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The aggregate market value of the voting common stock of the registrant held by stockholders (not including voting common stock held by directors and executive officers of the registrant) on June 30, 2005 (the last business day of the most recently completed second fiscal quarter) was approximately $3.0 billion. As of February 10, 2006, the registrant had 57,195,503 shares of voting common stock outstanding.

BorgWarner Inc. and its Consolidated Subsidiaries (the “Company”) has made forward-looking statements in this document 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, many of which are difficult to predict and generally beyond the control of the Company, that could cause actual results to differ materially from those expressed, projected, or implied in or by the forward-looking statements. Such risks and uncertainties include: fluctuations in global or regional vehicle production; the continued use of outside suppliers by original equipment manufacturers, fluctuations in demand for vehicles containing the Company’s products, general economic conditions, as well as other risks noted under “Risk Factors.” The Company does not undertake any obligation to update any forward-looking statement.

The Company, a Delaware corporation, was incorporated in 1987. The Company is a leading, global supplier of highly engineered systems and components, primarily for powertrain applications. The Company’s products help improve vehicle performance, fuel efficiency, air quality and vehicle stability. These products are manufactured and sold worldwide, primarily to original equipment manufacturers (“OEMs”) of light vehicles (passenger cars, sport-utility vehicles, vans and light trucks). The Company’s products are also sold to OEMs of commercial trucks, buses and agricultural and off-highway vehicles. The Company operates manufacturing facilities serving customers in the Americas, Europe and Asia, and is an original equipment supplier to every major automotive OEM in the world.

The Engine Group provides turbochargers for light vehicle, commercial vehicle and off-road applications for diesel and gasoline engine manufacturers in Europe, North America, South America and Asia. The Engine Group has greatly benefited from the growth in turbocharger demand in Europe. This growth is linked to increasing demand for diesel engines in light vehicles and for turbocharged gasoline engines. Benefits of turbochargers in both light vehicle 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.

Sales of turbochargers for light vehicles represented approximately 16%, 16%, and 13% of the Company’s total revenues for 2005, 2004 and 2003, respectively. The Company currently supplies light vehicle turbochargers to VW/ Audi, Renault, PSA, DaimlerChrysler, Hyundai and Fiat and commercial vehicle turbochargers to Caterpillar, John Deere, DaimlerChrysler, International, Deutz and MAN. The Company expects to supply the next generation of light vehicle turbochargers in Europe to VW/

Audi, Renault, PSA, BMW, Ford and Fiat. In 2004, the Company announced that it would supply the 3.0 liter, 6-cylinder engine for the BMW 5-series with its regulated two-stage turbocharging system known as R2S^®. The system allows continuously variable adaption of the turbine and compressor side for every operating point of the engine. In 2005, the Company announced the start of production of R2S^® for medium truck applications. In 2005, the Company also announced that it would supply turbochargers for VW/ Audi’s 2.0 liter gasoline direct injection engine as well as for the first dual-charged 1.4 liter gasoline direct injection engine. These products are provided from facilities in Europe, North America, South America, and Asia.

The Company’s timing chain systems are used on Ford’s family of overhead cam engines, including the Duratech and Triton, and in-line 4 cylinder engines, as well as on Chrysler’s 2.7 liter, 3.7 liter, 4.7 liter and 5.7 liter overhead cam engines, which includes the Hemi applications. In addition, the Company provides timing systems to a number of Asian OEMs and their North American transplant operations, including Honda, Nissan, and Hyundai, and to several European OEMs. The Company believes that it is the world’s leading manufacturer of timing chain systems.

The Engine Group also has started production of its first high-volume variable cam timing (“VCT”) systems for a new family of GM V6 engines. VCT is a means of precisely controlling the flow of air into and out of an engine by allowing the camshaft to be dynamically phased relative to its crankshaft. The Company’s VCT system includes Torsional Assist^tm technology, which utilizes camshaft torque as its actuation energy instead of the conventional oil-pressure actuated approach. The VCT systems are utilized by GM’s new 3.5 liter and 3.9 liter V-6 engines in the 2006 model year Chevrolet Impala and Pontiac G6.

HY-VO^® chain is used to transfer power from the engine to the drivetrain. 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. These products are provided from facilities in North America, Europe and Asia.

The Engine Group also manufactures a wide variety of fluid pumps, including engine hydraulic pumps for variable cam timing and engine lubrication, and products for engine air intake management. Key products for engine air intake management include throttle bodies, electronic throttle control, and complete engine induction modules. The Engine Group also designs and manufactures products to control emissions and improve gas mileage such as electric air pumps, variable force solenoids for the actuation of cam phasing systems and exhaust gas recirculation valves for gasoline and diesel applications. These products are provided from facilities in North America and Europe.

The Engine Group is a global provider of engine thermal solutions. The group manufactures and markets air sensing fan drives that mechanically control and electronically control fans to sense and respond to multiple cooling requirements. The Engine Group also manufactures and markets polymer fans for engine cooling systems. The Company’s thermal products provide improved vehicle fuel economy and reduced engine emissions while minimizing parasitic horsepower loss. These advanced thermal systems products are provided from facilities in North America, South America, Europe, and Asia. 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.

In 2005, the Company acquired 69.4% of the outstanding shares of Beru Aktiengesellschaft (“Beru”), headquartered in Ludwigsburg, Germany. Beru’s operating results are included within the Engine Group. Beru is a leading global automotive supplier of diesel cold starting technology (glow plugs and instant starting systems); gasoline ignition technology (spark plugs and ignition coils); and electronic control units and sensor technology (tire pressure sensors, diesel cabin heaters and selected sensors). These products are provided from facilities located in Europe, Asia and North America.

The Drivetrain Group engineers and manufactures components and modules for automatic transmissions 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. NSK-Warner is the joint venture partner with a 40% interest in the Drivetrain Group’s Korean subsidiary, BorgWarner Transmission Systems Korea, Inc.

In 2003, the Company launched its DualTronic^tm transmission technology on the VW Golf R32 DSG and the Audi TT 3.2. The technology provides the smooth-shifting convenience of an automatic transmission with the fuel efficiency of a manual transmission. Through advanced electrohydraulic controls and a unique two-clutch wet-friction system, DualTronic^tm technology eliminates the disruptive feel of a manual transmission gear shift. This technology is being launched across the entire VW Group vehicle family, including VW, Audi, Skoda and Seat.

There has been a noticeable trend in transmission technology from four and five speed to six and seven speed transmissions. Transmissions with more speeds improve fuel economy and vehicle performance. These transmissions are being developed by a variety of transmission manufacturers, including ZF, Aisin AW, Hyundai, DaimlerChrysler, GM, Ford and Jatco. The Company supplies products for four, five, six, and seven speed transmissions, including solenoids, transmission control modules, friction plates and clutching mechanisms.

The Company’s torque management products include 4WD, AWD transfer cases and systems for rear-wheel drive vehicles, and torque management products and systems to transfer torque within the drivetrain for FWD/AWD based vehicles. The main focus is on electronically controlled (active) torque management devices and systems. Other torque management products include synchronizer rings and systems for application in manual and automated transmissions.

Transfer cases are installed primarily on light trucks, sport-utility vehicles (“SUVs”), and rear-wheel drive based cross-over vehicles (“CUVs”). 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 data and sensors indicate it is necessary. The TOD^® transfer case is available on the Ford Explorer, Ford Expedition, Lincoln Navigator and SsangYong Musso. In 2001, this technology was also adopted by Hyundai for its Terracan SUV, and was launched

Sales of rear-wheel drive based transfer cases and components represented approximately 12%, 18% and 20% of the Company’s total revenues for 2005, 2004 and 2003, respectively. The Company’s largest customer of 4WD transfer cases is Ford Motor Company. The Company supplies the majority of the 4WD transfer cases to Ford, including those installed in the Ford Explorer, the Lincoln Aviator, the Ford Expedition, the Ford F-150, 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 the Suburban, along with the GMC Yukon and the Yukon XL. The Company also supplies transfer cases for the Cadillac SRX and STS and began supplying transfer cases for the new Hummer H3 in 2005. The Company also supplies 4WD transfer cases to several Asian-based OEMs. The Company also began supplying transfer cases to Audi in 2005 for its new Q7 SUV.

One of the Company’s AWD iTrac^® products is the INTERACTIVE TORQUE MANAGEMENT^tm (“ITM^®”) system. This product was introduced on the Acura MDX in 2000, was launched on the Honda Pilot in 2002 and on the Honda Ridgeline, a new midsize pickup, in 2005. ITM^® 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 FWD based CUVs and passenger cars. A variant of this product, ITM-1^®, which features a single clutch pack in front of the rear axle differential, was launched on the Hyundai Santa Fe in 2002, the Hyundai Tucson and KIA Sportage in 2004. The Company has announced that it will begin supplying a North American OEM with ITM^® product in early 2006 for several passenger cars and CUVs.

