement of the applicable Deferral Year. A new non-employee member of the Board of Directors shall be eligible to participate in the Plan if he files a Deferral Election with the Committee within 30 days of his commencement of service as a member of the Board of Directors. 4.2. Minimum and Maximum Deferral and Form of Election. Prior to the beginning of each Deferral Year, each Participant may elect to defer up to 100% of his Retainer Fee, in increments of 5%. The Participant may also elect not to defer any portion of his Retainer Fee in a Deferral Year. In each Deferral Election, the Participant shall specify the percentage of deferred Retainer Fee (in increments of 5%) that is to be allocated to the Moody's Money Credit Account, the percentage of his deferred Retainer Fee to be allocated to the Prime Rate Money Credit Account, and the percentage of his deferred Retainer Fee to be allocated to the BWA Stock Unit Account. The Participant shall also elect one or more times and forms of distribution, as specified in Section 6.1. Once a Participant makes an election pursuant to this Section, he may not change such election, except as indicated elsewhere in the Plan. A Participant's Deferral Election shall become effective after the Committee reviews it and deems it complete. The Committee shall notify the Participant upon accepting the Deferral Election. A Participant shall complete a separate Deferral Election for each Deferral Year. The amount of any Retainer Fee deferred pursuant to each Deferral Election must remain in the Plan until the Participant's sixty-fifth (65th) birthday or his Termination of Service (as elected by the Participant, subject to the provisions of Section 6.1) unless the Committee elects to distribute such amounts due to an Unforeseeable Financial Emergency (pursuant to Section 6.6). At the time of a Participant's initial Deferral Election, he shall also elect a Beneficiary and form of payment to such Beneficiary, on a Beneficiary designation form provided by the Committee, as provided in Section 6.3. 4.3. Timing of Deferral Credits. The percentage amount of a Retainer Fee that a Participant elects to defer in the Deferral Election shall cause an equivalent reduction in the amount of the Retainer Fee actually paid in cash to the Participant for that year. Retainer Fee deferrals shall be credited to each Participant's appropriate Deferred Benefit Account as of the January 1 immediately following the relevant Deferral Year. For example, any Retainer Fee payable to the Participant during 1995 shall be credited to his Participant Account as of January 1, 1996. Such amounts shall be credited to the Participant's Moody's Money Credit Account, the Prime Rate Money Credit Account, and the BWA Stock Unit Account in the percentages elected pursuant to Section 4.2. Amounts credited to the BWA Stock Unit Account shall be converted to BWA Stock Units, as provided in Section 5.4(a). 4.4. Failure to Submit Election Forms. If a Participant fails to submit a Deferral Election within the relevant time limit under Section 4.1, the Participant will be deemed to have elected to defer 0% of his Retainer Fee for the Deferral Year for which such Deferral Election is required. 4.5. Nullification of Deferral Elections. Notwithstanding the submission of Deferral Elections pursuant to this Article, the Committee may nullify or modify such elections upon determination that an Unforeseeable Financial Emergency exists. This nullification may be in addition to any distribution allowed under Section 6.6 and shall be applied so as to avoid the application of the short-swing profit rules of Section 16(b) of the Securities Exchange Act of 1934. V. STATUS OF DEFERRED AMOUNTS 5.1. Participant Account. (a) Establishment and Crediting of Contributions, Earnings, and Dividends. The Company shall establish a Participant Account for each Participant to reflect accurately its total liability to him for all Deferred Benefit Accounts. The Participant Account shall be credited with all amounts deferred by a Participant under each Deferral Election, any interest earned on amounts deferred in the Moody's Money Credit Account or the Prime Rate Money Credit Account, and any dividends and appreciation or depreciation in the Market Value of the BWA Stock Units in the Participant's BWA Stock Unit Account. (b) Sub-Accounts. Each Participant Account shall contain sub-accounts for each Deferred Benefit Account, and shall reflect amounts in such Deferred Benefit Account that are attributable to the Retainer Fee deferred under the applicable Deferral Election, and such sub-accounts shall indicate whether amounts are allocated to the Moody's Money Credit Account, the Prime Rate Money Credit Account or the BWA Stock Unit Account. Each such sub-account shall be credited with, and shall reflect the total amount attributable to, the Moody's Interest Yield, the Prime Rate Interest Yield or the BWA Stock Unit value and dividends, as appropriate. 5.2. Moody's Money Credit Account. Amounts in a Participant Account that have been allocated to the Moody's Money Credit Account shall earn interest at the Moody's Interest Yield. Interest shall be compounded annually and credited each January 1, until all amounts allocated to the Moody's Money Credit Account have been distributed to or withdrawn by the Participant. 5.3. Prime Rate Money Credit Account. Amounts in a Participant Account that have been allocated to the Prime Rate Money Credit Account shall earn interest at the Prime Rate Interest Yield. Interest shall be compounded annually and credited each January 1, until all amounts allocated to the Prime Rate Money Credit Account have been distributed to or withdrawn by the Participant. 5.4. BWA Stock Unit Account. A Participant's BWA Stock Unit Account shall be expressed in terms of BWA Stock Units, which represent units of Common Stock to the nearest one-hundredth of a share. (a) Converting Deferred Retainer Fee to BWA Stock Units. Amounts in a Participant Account that have been allocated to the BWA Stock Unit Account shall be converted to BWA Stock Units. The number of BWA Stock Units credited to the account will be determined by dividing the amount of deferred Retainer Fee credited to this account on the January 1 immediately following the relevant Deferral Year by the Market Value of a share of Common Stock as of December 31 of the relevant Deferral Year. (b) Converting Dividends to BWA Stock Units. Whenever the Company pays a dividend on its Common Stock, in cash or in property, at a time when a Participant has BWA Stock Units credited to his BWA Stock Unit Account, the Participant shall receive a number of additional BWA Stock Units equal to the result of first multiplying the number of BWA Stock Units in his BWA Stock Unit Account by the dividend paid on each share of Common Stock and then dividing this amount by the Market Value of Common Stock on the date that the dividend is paid. (c) Market Value. The "Market Value" of a share of Common Stock on a particular day shall be the closing price of such share on the New York Stock Exchange on the day in question, or the day of the last previous sale if there is not any sale on the day in question. (d) Other Adjustments. In the event of a stock dividend on Common Stock or any split-up or combination of shares of Common Stock, or any other change therein, an appropriate adjustment shall be made in the aggregate number of BWA Stock Units then credited to the Participant's BWA Stock Unit Account so as to give effect to the extent practicable to such change in the capital structure of the Company and to the purpose and intent of the Plan. 5.5. Transfers Between Accounts. A Participant may elect to make transfers between and among his Moody's Money Credit Account and his Prime Rate Money Credit Account in accordance with the following provisions: (a) A Participant may elect to make only one such transfer each Deferral Year, under procedures established by the Committee. (b) Each transfer shall be effective and credited as of the January 1 next following the date the Participant makes the transfer election. (c) Transfers must be in an amount that equals or exceeds the lesser of $1,000 or the entire balance of the account from which the transfer is made. (d) In no event will a Participant be allowed to make any transfers either to or from his BWA Stock Unit Account. Amounts credited to a Participant's BWA Stock Unit Account shall remain in such account until distributed or withdrawn from such account pursuant to Article VI. 5.6. Determination of Account. Each Participant Account as of each Valuation Date shall consist of the balance of the Participant Account as of the immediately preceding Valuation Date, plus any Retainer Fee deferred and credited pursuant to Section 4.2 and transfers credited pursuant to Section 5.5. The Participant Account shall be reduced by the amount of all withdrawals, transfers and distributions, if any, made from such Participant Account as of the current Valuation Date or since the preceding Valuation Date. With respect to amounts in the Moody's Money Credit Account, the appropriate Moody's Interest Yield shall be credited on the balance of the Moody's Money Credit Account as of the immediately preceding Valuation Date. Similarly, with respect to amounts in the Prime Rate Money Credit Account, the appropriate Prime Rate Interest Yield shall be credited on the balance of the Prime Rate Money Credit Account as of the immediately preceding Valuation Date. With respect to amounts in the BWA Stock Unit Account, the amounts will be deemed to be invested in the BWA Stock Units, each of which has a value equal to the Market Value of a share of Common Stock on the date immediately preceding the Valuation Date, and any dividend equivalent to be added shall be calculated based on the number of BWA Stock Units to the credit of the Participant on the immediately preceding Valuation Date. The Committee shall advise each Participant of the balance in his Participant Account at least annually (on a date to be determined by the Committee). 5.7. Vesting of Participant Account. A Participant shall be 100 percent vested in all amounts credited to his Participant Account at all times. VI. DISTRIBUTIONS AND WITHDRAWALS OF BENEFITS 6.1. Distribution Options. When making a Deferral Election pursuant to Section 4.2, the Participant must elect one of the following alternative forms of payment for each related Deferred Benefit Account: (a) Approximately equal monthly installments for a period of 5, 10, 15 or 20 years payable on the first day of each month commencing on the January 1 next following the Participant's sixty-fifth (65th) birthday or Termination of Service, according to the option chosen by the Participant. (b) A lump sum payable on the January 1 next following the Participant's sixty-fifth (65th) birthday or Termination of Service, according to the option chosen by the Participant. Notwithstanding subsections (a) and (b) above, any Participant who is age sixty-five (65) or older in the relevant Deferral Year must elect to commence payment of any Deferred Benefit Account for such Deferral Year on the January 1 next following his Termination of Service. 6.2. Change in Distribution Options. At least 24 months (or more) prior to the expiration of the Participant's term as a member of the Board of Directors or the Participant's sixty-fifth (65th) birthday, whichever occurs first, a Participant may submit a written election to the Committee to change the commencement of payment of one or more Deferred Benefit Accounts from Termination of Service to age 65 or change the form of payment elected for such Deferred Benefit Account(s) from installment payment to lump sum without penalty; provided, however, that if the Participant subsequently incurs a Termination of Service within the 24 months immediately succeeding such election change, the election change shall be null and void and the original election shall be reinstated. However, any other changes elected by the Participant shall result in a 10% reduction before payment of the relevant Deferred Benefit Account. This includes, but is not limited to, (a) an election to change from a lump sum payment to installment payments or (b) an election to defer commencement of payment that is submitted to the Committee less than 24 months prior to the expiration of the Participant's term. The Participant shall only be subjected to one 10% reduction in each affected Deferred Benefit Account at one time, regardless of the number of changes in form of payment that a Participant elects at that time. 6.3. Designation of Beneficiary and Form of Death Benefit. Each Participant must designate at least one individual or other entity as a Beneficiary (on a Beneficiary designation form provided by the Committee) in the event of the Participant's death. The Participant may also designate one or more contingent beneficiaries. The Participant shall also designate a form of death benefit from among the following: lump sum payment or monthly payments for a period of 5, 10, 15 or 20 years. The form of death benefit elected shall apply to the full amount of the Participant's Account. All forms of benefit shall commence as of the January 1 next following the Participant's death. 6.4. Death Prior to Termination of Service. Upon the death of a Participant prior to his Termination of Service, the Beneficiary of the deceased Participant shall be entitled to a death benefit equal to the value of the Participant Account as determined under Section 5.6. The form of benefit shall be as provided in Section 6.3. If the Participant's Beneficiary is not alive at the time of the Participant's death, and the Participant has no surviving spouse, the estate of the Participant may petition the Committee for payment of the Participant Account to the estate in the form of a lump sum on the first day of the first month subsequent to the petition (such day to be a Valuation Date with respect to the applicable Participant Account) or as soon as otherwise administratively feasible. 6.5. Death Following Termination of Service. Upon the death of a Participant following his Termination of Service, the Beneficiary of the deceased Participant shall continue to receive any of the remaining payments from the Participant Account in the form of payment elected by the Participant in his Deferral Elections. 6.6. Emergency Benefit; Waiver of Deferral. In the event that the Committee, upon written petition of the Participant or his Beneficiary, determines in its sole discretion that the Participant or his Beneficiary has suffered an Unforeseeable Financial Emergency (including an Unforeseeable Financial Emergency as a result of a Disability), the Company shall pay to the Participant or his Beneficiary on the first day of the calendar month as soon as practicable following such determination (such date to be a Valuation Date with respect to the applicable Participant Account), an amount necessary to satisfy the emergency, but not in excess of the sum of the Participant's Moody's Money Credit Account and Prime Rate Money Credit Account. No payments shall be made from a Participant's BWA Stock Unit Account pursuant to this Section 6.6. 6.7. Unscheduled Withdrawals. A Participant may make an Unscheduled Withdrawal of any amounts in his Moody's Money Credit Account and/or Prime Rate Money Credit Account that have been in the Plan for at least five years by filing an election with the Committee. The Company shall make payment of the requested withdrawal as of the January 1 next following the Committee's receipt and approval of the withdrawal election. Subject to the remainder of this Section 6.7, a request for an Unscheduled Withdrawal may be filed at any time prior to December 15th of the year preceding the year in which unscheduled withdrawal is made. A Participant may take no less than the lesser of $2,000 or the remaining balance in his Participant Account in the form of an Unscheduled Withdrawal. Amounts taken in the form of an Unscheduled Withdrawal will be reduced by a 10% penalty at the time of payment. No Unscheduled Withdrawals shall be made from a Participant's BWA Stock Unit Account. 6.8. Withholding Taxes. To the extent required by law in effect at the time payments are made, the Company shall withhold any taxes required to be withheld by any Federal, State, or local government. 6.9. Form of Distributions/Withdrawals. All distributions and withdrawals made under the Plan shall be made in cash and shall be valued as of the Valuation Date coincident with or immediately preceding the date of the distribution or withdrawal. Distributions from the BWA Stock Account shall be converted to cash, as of such Valuation Date, in order to effect such distributions. VII. CLAIMS FOR BENEFITS PROCEDURE 7.1. Claim for Benefits. Any claim for benefits under the Plan shall be made in writing to any member of the Committee. If such claim is wholly or partially denied by the Committee, the Committee shall, within a reasonable period of time, but not later than 60 days after receipt of the claim, notify the claimant of the denial of the claim. 7.2. Request for Review of a Denial of a Claim for Benefits. Upon the receipt by the claimant of written notice of denial of the claim, the claimant may within 90 days file a written request to the Committee, requesting a review of the denial of the claim, which review shall include a hearing if deemed necessary by the Committee in its sole discretion. In connection with the claimant's appeal of the denial of his claim, he may review relevant documents and may submit issues and comments in writing. 7.3. Decision upon Review of Denial of Claim for Benefits. The Committee shall render a decision on the claim review promptly, but no more than 60 days after the receipt of the claimant's request for review, unless special circumstances (such as the need to hold a hearing) require an extension of time, in which case the 60 day period shall be extended to 120 days. The decision of the Committee shall be final and binding in all respects on both the Company and the claimant. VIII. ADMINISTRATION 8.1. Committee. The Plan shall be administered by the Committee. No member of the Committee may be a Participant under the Plan. The Committee may designate another administrative committee comprised of Company employees to oversee the day to day administration of the Plan. 8.2. General Rights, Powers, and Duties of Committee. The Committee shall be the Plan Administrator and it shall be responsible for the management, operation, and administration of the Plan. In addition to any powers, rights and duties set forth elsewhere in the Plan, it shall have the following powers and duties: (a) To adopt such rules and regulations consistent with the provisions of the Plan as it deems necessary for the proper and efficient administration of the Plan; (b) To administer the Plan in accordance with its terms and any rules and regulations it establishes; (c) To maintain records concerning the Plan sufficient to prepare reports, returns and other information required by the Plan or by law; (d) To construe and interpret the Plan and resolve all questions arising under the Plan; (e) To direct the payment of benefits under the Plan, and to give such other directions and instructions as may be necessary for the proper administration of the Plan; and (f) To be responsible for the preparation, filing and disclosure on behalf of the Plan of such documents and reports as are required by any applicable Federal or State law. 8.3. Information to be Furnished to Committee. The Company shall furnish the Committee such data and information as it may require. The records of the Company shall be determinative of each Participant's period of service as a member of the Board of Directors, personal data and Retainer Fee deferrals. Participants and their Beneficiaries shall furnish to the Committee such evidence, data or information, and shall execute such documents, as the Committee requests. 8.4. Responsibility. No member of the Committee or of the Board of Directors shall be liable to any person for any action taken or omitted in connection with the administration of this Plan unless attributable to his own fraud or willful misconduct; nor shall the Company be liable to any person for any such action unless attributable to fraud or willful misconduct on the part of a director, officer or employee of the Company within the scope of his Company duties. Each member of the Committee shall be indemnified and held harmless by the Company for any liability arising out of the administration of the Plan, to the maximum extent permitted by law. IX. AMENDMENT AND TERMINATION 9.1. Amendment. The Plan may be amended in whole or in part by the Committee at any time. No amendment shall effectively decrease the value of a Participant Account. An amendment that makes a prospective change in the future interest rate credited under the Plan will only become effective on the subsequent January 1 after providing advance written notice to Participants and Beneficiaries then entitled to receive benefits. The Committee reserves the unilateral right to change any rule under the Plan if it deems such a change necessary to avoid constructive receipt or to avoid the application of the Employee Retirement Income Security Act of 1974, as amended, to the Plan. 9.2. Company's Right to Terminate. The Committee reserves the sole right to terminate the Plan and/or any Deferral Elections pertaining to a Participant at any time after the Effective Date. In the event of any such termination, the Participant shall be entitled to the accrued amount of his Participant Account determined under Section 5.1, determined using the date of the Termination of the Plan as a Valuation Date. Such benefit shall be paid to the Participant in quarterly installments over a period of no more than ten (10) years, except that the Committee, in its sole discretion, may pay out such benefit in a lump sum or in installments over a period shorter than ten (10) years. X. MISCELLANEOUS 10.1. No Implied Rights; Rights on Termination of Service. Neither the establishment of the Plan nor any amendment thereof shall be construed as giving any Participant, Beneficiary, or any other person any legal or equitable right unless such right shall be specifically provided for in the Plan or conferred by specific action of the Committee in accordance with the terms and provisions of the Plan. Except as expressly provided in this Plan, the Company shall not be required or be liable to make any payment under the Plan. 10.2. No Right to Company Assets. Neither the Participant nor any other person shall acquire by reason of the Plan any right in or title to any assets, funds or property of the Company whatsoever including, without limiting the generality of the foregoing, any specific funds, assets, or other property which the Company, in its sole discretion, may set aside in anticipation of a liability hereunder. Any benefits which become payable hereunder shall be paid from the general assets of the Company. The Participant shall have only a contractual right to the amounts, if any, payable hereunder, unsecured by any asset of the Company. Nothing contained in the Plan constitutes a guarantee by the Company that the assets of the Company shall be sufficient to pay any benefit to any person. 10.3. No Service Rights. Nothing herein shall constitute a contract of continuing service or in any manner obligate the Company to continue the services of the Participant or obligate the Participant to continue in the service of the Company. Nothing herein shall be construed as fixing or regulating the Retainer Fee or any other amount payable to any Participant. 10.4. Offset. If, at the time payments or installments of payments are to be made hereunder, the Participant or the Beneficiary or both are indebted or obligated to the Company, then the payments under the Plan remaining to be made to the Participant or the Beneficiary or both may, at the discretion of the Company, be reduced by the amount of such indebtedness or obligation, provided, however, that an election by the Company not to reduce any such payment or payments shall not constitute a waiver of its claim for such indebtedness or obligation. 10.5. Non-assignability. Neither the Participant nor any other person shall have any voluntary or involuntary right to commute, sell, assign, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, which are expressly declared to be unassignable and non-transferable. No part of the amounts payable prior to actual payment shall be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by the Participant or any other person, or be transferable by operation of law in the event of the Participant's or any other person's bankruptcy or insolvency. 10.6. Notice. Any notice required or permitted to be given under the Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, and if given to the Company, delivered to the principal office of the Company, directed to the attention of the Committee. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark or the receipt for registration or certification. 10.7. Governing Laws. The Plan shall be construed and administered according to the laws of the State of Illinois. EX-13.1 6 c75405exv13w1.txt EX-13.1 ANNUAL REPORT TO STOCKHOLDERS EXHIBIT 13.1 2002 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BorgWarner Inc. and Consolidated Subsidiaries INTRODUCTION BorgWarner Inc. and Consolidated Subsidiaries (the "Company") is a leading global supplier of highly engineered systems and components primarily for powertrain applications. Our products help improve vehicle performance, fuel efficiency, air quality and vehicle stability. They are manufactured and sold worldwide, primarily to original equipment manufacturers (OEM) of passenger cars, sport-utility vehicles, trucks and commercial transportation products. We operate manufacturing facilities serving customers in the Americas, Europe and Asia, and are an original equipment supplier to every major OEM in the world. RESULTS OF OPERATIONS 2002 VS. 2001 VS. 2000 BorgWarner reported net earnings for 2002 of $149.9 million, or $5.58 per diluted share, before charges for the cumulative effect of an accounting change related to goodwill. After this charge, the Company had a net loss of $119.1 million, or $(4.44) per diluted share. The Company's net earnings in 2001 were $66.4 million, or $2.51 per diluted share. Net earnings in 2000 were $94.0 million or $3.54 per diluted share. The following table reconciles reported earnings to earnings before non-recurring charges and effects of change in accounting principle.