The Company’s automotive products are generally sold directly to OEMs substantially pursuant to negotiated annual contracts, 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 typically ships its products directly from its plants to the OEMs.

Each of the Company’s business units within its two operating segments has its own sales function. Account executives for each business unit are assigned to serve specific OEM customers for one or more of a business unit’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 and as a key interface with the customers.

The Company’s business is moderately seasonal because the Company’s largest North American customers typically halt vehicle production for approximately two weeks in July and one week in December. Additionally, customers in Europe and Asia typically shut down vehicle production during portions of July or August and one week in the fourth quarter. Accordingly, the Company’s third and fourth quarters may reflect those practices.

The Company conducts advanced engine and drivetrain research at the segment level. This advanced engineering function looks to leverage electronics and the Company’s expertise across product lines to create new engine and drivetrain systems and modules that can be commercialized. A venture capital fund that was created by the Company as seed money for new innovation and collaboration across businesses is managed by this function.

In addition, each of the Company’s operating segments has its own research and development (“R&D”) organization. The Company has 811 employees, including engineers, mechanics and technicians, engaged in R&D activities at facilities worldwide. The Company also operates testing facilities such as prototype, measurement and calibration, life cycle 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 $161.0 million, $123.1 million, and $118.2 million in 2005, 2004, and 2003, respectively, on R&D activities. Not included in the reported R&D activities were customer-sponsored R&D activities of approximately $33.3 million, $31.8 million, and $22.3 million in 2005, 2004, and 2003, respectively.

The Company has approximately 3,500 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.

As of December 31, 2005, the Company and its consolidated subsidiaries had approximately 17,400 salaried and hourly employees (as compared with approximately 14,500 employees at December 31, 2004), of which approximately 7,600 were U.S. employees. Included in these 17,400 employees are approximately 2,700 Beru employees. Approximately 24% of the Company’s U.S. workers are unionized. The hourly workers at the Company’s non-U.S. operations are typically unionized. The Company believes its present relations with employees to be satisfactory.

Despite these challenges, the Company used a variety of tactics in order to limit the impact of inflationary prices and supply shortages. The Company formed a global procurement organization to accelerate: cost reductions, purchases from lower cost regions, risk mitigation efforts, and collaborative buying activities. In addition, the Company used long-term contracts, cost sharing arrangements, design changes, customer buy programs, and hedging instruments to help control costs. The Company intends to use similar measures in 2006 and beyond.

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 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 (“EPA”) 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 38 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 the 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 and consulting costs; remediation alternatives; estimated legal fees; and other factors; the Company has established an accrual for indicated environmental liabilities with a balance at December 31, 2005 of approximately $38.3 million. Included in the total accrued liability is the $16.1 million anticipated remaining costs to settle all outstanding claims related to the Crystal Springs, Mississippi plant described separately below, which was included in the amount recorded in the second quarter of 2005. For the other 37 sites, we have accrued amounts that do not exceed $3.0 million related to any individual site and management does not believe that the costs related to any of these other individual sites will have a material adverse effect on the Company’s results of operations, cashflow, or financial condition. The Company expects to expend substantially all of this $38.3 million environmental accrued liability over the next three to five years.

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. The liabilities at issue result from operations of Kuhlman Electric that pre-date the Company’s acquisition of Kuhlman Electric’s parent company, Kuhlman Corporation, during 1999. 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. Kuhlman Electric and others, including the Company, were sued in numerous related lawsuits, in which multiple claimants alleged personal injury and property damage.

The Company and other defendants, including the Company’s subsidiary Kuhlman Corporation, entered into a settlement in July 2005 regarding approximately 90% of personal injury and property damage claims relating to the alleged environmental contamination. In exchange for, among other things, the dismissal with prejudice of these lawsuits, the defendants agreed to pay a total sum of up to $39.0 million in settlement funds. The settlement was paid in three approximately equal installments. The first two payments of $12.9 million were made in the third and fourth quarter of 2005 and the remaining installment of $13.0 million was paid in the first quarter of 2006.

The same group of defendants entered into a settlement in October 2005 regarding approximately 9% of personal injury and property damage claims relating to the alleged environmental contamination. In exchange for, among other things, the dismissal with prejudice of these lawsuits, the defendants agreed to pay a total sum of up to $5.4 million in settlement funds. The settlement was paid in two approximately equal installments in the fourth quarter of 2005 and the first quarter of 2006. With this settlement, the Company and other defendants have resolved about 99% of the known personal injury and property damage claims relating to the alleged environmental contamination.

makes the following documents available on its Internet website: the Audit Committee Charter; the Compensation Committee Charter; the Corporate Governance Committee Charter; the Company’s Corporate Governance Guidelines; the Company’s Code of Ethical Conduct; and the Company’s Code of Ethics for CEO and Senior Financial Officers. You may also obtain a copy of any of the foregoing documents, free of charge, if you submit a written request to Mary Brevard, Vice President, Investor Relations and Corporate Communications, 3850 Hamlin Road, Auburn Hills, Michigan 48326.

Mr. Manganello has been Chairman of the Board since June 2003 and Chief Executive Officer since February 2003. 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. (“TorqTransfer Systems”) from February 1999 until February 2002.

Mr. Adams has been Executive Vice President, Chief Financial Officer and Chief Administrative Officer since April 2004 and was elected to the Board of Directors in April 2005. He was Executive Vice President — Finance and Chief Financial Officer of American Axle & Manufacturing Holdings Inc. (“American Axle”) from July 1999 until April 2004. Prior to joining American Axle, he was Vice President and Treasurer and principal financial officer of BorgWarner from May 1993 until June 1999.

Mr. Matthes has been Vice President of the Company and President and General Manger of BorgWarner Transmission Systems Inc. (“Transmission Systems”) since July 2005. He was General Manager, Operations Europe for Transmission Systems from August 2004 to July 2005. He was Vice President — Operations Europe for Transmission Systems from January 2003 to August 2004. He was Managing Director for Transmission Systems Europe from December 2002 to January 2003. He was General Manager, DualTronic^TM from November 2000 to July 2005.

Ms. Niekamp has been Vice President of the Company and President and General Manager of TorqTransfer Systems since July 2004. She was Senior Vice President and Chief Financial Officer of Mead Westvaco Corp. (“Mead”) from April 2003 until March 2004. She was Senior Vice President, Strategy & Specialty Operations of Mead from February 2002 until April 2003. She was President and General Manager of the Mead Specialty Paper Division from July 1998 until January 2002.

Mr. Perlick has been Vice President, Technology of the Company since July 2005. He was Vice President of the Company and President of Transmission Systems from September 2004 until June 2005. He was Acting President of Transmission Systems from November 2003 until August 2004. He was Vice President — Engineering of TorqTransfer Systems from February 1999 until October 2003 and was Acting President of TorqTransfer Systems from February 2002 to December 2002.

Mr. Weber has been Vice President of the Company since July 2002. He has been President and General Manager of BorgWarner Morse TEC Inc. (“Morse TEC”) since August 2005 and BorgWarner Thermal Systems Inc. since January 2003. He was President and General Manager of BorgWarner Emissions Systems Inc. from July 2002 until July 2005. He was Vice President, Passenger Car Operations, BorgWarner Turbo Systems Inc. from January 1999 to June 2002.

Some of our products, in particular four-wheel drive transfer cases, are currently used exclusively in four-wheel drive systems for sport utility vehicles and light trucks. For 2005, for example, sales of rear-wheel drive transfer cases represented approximately 12% of our total consolidated revenue. Any significant reduction in production in this market segment or loss of business in this market segment would have a material adverse effect on our sales to OEMs and our financial position and operating results.

We compete worldwide with a number of other manufacturers and distributors that produce and sell products similar to ours. Price, quality, and technological innovation are the primary elements of competition. Our competitors include vertically integrated units of our major OEM customers, as well as a large number of independent domestic and international suppliers. We are not as large as a number of these companies and do not have as many financial or other resources. The competitive environment has changed dramatically over the past few years as our traditional U.S. OEM customers, faced with intense international competition, have expanded their worldwide sourcing of components. As a result, we have experienced competition from suppliers in other parts of the world that enjoy economic advantages, such as lower labor costs, lower health care costs and, in some cases, export or raw materials subsidies. Increased competition could adversely affect our businesses.

There is substantial and continuing pressure on OEMs to reduce costs, including costs of products we supply. Although OEMs have indicated that they will continue to rely on outside suppliers, a number of our major OEM customers manufacture products for their own uses that directly compete with our products. These OEMs could elect to manufacture such products for their own uses in place of the products we currently supply. We believe that our ability to develop proprietary new products and to control our costs will allow us to remain competitive. However, we cannot assure you that we will be able to improve or maintain our gross margins on product sales to OEMs or that the trend by OEMs toward increased outsourcing will continue.

Annual price reductions to OEM customers appear to have become a permanent feature of our business environment. In 2005 and 2004, the combination of price reductions to customers and cost increases for material, labor, and overhead, totaled approximately $139.6 million and $127.8 million, respectively. To maintain our profit margins, we seek price reductions from our suppliers, improve production processes to increase manufacturing efficiency, update product designs to reduce costs and develop new products the benefits of which support stable or increased prices. Our ability to pass through increased raw material costs to our OEM customers is limited, with cost recovery less than 100% and often on a delayed basis. We cannot assure you that we will be able to reduce costs in an amount equal to annual price reductions and increases in raw material costs.

All three of our primary North American customers, Ford, DaimlerChrysler, and General Motors, have major union contracts with the United Automobile, Aerospace and Agricultural Implement Workers of America. Because of domestic OEMs’ dependence on a single union, we are affected by labor difficulties and work stoppages at OEMs’ facilities. Similarly, a majority of our global customers’ operations outside of North America are also represented by various unions. Any extended work stoppage could have a material adverse effect on our financial position and operating results.

As of December 31, 2005, approximately 24% of our U.S. hourly employees were unionized. Our two most significant domestic collective bargaining agreements are for our Muncie, Indiana plant and our Ithaca, New York plants. The Muncie agreement expires in May 2009 and the Ithaca agreement expires in October 2008. The hourly workers at our European and certain Asian facilities are also unionized. While we believe that our relations with our employees are good, a prolonged dispute with our employees could have a material adverse effect on our financial position and operating results.

Our operations are subject to laws governing, among other things, emissions to air, discharges to waters, and the generation, handling, storage, transportation, treatment, and disposal of waste and other materials. We believe that our business, operations, and activities have been and are being operated in compliance in all material respects with applicable environmental and health and safety laws. However, the operation of automotive parts manufacturing plants entails risks in these areas, and we cannot assure you that we will not incur material costs or liabilities as a result. Furthermore, through various acquisitions over the years, we have acquired a number of manufacturing facilities, and we cannot assure you that we will not incur materials costs and liabilities relating to activities that predate our ownership. In addition, potentially significant expenditures could be required in order to comply with evolving environmental and health and safety laws that may be adopted in the future.

We and certain of our current and former direct and indirect corporate predecessors, subsidiaries and divisions have been identified by the United States Environmental Protection Agency and certain state environmental agencies and private parties as potentially responsible parties at various hazardous waste disposal sites under the Comprehensive Environmental Response, Compensation and Liability Act and equivalent state laws. As a result, as of December 31, 2005, we may be liable for the cost of clean-up and other remedial activities at 38 of these sites.

We believe that none of these matters, individually or in the aggregate, will have a material adverse effect on our future financial position or operating results, either because estimates of the maximum potential liability at a site are not large or because liability will be shared with other potentially responsible parties. However, we cannot assure you of the ultimate outcome.

We provide warranties to our customers for some of our products. Under these warranties, we may be required to bear costs and expenses for the repair or replacement of these products. We cannot assure you that costs and expenses associated with these product warranties will not be material, or that those costs will not exceed any amounts accrued for such warranties in our financial statement.

We are also party to, or have an obligation to defend a party to, various legal proceedings, including those described in Note 14 to the Notes to the Consolidated Financial Statements. Although we believe that none of these matters is likely to have a material adverse effect on our financial condition or future operating results, there can be no assurance as to the ultimate outcome of any such matter or proceeding.

We have a stated goal of increasing revenues and operating revenues at a rate greater than global vehicle production by increasing content per vehicle with innovative new components and through select acquisitions. We may not meet our goal because of any of the following: (a) a significant decrease in the production of sport utility vehicles and light trucks, high content vehicles for us; (b) the failure to develop new products which will be purchased by our customers; (c) technology changes rendering our products obsolete; (d) a reversal of the trend of supplying systems (which allows us to increase content per vehicle) instead of components; and (e) the failure to find suitable acquisition targets or the failure to integrate operations of acquired businesses quickly and cost effectively.

We have manufacturing and technical facilities in many regions and countries, including North America, Europe, China, India, South Korea, Japan, and Brazil and sell our products worldwide. For 2005, approximately 55 percent of our sales were outside North America. Consequently, our results could be affected by changes in trade, monetary and fiscal policies, trade restrictions or prohibitions, import or other charges or taxes, and fluctuations in foreign currency exchange rates, changing economic conditions, and political instability and disputes.

As of December 31, 2005, the Company had 62 manufacturing, assembly, and technical facilities strategically located throughout the United States and worldwide. In addition to its U.S. manufacturing facilities, the Company has 10 facilities in Germany, five facilities in each of India and Korea, three facilities in each of the United Kingdom and France, two facilities in each of China, Japan, Mexico, Hungary, and Italy, and one facility in each of Brazil, Canada, Ireland, Spain, and Taiwan. The Company also has several sales offices, warehouses and technical centers. The Company’s worldwide headquarters are located in a leased facility in Auburn Hills, Michigan. In 2002, the Company completed construction of the BorgWarner Powertrain Technical Center (the “PTC”) in Auburn Hills, Michigan, which serves as a primary research and development facility and contains many of the administrative personnel for the Engine and Drivetrain segments. There are approximately 475 employees located at the PTC. In general, the Company believes its facilities to be suitable and adequate to meet its current and reasonably anticipated needs. The majority of the facilities are operating at normal levels based on capacity.

The Company is subject to a number of claims and judicial and administrative proceedings (some of which involve substantial amounts) arising out of the Company’s business or relating to matters for which the Company may have a contractual indemnity obligation. See Note 14 of the Notes to Consolidated Financial Statements in the Company’s Annual Report for a discussion of environmental, asbestos and other litigation, which is incorporated herein by reference.

A declaratory judgment action was filed by a subsidiary of the Company, BorgWarner Diversified Transmission Products Inc. (“DTP”), in January 2006 in the United Stated District Court, Southern District of Indiana, Indianapolis Division, against the United Automobile, Aerospace, and Agricultural Implements Workers of America, Local No. 287 and Gerald Poor, individually and as the representative of a defendant class. DTP is seeking the Court’s affirmation that DTP will not violate the Labor-Management Relations Act or the Employee Retirement Income Security Act by amending certain retirees’ medical plans, effective March 12, 2006. DTP believes that it is within its rights to amend the plan and that it will be successful on the merits of the lawsuit, although there can be no guarantee of success in any litigation.

The Company has increased its dividend during each of the last four years. During 2004, the Company paid a quarterly dividend of $0.25 on a pre-split basis. In May 2004, the Company declared a two-for-one stock split, thereby adjusting the quarterly dividend to $0.125. For the first quarter of 2005, the Company announced an increase in the cash dividend from $0.125 per share to $0.14 per share. The Company announced an increase of the cash dividend from $0.14 per share to $0.16 per share for the first quarter of 2006. While the Company currently expects that comparable quarterly

The Selected Financial Data for the five years ended December 31, 2005 with respect to the following line items in 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.

Information with respect to interest rate risk and foreign currency exchange risk is contained in Note 10 of the Notes to Consolidated Financial Statements in 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 9 of the Notes to Consolidated Financial Statements 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 19 of the Notes to Consolidated Financial Statements 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 Registered Public Accounting Firm’s Report as set forth 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, 2005 and 2004 is set forth in the Company’s Annual Report and is incorporated herein by reference. For a list of financial statements filed as part of this report, see Item 15, “Exhibits and Financial Statement Schedules” beginning on page 25.

The Company has adopted and maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports filed under the Exchange Act, such as this Form 10-K, is recorded, processed, summarized and reported within the time periods required under the Securities and Exchange Commission’s rules and forms. The Company’s disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure. The Company’s internal controls are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of its consolidated financial statements in conformity with GAAP. As required under Exchange Act Rule 13a-15, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective. This evaluation included consideration of the restatements described below and in Note 18 of the Company’s audited Consolidated Financial Statements included in Part IV, Item 15 of this report.

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(e). Management conducted an assessment of the Company’s internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework. Based on the assessment, management concluded that, as of December 31, 2005, the Company’s internal control over financial reporting is effective. Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report below.

The Company’s management, including its Chief Executive Officer and the Chief Financial Officer, does not expect that the Company’s disclosure controls and procedures and its internal control processes will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

The Company purchased a 69.4% stake in Beru in January 2005. The Company considers the acquisition of Beru to be material to the results of its operations, financial position and cash flows from the date of acquisition through December 31, 2005, and believes that the internal controls and procedures of Beru have a material effect on internal control over financial reporting. Throughout 2005 the Company went through a process to coordinate the internal control processes at Beru and has extended its Sarbanes-Oxley Act Section 404 compliance program to include Beru at December 31, 2005.