The earnings comparison for 2002 to 2001, other than the items reflected in the table above, was positively affected by increased sales, operating leverage, lower interest expense and a lower tax rate. Overall, our sales increased 16.1% from 2001 and declined 11.1% between 2001 and 2000. The main causes of the sales increase in 2002 were increased production in the auto industry, increased demand for turbochargers, especially in Europe, and new business. As a comparison, worldwide vehicle production increased by 2.3% in 2002 and decreased by 3.8% in 2001. North American production increased by 5.7% in 2002 and decreased by 9.7% in 2001, Japanese production increased by 3.8% in 2002 and decreased by 2.3% in 2001 and Western European production decreased 1.5% in 2002 and increased 1.4% in 2001. Our 2001 results reflected weak production demand, the weak Euro and Yen, production slowdowns and shutdowns, and further deterioration in the heavy truck market. Our outlook for the industry as we head into 2003 is one of caution and uncertainty. The North American automotive market was strong in 2002, but increased incentives drove consumer sales. It is uncertain whether these incentive levels will continue in 2003 and what impact this will have. We anticipate global production levels of light vehicles to be steady or slightly lower than the 2002 levels. There is also uncertainty in the medium- and heavy- truck markets as these markets continue to reflect depressed business levels. We expect the medium and heavy truck markets to continue to be down in the first half of 2003, and are cautiously optimistic of a recovery in the second half of 2003. Assuming these conditions and no major negative events, we anticipate our sales and earnings to grow due to new business from increased penetration, new customers and new applications. RESULTS BY OPERATING SEGMENT We announced a reorganization into two reportable operating segments in December of 2002 to be effective January 1, 2003. The two segments are Driveline and Engine. The Driveline segment is primarily the combination of the TorqTransfer Systems and Transmissions Systems segments. The Engine segment is primarily the combination of the Morse TEC, Air/Fluid Systems, and Cooling Systems segments. For purposes of this discussion, we will show the operating segment structure in place for 2002, where our products fell into five reportable operating segments: Morse TEC, Air/Fluid Systems, Cooling Systems, TorqTransfer Systems, and Transmission Systems. Set forth below are our results under both organizational structures for each of the last three years. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002. Accordingly, the segment EBITA table below and all Management's Discussion and Analysis segment comparisons of the three-year period excludes goodwill amortization. See Note Thirteen to the Consolidated Financial Statements for further details on the Company's implementation of SFAS No. 142. 29 BorgWarner 2002 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NET SALES

EARNINGS BEFORE INTEREST, TAXES AND GOODWILL AMORTIZATION (EBITA)

MORSE TEC sales increased by 20.4% and EBITA increased by 20.5%. Contributing to the sales increase were strong sales of engine timing chains, increased usage of turbochargers, and continued strength in sales of sport-utility vehicles (SUVs), many of which utilize the Company's chain products for their four wheel drive systems. The EBITA increase was due to greater productivity from increased production volume. The EBITA increase would have been greater except for the impact of the Honeywell International Inc. (Honeywell) agreement discussed more fully in Note Eleven to the Consolidated Financial Statements. Morse TEC sales decreased 1.9% and EBITA declined by 5.6% from 2000 to 2001. The North American automotive downturn affected this business, but was partially offset by expanded applications, particularly for engine timing systems. The EBITA decline was due to the previously mentioned lower volumes and a change in mix between chain products and lower margin turbocharger products. Morse TEC revenue is expected to grow in the coming years as turbocharger capacity is increased to meet demand on direct-injected diesel passenger cars and as new generations of variable geometry turbochargers for commercial diesel applications are introduced. The introduction of additional products, including timing systems for Chrysler overhead cam engines, increased North American transplant business, Ford's global four-cylinder engine program, and drive chain for the new Toyota hybrid engine and other Japanese and Korean applications, are expected in the coming years. This business expects to benefit from the continued conversion of engine timing systems from belts to chains in both Europe and Japan. Such growth may be tempered by the current economic climate, where new programs at OEMs could be delayed. AIR/FLUID SYSTEMS experienced an 8.6% increase in sales and a 20.6% increase in EBITA compared to 2001. The increase in sales was primarily due to continued ramp up and higher volumes of transmission control modules for DaimlerChrysler, a major customer. The increase in EBITA was due to the increased volume and higher productivity from facility rationalizations in late 2000. Sales decreased by 16.4% and EBITA decreased 54.5%, from 2001 to 2000. The decline in sales was primarily due to pricing and volume weakness at DaimlerChrysler. The decline in EBITA was due to volume decreases, product mix issues and production issues related to facility rationalizations. Despite a tempered outlook for 2003, we believe that this segment continues to provide opportunities for growth. We expect the segment to benefit from the trend in automatic transmissions to convert individual solenoids to modules and "smart" modules with integrated transmission control units. The segment should also benefit from the trend toward non-conventional automated transmissions. Other opportunities in the coming years include products designed to improve fuel efficiency and reduce emissions as well as fluid pumps for engine hydraulics supporting variable cam timing and engine lubrication. COOLING SYSTEMS' sales increased 6.9% and EBITA decreased 0.4%. Penetration into Asian and European markets contributed to the increased revenues. EBITA decreased primarily due to raw material price increases and costs associated with a facility rationalization that began in late 2001 and should be completed by early 2003. Sales decreased by 21.6% and EBITA decreased by 49.2% from 2000 to 2001. Revenues and EBITA were heavily impacted by the deteriorating North American market conditions. Approximately 80% of the business' sales are to customers in North America, mainly in the sport-utility, light-, medium- and heavy-truck markets. This performance was in line with our expectations due to weakness in the North American heavy truck market, along with an application lost in 2001. 30 BorgWarner BorgWarner Inc. and Consolidated Subsidiaries We expect better results in 2003 when new business is launched and the truck markets recover. Increasing fuel economy and environmental legislation in North America and Europe are expected to drive demand for electronically controlled cooling systems to accommodate increasingly higher operating engine temperatures. These requirements are also driving developing countries to embrace mechanically controlled drives. Because of our full product range and manufacturing locations in every major vehicle producing region, we expect to be well positioned to benefit from adoption of more advanced cooling technologies in these markets. TORQTRANSFER SYSTEMS' sales increased 26.0% and EBITA increased 62.0% from the prior year. The increase in sales was due to higher volumes for Hyundai and Kia, and the InterActive Torque Management (ITM)(TM) system application in the Acura MDX and the recently released Honda Pilot. Additionally, TorqTransfer Systems launched new applications for some GM vehicles, including the Hummer H2 and GMC Yukon, in mid-2002. The EBITA increase was due to higher volumes, and since this segment has a relatively high fixed cost structure, production volume changes result in larger swings in earnings. Sales were down 5.1% and EBITA was down 34.8% in 2001 versus 2000. This segment suffered particularly in the early part of the year from the effects of erratic scheduling. OEMs cut volumes at short notice in response to the market downturn and the effects of the Ford Explorer/Firestone tire issue. The EBITA decline was compounded by the need to support the launch of some new programs, which involved substantial engineering effort and the installation of new manufacturing capacity. For 2003, this segment expects to benefit from a full year of a new contract to supply transfer cases to General Motors, as well as continued increases in business with Kia and Hyundai. We expect moderate growth from this segment in 2003. TRANSMISSION SYSTEMS' sales increased 15.5%, and EBITA increased 19.7% in 2002. Sales growth was strong in all regions for this segment, due to a combination of market conditions and new applications, both in North America and overseas. The EBITA increase was driven by a combination of increased volume and cost controls. Compared to 2000, 2001 sales decreased 2.0%. The sales reduction was linked to volume decreases experienced by major North American OEMs, driven by the general North American automotive industry downturn as well as market share losses to European and Asian automakers in North America. EBITA in 2001 was 4.8% above 2000 levels. Because of significant cost cutting efforts taken in late 2000 and early 2001, this segment was able to increase EBITA, even while sales decreased. This segment was quick to respond to the softening North American marketplace and reduced overhead costs to be more in line with the then current industry levels. We expect the Transmission Systems segment to achieve moderate sales growth in 2003, linked to volume ramp-ups in recently launched applications as well as continued global market share increases by key customers in Europe and Asia. NEW OPERATING SEGMENT STRUCTURE FOR 2003. Below is the table for sales and EBITA for the past three years under the new operating structure. Note the EBITA numbers exclude goodwill amortization. NET SALES

EARNINGS BEFORE INTEREST, TAXES AND GOODWILL AMORTIZATION (EBITA)

DIVESTED OPERATIONS AND BUSINESSES HELD FOR SALE includes the results of Fuel Systems, which was sold in 2001; and the HVAC business, which was sold during 2000. These businesses did not fit our strategic goals, and we believe our resources are better spent on our core technologies in highly engineered powertrain components and systems. The sale of the Fuel Systems business did not result in a significant gain or loss. We adjusted our carrying value of this business in 2000 as part of the restructuring charge discussed on page 32. The $5.4 million gain on the sale of the HVAC business in 2000 is included in other income. Divested operations and businesses held for sale contributed sales of $18.0 million, and $132.9 million and EBITA of $(0.2) million, and $4.0 million in 2001 and 2000, respectively. 31 BorgWarner MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CORPORATE is the difference between calculated total company EBITA and the total from the segments and represents corporate headquarters expenses and expenses not directly attributable to the individual segments. This expense was $40.3 million in 2002, $26.5 million in 2001, and $4.6 million in 2000, excluding non-recurring charges in 2001 and 2000. This amount represents headquarters expenses and expenses not assigned to individual segments. The main reason for the increase in the expense was a decrease in excess of earnings from pension assets over the costs of the U.S. pension plans of $5.3 million from 2001 to 2002 and $10.5 million from 2000 to 2001. Additionally, expenses for post retirement benefits for discontinued operations, which are captured at the corporate level, contributed to the increase in 2002. Also impacting this number was a $5.4 million gain on the sale of the HVAC business in 2000. Corporate headquarters expense was slightly higher at $24.0 million in 2002 compared to $20.5 million in 2001 and $19.2 million in 2000. Our top ten customers accounted for approximately 78% of consolidated sales in 2002 and 2001 compared to 77% in 2000. Ford continues to be our largest customer with 26% of consolidated sales in 2002, compared to 30% in 2001 and 2000. DaimlerChrysler, our second largest customer, represented 20% of consolidated net sales in 2002, 21% in 2001 and 19% in 2000; and General Motors accounted for 12%, 12%, and 13%, in 2002, 2001, and 2000, respectively. No other customer accounted for more than 10% of sales in any of the periods presented. OTHER FACTORS AFFECTING RESULTS OF OPERATIONS The following table details our results of operations as a percentage of sales:

GROSS PROFIT for 2002 was 20.3%, an increase from 19.6% in 2001 and down from the 21.0% in 2000. The increase in gross profit in 2002 is mainly due to higher sales volumes. The decrease in 2001 compared to 2000 is attributable to lower sales volumes, which made it more difficult to cover the fixed costs of our manufacturing facilities. Additionally, many of our core businesses also showed gross margin improvement in both 2001 and 2000. The decrease in margin from 2000 to 2002 is due mainly to a shift in sales to lower margin businesses. For example, TorqTransfer Systems had the largest percentage sales gain in 2002, but has the lowest gross profit percentage because its products have the highest purchased content. Each group has experienced gross profit improvement at the operating level in 2002. The combination of price reductions to customers and cost increases for material, labor and overhead totaled approximately $75 million in 2002, as compared to $37 million and $16 million in 2001 and 2000, respectively. We were able to partially offset these impacts by actively pursuing reductions from our suppliers, making changes in product design and by using process technology to remove cost and/or improve manufacturing capabilities. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A) as a percentage of sales increased to 11.1% from 10.6% and 9.8% in 2001 and 2000, respectively. The increase in SG&A is due to several factors, including an increase in retiree costs for both pension and health care. Another factor is our continued commitment to research and development (R&D) in order to capitalize on growth opportunities. R&D spending was $109.1 million, or 4.0% of sales, as compared with $104.5 million, or 4.4% of sales, and $112.0 million, or 4.2% of sales in 2002, 2001 and 2000, respectively. We continue to invest in a number of cross-segment R&D programs, as well as a number of other key programs, all of which are necessary for short- and long-term growth. We intend to maintain our commitment to R&D investment while continuing to focus on controlling other SG&A costs. RESTRUCTURING AND OTHER NON-RECURRING CHARGES were $28.4 million in 2001 and $62.9 million in 2000. The 2001 non-recurring charges primarily include adjustments to the carrying value of certain assets and liabilities related to businesses acquired and disposed of over the past three years. Of the $28.4 million of pretax charges in 2001, $5.0 million represents non-cash charges. Approximately $3.3 million was spent in 2001, $8.4 million was spent in 2002, and $8.4 million was transferred to environmental reserves 32 BorgWarner BorgWarner Inc. and Consolidated Subsidiaries in 2001. The remaining $3.3 million is expected to be spent in 2003. The 2001 non-recurring charges included $8.4 million of environmental remediation costs related to sold businesses and $12.0 million of product quality costs for issues with products that were sold by acquired businesses prior to acquisition, all of which have been corrected in the currently produced products. The Company expects to fund the total cash outlay of these actions from operations. Restructuring and other non-recurring charges totaling $62.9 million were incurred in the second half of 2000 in response to deteriorating market conditions. The charges included the rationalization and integration of certain businesses and actions taken to bring costs in line with vehicle production slowdowns in major customer product lines. Of the $62.9 million in pretax charges, $47.3 million represented non-cash charges. Approximately $4.4 million was spent in 2000 and the remaining $11.2 million was spent in 2001. The actions taken as part of the 2000 restructuring charges are expected to generate approximately $19 million in annualized savings, primarily from lower salaries and benefit costs and reduced depreciation charges. These savings were more than offset by lower revenue from the deterioration in the automotive and heavy-duty truck markets. Components of the restructuring and other non-recurring charges are detailed in the following table and discussed further below.