In connection with the coordination of the internal controls and processes of Beru, Beru made improvements to its internal controls and the Company improved its monitoring of the preparation of financial information at Beru and other reporting units. The Company and Beru made the following improvements to internal control over financial reporting to remediate a control deficiency at Beru which resulted in the correction discussed in Note 18 to the financial statements;

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that BorgWarner Inc. and Consolidated Subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

The following information from the Company’s Proxy Statement is incorporated herein by reference and made a part of this report: “Election of Directors”; “Information on Nominees for Directors and Continuing Directors”; “Board of Directors and Its Committees”; “Involvement in Certain Legal Proceedings”; “Section 16(a) Beneficial Ownership Reporting Compliance”; and “Code of Ethics”. 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 “Director Compensation”, “Executive Compensation,” “Stock Options,” “Long-Term Incentive Plans,” and “Change of Control Employment Agreements” in the Company’s Proxy Statement is incorporated herein by reference and made a part of this report.

A-3 EX-10.10 2 c02047exv10w10.txt SECOND AMENDMENT AND RESTATED RECIEVABLES LOAN AGREEMENT Exhibit 10.10 ================================================================================ SECOND AMENDED AND RESTATED RECEIVABLES LOAN AGREEMENT DATED AS OF DECEMBER 6, 2004 AMONG BWA RECEIVABLES CORPORATION, AS BORROWER, BORGWARNER INC., AS COLLECTION AGENT, ABN AMRO BANK N.V., AS AGENT, THE BANKS FROM TIME TO TIME PARTY HERETO, AND WINDMILL FUNDING CORPORATION ================================================================================ TABLE OF CONTENTS

-i- Section 7.7. Indemnities by the Collection Agent.................... 44 ARTICLE VIII TERMINATION EVENTS..................................... 45 Section 8.1. Termination Events..................................... 45 ARTICLE IX INDEMNIFICATION........................................ 48 Section 9.1. Indemnities by the Borrower............................ 48 Section 9.2. Tax Indemnification and Characterization............... 50 Section 9.3. Increased Cost and Reduced Return...................... 51 Section 9.4. Other Costs and Expenses............................... 52 Section 9.5. Withholding Taxes...................................... 53 Section 9.6. Allocations............................................ 54 ARTICLE X THE AGENT.............................................. 54 Section 10.1. Appointment............................................ 54 Section 10.2. Delegation of Duties................................... 55 Section 10.3. Exculpatory Provisions................................. 55 Section 10.4. Reliance by Agent...................................... 55 Section 10.5. Notice of Termination.................................. 56 Section 10.6. Non-Reliance on Agent and Other Lenders................ 56 Section 10.7. Indemnification........................................ 56 Section 10.8. Agent in Its Individual Capacity....................... 57 Section 10.9. Successor Agent........................................ 57 Section 10.10. ABN AMRO Conflict Waiver............................... 57 Section 10.11. Certain Actions........................................ 58 ARTICLE XI MISCELLANEOUS.......................................... 58 Section 11.1. Term of Agreement...................................... 58 Section 11.2. Waivers; Amendments.................................... 58 Section 11.3. Notices................................................ 60 Section 11.4. Governing Law; Submission to Jurisdiction; Integration............................................ 60 Section 11.5. Severability; Counterparts............................. 61 Section 11.6. Successors and Assigns; Participations; Assignments.... 61 Section 11.7. Further Assurances..................................... 63 Section 11.8. Right of Setoff........................................ 63 Section 11.9. Waiver of Confidentiality.............................. 64 Section 11.10. Confidentiality of Agreement........................... 64 Section 11.11. Bankruptcy Petition Against Windmill................... 65 Section 11.12. Limitation of Liability................................ 65 Section 11.13. Headings............................................... 65 Section 11.14. WAIVER OF TRIAL BY JURY................................ 65 Section 11.15. Administrator.......................................... 65 Section 11.16. No Recourse............................................ 65 Section 11.17. Reliance on Information Obtained from Third Parties.... 66

-ii- Section 11.18. Excess Funds........................................... 66 Section 11.19. Enforceability of Receivables.......................... 66 Section 11.20. Integration............................................ 67 Section 11.21. Elimination of Program LOC Provider.................... 67 Section 11.22. Original Receivables Loan Agreement.................... 67 Signature................................................................ 68