Severance and other benefit costs relate to the reduction of approximately 220 employees from the workforce. The reductions affected each of our operating segments, apart from TorqTransfer Systems, across each of our geographical areas, and across each major functional area, including production and selling and administrative positions. Approximately $8.9 million had been paid for severance and other benefits for the terminated employees. Asset write-downs primarily consist of the write-off of impaired assets no longer used in production as a result of the industry downturn and the consolidation of certain operations. Such assets have been taken out of productive use and have been disposed. Loss on anticipated sale of business represents the Fuel Systems business, which was sold to an investor group led by TMB Industries, a private equity group, in April 2001 for a pretax loss of $35.2 million. Fuel Systems produced metal tanks for the heavy-duty truck market in North America and did not fit our strategic focus on powertrain technology. Terms of the transaction did not have a significant impact on the Company's results of operations, financial condition or cash flows. Other exit costs and non-recurring charges are primarily non-employee related exit costs incurred to close certain non-production facilities the Company has previously sold or no longer needs and non-recurring product quality related charges. The 2001 non-recurring charges include $8.4 million of environmental remediation costs related to sold businesses and $12.0 million of product quality costs for issues with products that were sold by acquired businesses prior to acquisition, all of which have been fixed in the currently produced products. GOODWILL AMORTIZATION was zero in 2002, compared to $42.0 million in 2001 and $43.3 million in 2000. As discussed more fully in Note Thirteen to the Consolidated Financial Statements, the Company adopted the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," which discontinued the amortization of goodwill effective January 1, 2002. OTHER, NET decreased to $0.9 million of income in 2002, from $2.1 million in 2001 and $8.1 million in 2000. The 2000 number included a gain on the sale of the HVAC business of $5.4 million. 33 BorgWarner MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EQUITY IN AFFILIATE EARNINGS, NET OF TAX increased by $4.6 million from 2001 and decreased by $0.8 million between 2001 and 2000. This line item is driven by the results of our 50% owned Japanese joint venture, NSK-Warner. Our equity in NSK-Warner's earnings of $20.4 million was $4.7 million higher than 2001, which was $1.2 million lower than 2000. INTEREST EXPENSE, NET decreased by $10.1 million in 2002 and decreased by $14.8 million between 2001 and 2000. The decreases in 2002 and 2001 were due to lower interest rates as well as lower debt levels, as the Company used cash generated in 2002 and 2001 to pay off debt. In 2002, the Company paid down $90.3 million of balance sheet debt and reduced the amount of securitized accounts receivable sold by $30.0 million. In 2001, the Company paid down $57.8 million of balance sheet debt and reduced the amount of securitized accounts receivable sold by $30.0 million. The Company took advantage of lower interest rates through the use of interest rate swap arrangements described more fully in Note Six to the Consolidated Financial Statements. At the end of 2002, the amount of debt with fixed interest rates was 61% of total debt, including the impact of the interest rate swaps. The provision for income taxes results in an effective tax rate for 2002 of 33.0% compared with rates of 36.1% for 2001 and 36.2% for 2000. Our effective tax rates have been lower than the standard federal and state tax rates due to the realization of certain R&D and foreign tax credits; foreign rates, which differ from those in the U.S.; and offset somewhat by non-deductible expenses. The decrease in rates is also a result of certain changes in the Company's legal structure. In 2003, the Company anticipates realizing a further 2% to 4% improvement in its income tax rate. FINANCIAL CONDITION AND LIQUIDITY Our cash and cash equivalents increased $3.7 million at December 31, 2002 compared with December 31, 2001. Net cash provided by operating activities of $261.4 million was primarily used to fund $138.4 million of capital expenditures, repay $120.3 million of long-term debt, and distribute $16.0 million of dividends to our shareholders. Operating cash flow of $261.4 million is $23.6 million more than in 2001. The $261.4 million consists of a net loss of $119.1 million, non-cash charges of $453.5 million and a $73.0 million decrease in net operating assets and liabilities, net of the effects of divestitures. Non-cash charges are primarily comprised of $137.4 million in depreciation and amortization and the $269.0 million, net of tax non-cash charge for a change in accounting principle. Accounts receivable increased $67.4 million, however, $30.0 million of the increase was due to the reduction in securitized accounts receivable sold. Net cash used in investing activities totaled $130.0 million, compared with $165.3 million in the prior year. 2001 investing activities benefited by $14.4 million in net proceeds from the sales of businesses, mainly non-strategic portions of our 1999 acquisitions. Capital spending totaling $138.4 million in 2002 was $2.5 million lower than in 2001. Approximately 60% of the 2002 spending was related to expansion, with the remainder for cost reduction and other purposes. Heading into 2003, we plan to keep capital spending under control to be prepared if the industry slows down. Our goal is to reduce spending as a percentage of sales from historical levels of up to 6% to a target of 4.5% to 5.5%. Stockholders' equity decreased by $122.8 million in 2002. The decrease was caused by net loss of $119.1 million along with adjustments for minimum pension liability of $42.3 million, dividends of $16.0 million, and purchase of treasury stock of $18.1 million, offset by currency translation adjustments of $40.9 million and stock issuances to retirement plans of $20.8 million. In relation to the dollar, the currencies in foreign countries where we conduct business, particularly the Euro, strengthened, especially at the end of 2002, therefore causing the currency translation component of other comprehensive income to increase in 2002. Our total capitalization as of December 31, 2002 of $1,628.1 million is comprised of short-term debt of $14.4 million, long-term debt of $632.3 million and stockholders' equity of $981.4 million. Capitalization at December 31, 2001 was $1,841.2 million. During the year, we reduced our balance sheet debt to capital ratio to 39.9% from 40.0% in 2001 and 42.2% in 2000. If the reduction to equity associated with the adoption of SFAS No. 142 had taken place in 2001, the 2001 ratio would have been 46.9%. The Company has a $350 million revolving credit facility that extends until July 21, 2005. Additionally, the Company also has $300 million available under a shelf registration statement on file with the Securities and Exchange Commission through which a variety of debt and/or equity instruments may be issued. The Company has access to the commercial paper market through an accounts receivable securitization facility which is rolled over annually. As of December 31, 2002, the facility was sized at $90 million and has been in place with its current funding partner since January 1994. From 34 BorgWarner BorgWarner Inc. and Consolidated Subsidiaries a credit quality perspective, the Company has an investment grade credit rating of BBB+ from Standard & Poor's and Baa2 from Moody's. The Company's required debt principal amortization and payment obligations under lease commitments at December 31, 2002, are as follows:

We believe that the combination of cash from operations and available credit facilities will be sufficient to satisfy our cash needs for our current level of operations and our planned operations for the foreseeable future. We will continue to balance our needs for internal growth, debt reduction and share repurchase. OTHER MATTERS Environmental/Contingencies The Company and certain of its current and former direct and indirect corporate predecessors, subsidiaries and divisions have been identified by the United States Environmental Protection Agency and certain state environmental agencies and private parties as potentially responsible parties (PRPs) at various hazardous waste disposal sites under the Comprehensive Environmental Response, Compensation and Liability Act (Superfund) and equivalent state laws and, as such, may presently be liable for the cost of clean-up and other remedial activities at 44 such sites. Responsibility for clean-up and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula. Based on information available to the Company, which in most cases, includes: an estimate of allocation of liability among PRPs; the probability that other PRPs, many of whom are large, solvent public companies, will fully pay the 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; remediation alternatives; estimated legal fees; and other factors, the Company has established a reserve for indicated environmental liabilities with a balance at December 31, 2002 of approximately $20.3 million. The Company expects this amount to be expended over the next three to five years. The Company believes that none of these matters, individually or in the aggregate, will have a material adverse effect on its financial condition 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. In connection with the sale of Kuhlman Electric Corporation, the Company agreed to indemnify the buyer and Kuhlman Electric for certain environmental liabilities relating to the past operations of Kuhlman Electric. During 2000, Kuhlman Electric notified the Company that it discovered potential environmental contamination at its Crystal Springs, Mississippi plant while undertaking an expansion of the plant. The Company has been working with the Mississippi Department of Environmental Quality and Kuhlman Electric to investigate the extent of the contamination. The investigation has revealed the presence of polychlorinated biphenyls (PCBs) in portions of the soil at the plant and neighboring areas. Kuhlman Electric and others, including the Company, have been sued in several related lawsuits which claim personal and property damage. The Company has moved to be dismissed from some of these lawsuits. The Company's lawsuit against Kuhlman Electric seeking declaration of the scope of the Company's contractual indemnity has been amicably resolved and dismissed. The Company believes that the reserve for environmental liabilities is sufficient to cover any potential liability associated with this matter. However, due to the nature of environmental liability matters, there can be no assurance that the actual amount of environmental liabilities will not exceed the amount reserved. Patent infringement actions were filed against the Company's turbocharger unit located in Europe in late 2001 and in 2002 by Honeywell International. The Dusseldorf District Court in Germany entered a preliminary injunction against the Company on July 9, 2002 limiting the Company's ability to manufacture and sell a certain variable turbine geometry (VTG) turbocharger in Germany until a patent hearing, then scheduled for December 2002. In order to continue uninterrupted service to its customer, the Company paid Honeywell $25 million in July 2002 so that it could continue to make and deliver disputed car turbochargers through June of 2003. The agreement with Honeywell partially settles litigation, suspends the July 2002 preliminary injunction and provides for a license to deliver until June 2003. As part of the agreement, Honeywell agreed to not seek damages for deliveries made before June 30, 2003. 35 BorgWarner MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company appealed the granting of the July preliminary injunction, but Honeywell withdrew the preliminary injunction before the Company's appeal could be heard. In January 2003, the Dusseldorf District Court decided that the Company's current design of the VTG turbocharger infringes the patent asserted by Honeywell. The Company continues to believe that its current production designs do not violate the Honeywell patents and are not covered by their lawsuit and plans to challenge the District Court's decision. The Company has informed its customers of its inability to deliver the current design VTG turbocharger after June 30, 2003. The Company continues to develop a new generation VTG turbocharger to replace the current model and expects to begin delivery of the new generation VTG turbocharger by July 1, 2003 if approved by the customers. The Company is recognizing expense of the $25 million license payment as it ships the affected products from January 2002 to June 2003. In 2002, $14.5 million of expense was recognized. Critical Accounting Policies The Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The significant accounting principles which management believes are the most important to aid in fully understanding our financial results are included below. Management also believes that all of the accounting policies are important to investors. Therefore, the Notes to the Consolidated Financial Statements provide a more detailed description of these and other accounting policies of the Company. SALES OF RECEIVABLES The Company securitizes and sells certain receivables through third party financial institutions without recourse. The amount sold can vary each month based on the amount of underlying receivables. In December 2002, the Company reduced the maximum size of the facility from $120 million to $90 million. PRODUCT WARRANTY Provisions for estimated expenses related to product warranty are made at the time products are sold. These estimates are established using historical information about the nature, frequency, and average cost of warranty claims. Management actively studies trends of warranty claims and takes action to improve vehicle quality and minimize warranty claims. Management believes that the warranty reserve is appropriate; however, actual claims incurred could differ from the original estimates, requiring adjustments to the reserve. GOODWILL AND OTHER INTANGIBLE ASSETS The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002. Under SFAS No. 142, goodwill is no longer amortized; however, it must be tested for impairment at least annually. Amortization continues to be recorded for other intangible assets with definite lives. The Company is subject to financial statement risk to the extent that goodwill and indefinite-lived intangible assets become impaired. See Note Thirteen to the Consolidated Financial Statements for more information regarding goodwill and the adoption of SFAS No. 142. PENSION AND OTHER POSTRETIREMENT BENEFITS The Company's employee pension and other postretirement benefit (i.e., health care) costs and obligations are dependent on management's assumptions used by actuaries in calculating such amounts. These assumptions include discount rates, health care cost trend rates, inflation, long-term return on plan assets, retirement rates, mortality rates and other factors. Management bases the discount rate assumption on investment yields available at year-end on AA-rated corporate long-term bond yields. Health care cost trend assumptions are developed based on historical cost data, the near-term outlook, and an assessment of likely long-term trends. The inflation assumption is based on an evaluation of external market indicators. Retirement and mortality rates are based primarily on actual plan experience. Actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect the recognized expense and recorded obligation in such future periods. While management believes that the assumptions used are appropriate, significant differences in actual experience or significant changes in assumptions would affect pension and other postretirement benefit costs and obligations. See Note Eight to the Consolidated Financial Statements for more information regarding costs and assumptions for employee retirement benefits. 36 BorgWarner BorgWarner Inc. and Consolidated Subsidiaries IMPAIRMENT OF LONG-LIVED ASSETS The Company periodically reviews the carrying value of its long-lived assets held and used and assets to be disposed of, including other intangible assets, when events and circumstances warrant such a review. This review is performed using estimates of future cash flows. If the carrying value of a long-lived asset is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value. Management believes that the estimates of future cash flows and fair value are reasonable; however, changes in estimates of such cash flows and fair value could affect the evaluations. New Accounting Pronouncements In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No. 142, effective January 1, 2002, specifies that goodwill and certain intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. SFAS No. 142 also requires that, upon adoption, goodwill be allocated to the Company's reporting units and a two-step impairment analysis be performed. The Company adopted SFAS No. 142 effective January 1, 2002. Under the transitional provisions of the SFAS, the Company allocated goodwill to its reporting units and performed the two-step impairment analysis. The fair value of the Company's businesses used to determine the goodwill impairment was computed using the expected present value of associated future cash flows. As a result of this analysis, the Company determined that goodwill associated with its Cooling Systems and Air/Fluid Systems operating segments was impaired due to fundamental changes in their served markets, particularly the medium- and heavy-truck markets, and weakness at a major customer. As a result a charge of $269 million, net of taxes of $76 million, was recorded. The impairment loss was recorded in the first quarter of 2002 as a cumulative effect of change in accounting principle. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company adopted SFAS No. 144 effective January 1, 2002. The adoption of SFAS No. 144 had no impact on the Company's results of operations, financial position or cash flows. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement eliminates the automatic classification of gain or loss on extinguishment of debt as an extraordinary component of income and requires that such gain or loss be evaluated for extraordinary classification under the guidelines of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations." This statement also requires sales-leaseback accounting for certain lease modifications that have economic effects that are similar to sales-leaseback transactions and makes various other technical corrections to the existing pronouncements mentioned above. The adoption of SFAS No. 145 had no impact on the Company's results of operations, financial position or cash flows. In June 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company does not expect that the adoption of SFAS No. 146 will have a material impact on the Company's results of operations, financial position or cash flows. In November 2002, the FASB issued Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others" (FIN 45), which expands previously issued accounting guidance and disclosure requirements for certain guarantees. FIN 45 requires the Company to recognize an initial liability for the fair value of an obligation assumed by issuing a guarantee. The provision for initial recognition and measurement of the liability will be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 will not have a material impact on the Company's financial position, operating results or liquidity and resulted in additional disclosures in the Company's Consolidated Financial Statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123." This Statement amends FASB Statement No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and amends the disclosure requirements to require prominent disclosures in both annual and interim financial statements about the method of 37 BorgWarner MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS accounting for stock-based employee compensation and the effect of the method used on reported results. The Company is required to adopt SFAS No. 148 on January 1, 2004. The Company is currently assessing the impact of the adoption of SFAS No. 148. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities," (FIN 46). FIN 46 requires that the assets, liabilities and results of the activity of variable interest entities be consolidated into the financial statements of the entity that has the controlling financial interest. FIN 46 also provides the framework for determining whether a variable interest entity should be consolidated based on voting interest or significant financial support provided to it. For the Company, this Interpretation is effective immediately for variable interest entities created after January 31, 2003 and effective July 1, 2003, for variable interest entities acquired before February 1, 2003. The Company does not expect the adoption of FIN 46 to have any impact on its fiscal 2003 Consolidated Financial Statements. Qualitative and Quantitative Disclosure About Market Risk The Company's primary market risks include fluctuations in interest rates and foreign currency exchange rates. We are also affected by changes in the prices of commodities used or consumed in our manufacturing operations. Some of our commodity purchase price risk is covered by supply agreements with customers and suppliers. Other commodity purchase price risk is addressed by hedging strategies, which include forward contracts. We do not engage in any derivative instruments for purposes other than hedging specific risk. We have established policies and procedures to manage sensitivity to interest rate, foreign currency exchange rate market, and commodity purchase price risk, which include monitoring the level of exposure to each market risk. Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. Our earnings exposure related to adverse movements in interest rates is primarily derived from outstanding floating rate debt instruments that are indexed to floating money market rates. A 10% increase or decrease in the average cost of our variable rate debt would result in a change in pre-tax interest expense of approximately $0.5 million. We also measure interest rate risk by estimating the net amount by which the fair value of all of our interest rate sensitive assets and liabilities would be impacted by selected hypothetical changes in market interest rates. Fair value is estimated using a discount cash flow analysis. Assuming a hypothetical instantaneous 10% change in interest rates as of December 31, 2002, the net fair value of these instruments would increase by approximately $29.2 million if interest rates decreased and would decrease by approximately $26.6 million if interest rates increased. Our interest rate sensitivity analysis assumes a parallel shift in interest rate yield curves. The model, therefore, does not reflect the potential impact of changes in the relationship between short-term and long-term interest rates. Interest rate sensitivity at December 31, 2001, measured in a similar manner, was slightly greater than at December 31, 2002. Foreign currency risk is the risk that we will incur economic losses due to adverse changes in foreign currency exchange rates. We mitigate our foreign currency exchange rate risk principally by establishing local production facilities in markets we serve, by invoicing customers in the same currency as the source of the products and by funding some of our investments in foreign markets through local currency loans. Such non-U.S. dollar debt was $152.0 million as of December 31, 2002 and $116.3 million as of December 31, 2001. We also monitor our foreign currency exposure in each country and implement strategies to respond to changing economic and political environments. In addition, the Company periodically enters into forward contracts in order to reduce exposure to exchange rate risk related to transactions denominated in currencies other than the functional currency. In the aggregate, our exposure related to such transactions was not material to our financial position, results of operations or cash flows in both 2002 and 2001. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS Statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations may contain forward-looking statements as contemplated by the 1995 Private Securities Litigation Reform Act that are based on management's current expectations, estimates and projections. Words such as "expects," "anticipates," "intends," "plans," "believes," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. Forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those projected or implied in the forward-looking statements. Such risks and uncertainties include: fluctuations in domestic or foreign automotive production, the continued use of outside suppliers, fluctuations in demand for vehicles containing BorgWarner products, general economic conditions, as well as other risks detailed in the Company's filings with the Securities and Exchange Commission, including the Cautionary Statements filed as Exhibit 99.1 to the Form 10-K for the fiscal year ended December 31, 2002. 38 BorgWarner 2002 MANAGEMENT'S RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS The information in this report is the responsibility of management. BorgWarner Inc. and Consolidated Subsidiaries (the "Company") has in place reporting guidelines and policies designed to ensure that the statements and other information contained in this report present a fair and accurate financial picture of the Company. In fulfilling this management responsibility, we make informed judgments and estimates conforming with accounting principles generally accepted in the United States of America. The accompanying Consolidated Financial Statements have been audited by Deloitte & Touche LLP, independent auditors. Management has made available all the Company's financial records and related information deemed necessary by Deloitte & Touche LLP. Furthermore, management believes that all representations made by it to Deloitte & Touche LLP during its audit were valid and appropriate. Management is responsible for maintaining a comprehensive system of internal control through its operations that provides reasonable assurance that assets are protected from improper use, that material errors are prevented or detected within a timely period and that records are sufficient to produce reliable financial reports. The system of internal control is supported by written policies and procedures that are updated by management as necessary. The system is reviewed and evaluated regularly by the Company's internal auditors as well as by the independent auditors in connection with their annual audit of the financial statements. The independent auditors conduct their evaluation in accordance with auditing standards generally accepted in the United States of America and perform such tests of transactions and balances as they deem necessary. Management considers the recommendations of its internal auditors and independent auditors concerning the Company's system of internal control and takes the necessary actions that are cost-effective in the circumstances. Management believes that, as of December 31, 2002, the Company's system of internal control was adequate to accomplish the objectives set forth in the first sentence of this paragraph. The Company's Finance and Audit Committee, composed entirely of directors of the Company who are not employees, meets periodically with the Company's management and independent auditors to review financial results and procedures, internal financial controls and internal and external audit plans and recommendations. In carrying out these responsibilities, the Finance and Audit Committee and the independent auditors have unrestricted access to each other with or without the presence of management representatives. /s/ TIMOTHY M. MANGANELLO /s/ GEORGE E. STRICKLER Timothy M. Manganello George E. Strickler President and Chief Executive Executive Vice President and Chief Officer Financial Officer February 6, 2003 2002 BorgWarner Inc. and Consolidated Subsidiaries INDEPENDENT AUDITORS' REPORT To The Board of Directors and Stockholders of BorgWarner Inc.: We have audited the consolidated balance sheets of BorgWarner Inc. and Consolidated Subsidiaries (the "Company") as of December 31, 2002 and 2001, and the related consolidated statements of operations, cash flows, and stockholders' equity for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of BorgWarner Inc. and Consolidated Subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note Thirteen to the Consolidated Financial Statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangibles," and accordingly, discontinued the amortization of goodwill to conform to the provisions of this standard. Note Thirteen provides transitional disclosures regarding the impact of the adoption of SFAS No. 142. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Chicago, Illinois February 6, 2003 39 BorgWarner CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying Notes to Consolidated Financial Statements. 40 BorgWarner 2002 CONSOLIDATED BALANCE SHEETS BorgWarner Inc. and Consolidated Subsidiaries