EXHIBITS Exhibit A Credit and Collection Policy Exhibit B-1 Form of Contract Exhibit B-2 Contract Terms Exhibit C Lock-Boxes and Lock-Box Banks Exhibit D Form of Lock-Box Letter Exhibit E Form of Periodic Report Exhibit F Form of Assignment-From a Bank to Windmill Exhibit G Addresses of Borrower and Originators Exhibit H Borrower's and Borg-Warner Entities' Corporate Names; Trade Names; Assumed Names Exhibit I Intentionally Omitted Exhibit J Form of Compliance Certificate Exhibit K Form of Loan Request Exhibit L Activities to Maintain Separate Corporate Existence of Borg-Warner Entities Exhibit M Form of Transfer Supplement for Bank Commitment Exhibit N Form of Transfer Supplement for Windmill SCHEDULES Schedule I Banks and Bank Commitments -iii- SECOND AMENDED AND RESTATED RECEIVABLES LOAN AGREEMENT SECOND AMENDED AND RESTATED RECEIVABLES LOAN AGREEMENT, dated as of December 6, 2004, among the banks which are or may become a party to this Agreement (the "Banks"), Windmill Funding Corporation, a Delaware corporation ("Windmill"), ABN AMRO Bank N.V., as agent for the Lenders (the "Agent"), BWA Receivables Corporation, a Delaware corporation (the "Borrower") and BorgWarner Inc., a Delaware corporation (the "Collection Agent"). PRELIMINARY STATEMENTS The Borrower, Agent, the Banks from time to time party thereto, Windmill and ABN AMRO Bank N.V., as provider of the Program LOC (the "Program LOC Provider") are parties to an Amended and Restated Receivables Loan Agreement, dated as of December 23, 1998 (as heretofore amended the "Original Receivables Loan Agreement"); Subject to and upon the terms and conditions set forth herein, the parties desire to remove the Program LOC Provider and to amend and restate the Original Receivables Loan Agreement in the form of this Agreement. This Agreement amends and replaces in its entirety the Original Receivables Loan Agreement and, from and after the date hereof, all references made to the Original Receivables Loan Agreement in any Transaction Document or in any other instrument or document shall, without more, be deemed to refer to this Agreement; NOW, THEREFORE, in consideration of the mutual agreements contained herein and the other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: ARTICLE I DEFINITIONS Section 1.1. Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "ABN AMRO" shall mean ABN AMRO Bank N.V., in its individual capacity and not in its capacity as the Agent. "ABN AMRO Prime Rate" shall mean at the time any determination thereof is to be made, a rate per annum equal to the greater (redetermined daily) of: (i) the floating commercial loan rate of ABN AMRO for Dollars announced from time to time, changing as and when said rate changes, and (ii) the Federal Funds Effective Rate plus three fourths of one percent (0.75%). The ABN AMRO Prime Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer by ABN AMRO. ABN AMRO may make commercial loans or other loans at rates of interest at, above or below the ABN AMRO Prime Rate. "ABN AMRO Roles" shall have the meaning ascribed to such term in Section 10.10. "Administration Agreement" shall mean that certain Second Amended and Restated Administration Agreement by and between the Management Company and the Administrator, dated as of May 1, 2003. "Administrator" shall mean ABN AMRO, in its capacity as Administrator under the Administration Agreement, and any successor thereto. "Adverse Claim" shall mean a lien, security interest, charge, mortgage, pledge, hypothecation, assignment or encumbrance, or any other right or claim, in, of or on any Person's assets or properties in favor of any other Person. "Affected Assets" shall mean each and every Receivable, Related Account and Related Security, if any, with respect thereto, each and every Collection, with respect thereto, and proceeds of any of the foregoing. "Affected Bank" shall have the meaning ascribed to such term in Section 11.6(d). "Affiliate" shall mean, with respect to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person or a Subsidiary of such Person. For purposes of this definition, a Person shall be deemed to be "controlled by" another Person if such other Person possesses, directly or indirectly, power to either (i) vote ten percent (10%) or more of the securities having ordinary voting power for the election of directors of such Person or (ii) direct or cause the direction of the management and policies of such Person whether by contract or otherwise. "Agent" shall have the meaning ascribed to such term in the first paragraph of this Agreement. "Agent's Account" means the account designated to the Borrower and the Lenders by the Agent. "Aggregate Commitment" shall mean an amount equal to Fifty One Million Dollars ($51,000,000), as such amount may be reduced pursuant to Section 2.6. "Aggregate Loan Amount" means the sum of the Loan Amounts of all Lenders. "Aggregate Unpaids" shall mean, at any time, an amount equal to the sum of (i) the aggregate accrued and unpaid Interest with respect to all Tranche Periods at such time, plus (ii) the Aggregate Loan Amount at such time, plus (iii) all other amounts owed (whether due or accrued) hereunder by the Borrower to the Agent, Windmill, any Bank, the Collection Agent or any other Person at such time. "Agreement" shall mean this Second Amended and Restated Receivables Loan Agreement. -2- "Allocated Commercial Paper" means commercial paper notes issued by Windmill for a tenor and in an amount specifically requested by any Person in connection with a Receivable Purchase Facility. "Approved Obligor" shall mean each of Ford Motor Company, General Motors Corporation, Daimler Chrysler Corporation, New Venture Gear, Caterpillar Corporation and the wholly-owned Subsidiaries of each of the foregoing. "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. "Assigned Windmill Settlement" means, for each Committed Lender for any Put, the product of such Committed Lender's Purchase Percentage and the amount of the Windmill Settlement being transferred pursuant to such Put. "Average Collection Period" shall mean, at any time, a period of days equal to the product of (a) a fraction (i) the numerator of which shall be the amount set forth in the most recent Periodic Report with respect to the preceding month as the "Beginning Balance" (ii) and the denominator of which shall be the Collections received during such preceding month as set forth in such Periodic Report, multiplied by (b) thirty (30). "Bank Commitment" shall mean at any time, for any Bank, the amount set forth opposite such Bank's name on Schedule I under the heading "Bank Commitment" and adjusted in accordance with Section 11.6(c), as such amount may be reduced pursuant to Section 2.6. -3- "Bank Termination Date" shall mean the earliest to occur of (i) the date of the occurrence of a Termination Event described in Section 8.1(f), (ii) the date that the Agent designates as the Bank Termination Date in a written notice to the Borrower given at any time after the occurrence of any other Termination Event, (iii) that Business Day designated by the Borrower as the Bank Termination Date with no less than five (5) Business Days prior written notice to the Agent, and (iv) April 29, 2005. "Bankruptcy Event" means, for any Person, that (a) such Person makes a general assignment for the benefit of creditors or any proceeding is instituted by or against such Person seeking to adjudicate it bankrupt or insolvent, or seeking the liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or any substantial part of its property or (b) such Person takes any corporate action to authorize any such action. "Banks" shall have the meaning ascribed to such term in the first paragraph of this Agreement. "Borg-Warner Entities" shall mean the Parent, each Originator and the Borrower. "Borrower" shall have the meaning ascribed to such term in the first paragraph of this Agreement. "Borrower Account" shall mean the Borrower's account number 92-35671 at The First National Bank of Chicago or such other account designated by the Borrower in writing to the Agent with at least ten (10) days prior notice. "Borrowing" shall mean the incurrence by the Borrower of a Loan. "Break Funding Costs" means for any Pool Funded Loan Interest amounts payable to Windmill under the applicable Receivables Purchase Facility in connection with any prepayment or amortization of amounts payable thereunder in excess of the amount of the investment or loan prepaid or amortized and accrued and unpaid interest or discount thereon. "Business Day" shall mean generally any day excluding Saturday, Sunday and any day which is a day on which banking institutions located in New York, New York or Chicago, Illinois are authorized or required by law or other governmental action to close and excluding any day which is a holiday on the Federal Reserve calendar and with respect to any matters relating to the Eurodollar Rate or a Eurodollar Tranche Period, a Business Day on which dealings in Dollars are carried on in the London interbank market. "Capitalized Lease" shall mean any lease of property, real or personal, by a Person as lessee which would be capitalized on a balance sheet of such Person prepared in accordance with GAAP. -4- "Charge-Off" shall mean any Receivable that has been (in accordance with the objective criteria of the Credit and Collection Policy then in effect) or should have been charged-off or written-off by the Borrower. "Collection" shall mean, with respect to each Receivable, any cash collections or other cash proceeds of such Receivable, including any Finance Charges paid thereon and any cash proceeds received from the Related Security with respect to such Receivable and any amount deemed to have been received by the Borrower or the Collection Agent with respect to such Receivable pursuant to Section 2.5(b) or otherwise. "Collection Agent" shall have the meaning ascribed to such term in Section 7.1. "Collection Agent Fee" shall mean a fee equal to Two Thousand Dollars ($2,000) per month payable in accordance with Section 7.6. "Collection Reserve Percentage" shall mean, at any time, two percent (2%). "Commitment" means, for each Bank, its Bank Commitment. "Committed Lenders" is defined in Section 2.1(b). "Concentration Factor" shall mean, at any time, an amount equal to three and thirty three hundredths of one percent (3.33%) of the Aggregate Loan Amount at such time. "Contract" shall mean, with respect to any Receivable, any and all contracts, understandings, instruments, agreements, leases, invoices, notes, or other writings pursuant to which such Receivable arises or which evidences such Receivable or under which an Obligor becomes or is obligated to make payment in respect of such Receivable. "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. "CP Dealers" shall mean each Person which Windmill elects to hire as a placement agent or commercial paper dealer as of and after the effective date of such hiring. "CP Rate" shall mean, with respect to any CP Tranche Period, the rate equivalent to the rate per annum (or if more than one rate, the weighted average of the rates) at which commercial paper having a term equal to such CP Tranche Period may be sold by any CP Dealer selected by Windmill, as agreed between each such CP Dealer and Windmill; provided, however, that if the rate (or rates) as agreed between any such CP Dealer and Windmill is a discount rate (or rates), the "CP Rate" for such CP Tranche Period shall be the rate (or, if more than one rate, the weighted average of the rates) resulting from Windmill's converting such discount rate (or rates) to an interest-bearing equivalent rate per annum. The CP Rate shall be calculated in a manner which includes the costs and expenses to Windmill of issuing the related commercial paper notes, including all dealer commissions thereon and note issuance costs in connection therewith. -5- "CP Tranche" shall mean a Tranche as to which Interest is calculated at, or by reference to, a CP Rate. "CP Tranche Period" shall mean, with respect to a CP Tranche, a period of days commencing on a Business Day as selected by the Borrower or the Agent (but not to exceed two hundred seventy (270) days. "Credit and Collection Policy" shall mean the Borrower's credit and collection policy and practices relating to Contracts and Receivables existing on the date hereof and attached as Exhibit A, as modified in writing from time to time in accordance with the terms of this Agreement. "Deemed Collections" is defined in Section 2.5(c). "Default Ratio" shall mean, at any time of determination, the ratio (expressed as a percentage) of (i) the aggregate Outstanding Balance of all Defaulted Receivables (other than Charge-Offs and Excluded Receivables) at such time, to (ii) the aggregate Outstanding Balance of all Receivables (other than Charge-Offs and Excluded Receivables) at such time. "Defaulted Receivable" shall mean any Receivable (i) as to which all or any portion of any amount payable thereon remains unpaid for more than ninety (90) days from the original due date for such payment, or (ii) as to which the Obligor thereof has taken any action, or suffered any event to occur, of the type described in Section 8.1(f) (as if references to any Borg-Warner Entity therein referred to such Obligor). "Delinquency Ratio" shall mean, at any time of determination, the ratio (expressed as a percentage) of (i) the aggregate Outstanding Balance of all Delinquent Receivables (other than Excluded Receivables) at such time, to (ii) the aggregate Outstanding Balance of all Receivables (other than Charge-Offs and Excluded Receivables) at such time. "Delinquent Receivable" shall mean a Receivable as to which any payment, or part thereof, remains unpaid for more than thirty (30) days but no more than ninety (90) days from the original due date for such payment. "Deposit Date" means each day on which any Collections are deposited in any Lock-Box Account or on which the Collection Agent receives any Collections. "Depositary" shall mean JPMorgan Chase Bank, in its capacity as Depositary under that certain Second Amended and Restated Depositary Agreement between Windmill and the Depositary, dated as of May 1, 2003. "Designated Financial Officer" shall mean, with respect to any Person, an officer of such Person. "Designated Obligor" shall mean, at any time, each Obligor other than any Obligor that the Agent (upon the direction of the Required Banks) has notified the Borrower in writing at least -6- three (3) Business Days prior to such time shall not be considered a Designated Obligor, which writing shall describe the basis for such determination. "Desired Increase" shall have the meaning ascribed to such term in Section 3.2. "Dilution Ratio" shall mean, for any period of determination, the ratio (expressed as a percentage) of (a) the aggregate amount of payments owed by the Borrower pursuant to Section 2.5 (other than amounts owed with respect to Tooling Receivables and Retroactive Pricing Adjustment Receivables) during such period, to (b) the aggregate amount of Collections (other than Collections from Tooling Receivables or Retroactive Pricing Adjustment Receivables) received during such period. "Dilution Reserve Percentage" shall mean, at any time, three times the average Dilution Ratio for the calendar month covered by the most recent Periodic Report delivered by the Borrower hereunder and for the two calendar months immediately preceding such calendar month. "Discount Period" means, with respect to any Settlement Date or the Bank Termination Date, the period from and including the preceding Settlement Date (or if none, the date that the first Loan is made hereunder) to but not including such Settlement Date or Bank Termination Date, as applicable. "Dollar" and "$" shall mean lawful money of the United States of America. "Downgrading Event" shall mean, (a) with respect to any Person (other than New Venture Gear), that any one of the following has occurred with respect to such Person: (i) any long-term unsecured indebtedness of such Person (that is not subordinated to the general indebtedness of such Person) is rated less than BBB by S&P or Baa2 by Moody's or BBB by Fitch, (ii) any short-term indebtedness of such Person is rated less than A-2 by S&P or P-2 by Moody's or (iii) for the long-term unsecured indebtedness of any Person (that is not subordinated to the general indebtedness of such Person) that is not rated by Moody's, S&P or Fitch, notice by the Agent that a "Downgrading Event" has occurred with respect to such Person and (b) with respect to New Venture Gear, that any one of the following has occurred with respect to DaimlerChrysler AG: (i) any long-term unsecured indebtedness of DaimlerChrysler AG (that is not subordinated to the general indebtedness of DaimlerChrysler AG) is rated less than BBB by S&P or Baa2 by Moody's or BBB by Fitch, (ii) any short-term indebtedness of DaimlerChrysler AG is rated less than A-2 by S&P or P-2 by Moody's, (iii) for the long-term unsecured indebtedness of DaimlerChrysler AG (that is not subordinated to the general indebtedness of DaimlerChrysler AG) that is not rated by Moody's, S&P or Fitch, notice by the Agent that a "Downgrading Event" has occurred with respect to DaimlerChrysler AG or (iv) at any time DaimlerChrysler AG does not own a majority of the issued and outstanding shares of the voting capital stock of New Venture Gear. "Early Collection Fee" shall mean, for each Lender and each CP Tranche Period or Eurodollar Tranche Period during which any Loan Amount allocated to such Tranche Period is reduced, or which is terminated prior to the end of the period for which it was originally scheduled to last (the amount of such reduction or, in the case of a termination of a Tranche -7- Period, the amount of the Loan Amount allocated to such Tranche Period being referred to as the "Allocated Amount"), the excess, if any, of (i) the Interest that would have accrued during the remainder of such Tranche Period subsequent to the date of such reduction or termination on the Allocated Amount if such reduction or termination had not occurred, over (ii) the sum of (a) to the extent the Allocated Amount is allocated to another Tranche Period, the Interest actually accrued on the portion of the Allocated Amount so allocated during the remainder of such Tranche Period, plus (b) to the extent the Allocated Amount is not allocated to another Tranche Period, the income, if any, actually received by such Lender from investing the portion of the Allocated Amount not so allocated. "Effective Date" shall have the meaning ascribed to such term in Section 5.1. "Eligible Receivable" means, at any time, any Receivable: (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, (ii) the Obligor of which is not the Obligor of any Charge-Off, (iii) the Obligor of which is not the Obligor of Receivables (other than Retroactive Pricing Adjustment Receivables) for which any payment, or part thereof, remains unpaid for more than sixty (60) days from the original due date for such payment, which Receivables have an aggregate Outstanding Balance in excess of ten percent (10%) of the aggregate Outstanding Balance of all such Obligor's Receivables (other than Retroactive Pricing Adjustment Receivables), (iv) which is not a Tooling Receivable, a Retroactive Pricing Adjustment Receivable, a Defaulted Receivable, a Charge-Off, or a Receivable for which any payment, or part thereof, remains unpaid for more than sixty (60) days from the original due date for such payment, (v) which, according to the Contract related thereto, requires a payment within sixty (60) days of the original billing date (which shall not be later than the date on which the goods giving rise to such Receivable are shipped or delivered to the related Obligor or the services giving rise to such Receivable are rendered to the related Obligor) therefor, (vi) which is an "account" within the meaning of Section 9-106 of the UCC of all applicable jurisdictions, -8- (vii) which is denominated and payable only in Dollars in the USA, (viii) which arises under a duly authorized Contract which either is in substantially the form of one of the forms of contract set forth on Exhibit B-1 or complies with the Contract terms set forth on Exhibit B-2 or is otherwise approved by the Agent in writing, and, in any case, which Contract has not been modified or restructured and is in full force and effect and constitutes the legal, valid and binding obligation of the related Obligor enforceable against such Obligor in accordance with its terms subject to no offset, counterclaim or other defense, (ix) which arises under a Contract which (A) does not require the Obligor under such Contract to consent to the transfer, sale or assignment of the rights of the applicable Originator under such Contract and (B) does not contain a confidentiality provision that purports to restrict the ability of the Agent or any Lender to exercise its rights under this Agreement, including its right to review the Contract, (x) which arises under a Contract that contains an obligation of the related Obligor to pay a specified sum of money, which obligation has been fully earned by the sale of goods or the provision of services by an Originator and is subject to no contingencies, and which Contract is not an executory contract or unexpired lease, in each case, within the meaning of Section 365 of the Federal Bankruptcy Code, (xi) which, together with the Contract related thereto, does not contravene any laws, rules or regulations applicable thereto (including laws, rules and regulations relating to truth in lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices and privacy) and with respect to which no part of the Contract related thereto is in violation of any such law, rule or regulation, (xii) which (A) satisfies all applicable objective requirements of the Credit and Collection Policy, and (B) complies with such other objective criteria and requirements that the Agent deems necessary, as the Agent may from time to time specify to the Borrower in a written notice at least five (5) days prior to the effectiveness of such other objective criteria and requirements, (xiii) which arises in the ordinary course of business of an Originator, (xiv) which was validly purchased by the Borrower from an Originator pursuant to a Purchase Agreement, which purchase is not voidable, including pursuant to Section 548 of the Federal Bankruptcy Code or similar laws regarding fraudulent conveyances or fraudulent transfers, and which purchase vests in the Borrower a valid and perfected first priority ownership interest therein, (xv) which arises solely from the sale of goods or the rendering of services to the related Obligor by an Originator and not by any other Person (in whole or in part), -9- (xvi) as to which the