See accompanying Notes to Consolidated Financial Statements. 41 BorgWarner 2002 CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying Notes to Consolidated Financial Statements. 42 BorgWarner 2002 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY BorgWarner Inc. and Consolidated Subsidiaries

See accompanying Notes to Consolidated Financial Statements. 43 BorgWarner 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTRODUCTION BorgWarner Inc. and Consolidated Subsidiaries (the "Company") is a leading global supplier of highly engineered systems and components primarily for powertrain applications. These products are manufactured and sold worldwide, primarily to original equipment manufacturers of passenger cars, sport-utility vehicles, trucks, commercial transportation products and industrial equipment. For purposes of this annual report, its products fall into five operating segments: Morse TEC, Air/Fluid Systems, Cooling Systems, TorqTransfer Systems and Transmission Systems. Effective January 1, 2003, the Company will be reporting its results under its reorganized structure of two reportable operating segments: Driveline and Engine. The Driveline segment is primarily the combination of the TorqTransfer Systems and Transmission Systems segments. The Engine segment is primarily the combination of the Morse TEC, Air/Fluid Systems, and Cooling Systems segments. 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following paragraphs briefly describe significant accounting policies. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include all significant majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior amounts have been reclassified to conform to the current year presentation. CASH AND CASH EQUIVALENTS Cash and cash equivalents are valued at cost, which approximates market. It is the Company's policy to classify investments with original maturities of three months or less as cash and cash equivalents. ACCOUNTS RECEIVABLE The Company securitizes and sells certain receivables through third party financial institutions without recourse. The amount sold can vary each month based on the amount of underlying receivables. In December 2002, the Company reduced the maximum size of the facility from $120 million to $90 million. During the year ended December 31, 2002, total cash proceeds from sales of accounts receivable were $1,389.2 million, and the amount of receivables sold ranged from $90 to $120 million at any time during the year. In 2002, the Company paid a servicing fee of $2.5 million related to these receivables, which is included in interest expense and finance charges. At December 31, 2002, the Company had sold $90 million of receivables under a Receivables Transfer Agreement for face value without recourse. At December 31, 2001, the amount sold was $120 million. INVENTORIES Inventories are valued at the lower of cost or market. Cost of U.S. inventories is determined by the last-in, first-out (LIFO) method, while the foreign operations use the first-in, first-out (FIFO) method. Inventories held by U.S. operations was $96.0 million in 2002 and $81.1 million in 2001. Such inventories, if valued at current cost instead of LIFO, would have been greater by $3.6 million and $3.9 million, respectively. PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION Property, plant and equipment are valued at cost less accumulated depreciation. Expenditures for maintenance, repairs and renewals of relatively minor items are generally charged to expense as incurred. Renewals of significant items are capitalized. Depreciation is computed generally on a straight-line basis over the estimated useful lives of the assets. Useful lives for buildings range from 15 to 40 years and useful lives for machinery and equipment range from 3 to 12 years. For income tax purposes, accelerated methods of depreciation are generally used. GOODWILL AND OTHER INTANGIBLE ASSETS The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002. Under SFAS No. 142, goodwill is no longer amortized; however, it must be tested for impairment at least annually. Amortization continues to be recorded for other intangible assets with definite lives. See Note Thirteen for further details on the adoption of SFAS No. 142. The Company had intangible assets with a cost of $14.7 million, less accumulated amortization of $7.6 million and $6.5 million at December 31, 2002 and 2001, respectively. The intangible assets are being amortized on a straight-line basis over their legal lives, which range from 10 to 15 years. Annual amortization expense recognized was $1.1 million in each of the years 2002, 2001 and 2000. The estimated future annual amortization expense for each of the successive years 2003 through 2007 is $1.1 million. 44 BorgWarner BorgWarner Inc. and Consolidated Subsidiaries REVENUE RECOGNITION The Company recognizes revenue upon shipment of product when title and risk of loss pass to the customer. Although the Company may enter into long-term supply agreements with its major customers, each shipment of goods is treated as a separate sale and the price is not fixed over the life of the agreements. FINANCIAL INSTRUMENTS Financial instruments consist primarily of investments in cash, short-term securities, receivables and debt securities, and obligations under accounts payable, accrued expenses and debt instruments. The Company believes that the fair value of the financial instruments approximates the carrying value, except as noted in Note Six. The Company received corporate bonds with a face value of $30.3 million as partial consideration for the sales of Kuhlman Electric and Coleman Cable in 1999. These bonds were recorded at their fair market value of $12.9 million using valuation techniques that considered cash flows discounted at current market rates and management's best estimates of credit quality. In 2001, the sale agreement with Coleman Cable was finalized, resulting in the exchange of the corporate bonds along with a purchase price receivable, for $3 million in cash and a $2 million note, which was collected in 2002. The fair value of these instruments was estimated to be $8.8 million at December 31, 2002 and $10.9 million at December 31, 2001. They have been classified as investments available-for-sale in the other current assets section of the Consolidated Balance Sheets. The contractual maturities of these bonds are beyond five years. FOREIGN CURRENCY The financial statements of foreign subsidiaries are translated to U.S. dollars using the period-end exchange rate for assets and liabilities and an average exchange rate for each period for revenues and expenses. The local currency is the functional currency for substantially all the Company's foreign subsidiaries. Translation adjustments for foreign subsidiaries are recorded as a component of accumulated other comprehensive income in stockholders' equity. PRODUCT WARRANTIES The Company provides warranties on some of its products. The warranty terms are typically from one to three years. Provisions for estimated expenses related to product warranty are made at the time products are sold. These estimates are established using historical information about the nature, frequency, and average cost of warranty claims. Management actively studies trends of warranty claims and takes action to improve vehicle quality and minimize warranty claims. Management believes that the warranty reserve is appropriate; however, actual claims incurred could differ from the original estimates, requiring adjustments to the reserve. The reserve is represented in both long-term and short-term liabilities on the balance sheet. Below is a table that shows the activity in the warranty accrual accounts:

DERIVATIVE FINANCIAL INSTRUMENTS The Company recognizes that certain normal business transactions generate risk. Examples of risks include exposure to exchange rate risk related to transactions denominated in currencies other than the functional currency, changes in cost of major raw materials and supplies, and changes in interest rates. It is the objective and responsibility of the Company to assess the impact of these transaction risks, and offer protection from selected risks through various methods including financial derivatives. All derivative instruments held by the Company are designated as hedges, have high correlation with the underlying exposure and are highly effective in offsetting underlying price movements. Accordingly, gains and losses from changes in derivative fair values are deferred until the underlying transaction occurs. The Company does not engage in any derivative instruments for purposes other than hedging specific risk. NEW ACCOUNTING PRONOUNCEMENTS In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company adopted SFAS No. 144 effective January 1, 2002. The adoption of SFAS No. 144 had no impact on the Company's results of operations, financial position or cash flows. 45 BorgWarner NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement eliminates the automatic classification of gain or loss on extinguishment of debt as an extraordinary component of income and requires that such gain or loss be evaluated for extraordinary classification under the guidelines of Accounting Principles Board Opinion No. 30 "Reporting the Results of Operations." This statement also requires sales-leaseback accounting for certain lease modifications that have economic effects that are similar to sales-leaseback transactions and makes various other technical corrections to the existing pronouncements mentioned above. The adoption of SFAS No. 145 had no impact on the Company's results of operations, financial position or cash flows. In June 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company does not expect that the adoption of SFAS No. 146 will have a material impact on the Company's results of operations, financial position or cash flows. In November 2002, the FASB issued Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others" (FIN 45), which expands previously issued accounting guidance and disclosure requirements for certain guarantees. FIN 45 requires the Company to recognize an initial liability for the fair value of an obligation assumed by issuing a guarantee. The provision for initial recognition and measurement of the liability will be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 will not have a material impact on the Company's financial position, operating results or liquidity and resulted in additional disclosures in the Company's Consolidated Financial Statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123." This Statement amends FASB Statement No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and amends the disclosure requirements to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company is required to adopt SFAS No. 148 on January 1, 2004. The Company is currently assessing the impact of the adoption of SFAS No. 148. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities," (FIN 46). FIN 46 requires that the assets, liabilities and results of the activity of variable interest entities be consolidated into the financial statements of the entity that has the controlling financial interest. FIN 46 also provides the framework for determining whether a variable interest entity should be consolidated based on voting interest or significant financial support provided to it. For the Company, this Interpretation is effective immediately for variable interest entities created after January 31, 2003 and effective July 1, 2003, for variable interest entities acquired before February 1, 2003. The Company does not expect the adoption of FIN 46 to have any impact on its fiscal 2003 Consolidated Financial Statements. 2 RESEARCH AND DEVELOPMENT COSTS The Company spent approximately $109.1 million, $104.5 million and $112.0 million in 2002, 2001 and 2000, respectively, on research and development (R&D) activities. Not included in these amounts were customer-sponsored R&D activities of approximately $14.2 million, $20.0 million and $12.5 million in 2002, 2001 and 2000, respectively. 3 OTHER INCOME Items included in other income consist of:

46 BorgWarner BorgWarner Inc. and Consolidated Subsidiaries 4 INCOME TAXES Earnings before taxes and provision for taxes consist of:

The analysis of the variance of income taxes as reported from income taxes computed at the U.S. statutory rate for consolidated operations is as follows:

At December 31, 2002, the Company had $8.4 million of foreign tax credit carryforwards, $3.0 million of R&D tax credit carryforwards, and $1.9 million of net foreign operating loss carryforwards available to offset future taxable income. The foreign tax credits and net operating loss carryforwards will expire in 2007. The R&D tax credit carryforward will expire in 2022. Following are the gross components of deferred tax assets and liabilities as of December 31, 2002 and 2001:

No deferred income taxes have been provided on undistributed earnings of foreign subsidiaries totaling $59.2 million and $47.8 million in 2002 and 2001, respectively, as the amounts are essentially permanent in nature. Any such potential liability would be substantially offset by foreign tax credits with respect to such undistributed foreign earnings. 47 BorgWarner NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5 BALANCE SHEET INFORMATION Detailed balance sheet data are as follows:

Dividends and other payments received from affiliates accounted for under the equity method totaled $8.4 million in 2002, $8.9 million in 2001 and $25.5 million in 2000. The Company has a 50% interest in NSK-Warner, a joint venture based in Japan that manufactures automatic transmission components. The Company's share of the earnings or losses reported by NSK-Warner is accounted for using the equity method of accounting. NSK-Warner has a fiscal year-end of March 31. The Company's equity in the earnings of NSK-Warner consists of the 12 months ended November 30 so as to reflect earnings on as current a basis as is reasonably feasible. Following are summarized financial data for NSK-Warner, translated using the ending or periodic rates as of and for the fiscal years ended March 31, 2002, 2001 and 2000:

The equity of NSK-Warner as of March 31, 2002, was $193.5 million. 48 BorgWarner BorgWarner Inc. and Consolidated Subsidiaries 6 NOTES PAYABLE AND LONG-TERM DEBT Following is a summary of notes payable and long-term debt. The weighted average interest rate on all borrowings for 2002 and 2001 was 5.2% and 5.8%, respectively.

Annual principal payments required as of December 31, 2002 are as follows (in millions of dollars): 2003 $ 14.4 2004 7.5 2005 39.0 2006 149.5 2007 5.2 After 2007 434.1 Less: Unamortized discounts (3.0) ------ Total $646.7 ======

The Company has a revolving credit facility which provides for borrowings up to $350 million through July, 2005. At December 31, 2002, there were no borrowings outstanding under the facility and the Company had $7.1 million of obligations under standby letters of credit. At December 31, 2001, $20.0 million of borrowings under the facility were outstanding in addition to $6.5 million of obligations under standby letters of credit. The credit agreement contains numerous financial and operating covenants including, among others, covenants requiring the Company to maintain certain financial ratios and restricting its ability to incur additional indebtedness. The Company has entered into interest rate and currency swaps to manage interest rate and foreign currency risk. A summary of these instruments outstanding at December 31, 2002 follows (currency in millions):
INTEREST RATES (b) Hedge Notional ------------------ Floating Interest Type Amount Receive Pay Rate Basis ---------- -------- ------- ----- ------------------- INTEREST RATE SWAPS (a) Fixed to floating Fair value $ 125 7.0% 2.8% 6 month LIBOR+1.43% Fixed to floating Fair value $ 25 6.5% 1.8% 6 month LIBOR+.45% CROSS CURRENCY SWAPS (MATURE IN 2006) Floating $ Cash Flow $ 70 2.8% -- 6 mo. USD LIBOR+1.43% to floating Y. Investment Y.8,871 -- 1.3% 6 mo. JPY LIBOR+1.21%
(a) The maturity of the swaps corresponds with the maturity of the hedged item as noted in the debt summary, unless otherwise indicated. (b) Interest rates are as of December 31, 2002. The ineffective portion of the swaps was not material. As of December 31, 2002, the fair value of the fixed to floating interest rate swaps was $14.9 million. Cross currency swaps were recorded at their fair value of $(4.8) million. Fair value is based on quoted market prices for contracts with similar maturities. As of December 31, 2002 and 2001, the estimated fair values of the Company's senior unsecured notes totaled $610.7 million and $579.6 million, respectively. The estimated fair values were $50.3 million higher in 2002, and $21.0 million lower in 2001, than their respective carrying values. Fair market values are developed by the use of estimates obtained from brokers and other appropriate valuation techniques based on information available as of year-end. The fair value estimates do not necessarily reflect the values the Company could realize in the current markets. 49 BorgWarner NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 RESTRUCTURING AND OTHER NON-RECURRING CHARGES Other non-recurring charges of $28.4 million were incurred in the fourth quarter of 2001. The charges primarily include adjustments to the carrying value of certain assets and liabilities related to businesses acquired and disposed of over the past three years. Of the $28.4 million of pretax charges, $5.0 million represents non-cash charges. Approximately $3.3 million was spent in 2001, $8.4 million in 2002, and $8.4 million was transferred to environmental reserves in 2001. The remaining $3.3 million is expected to be spent in 2003. The Company expects to fund the total cash outlay of these actions with cash flow from operations. Restructuring and other non-recurring charges totaling $62.9 million were incurred in 2000 in response to deteriorating market conditions. The charges included the rationalization and integration of certain businesses and actions taken to bring costs in line with vehicle production slowdowns in major customer product lines. Of the $62.9 million pretax charges in 2000, $47.3 million represented non-cash charges. Approximately $4.4 million was spent in 2000 and $11.2 million was spent in 2001. Components of the restructuring and other non-recurring charges are detailed in the following table and discussed further below.
millions of dollars Severance Loss on Other Exit Costs and Other Asset Sale of and Non-Recurring Benefits Write-down Business Charges Total --------- ---------- -------- ----------------- ----- Provisions $ 8.9 $ 11.6 $ 35.2 $ 7.2 $ 62.9 Incurred (4.3) -- -- (0.1) (4.4) Non-cash write-offs -- (11.6) (35.2) (0.5) (47.3) ------ ------ -------- -------- ------ Balance, December 31, 2000 $ 4.6 $ -- $ -- $ 6.6 $ 11.2 ------ ------ -------- -------- ------ Provisions -- 5.0 -- 23.4 28.4 Incurred (4.6) -- -- (18.3) (22.9) Non-cash write-offs -- (5.0) -- -- (5.0) ------ ------ -------- -------- ------ Balance, December 31, 2001 $ -- $ -- $ -- $ 11.7 $ 11.7 ------ ------ -------- -------- ------ Provisions -- -- -- -- -- Incurred -- -- -- (8.4) (8.4) Non-cash write-offs -- -- -- -- -- ------ ------ -------- -------- ------ Balance, December 31, 2002 $ -- $ -- $ -- $ 3.3 $ 3.3 ====== ====== ======== ======== ======
Severance and other benefit costs relate to the reduction of approximately 220 employees from the workforce. The reductions affected each of the Company's operating segments, apart from TorqTransfer Systems, across each of the Company's geographical areas, and across each major functional area, including production and selling and administrative positions. Approximately $8.9 million had been paid for severance and other benefits for the terminated employees. Asset write-downs primarily consist of the write-off of impaired assets no longer used in production as a result of the industry downturn and the consolidation of certain operations. Such assets have been taken out of productive use and have been disposed. Loss on anticipated sale of business represents the Fuel Systems business, which was sold in April 2001 to an investor group led by TMB Industries, a private equity group, for a pretax loss of $35.2 million. Fuel Systems produced metal tanks for the heavy-duty truck market in North America and did not fit the Company's strategic focus on powertrain technology. Terms of the transaction did not have a significant impact on the Company's results of operations, financial condition or cash flows. Other exit costs and non-recurring charges are primarily non-employee related exit costs for certain non-production facilities the Company has previously sold or no longer needs and non-recurring product quality related charges. The 2001 non-recurring charges include $8.4 million of environmental remediation costs related to sold businesses and $12.0 million of product quality costs for issues with products that were sold by acquired businesses prior to acquisition, all of which have been fixed in the currently produced products. 8 RETIREMENT BENEFIT PLANS The Company has a number of defined benefit pension plans and other postretirement benefit plans covering eligible salaried and hourly employees. The other postretirement benefit plans, which provide medical and life insurance benefits, are unfunded plans. The following provides a reconciliation of the plans' benefit obligations, plan assets, funded status and recognition in the Consolidated Balance Sheets. 50 BorgWarner BorgWarner Inc. and Consolidated Subsidiaries
millions of dollars Pension Postretirement Benefits Benefits ---------------------- ---------------------- December 31, 2002 2001 2002 2001 -------- -------- -------- -------- CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $ 385.7 $ 350.3 $ 407.1 $ 341.6 Service cost 7.6 7.1 5.0 4.4 Interest cost 26.3 25.0 28.8 25.0 Plan participants' contributions 0.2 0.2 -- -- Amendments -- 7.5 (2.3) -- Net actuarial loss 32.7 23.6 37.9 64.2 Currency translation adjustment 17.3 (1.4) -- -- Settlements -- (0.2) -- (1.4) Curtailments -- -- (0.5) -- Benefits paid (26.7) (26.4) (29.5) (26.7) -------- -------- -------- -------- Benefit obligation at end of year $ 443.1 $ 385.7 $ 446.5 $ 407.1 ======== ======== ======== ======== CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year $ 358.2 $ 385.1 Actual return on plan assets (27.7) (2.3) Employer and other contributions 11.7 3.1 Plan participants' contributions 0.2 0.2 Currency translation adjustment 7.8 (1.2) Settlements -- (0.3) Benefits paid (26.7) (26.4) -------- -------- Fair value of plan assets at end of year $ 323.5 $ 358.2 ======== ======== RECONCILIATION OF FUNDED STATUS: Funded status $ (119.6) $ (27.5) $ (446.5) $ (407.1) Unrecognized net actuarial loss 142.9 50.8 131.4 98.2 Unrecognized transition asset (0.1) (0.3) -- -- Unrecognized prior service cost 11.1 12.7 (2.6) (0.6) -------- -------- -------- -------- Net amount recognized $ 34.3 $ 35.7 $ (317.7) $ (309.5) ======== ======== ======== ======== AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS: Prepaid benefit cost $ 80.3 $ 71.1 $ -- $ -- Accrued benefit liability (46.0) (35.4) (317.7) (309.5) Additional minimum liability (106.0) (42.2) -- -- Intangible asset 10.7 12.3 -- -- Accumulated other comprehensive income 95.3 29.9 -- -- -------- -------- -------- -------- Net amount recognized $ 34.3 $ 35.7 $ (317.7) $ (309.5) ======== ======== ======== ========
The funded status of pension plans included above with accumulated benefit obligations in excess of plan assets at December 31 is as follows:
millions of dollars 2002 2001 -------- -------- Accumulated benefit obligation $ 343.8 $ 295.2 Plan assets 216.7 238.1 -------- -------- Deficiency $ 127.1 $ 57.1 ======== ========
The $127.1 million deficiency in 2002 consists of $60.7 million related to U.S. plans, $25.0 million related to UK plans, and $41.4 million related to German plans. The 2001 deficiency of $57.1 million consists of $19.2 million related to U.S. plans, $5.1 million related to UK plans, and $32.8 million related to German plans.
millions of dollars Pension Benefits Other Postretirement Benefits For the Year Ended -------------------------------- -------------------------------- December 31, 2002 2001 2000 2002 2001 2000 -------- -------- -------- -------- -------- -------- COMPONENTS OF NET PERIODIC BENEFIT COST: Service cost $ 7.6 $ 7.1 $ 6.8 $ 5.0 $ 4.4 $ 3.8 Interest cost 26.3 25.0 23.4 28.8 25.0 23.4 Expected return on plan assets (30.7) (32.1) (36.8) -- -- -- Amortization of unrecognized transition asset (0.2) (0.1) (0.1) -- -- -- Amortization of unrecognized prior service cost 1.6 2.2 1.5 (0.1) (0.1) (0.1) Amortization of unrecognized (gain)/loss 2.2 -- (2.7) 4.0 -- -- Settlement loss -- 0.1 1.8 -- -- -- -------- -------- -------- -------- -------- -------- Net periodic benefit cost (income) $ 6.8 $ 2.2 $ (6.1) $ 37.7 $ 29.3 $ 27.1 ======== ======== ======== ======== ======== ========
51 BorgWarner NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company's weighted-average assumptions used as of December 31, in determining the net periodic benefit cost and the benefit obligation liabilities shown above were as follows:
percent Pension Benefits Other Postretirement Benefits ------------------------------ ------------------------------ 2002 2001 2000 2002 2001 2000 -------- -------- -------- -------- -------- -------- U.S. plans: Discount rate 6.75 7.25 7.5 6.75 7.25 7.5 Rate of compensation increase 4.5 4.5 4.5 Expected return on plan assets 8.75 9.5 9.5 Foreign plans: Discount rate 5.5-6.0 5.5-6.0 5.5-6.0 Rate of compensation increase 2.5-4.0 2.5-4.0 2.5-4.0 Expected return on plan assets 7.0 6.5 6.0
The weighted-average rate of increase in the per capita cost of covered health care benefits is projected to be 8% in 2003 grading down 1% per year until the ultimate rate of 4.5% is reached in 2007. A one-percentage point change in the assumed health care cost trend would have the following effects:
millions of dollars One Percentage Point Increase Decrease -------- -------- ~~Effect on postretirement benefit obligation $ 53.3 $ (44.7) Effect on total service and interest cost components $ 5.0 $ (4.1)~~
9 STOCK INCENTIVE PLANS STOCK OPTION PLANS Under the Company's 1993 Stock Incentive Plan, the Company may grant options to purchase shares of the Company's common stock at the fair market value on the date of grant. In 2000, the Company increased the number of shares available for grant by 1,200,000 to 2,700,000 shares. The options vest over periods up to three years and have a term of ten years from date of grant. As of December 31, 2002, there are 1,825,105 outstanding options under the 1993 Stock Incentive Plan. The Company accounts for stock options in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation cost has been recognized for fixed stock options because the exercise price of the stock options exceeded or equaled the market value of the Company's common stock at the date of grant. A summary of the plan's shares under option at December 31, 2002, 2001 and 2000 follows:
2002 2001 2000 ------------------------ ------------------------ ------------------------ Weighted- Weighted- Weighted- Average Average Average Shares Exercise Shares Exercise Shares Exercise (thousands) Price (thousands) Price (thousands) Price ----------- --------- ----------- --------- ----------- --------- Outstanding at beginning of year 1,493 $ 44.67 1,248 $ 41.22 861 $ 43.37 Granted 616 50.67 442 47.99 506 36.11 Exercised (217) 45.22 (129) 22.51 (54) 19.59 Forfeited (67) 46.26 (68) 45.18 (65) 47.77 ----------- --------- ----------- --------- ----------- --------- Outstanding at end of year 1,825 $ 46.57 1,493 $ 44.67 1,248 $ 41.22 ----------- --------- ----------- --------- ----------- --------- Options exercisable at year-end 594 $ 45.21 423 $ 46.81 431 $ 38.12 ----------- --------- ----------- --------- ----------- --------- Options available for future grants 345 -----------
52 BorgWarner BorgWarner Inc. and Consolidated Subsidiaries The following table summarizes information about stock options outstanding at December 31, 2002:
Options Outstanding Options Exercisable ------------------------------------------ ---------------------- Weighted- Weighted- Weighted- Number Average Average Number Average Range of Outstanding Remaining Exercise Exercisable Exercise Exercise Prices (thousands) Contractual Life Price (thousands) Price ----------- ---------------- --------- ----------- -------- $22.50 - 44.19 491 6.7 $35.54 258 $ 34.66 $48.28 - 53.44 1,149 8.4 50.05 151 52.32 $53.88 - 57.31 185 5.9 54.17 185 54.17 ------ ---- ------ ---- -------- $22.50 - 57.31 1,825 7.7 $46.57 594 $ 45.21 ====== ==== ====== ==== ========
Pro-forma information regarding net income and earnings per share is required by SFAS No. 123, "Accounting for Stock-Based Compensation," and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for the Company's options was estimated at the date of grant using a Black-Scholes options pricing model with the following weighted average assumptions:
2002 2001 2000 --------- --------- --------- Risk-free interest rate 4.34% 5.02% 6.50% Dividend yield 1.32% 1.49% 1.52% Volatility factor 33.66% 32.73% 32.54% Weighted-average expected life 6.5 YEARS 6.5 years 6.5 years
For purposes of pro-forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro-forma net earnings/(loss) and earnings/(loss) per share, adjusted to include pro-forma expense related to stock options, are as follows:
millions of dollars, except per share and option amounts 2002 2001 2000 ---------- ---------- ---------- Net earnings/(loss) - as reported $ (119.1) $ 66.4 $ 94.0 Net earnings/(loss) - pro-forma (121.8) 64.8 92.5 Earnings/(loss) per share - as reported (basic) (4.47) 2.52 3.56 Earnings/(loss) per share - as reported (diluted) (4.44) 2.51 3.54 Earnings/(loss) per share - pro-forma (basic) (4.57) 2.46 3.50 Earnings/(loss) per share - pro-forma (diluted) (4.54) 2.45 3.48 Weighted-average fair value of options granted during the year 20.26 17.28 13.63
EXECUTIVE STOCK PERFORMANCE PLAN The Company has an executive stock performance plan which provides payouts at the end of successive three-year periods based on the Company's performance in terms of total stockholder return relative to a peer group of automotive companies. Payouts earned are payable 40% in cash and 60% in the Company's common stock. For the three-year measurement periods ended December 31, 2002, 2001 and 2000, the amounts earned and expensed under the plan were $4.5 million, $3.6 million and $1.7 million, respectively. Under this plan, 23,280 shares, 25,860 shares and 21,818 shares were issued in 2002, 2001 and 2000, respectively. Estimated shares issuable under the plan are included in the computation of diluted earnings per share as earned. EARNINGS PER SHARE In calculating earnings per share, earnings are the same for the basic and diluted calculations. Shares increased for diluted earnings per share by 229,000, 148,000 and 96,000 for 2002, 2001 and 2000, respectively, due to the effects of stock options and shares issuable under the executive stock performance plan. 10 OTHER COMPREHENSIVE INCOME The tax effects of the components of other comprehensive income/(loss) in the Consolidated Statements of Stockholders' Equity are as follows:
millions of dollars For the Year Ended December 31, 2002 2001 2000 -------- -------- -------- Foreign currency translation adjustment $ 55.9 $ (14.6) $ (28.0) Income taxes (15.0) (3.8) (0.2) -------- -------- -------- Net foreign currency translation adjustment 40.9 (18.4) (28.2) -------- -------- -------- Minimum pension liability adjustment (65.4) (29.7) (0.1) Income taxes 23.1 11.0 -- -------- -------- -------- Net minimum pension liability adjustment (42.3) (18.7) (0.1) -------- -------- -------- Other comprehensive loss $ (1.4) $ (37.1) $ (28.3) ======== ======== ========
53 BorgWarner NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The components of accumulated other comprehensive loss, net of tax, in the Consolidated Balance Sheets are as follows:
millions of dollars December 31, 2002 2001 -------- -------- Foreign currency translation adjustment $ 6.7 $ (34.2) Minimum pension liability adjustment (61.2) (18.9) -------- -------- Accumulated other comprehensive loss $ (54.5) $ (53.1) ======== ========