Agent has not notified the Borrower in writing that the Agent, Windmill or the Required Banks have determined, in its or their reasonable business judgment, that such Receivable or class of Receivables of which such Receivable is a part is not acceptable as an Eligible Receivable, including because such Receivable arises under a Contract that is not acceptable to the Agent, Windmill or such Required Banks but excluding any determination based upon the credit quality of an Approved Obligor if a Downgrading Event has not occurred with respect to such Approved Obligor or any Subsidiary of such Approved Obligor, (xvii) which is an account receivable representing all or part of the sales price of merchandise, insurance and services within the meaning of Section 3(c)(5) of the Investment Company Act of 1940, as amended, and (xviii) a purchase of which with the proceeds of notes would constitute a "current transaction" within the meaning of Section 3(a)(3) of the Securities Act of 1933, as amended. "Eurodollar Rate" shall mean, with respect to any Eurodollar Tranche Period, the sum of (i) the quotient of (a) the rate determined by the Agent to be the rate at which deposits in Dollars are offered by ABN AMRO to first-class banks in the London interbank market at approximately 11:00 a.m. (London time) two (2) Business Days prior to the first day of such Eurodollar Tranche Period, such deposits being in the approximate amount of ABN AMRO's Pro Rata Share of the Bank Loan Amount allocated to such Eurodollar Tranche Period and having a maturity approximately equal to such Eurodollar Tranche Period, divided by (b) one (1) minus the Reserve Requirement (expressed as a decimal), as defined below, applicable to such Eurodollar Tranche Period, plus (ii) as to all applications affecting the Banks, one and one quarter percent (1.25%) per annum. The Eurodollar Rate shall be rounded up, if necessary, to the next higher one sixteenth of one percent (0.0625%). The "Reserve Requirement" means the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which may be imposed in respect of Eurocurrency liabilities, under and as defined in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Eurodollar Tranche" shall mean a Tranche as to which Interest is calculated at, or by reference to, a Eurodollar Rate. "Eurodollar Tranche Period" shall mean, with respect to a Eurodollar Tranche, a period of one (1) month, two (2) months or three (3) months, or such other period as may be mutually agreeable to the parties hereto, commencing on a Business Day selected by the Borrower or the Agent pursuant to the terms hereof. Such Eurodollar Tranche Period shall end on the day in the succeeding calendar month which corresponds numerically to the beginning day of such Eurodollar Tranche Period, provided, however, that if there is no such numerically corresponding day in such succeeding month, such Eurodollar Tranche Period shall end on the last Business Day of such succeeding month. If a Eurodollar Tranche Period would otherwise end on a day which is not a Business Day, such Eurodollar Tranche Period shall end on the next succeeding Business Day, provided, however, that if said next succeeding Business Day falls in a new month, such Eurodollar Tranche Period shall end on the immediately preceding Business Day. -10- "Excess Funds" shall have the meaning ascribed to such term in Section 11.18. "Excluded Receivable" shall mean all Tooling Receivables, Retroactive Pricing Adjustment Receivables, Intercompany Receivables and Foreign Receivables. "Face Amount" shall mean the face amount of a Windmill commercial paper note issued on a discount basis or, with respect to any Windmill commercial paper note not issued at a discount, the principal amount of such note together with interest thereon to stated maturity. "Federal Bankruptcy Code" shall mean the bankruptcy code of the United States of America codified in Title 11 of the United States Code. "Federal Funds Effective Rate" means for any day the greater of (i) the highest rate per annum as determined by ABN AMRO at which overnight Federal funds are offered to ABN AMRO for such day by major banks in the interbank market, and (ii) if ABN AMRO is borrowing overnight funds from a Federal Reserve Bank that day, the highest rate per annum at which such overnight borrowings are made on that day. Each determination of the Federal Funds Effective Rate by ABN AMRO shall be conclusive and binding on the Borrower except in the case of manifest error. "Fee Letter" means the letter agreement dated as of the date hereof among the Borrower, the Agent, Windmill and the Program LOC Provider. "Filing Assets" shall have the meaning ascribed to such term in Section 5.1(e). "Finance Charges" shall mean, with respect to a Contract, any finance, interest, late or similar or other charges owing by an Obligor pursuant to such Contract. "Financial Investment" shall mean, with respect to any Person, any direct or indirect investment by such Person in any other Person, whether by means of share purchase, capital contribution, loan or otherwise, excluding the incurrence of receivables arising from sales or services rendered in the ordinary course of business. "Fitch" shall mean Fitch, Inc. "Foreign Receivable" shall mean any Receivable the Obligor of which, if a natural person, is not a resident of the USA or, if a corporation or other business organization, is not organized under the laws of the USA or does not have its chief executive office or principal place of business in the USA. "Funding Agreement" shall mean any agreement or instrument executed by Windmill and executed by or in favor of any Windmill Funding Source. "Funding Charges" means, for each day, the sum of (i) interest accrued on Pooled Commercial Paper on such day, plus (ii) any and all accrued commissions in respect of placement agents and commercial paper dealers in respect of such Pooled Commercial Paper for such day, plus (iii) issuing and paying agents' fees incurred on such Pooled Commercial Paper -11- for such day, plus (iv) other costs associated with funding small or odd-lot amounts with respect to all Receivable Purchase Facilities which are funded by Pooled Commercial Paper for such day, minus (v) any accrual of income net of expenses received on such day from investment of collections received under all Receivable Purchase Facilities funded with Pooled Commercial Paper, minus (vi) any payment received on such day net of expenses in respect of Break Funding Costs related to the prepayment of any Loan Interests held by Windmill pursuant to the terms of any Receivable Purchase Facilities funded substantially with Pooled Commercial Paper. "GAAP" shall mean generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other Person as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of the date of determination; provided, however, that for purposes of those certain financial covenants set forth in Exhibit A to the Indemnity Agreement, the term GAAP shall be GAAP as applicable on September 30, 1992. "Governmental Authority" shall mean any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, or any court, in each case whether in the USA or foreign. "Guaranty" shall mean any agreement, undertaking or arrangement by which a Person assumes, guarantees, endorses, contingently agrees to purchase or provide funds for the payment of, or otherwise becomes liable upon, the obligation, Indebtedness or liability of any other Person, or agrees to maintain the net worth or working capital or other financial condition (including dividends or other distributions) of any other Person or otherwise assures any creditor of such other Person against loss, including any comfort letter, operating agreement or take-or-pay contract and shall include the contingent liability of such Person in connection with any application for a letter of credit. "IMF" shall have the meaning ascribed to such term in Section 11.6(c). "Income Taxes" shall have the meaning ascribed to such term in Section 9.2(a). "Indebtedness" shall mean a Person's (i) obligations for borrowed money, (ii) obligations representing the deferred purchase price of property other than accounts payable arising in the ordinary course of such Person's business on terms customary in the trade, (iii) obligations (including leases), whether or not assumed, secured by a lien on, or payable out of the proceeds or production from, property now or hereafter owned or acquired by such Person, (iv) obligations which are evidenced by bonds, debentures, notes, acceptances, or other instruments, (v) Capitalized Lease obligations and (vi) obligations for which such Person is obligated pursuant to a Guaranty. "Indemnified Losses" shall have the meaning ascribed to such term in Section 9.1. "Indemnified Party" shall have the meaning ascribed to such term in Section 9.1. -12- "Indemnity Agreement" shall mean that certain Indemnity Agreement dated as of the date hereof among, the Parent, each Originator and the Agent for the benefit of the Agent, the Lenders and each Person to whom any of the Aggregate Unpaids is owed. "Insufficiency" shall have the meaning ascribed to such term in Section 11.18. "Intended Characterization" shall have the meaning ascribed to such term in Section 9.2(c). "Intercompany Receivable" shall mean a Receivable the Obligor of which is an Affiliate of the Borrower or any Originator. "Interest" shall mean, with respect to any Tranche Period: TR x TA x AD ---- Year Where: "TR" is equal to the Tranche Rate applicable to such Tranche Period; "TA" is equal to the portion of the Loan Amount allocated to such Tranche Period; "AD" is equal to the actual number of days elapsed during such Tranche Period; and "Year" is equal to the number three hundred sixty (360); provided, however, that no provision of this Agreement shall require the payment or permit the collection of Interest in excess of the maximum permitted by applicable law; and provided, further, however, that Interest shall not be considered paid by any payment if at any time such payment is rescinded or must be returned for any reason. "Interest Rate" means, for any Tranche Period or Interest Period, the CP Rate, the Eurodollar Rate or the Prime Rate. "Interest Reserve" shall mean, at any time, the sum of (a) the accrued and unpaid Interest for all Tranche Periods at such time, plus (b) the product of (i) a percentage equal to the highest Tranche Rate, for any Tranche Period outstanding at such time (or, if greater, the Eurodollar Rate) plus five percent (5%), multiplied by (ii) the Aggregate Loan Amount at such time, multiplied by (iii) a fraction (A) the numerator of which is the product of the Average Collection Period multiplied by one and one half (1.5), and (B) the denominator of which is three hundred sixty (360). "Interest Reserve Percentage" shall mean, at any time, the quotient of (i) the Interest Reserve at such time, divided by (ii) the Aggregate Loan Amount at such time. -13- "Interim Liquidation" means any time before the Loan Amortization Date during which Collections shall be used to pay Loan Amounts as described in Section 3.3, as established pursuant to Section 2.2. "Interim Liquidation Period" shall mean any period beginning and ending on any day designated by the Borrower in a written notice to the Agent in each case given on or prior to, respectively, such beginning and ending day. "Lenders" means the Committed