11 COMMITMENTS AND CONTINGENCIES The Company and certain of its current and former direct and indirect corporate predecessors, subsidiaries and divisions have been identified by the United States Environmental Protection Agency and certain state environmental agencies and private parties as potentially responsible parties (PRPs) at various hazardous waste disposal sites under the Comprehensive Environmental Response, Compensation and Liability Act (Superfund) and equivalent state laws and, as such, may presently be liable for the cost of clean-up and other remedial activities at 44 such sites. Responsibility for clean-up and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula. Based on information available to the Company, which in most cases, includes: an estimate of allocation of liability among PRPs; the probability that other PRPs, many of whom are large, solvent public companies, will fully pay the 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; remediation alternatives; estimated legal fees; and other factors, the Company has established a reserve for indicated environmental liabilities with a balance at December 31, 2002 of approximately $20.3 million. The Company expects this amount to be expended over the next three to five years. BorgWarner believes that none of these matters, individually or in the aggregate, will have a material adverse effect on its financial condition 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. In connection with the sale of Kuhlman Electric Corporation, the Company agreed to indemnify the buyer and Kuhlman Electric for certain environmental liabilities relating to the past operations of Kuhlman Electric. During 2000, Kuhlman Electric notified the Company that it discovered potential environmental contamination at its Crystal Springs, Mississippi plant while undertaking an expansion of the plant. The Company has been working with the Mississippi Department of Environmental Quality and Kuhlman Electric to investigate the extent of the contamination. The investigation has revealed the presence of polychlorinated biphenyls (PCBs) in portions of the soil at the plant and neighboring areas. Kuhlman Electric and others, including the Company, have been sued in several related lawsuits which claim personal and property damage. The Company has moved to be dismissed from some of these lawsuits. The Company's lawsuit against Kuhlman Electric seeking declaration of the scope of the Company's contractual indemnity has been amicably resolved and dismissed. The Company believes that the reserve for environmental liabilities is sufficient to cover any potential liability associated with this matter. However, due to the nature of environmental liability matters, there can be no assurance that the actual amount of environmental liabilities will not exceed the amount reserved. Patent infringement actions were filed against the Company's turbocharger unit located in Europe in late 2001 and in 2002 by Honeywell International. The Dusseldorf District Court in Germany entered a preliminary injunction against the Company on July 9, 2002 limiting the Company's ability to manufacture and sell a certain variable turbine geometry (VTG) turbocharger in Germany until a patent hearing, then scheduled for December 2002. In order to continue uninterrupted service to its customer, the Company paid Honeywell $25 million in July 2002 so that it could continue to make and deliver disputed car turbochargers through June of 2003. The agreement with Honeywell partially settles litigation, suspends the July 2002 preliminary injunction and provides for a license to deliver until June 2003. As part of the agreement, Honeywell agreed to not seek damages for deliveries made before June 30, 2003. The Company appealed the granting of the July preliminary injunction, but Honeywell withdrew the preliminary injunction before the Company's appeal could be heard. 54 BorgWarner BorgWarner Inc. and Consolidated Subsidiaries In January 2003, the Dusseldorf District Court decided that the Company's current design of the VTG turbocharger infringes the patent asserted by Honeywell. The Company continues to believe that its current production designs do not violate the Honeywell patents and are not covered by their lawsuit and plans to challenge the District Court's decision. The Company has informed its customers of its inability to deliver the current design VTG turbocharger after June 30, 2003. The Company continues to develop a new generation VTG turbocharger to replace the current model and expects to begin delivery of the new generation VTG turbocharger by July 1, 2003 if approved by the customers. The Company is recognizing expense of the $25 million license payment as it ships the affected products from January 2002 to June 2003. In 2002, $14.5 million of expense was recognized. 12 LEASES Certain assets are leased under long-term operating leases. These include machinery and equipment at one plant, rent for the corporate headquarters, and a leased plane. Most leases contain renewal options for various periods. Leases generally require the Company to pay for insurance, taxes and maintenance of the leased property. Total rent expense was $11.4 million in 2002, $8.3 million in 2001, and $10.1 million in 2000. The Company does not have any material capital leases. The Company has guaranteed the residual values of the leased machinery and equipment. The guarantees extend through the maturity of the underlying lease, which is in 2005. In the event the Company exercised its option not to purchase the machinery and equipment, the Company has guaranteed a residual value of $16.3 million. Future minimum operating lease payments at December 31, 2002 were as follows:
millions of dollars 2003 $ 4.3 2004 4.2 2005 22.7 2006 0.9 2007 0.9 After 2007 3.4 ------- Total minimum lease payments $ 36.4 =======
13 GOODWILL In July 2001, the Financial Accounting Standards Board issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142, effective January 1, 2002, specifies that goodwill and certain intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. SFAS No. 142 also requires that, upon adoption, goodwill be allocated to the Company's reporting units and a two-step impairment analysis be performed. The Company adopted SFAS No. 142 effective January 1, 2002. Under the transitional provisions of the SFAS, the Company allocated goodwill to its reporting units and performed the two-step impairment analysis. The fair value of the Company's businesses used in determination of the goodwill impairment was computed using the expected present value of associated future cash flows. As a result of this analysis, the Company determined that goodwill associated with its Cooling Systems and Air/Fluid Systems operating businesses was impaired due to fundamental changes in their served markets, particularly the medium and heavy truck markets, and weakness at a major customer. As a result a charge of $269 million, net of taxes of $76 million, was recorded. The impairment loss was recorded in the first quarter of 2002 as a cumulative effect of change in accounting principle. The changes in the carrying amount of goodwill (in millions of dollars) for the twelve months ended December 31, 2002, are as follows:
Morse Air/Fluid Cooling Transmission TorqTransfer TEC Systems Systems Systems Systems Total --------- --------- --------- ------------ ------------ --------- Balance at 12/31/2001 $ 385.4 $ 228.9 $ 417.3 $ 129.0 $ -- $ 1,160.6 Translation adjustments 8.9 0.5 2.0 -- -- 11.4 Change in accounting principle -- (73.5) (271.5) -- -- (345.0) --------- --------- --------- ------------ ------------ --------- Balance at 12/31/2002 $ 394.3 $ 155.9 $ 147.8 $ 129.0 $ -- $ 827.0 ========= ========= ========= ============ ============ =========
55 BorgWarner NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Also as a result of the adoption of SFAS No. 142, the Company did not amortize goodwill in 2002. The following table provides adjusted net earnings/(loss) and earnings per share data for the years ended December 31, 2002, 2001, and 2000 as if goodwill had not been amortized during these periods:
millions of dollars For the Twelve Months Ended December 31, 2002 2001 2000 ---------------- ---------------- ---------------- Reported net earnings before cumulative effect of change in accounting principle $ 149.9 $ 66.4 $ 94.0 Goodwill amortization, net of tax -- 26.5 27.3 ---------------- ---------------- ---------------- Adjusted net earnings before cumulative effect of change in accounting principle 149.9 92.9 121.3 Cumulative effect of change in accounting principle, net of tax (269.0) -- -- ---------------- ---------------- ---------------- Adjusted net earnings/(loss) $ (119.1) $ 92.9 $ 121.3 ================ ================ ================ BASIC EARNINGS (LOSS) PER SHARE: Reported net earnings before cumulative effect of change in accounting principle $ 5.63 $ 2.52 $ 3.56 Goodwill amortization -- 1.00 1.03 ---------------- ---------------- ---------------- Adjusted net earnings before cumulative effect of change in accounting principle 5.63 3.52 4.59 Cumulative effect of change in accounting principle, net of tax (10.10) -- -- ---------------- ---------------- ---------------- Adjusted net earnings/(loss) $ (4.47) $ 3.52 $ 4.59 ================ ================ ================ DILUTED EARNINGS (LOSS) PER SHARE: Reported net earnings before cumulative effect of change in accounting principle $ 5.58 $ 2.51 $ 3.54 Goodwill amortization -- 1.00 1.03 ---------------- ---------------- ---------------- Adjusted net earnings before cumulative effect of change in accounting principle 5.58 3.51 4.57 Cumulative effect of change in accounting principle, net of tax (10.02) -- -- ---------------- ---------------- ---------------- Adjusted net earnings/(loss) $ (4.44) $ 3.51 $ 4.57 ================ ================ ================
14 OPERATING SEGMENTS GEOGRAPHIC INFORMATION No country outside the U.S., other than Germany, accounts for as much as 5% of consolidated net sales, attributing sales to the sources of the product rather than the location of the customer. For this purpose, the Company's 50% equity investment in NSK-Warner (Note Five) amounting to $148.3 million at December 31, 2002 is excluded from the definition of long-lived assets, as are goodwill and certain other noncurrent assets.
millions of dollars Net Sales Long-Lived Assets 2002 2001 2000 2002 2001 2000 ----------- ----------- ----------- ----------- ----------- ----------- United States $ 1,859.1 $ 1,687.4 $ 1,960.2 $ 643.0 $ 638.5 $ 591.9 ----------- ----------- ----------- ----------- ----------- ----------- Europe: Germany 453.4 347.5 350.0 182.3 148.5 132.3 Other Europe 236.0 162.2 183.2 72.4 64.4 60.6 ----------- ----------- ----------- ----------- ----------- ----------- Total Europe 689.4 509.7 533.2 254.7 212.9 192.9 Other foreign 182.6 154.5 152.5 80.8 75.5 88.6 ----------- ----------- ----------- ----------- ----------- ----------- Total $ 2,731.1 $ 2,351.6 $ 2,645.9 $ 978.5 $ 926.9 $ 873.4 =========== =========== =========== =========== =========== ===========
SALES TO MAJOR CUSTOMERS Consolidated sales included sales to Ford Motor Company of approximately 26%, 30% and 30%; to DaimlerChrysler of approximately 20%, 21% and 19%; and to General Motors Corporation of approximately 12%, 12% and 13% for the years ended December 31, 2002, 2001 and 2000, respectively. No other single customer accounted for more than 10% of consolidated sales in any year between 2000 and 2002. Such sales consisted of a variety of products to a variety of customer locations worldwide. Each of the five operating segments had significant sales to all three of the customers listed above. For purposes of this footnote, the Company's business was comprised of five operating segments: Morse TEC, Air/Fluid Systems, Cooling Systems, TorqTransfer Systems and Transmission Systems. These reportable segments are strategic business units which are managed separately because each represents a specific grouping of automotive components and systems. The Company evaluates performance based on earnings before interest and taxes, which emphasizes realization of a satisfactory return on the total capital invested in each operating unit. Intersegment sales, which are not significant, are recorded at market prices. This footnote presents summary segment information. 56 BorgWarner BorgWarner Inc. and Consolidated Subsidiaries OPERATING SEGMENTS
millions of dollars Sales Earnings ---------------------------------- Before Long-Lived Inter- Interest Year End Depreciation/ Assets Customers segment Net and Taxes Assets Amortization Expenditures(c) --------- --------- --------- --------- --------- --------------- ---------------- 2002 Morse TEC $ 1,018.7 $ 28.2 $ 1,046.9 $ 159.2 $ 1,190.5 $ 54.9 $ 72.0 Air/Fluid Systems 375.6 12.8 388.4 23.4 310.0 19.9 15.4 Cooling Systems 235.8 -- 235.8 25.1 239.4 13.1 7.6 TorqTransfer Systems 626.5 3.6 630.1 39.2 280.5 25.9 18.0 Transmission Systems 474.5 20.7 495.2 64.9 397.6 21.5 33.2 Inter-segment eliminations -- (65.3) (65.3) -- -- -- -- --------- --------- --------- --------- --------- --------------- --------------- Total 2,731.1 -- 2,731.1 311.8 2,418.0 135.3 146.2 Corporate -- -- -- (40.3) 264.9(b) 2.1 19.9 --------- --------- --------- --------- --------- --------------- --------------- Consolidated $ 2,731.1 $ -- $ 2,731.1 $ 271.5(d) $ 2,682.9 $ 137.4 $ 166.1 ========= ========= ========= ========= ========= =============== =============== 2001 Morse TEC $ 846.7 $ 22.7 $ 869.4 $ 119.8 $ 1,066.4 $ 62.3 $ 75.7 Air/Fluid Systems 350.2 7.6 357.8 12.9 382.1 25.1 17.6 Cooling Systems 220.5 -- 220.5 7.5 510.1 30.6 14.6 TorqTransfer Systems 498.7 1.4 500.1 24.1 266.6 23.4 38.0 Transmission Systems 417.5 11.3 428.8 48.5 359.6 26.1 26.6 Divested operations and businesses held for sale* 18.0 -- 18.0 (0.2) -- 0.2 -- Inter-segment eliminations -- (43.0) (43.0) -- -- -- -- --------- --------- --------- --------- --------- --------------- --------------- Total 2,351.6 -- 2,351.6 212.6 2,584.8 167.7 172.5 Corporate -- -- -- (26.5) 186.1(b) 2.2 10.4 Restructuring and other non-recurring charges -- -- -- (28.4) -- -- -- --------- --------- --------- --------- --------- --------------- --------------- Consolidated $ 2,351.6 $ -- $ 2,351.6 $ 157.7(d) $ 2,770.9 $ 169.9 $ 182.9 ========= ========= ========= ========= ========= =============== =============== 2000 Morse TEC $ 860.0 $ 25.8 $ 885.8 $ 127.4 $ 1,017.7 $ 58.7 $ 82.8 Air/Fluid Systems 419.0 8.8 427.8 35.7 403.2 25.6 27.0 Cooling Systems 280.8 0.5 281.3 32.1 536.8 30.5 16.7 TorqTransfer Systems 524.9 1.8 526.7 37.2 250.3 24.0 19.2 Transmission Systems 428.5 9.0 437.5 46.0 353.1 25.5 32.6 Divested operations and businesses held for sale* 132.7 0.2 132.9 3.2 73.6 3.0 4.6 Inter-segment eliminations -- (46.1) (46.1) -- -- -- -- --------- --------- --------- --------- --------- --------------- --------------- Total 2,645.9 -- 2,645.9 281.6 2,634.7 167.3 182.9 Corporate -- -- -- (4.6) 104.9(b) 3.1 13.9 Restructuring and other non-recurring charges -- -- -- (62.9) -- -- -- --------- --------- --------- --------- --------- --------------- --------------- Consolidated $ 2,645.9 $ -- $ 2,645.9 $ 214.1(d) $ 2,739.6 $ 170.4 $ 196.8 ========= ========= ========= ========= ========= =============== ===============
(a) Fuel Systems was sold in 2001. The HVAC business was sold in 2000. (b) Corporate assets, including equity in affiliates, are net of trade receivables sold to third parties, and include cash, marketable securities, deferred taxes and investments and advances. (c) Long-lived asset expenditures includes capital spending and additions to non-perishable tooling, net of customer reimbursements. (d) Earnings before interest and taxes above is net of interest expense and finance charges of $37.7, $47.8 and $62.6 million in 2002, 2001 and 2000, respectively. Had these amounts been included in the table above, earnings before income taxes for the years 2002, 2001 and 2000 would be $233.8, $109.9 and $151.5 million, respectively. 57 BorgWarner NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Interim Financial Information (Unaudited) The following information includes all adjustments, as well as normal recurring items, that the Company considers necessary for a fair presentation of 2002 and 2001 interim results of operations. Certain 2002 and 2001 quarterly amounts have been reclassified to conform to the annual presentation.
millions of dollars, except per share amounts 2002 Quarter Ended, March 31 June 30 Sept. 30 Dec. 31 Year 2002 --------- --------- --------- --------- --------- Net sales $ 633.9 $ 712.4 $ 684.0 $ 700.8 $ 2,731.1 Cost of sales 504.2 561.4 556.1 554.8 2,176.5 --------- --------- --------- --------- --------- Gross profit 129.7 151.0 127.9 146.0 554.6 Selling, general and administrative expenses 74.5 76.5 73.2 79.3 303.5 Goodwill amortization -- -- -- -- -- Other, net (0.5) 0.1 (0.2) (0.3) (0.9) Restructuring and other non-recurring charges -- -- -- -- -- --------- --------- --------- --------- --------- Operating income 55.7 74.4 54.9 67.0 252.0 Equity in affiliate earnings, net of tax (3.4) (6.0) (4.5) (5.6) (19.5) Interest expense, net 9.8 9.5 9.3 9.1 37.7 --------- --------- --------- --------- --------- Income before income taxes 49.3 70.9 50.1 63.5 233.8 Provision for income taxes 16.3 23.6 16.4 20.9 77.2 Minority interest, net of tax 1.5 1.6 1.8 1.8 6.7 --------- --------- --------- --------- --------- Net earnings before cumulative effect of accounting change $ 31.5 $ 45.7 $ 31.9 $ 40.8 $ 149.9 ========= ========= ========= ========= ========= Cumulative effect of accounting changes (269.0) -- -- -- (269.0) --------- --------- --------- --------- --------- Net earnings/(loss) $ (237.5) $ 45.7 $ 31.9 $ 40.8 $ (119.1) ========= ========= ========= ========= ========= Net earnings/(loss) per share - basic $ (8.98) $ 1.72 $ 1.19 $ 1.52 $ (4.47) ========= ========= ========= ========= ========= Net earnings/(loss) per share - diluted $ (8.90) $ 1.70 $ 1.18 $ 1.52 $ (4.44) ========= ========= ========= ========= ========= millions of dollars, except per share amounts 2001 Quarter Ended, March 31 June 30 Sept. 30 Dec. 31 Year 2001 --------- --------- --------- --------- --------- Net sales $ 606.8 $ 602.0 $ 559.9 $ 582.9 $ 2,351.6 Cost of sales 494.3 480.4 451.5 464.6 1,890.8 --------- --------- --------- --------- --------- Gross profit 112.5 121.6 108.4 118.3 460.8 Selling, general and administrative expenses 59.4 63.0 59.2 68.1 249.7 Goodwill amortization 10.6 10.3 10.4 10.7 42.0 Other, net (0.6) 0.2 (0.6) (1.1) (2.1) Restructuring and other non-recurring charges -- -- -- 28.4 28.4 --------- --------- --------- --------- --------- Operating income 43.1 48.1 39.4 12.2 142.8 Equity in affiliate earnings, net of tax (3.9) (4.8) (3.3) (2.9) (14.9) Interest expense, net 12.8 12.4 12.3 10.3 47.8 --------- --------- --------- --------- --------- Income before income taxes 34.2 40.5 30.4 4.8 109.9 Provision for income taxes 12.4 15.1 10.9 1.3 39.7 Minority interest, net of tax 0.7 0.7 1.1 1.3 3.8 --------- --------- --------- --------- --------- Net earnings before cumulative effect of accounting change $ 21.1 $ 24.7 $ 18.4 $ 2.2 $ 66.4 ========= ========= ========= ========= ========= Cumulative effect of accounting changes -- -- -- -- -- --------- --------- --------- --------- --------- Net earnings/(loss) $ 21.1 $ 24.7 $ 18.4 $ 2.2 $ 66.4 ========= ========= ========= ========= ========= Net earnings/(loss) per share - basic $ 0.80 $ 0.94 $ 0.70 $ 0.08 $ 2.52 ========= ========= ========= ========= ========= Net earnings/(loss) per share - diluted $ 0.80 $ 0.93 $ 0.70 $ 0.08(b)$ 2.51(b) ========= ========= ========= ========= =========
(a) In 2002, the Company recorded a $269.0 million charge for cumulative effect of change in accounting principle, net of tax. This charge was $10.02 per diluted share. Earnings before cumulative effect of change in accounting principle were $149.9 million or $5.58 per diluted share. (b) Diluted earnings per share excluding the fourth quarter non-recurring charges were $0.80 for the quarter ended December 31, 2001 and $3.23 for the year ended December 31, 2001. 58 BorgWarner 2002 SELECTED FINANCIAL DATA BorgWarner Inc. and Consolidated Subsidiaries
millions of dollars, except per share data For the Year Ended December 31, 2002 2001 2000 1999 1998 ---------- ---------- ---------- ---------- ---------- STATEMENT OF OPERATIONS DATA Net sales $ 2,731.1 $ 2,351.6 $ 2,645.9 $ 2,458.6 $ 1,836.8 ---------- ---------- ---------- ---------- ---------- Cost of sales 2,176.5 1,890.8 2,090.7 1,968.3 1,518.0 Gross profit 554.6 460.8 555.2 490.3 318.8 Selling, general and administrative expenses 303.5 249.7 258.7 214.8 142.6 Goodwill amortization -- 42.0 43.3 32.1 16.8 Other, net (0.9) (2.1) (8.1) (2.4) (4.8) Restructuring and other non-recurring charges -- 28.4(b) 62.9(c) -- -- ---------- ---------- ---------- ---------- ---------- Operating income 252.0 142.8 198.4 245.8 164.2 Equity in affiliate earnings, net of tax (19.5) (14.9) (15.7) (11.7) (5.5) Interest expense, net 37.7 47.8 62.6 49.2 26.9 ---------- ---------- ---------- ---------- ---------- Income before income taxes 233.8 109.9 151.5 208.3 142.8 Provision for income taxes 77.2 39.7 54.8 74.7 46.0 Minority interest, net of tax 6.7 3.8 2.7 1.3 2.1 ---------- ---------- ---------- ---------- ---------- Net earnings before cumulative effect of accounting change 149.9 66.4 94.0 132.3 94.7 Cumulative effect of change in accounting principle, net of tax (269.0)(a) -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net earnings/(loss) $ (119.1) $ 66.4 $ 94.0 $ 132.3 $ 94.7 ---------- ---------- ---------- ---------- ---------- Net earnings/(loss) per share - basic $ (4.47)(a) $ 2.52(b) $ 3.56(c) $ 5.10 $ 4.03 ---------- ---------- ---------- ---------- ---------- Average shares outstanding (thousands) - basic 26,625 26,315 26,391 25,948 23,479 Net earnings/(loss) per share - diluted $ (4.44)(a) $ 2.51(b) $ 3.54(c) $ 5.07 $ 4.00 ---------- ---------- ---------- ---------- ---------- Average shares outstanding (thousands) - diluted 26,854 26,463 26,487 26,078 23,676 Cash dividend declared per share $ 0.63 $ 0.60 $ 0.60 $ 0.60 $ 0.60 BALANCE SHEET DATA (at end of period) Total assets $ 2,682.9 $ 2,770.9 $ 2,739.6 $ 2,970.7 $ 1,846.1 Total debt 646.7 737.0 794.8 980.3 393.5
(a) In 2002, upon the adoption of SFAS No. 142, the Company recorded a $269.0 million charge for cumulative effect of accounting principle, net of tax. This charge was $10.02 per diluted share. Earnings before cumulative effect of change in accounting principle were $149.9 million or $5.58 per diluted share. (b) In 2001, the Company recorded $28.4 million in non-recurring charges. Net of tax, this totaled $19.0 million or $0.72 per diluted share. Earnings before non-recurring charges were $85.4 million or $3.23 per diluted share. (c) In 2000, the Company recorded $62.9 million in restructuring and other non-recurring charges. Net of tax, this totaled $38.7 million or $1.47 per diluted share. Earnings before restructuring and other non-recurring charges were $132.7 million, or $5.01 per diluted share. 59 BorgWarner CORPORATE INFORMATION COMPANY INFORMATION BorgWarner Inc. 200 South Michigan Avenue, Chicago, IL 60604 312-322-8500 www.bwauto.com STOCK LISTING Shares are listed and traded on the New York Stock Exchange. Ticker symbol: BWA.
High Low ------ -------- Fourth Quarter 2002 $52.51 $39.15 Third Quarter 2002 62.06 48.89 Second Quarter 2002 67.86 55.87 First Quarter 2002 64.12 49.71 Fourth Quarter 2001 $52.25 $39.88 Third Quarter 2001 54.50 36.49 Second Quarter 2001 49.62 39.60 First Quarter 2001 45.81 38.90
DIVIDENDS The current dividend practice established by the directors is to declare regular quarterly dividends. The last such dividend of 18 cents per share of common stock was declared on December 9, 2002, payable February 17, 2003, to stockholders of record on February 3, 2003. The current practice is subject to review and change at the discretion of the Board of Directors. SHAREHOLDER SERVICES Mellon Investor Services is the transfer agent, registrar and dividend dispersing agent for BorgWarner common stock. Mellon Investor Services for BorgWarner 85 Challenger Road Ridgefield Park, NJ 07660 www.mellon-investor.com Communications concerning stock transfer, change of address, lost stock certificates or proxy statements for the annual meeting should be directed to Mellon Investor Services at 800-851-4229. DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN The BorgWarner Dividend Reinvestment and Stock Purchase Plan has been established so that anyone can make direct purchases of BorgWarner common stock and reinvest dividends. We pay the brokerage commissions on purchases. Questions about the plan can be directed to Mellon at 800-851-4229. To receive a prospectus and enrollment package, contact Mellon at 800-842-7629. ANNUAL MEETING OF STOCKHOLDERS The 2003 annual meeting of stockholders will be held on Wednesday, April 23, 2003, beginning at 10:00 a.m. on the 19th floor of our headquarters at 200 South Michigan Avenue in Chicago. STOCKHOLDERS As of December 31, 2002, there were 2,979 holders of record and an estimated 9,000 beneficial holders. INVESTOR INFORMATION Visit WWW.BWAUTO.COM for a wide range of company information. For investor information, including the following, click on Investor Information. o BorgWarner News Releases o BorgWarner Stock Quote o Earnings Release Conference Call Calendar o Analyst Coverage o Shareholder Services o BorgWarner In The News Articles o Annual Reports o Proxy Statement and Card o Dividend Reinvestment/Stock Purchase Plan o Financials and SEC Filings (including the Annual Report on Form 10K) o Request Information Form NEWS RELEASE SIGN-UP At our Investor Information web page, you can sign up to receive BorgWarner's news releases. Here's how to sign up: 1. Go to WWW.BWAUTO.COM 2. Click Investor Information 3. Click News Releases Sign-up and follow the instructions INVESTOR INQUIRIES Investors and securities analysts requiring financial reports, interviews or other information should contact Mary E. Brevard, Director of Investor Relations and Communications at BorgWarner headquarters, 312-322-8683. For copies of printed material, call our BorgWarner Investor Relations Hot Line at 312-322-8524. BorgWarner Inc. owns U.S. trademark registrations for: BorgWarner, (LOGO), (BORGWARNER LOGO) and TORQUE-ON-DEMAND. BorgWarner owns the following trademarks: ITM, InterActive Torque Management and DualTronic. PTC photo:(C)Studio B Architects, Michael Collyer Photographer 60 BorgWarner EX-21.1 7 c75405exv21w1.txt EX-21.1 SUBSIDIARIES OF THE COMPANY EXHIBIT 21.1 BORGWARNER INC. (Parent) NAME OF SUBSIDIARY BorgWarner TorqTransfer Systems Inc. BorgWarner Powdered Metals Inc. BorgWarner South Asia Inc. Divgi-Warner PVT Limited Huazhong (Automotive) Transmission Company, Ltd. Borg-Warner Shenglong (Ningbo) Co. Ltd. BorgWarner TorqTransfer Systems Korea Inc. BorgWarner TorqTransfer Systems Beijing Co. Ltd. BorgWarner Diversified Transmission Products Inc. BorgWarner Air/Fluid Systems Inc. BorgWarner Air/Fluid Systems of Michigan Inc. BorgWarner Air/Fluid Systems Holding Inc. BorgWarner Cooling Systems Inc. BorgWarner Cooling Systems of Michigan Inc. BorgWarner Cooling Systems (India) Private Limited BorgWarner Morse TEC Inc. BorgWarner Canada Inc. BorgWarner Japan Inc. BorgWarner Morse TEC Japan K.K. BorgWarner Automotive Taiwan Co., Ltd. BorgWarner Morse TEC Mexico S.A. de C.V. BorgWarner Morse TEC Murugappa Pvt. Ltd. BorgWarner Morse TEC Korea Ltd. BorgWarner Transmission Systems Inc. BorgWarner NW Inc. BorgWarner Transmission Systems Korea, Inc. NSK-Warner K.K. Lapeer Warner, LLC BorgWarner Europe Inc. BorgWarner Holding Inc. BW Holding Ltd. BorgWarner Europe GmbH BorgWarner Holdings Ltd. BorgWarner Limited Kysor Industries S.A. Kysor Europe Limited Morse TEC Europe S.r.l. BorgWarner Germany GmbH BorgWarner Cooling Systems GmbH BorgWarner Transmission Systems Arnstadt GmbH BorgWarner Transmission Systems GmbH BorgWarner Vertriebs und Verwaltungs GmbH BorgWarner Turbo Systems Worldwide Headquarters GmbH 3K Warner Turbosystems GmbH BorgWarner France S.A.S. BorgWarner Air/Fluid Systems Tulle S.A.S. 3K-Warner Turbosystems do Brasil Ltda. TSA Turbochargers of South Africa Pty. Ltd. KKK Societa Italiana Turbocompressori S.r.l. BorgWarner Turbo Systems Alkatreszgyarto Kft. Hitachi Warner Turbo Systems Ltd. Turbo Energy Ltd. Creon Insurance Agency Limited Creon Trustees Limited Kuhlman Corporation BWA Turbo Systems Holding Corporation BorgWarner Turbo Systems Inc. BorgWarner Cooling Systems Korea, Inc. BorgWarner Automotive Brasil, Ltda. Kysor DO BRASIL LTDA. Kuhlman Plastics of Canada, Ltd. Spring Products Corporation EX-23.1 8 c75405exv23w1.txt EX-23.1 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-75564, 33-75566, 33-75568, 33-75572, 33-75574, 33-67822, and 33-67824 dated February 1, 1995; 33-92430, 33-92428, 33-92432, and 33-92426 dated May 17, 1995; 33-92862 and 33-92860 dated May 30, 1995; 33-92858 dated June 1, 1995; 333-12941, 333-12875, and 333-12939 dated September 27, 1996; 333-17179 dated December 3, 1996; 333-45423 dated February 2, 1998; 333-45491, 333-45493, 333-45495, 333-45507, and 333-45499, dated February 3, 1998; 333-51647 dated May 1, 1998; 333-67131, 333-67133 and 333-67135 dated November 12, 1998; 333-85299, 333-85297, 333-85295, 333-85293, 333-85291, 333-85289, 333-85301 and 333-85303 dated August 16, 1999; 333-95207 dated January 24, 2000; 333-35722, 333-35729, 333-35720, 333-35736, 333-35732, 333-35718 and 333-35716 dated April 27, 2000, all on Form S-8, and 333-99007 dated August 30, 2002 on Form S-3 of BorgWarner Inc., of our report dated February 6, 2003 (which expresses an unqualified opinion and includes an explanatory paragraph relating to the adoption of the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"), incorporated by reference in the Annual Report on Form 10-K of BorgWarner Inc. for the year ended December 31, 2002. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP March 21, 2003 EX-99.1 9 c75405exv99w1.txt EX-99.1 CAUTIONARY STATEMENTS EXHIBIT 99.1 CAUTIONARY STATEMENTS - -------------- Information provided by the Company from time to time may contain "forward- looking statements" as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are typically identified by words or phrases such as "expects," "anticipates," "intends," "plans," "believes," "estimates" "should" and similar expressions. The Company does not intend or assume any obligation to update any of these forward-looking statements. Such forward-looking statements are subject to risks and uncertainties including, but not limited to, those discussed below, which could cause actual results to differ materially from those expressed, projected or implied in the forward-looking statement. 1. The Company's principal operations are cyclical, because they are directly related to domestic and foreign vehicle production, which is itself cyclical and dependent on general economic conditions and other factors. Any significant reduction in such production would have an adverse effect on the level of the Company's sales to vehicle original equipment manufacturers ("OEMs") and on the Company's financial position and operating results. 2. Certain of the Company's products are currently used exclusively in sport-utility vehicles and light trucks. Any significant reduction in the production of such vehicles and trucks would have an adverse effect on the level of the Company's sales to OEMs and the Company's financial position and operating results. 3. A number of the Company's major OEM customers manufacture products for their own use that 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 for their own use and in place of the products now supplied by the Company. 4. The Company has a stated goal of increasing its revenues through the expansion of existing business and select acquisitions. Failure to grow existing business in sufficient volume because of changes in the vehicle market and/or the unavailability of suitable acquisition candidates could result in nonattainment of this goal. 5. Annual price reductions to OEM customers have become a permanent feature of the Company's business environment. 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 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. 6. The Company makes a significant annual investment in research and development activities to develop new and improved products and manufacturing processes. There can be no assurance that research and development activities will yield new or improved products or products which will be purchased by the OEMs, or new and improved manufacturing processes. 7. The Company has a stated goal to expand its operations in all significant global markets to balance the cyclical nature of the vehicle business. There can be no assurance that the Company will be able to expand its existing business or obtain new business outside of North America to balance its sales. In addition, there can be no assurance that vehicle production in North America, South America, Europe and Asia will not decline simultaneously. 8. The Company has a stated goal of continuing to increase revenues and operating earnings at a rate greater than overall world vehicle production by increasing its content per vehicle with innovative new components and systems. Any of the following factors could cause the Company to fail to outperform world automotive production: (a) a significant drop in production of sport utility vehicles and light trucks, high content vehicles for the Company's products; (b) a failure of research and development spending to result in new components and systems which will be purchased by the OEMs; (c) technology changes which could render the Company's components and systems obsolete; and (d) a reversal of the trend of supplying systems (which allows the Company to increase content per vehicle) instead of components. 9. With operations and sales in countries outside the United States, the Company could be affected by changes in trade, monetary and fiscal policies (both in the United States and elsewhere), trade restrictions or prohibitions, import and other charges or taxes, and fluctuations in foreign currency and foreign exchange rates, and political instability and disputes. 10. The use of the Internet by certain of our OEM customers has modified their business model for dealing with suppliers. The Company has a strategy to be responsive to these initiatives through a combination of increasing cost efficiency and product development. If such efforts are unsuccessful, the Company would be subject to a greater risk of lower sales and reduced profitability. 11. The Company bases its growth projections, in part, on long-term commitments made by our customers. These commitments generally range anywhere from one year to seven years into the future. If the actual production orders from our customers do not approximate such commitments, it could have a material adverse effect on the Company's growth and financial performance. 12. The Company competes worldwide with a number of other manufactures and distributors that produce and sell similar products. Price, quality and technological innovation are the primary elements of competition. Competitors include vertically integrated units of major customers, as well as, a large number of independent domestic and international suppliers. Increased pressure to lower the selling price of the Company's products could effect the Company's profitability. 13. From time to time, the Company expresses its expectations regarding a number of financial measures, including earnings per share and debt-to-capital ratio. In addition to the factors outlined above, the Company's decision to pursue an acquisition may affect its ability to meet such stated targets and expectations. EX-99.2 10 c75405exv99w2.txt EX-99.2 CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 99.2 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Timothy M. Manganello, President and Chief Executive Officer of BorgWarner Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge: (1) the Annual Report on Form 10-K of the Company for the year ended December 31, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 21, 2003 /s/ TIMOTHY M. MANGANELLO ------------------------------------- Timothy M. Manganello President and Chief Executive Officer EX-99.3 11 c75405exv99w3.txt EX-99.3 CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 99.3 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, George E. Strickler, Executive Vice President and Chief Financial Officer of BorgWarner Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge: (1) the Annual Report on Form 10-K of the Company for the year ended December 31, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 21, 2003 /s/ GEORGE E. STRICKLER ------------------------------------ George E. Strickler Executive Vice President & Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----


Delaware		13-3404508
(State of Incorporation)		(I.R.S. Employer Identification No.)


		Name of each exchange on
Title of each class		which registered

Common Stock, par value $.01 per share		New York Stock Exchange


		Part of Form 10-K
		into which
Document		incorporated

BorgWarner Inc. 2002 Annual Report to Stockholders		Parts I, II and IV
BorgWarner Inc. Proxy Statement for the 2003 Annual Meeting of Stockholders		Part III


PART I
	Item 1. Business
	Item 2. Properties
	Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
PART II
	Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters
	Item 6. Selected Financial Data
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A. Market Risk Disclosure
	Item 8. Financial Statements and Supplementary Data
	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
	Item 10. Directors and Executive Officers of the Registrant
	Item 11. Executive Compensation
	Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
	Item 13. Certain Relationships and Related Transactions
PART IV
	Item 14. Controls and Procedures
	Item 15. Exhibits, Financial Statement Schedules, and Reports On Form 8-K
SIGNATURES
CERTIFICATION
CERTIFICATION
EXHIBIT INDEX
EX-10.15 Seventh Amendment to Loan Agreement
EX-10.16 Eighth Amendment to Loan Agreement
EX-10.23 Deferred Compensation Plan
EX-13.1 Annual Report to Stockholders
EX-21.1 Subsidiaries of the Company
EX-23.1 Independent Auditors' Consent
EX-99.1 Cautionary Statements
EX-99.2 Certification of Chief Executive Officer
EX-99.3 Certification of Chief Financial Officer


	2002 Percent of
	Capacity
Locations	Utilization(1)(2)

Morse TEC		106.2	%
Headquarters: Ithaca, New York; Kirchheimbolanden, Germany
Arcore, Italy; Asheville, North Carolina; Bradford, England; Campinas Sao Paolo, Brazil; Guadalajara, Mexico; Cortland, New York; Ithaca, New York; Nabari City, Japan; Kakkalur, India; Oroszlany, Hungary; Simcoe, Ontario, Canada; Tainan Shien, Taiwan; Chennai, India
Air/ Fluid Systems		67.8	%
Headquarters: Auburn Hills, Michigan
Dixon, Illinois; Spring Lake, Michigan; Sallisaw, Oklahoma; Tulle, France; Water Valley, Mississippi
Cooling Systems		80.2	%
Headquarters: Marshall, Michigan
Bradford, England (leased); Cadillac, Michigan; Markdorf, Germany; Changwon, South Korea (leased); Fletcher, North Carolina; Ningbo, China; Sao Jose dos Campos, Brazil (leased)
TorqTransfer Systems		83.6	%
Headquarters: Auburn Hills, Michigan
Beijing, China (80% JV); Livonia, Michigan; Longview, Texas (leased); Margam, Wales; Muncie, Indiana; Pune, India (60% JV); Seneca, South Carolina; Sirsi, India (60% JV)
Transmission Systems		100.9	%
Headquarters: Auburn Hills, Michigan
Bellwood, Illinois; Eumsung, Korea (80% JV); Frankfort, Illinois; Heidelberg, Germany; Ketsch, Germany

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents


For the Fiscal Year Ended December 31, 2002	Commission File Number: 1-12162


Item
Number			Page

PART I
	1.	Business		3
	2.	Properties		11
	3.	Legal Proceedings		12
	4.	Submission of Matters to a Vote of Security Holders		13
PART II
	5.	Market for the Registrant’s Common Equity and Related Stockholder Matters		13
	6.	Selected Financial Data		14
	7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
	7a.	Market Risk Disclosure		14
	8.	Financial Statements and Supplementary Data		14
	9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		15
PART III
	10.	Directors and Executive Officers of the Registrant		15
	11.	Executive Compensation		15
	12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		15
	13.	Certain Relationships and Related Transactions		15
PART IV
	14.	Controls and Procedures		16
	15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K		16



	Year Ended December 31,

	2002			2001			2000

Morse TEC	$	1,046.9		$	869.4		$	885.8
Air/ Fluid Systems		388.4			357.8			427.8
Cooling Systems		235.8			220.5			281.3
TorqTransfer Systems		630.1			500.1			526.7
Transmission Systems		495.2			428.8			437.5
Divested operations and businesses held for sale		—			18.0			132.9
Inter-segment eliminations		(65.3	)		(43.0	)		(46.1	)

Net sales	$	2,731.1		$	2,351.6		$	2,645.9


(a)		BorgWarner Inc. owns 50% of NSK-Warner, which has a 40% interest in BorgWarner Transmission Systems Korea, Inc. giving the Company an effective ownership interest of 80%.


Name	Age		Position With Company

Timothy M. Manganello		53	President and Chief Executive Officer
George E. Strickler		55	Executive Vice President and Chief Financial Officer
Robert D. Welding		54	Executive Vice President
William C. Cline		53	Vice President and Controller
Kimberly L. Dickens		41	Vice President, Human Resources
Anthony D. Hensel		44	Vice President
Laurene H. Horiszny		47	Vice President, General Counsel and Secretary
John A. Kalina		57	Vice President and Chief Information Officer
John J. McGill		48	Vice President
Jeffrey L. Obermayer		47	Vice President and Treasurer
Alfred O. Weber		45	Vice President
F. Lee Wilson		48	Vice President
Roger J. Wood		40	Vice President


Item 4.	Submission of Matters to a Vote of Security Holders


Item 5.	Market for the Registrant’s Common Equity and Related Stockholder Matters


Quarter ended	High		Low

March 31, 2001	$	45.81	$	38.90
June 30, 2001	$	49.62	$	39.60
September 30, 2001	$	54.50	$	36.49
December 31, 2001	$	52.25	$	39.88
March 31, 2002	$	66.10	$	49.91
June 30, 2002	$	68.95	$	55.48
September 30, 2002	$	62.73	$	47.89
December 31, 2002	$	53.65	$	38.38


Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations


Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


Item 1.	Business


Item 2.	Properties


Item 6.	Selected Financial Data


Item 11.	Executive Compensation


Item 10.	Directors and Executive Officers of the Registrant


Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.


Item 15.	Exhibits, Financial Statement Schedules, and Reports On Form 8-K


Independent Auditors’ Report
Consolidated Statements of Operations — years ended December 31, 2002, 2001 and 2000
Consolidated Balance Sheets — December 31, 2002 and 2001
Consolidated Statements of Cash Flows — years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Stockholders’ Equity — years ended December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements



Signature				Title


/s/ TIMOTHY M. MANGANELLO Timothy M. Manganello				President and Chief Executive Officer (Principal Executive Officer)

/s/ GEORGE E. STRICKLER George E. Strickler				Executive Vice President and Chief Financial Officer (Principal Financial Officer)

/s/ WILLIAM C. CLINE William C. Cline				Vice President and Controller (Principal Accounting Officer)

/s/ JOHN F. FIEDLER John F. Fiedler				Chairman of the Board

/s/ PHYLLIS O. BONANNO Phyllis O. Bonanno				Director

/s/ ANDREW F. BRIMMER Andrew F. Brimmer				Director

/s/ WILLIAM E. BUTLER William E. Butler				Director

/s/ JERE A. DRUMMOND Jere A. Drummond				Director

/s/ PAUL E. GLASKE Paul E. Glaske				Director

/s/ IVAN W. GORR Ivan W. Gorr				Director



Signature				Title


/s/ ALEXIS P. MICHAS Alexis P. Michas				Director

/s/ JOHN RAU John Rau				Director

/s/ TIMOTHY M. MANGANELLO Timothy M. Manganello				Director


Exhibit
Number			Description

	*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).
	*3	.3	Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 3.3 of the Company’s Annual Report on Form 10-K for the year ended December 31, 1999).
	*3	.4	Certificate of Ownership and Merger Merging BorgWarner Inc. into Borg-Warner Automotive, Inc. (incorporated by reference to Exhibit 99.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2000).
	*4	.1	Indenture, dated as of November 1, 1996, between Borg-Warner Automotive, Inc. and The First National Bank of Chicago (incorporated by reference to Exhibit No. 4.1 to Registration Statement No. 333-14717).
	*4	.2	Indenture, dated as of February 15, 1999, between Borg-Warner Automotive, Inc. and The First National Bank of Chicago (incorporated by reference to Exhibit No. 4.1 to Amendment No. 1 to Registration Statement No. 333-66879).
	*4	.3	Rights Agreement, dated as of July 22, 1998, between Borg-Warner Automotive, Inc. and ChaseMellon Shareholder Services, L.L.C. (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form 8-A filed on July 24, 1998).
	*10	.1	Credit Agreement dated as of July 21, 2000 among BorgWarner Inc., as Borrower, the Lenders Party Thereto, The Chase Manhattan Bank, as Administrative Agent, Bank America, N.A., as Syndication Agent and Bank One, N.A. as Documentation Agent (incorporated by reference to Exhibit No. 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).
	*10	.2	First Amendment, dated as of August 3, 2000 to the Credit Agreement, dated as of July 21, 2000 among BorgWarner Inc., as Borrower, the Several Lenders From Time to Time Party Thereto, The Chase Manhattan Bank, as Administrative Agent for the Lenders, Chase Securities Inc. and Banc of America Securities LLC, as Co-Arranger, Bank of America, N.A., as Syndication Agent and Bank One, N.A. as Documentation Agent (incorporated by reference to Exhibit No. 10.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001).
	*10	.3	Distribution and Indemnity Agreement dated January 27, 1993 between Borg-Warner Automotive, Inc. and Borg-Warner Security Corporation (incorporated by reference to Exhibit No. 10.2 to Registration Statement No. 33-64934).
	*10	.4	Tax Sharing Agreement dated January 27, 1993 between Borg-Warner Automotive, Inc. and Borg-Warner Security Corporation (incorporated by reference to Exhibit No. 10.3 to Registration Statement No. 33-64934).
	†*10	.5	Borg-Warner Automotive, Inc. Management Stock Option Plan, as amended (incorporated by reference to Exhibit No. 10.6 to Registration Statement No. 33-64934).
	*10	.7	Receivables Transfer Agreement dated as of January 28, 1994 among BWA Receivables Corporation, ABN AMRO Bank N.V. as Agent and the Program LOC Provider and Windmill Funding Corporation (incorporated by reference to Exhibit No. 10.12 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1993).
	*10	.8	Amended and Restated Receivables Loan Agreement dated as of December 23, 1998 among BWA Receivables Corporation, as Borrower, Borg-Warner Automotive, Inc., as Collection Agent, ABN AMRO Bank N.V., as Agent, the Banks from time to time party hereto, ABN AMRO Bank N.V., as the Program LOC Provider and the Program LOC Provider and Windmill Funding Corporation (incorporated by reference to Exhibit No. 10.11 of the Company’s Annual Report on Form 10-K for the year ended December 31, 1998).