Lenders and Windmill. "Limited Guaranty" shall mean that certain Amended and Restated Limited Guaranty dated the date hereof from the Parent and each of the Originators for the benefit of the Borrower. "Liquidation Period" means, for Windmill only, all times when Windmill is not making Loans pursuant to Article II and, for all Lenders, all times (x) during an Interim Liquidation and (y) on and after the Loan Amortization. "Loan" is defined in Section 2.1(a). "Loan Amortization Date" means the earlier to occur of (i) April 29, 2005 or (ii) the date on which a Termination Event occurs. "Loan Amount" means, for each Lender, (a) the sum of (i) all Loans by such Lender and (ii) the aggregate amount of any payments or exchanges made by, or on behalf of, such Lender to any other Lender under Article III minus (b) all Collections, amounts received from any Lenders under Article III, and other amounts received or exchanged and, in each case, applied by the Agent or such Lender to reduce such Lender's Loan Amount. A Lender's Loan Amount shall be restored to the extent any amounts so received or exchanged and applied are rescinded or must be returned for any reason. "Loan Interest" is defined in Section 2.1(a). "Loan Limit" means Fifty Million Dollars ($50,000,000). "Loans" shall mean advances made to the Borrower hereunder secured by the Receivables. "Loans Supplement" shall have the meaning ascribed to such term in Sections 11.6(c), 11.6(e)(ii) and 11.6(f). "Lock-Box" shall mean each post office box or bank box listed on Exhibit C and such other boxes as such boxes may be added or deleted pursuant to the terms hereof. "Lock-Box Account" shall mean an account maintained by the Collection Agent at a Lock-Box Bank for the purpose of receiving, collecting or concentrating Collections from Receivables. -14- "Lock-Box Agreement" shall mean each agreement between the Borrower and a Lock-Box Bank with respect to the Lock-Box Accounts. "Lock-Box Bank" shall mean each of the banks set forth in Exhibit C and such other banks as may be added hereto or deleted herefrom as a Lock-Box Bank pursuant to the terms hereof. "Lock-Box Letter" shall mean a letter in substantially the form of Exhibit D (with such changes therein as are acceptable to the Agent) from the Borrower to each Lock-Box Bank, acknowledged and accepted by such Lock-Box Bank and the Agent. "Loss Reserve Percentage" shall mean, at any time, the product of (a) three multiplied by (b) the average Loss-to-Liquidation Ratio for each of the last three calendar months. "Loss-to-Liquidation Ratio" shall mean, for any period of determination, the ratio (expressed as a percentage) of (i) the Outstanding Balance of Charge-Offs which became Charge-Offs during such period, to (ii) the aggregate amount of Collections during such period. "Management Company" shall mean Securitization Services, LLC, a Delaware limited liability company. "Matured Aggregate Loan Amount" means, at any time, the Matured Value of Windmill's Loan Amount plus the total Loan Amounts of all other Lenders then outstanding. "Matured Value" means, for any Loan Amount, the sum of such Loan Amount and all unpaid Interest, fees and other amounts scheduled to become due (whether or not then due) on such Loan Amount during all Tranche Periods to which any portion of such Loan Amount has been allocated. "Maximum Incremental Loan Amount" means, at any time, the lesser of (a) the difference between the Loan Limit and the Aggregate Loan Amount then outstanding and (b) the difference between the Aggregate Commitment and the Matured Aggregate Loan Amount then outstanding. "Moody's" shall mean Moody's Investors Service, Inc. "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. "Non-Excluded Taxes" shall have the meaning ascribed to such term in Section 9.5. -15- "Obligor" shall mean, with respect to any Receivable, the Person obligated to make payments on such Receivable or any guarantor of such obligation. "OECD Country" shall have the meaning ascribed to such term in Section 11.6(c). "Originator" shall mean each of the following Delaware corporations: BorgWarner Diversified Transmission Products Inc.; BorgWarner Emissions Systems Inc.; BorgWarner Morse TEC Inc.; BorgWarner Transmission Systems Inc.; BorgWarner TorqTransfer Systems Inc.; BorgWarner Turbo Systems Inc. and BorgWarner Thermal Systems Inc. "Other Borrowers" shall have the meaning ascribed to such term in Section 9.1. "Other Costs" shall have the meaning ascribed to such term in Section 9.4. "Outstanding Balance" of any Receivable shall mean, at any time, the aggregate of all amounts required to be paid by the related Obligor and not then paid, whether or not then due, including any accrued and unpaid Finance Charges but excluding any unaccrued Finance Charges. "Parent" shall mean Borg-Warner Automotive, Inc., a Delaware corporation. "Participant" shall have the meaning ascribed to such term in Section 11.6(b). "Payment" shall mean any payment of funds hereunder by or on behalf of any Lender to the Borrower. "Payment Date" shall mean, with respect to each Payment, the Business Day on which such Payment is made. "Periodic Report" shall mean a monthly report, substantially in the form of Exhibit E or in such other form as mutually agreed to by the Collection Agent and the Agent. "Permitted Foreign Obligor" is defined in the definition of Eligible Receivables. "Permitted Investments" shall mean (a) evidences of indebtedness, maturing not more than thirty (30) days after the date of purchase thereof, issued by, or guaranteed by the full faith and credit of, the federal government of the USA, (b) repurchase agreements with banking institutions or broker-dealers registered under the Securities Exchange Act of 1934, as amended, fully secured by obligations of the kind specified in (a) above, or (c) money market funds rated not lower than the highest rating category from Moody's and AAA(m) or AAA(m-g) from S&P or otherwise acceptable to the Rating Agencies or (d) commercial paper issued by any corporation incorporated under the laws of the USA, provided that such commercial paper is rated at least A-1+ or the equivalent thereof by S&P and at least P-1 or the equivalent thereof by Moody's. "Person" shall mean individuals, partnerships, corporations, business trusts, joint stock companies, trusts, unincorporated associations, joint ventures, Governmental Authorities, or any other entity of whatever nature. -16- "Pool Funded Loan Interest" means each investment or loan of Windmill under a Receivables Loan Facility funded with Pooled Commercial Paper. "Pooled Allocation" means, for each Pool Funded Loan Interest, an amount each day equal to the product of (i) the Pooled Percentage Share of such Loan Interest on such day multiplied by (ii) the aggregate amount of Funding Charges for such day. "Pooled Commercial Paper" means commercial paper notes of Windmill except (A) Allocated Commercial Paper, and (B) Specially Pooled Paper. "Pooled Percentage Share" means, for each Pool Funded Loan Interest, a fraction (expressed as a percentage) the numerator of which is equal to the Loan Amount associated with such Pool Funded Loan Interest and the denominator of which is equal to the aggregate amount of all outstanding investment (or comparable terms used in any Receivable Purchase Facility) held by Windmill which is funded substantially with Pooled Commercial Paper. "Potential Termination Event" shall mean any event or condition which but for the lapse of time or the giving of notice, or both, would constitute a Termination Event. "Prime Rate" shall mean (a) prior to the occurrence of a Termination Event except with respect to any Tranche Period to which all or any portion of the Loan Amount of the Banks has been allocated, a rate per annum equal to the ABN AMRO Prime Rate and (b) on or after the occurrence of a Termination Event, the ABN AMRO Prime Rate plus two percent (2%) per annum. "Prime Tranche" shall mean a Tranche as to which Interest is calculated at, or by reference to, the Prime Rate. "Prime Tranche Period" shall mean, with respect to a Prime Tranche a period of one (1) day or any other period selected by the Borrower or otherwise determined, and approved by the Agent and commencing on a Business Day. "Pro Rata Share" shall mean, as to any Bank, a fraction (expressed as a percentage) (a) the numerator of which shall be the amount of its Bank Commitment, and (b) the denominator of which shall be the Aggregate Commitment. "Purchase Agreement" shall mean that certain Purchase Agreement, dated as of December 23, 1998, among the Borrower and each Originator. "Purchase Percentage" means, for any Put, for each Committed Lender, its Ratable Share or such lesser percentage as is necessary to prevent the Purchase Price of such Purchasers from exceeding its Unused Commitment. "Purchased Asset" shall have the meaning ascribed to such term in the Purchase Agreement. "Purchasing Banks" shall have the meaning ascribed to such term in Section 11.6(c). -17- "Put" is defined in Section 3.l(a). "Ratable Share" means, for each Committed Lender, such Committed Lender's Commitment divided by the Commitments of all Committed Lenders. "Rating" shall mean the ratings by a Rating Agency of the commercial paper notes issued by Windmill. "Rating Agency" shall mean (i) if Windmill's commercial paper notes are then rated by Moody's, Moody's, (ii) if Windmill's commercial paper notes are then rated by S&P, S&P, and (iii) if Windmill's commercial paper notes are then rated by any other rating agency, such rating agency. "Receivable" shall mean any indebtedness and other obligations owed to an Originator (without giving effect to any sale or conveyance to the Borrower pursuant to the Purchase Agreement or to the Agent for the benefit of the Lenders hereunder) or any right of such an Originator to payment from or on behalf of an Obligor whether constituting an account, chattel paper, instrument or general intangible, arising in connection with the sale or lease of goods or the rendering of services by such Originator (and conveyed by such Originator to the Borrower), including the obligation to pay any Finance Charges with respect thereto. Indebtedness and other rights and obligations arising from any one transaction, including indebtedness and other rights and obligations represented by an individual invoice or agreement, shall constitute a receivable separate from a receivable consisting of the indebtedness and other rights and obligations arising from any other transaction. "Receivable Purchase Facility" means any receivables purchase agreement, loan agreement or other similar contractual arrangement to which Windmill is a party relating to the transfer, purchase or financing of receivables or other assets. "Records" shall mean, with respect to any Receivable, all Contracts and other documents, books, records and other information (including computer programs, tapes, disks, punch cards, media, data processing software and related property and rights) relating to such Receivable and the related Obligor. "Referral Agent" shall mean ABN AMRO, in its capacity as a referral agent and the other Persons who become referral agents under that certain Second Amended and Restated Referral Agreement, dated as of May 1, 2003, between Windmill and the Referral Agent, and any successor thereto. "Register" shall have the meaning ascribed to in such term Section 11.6(g). "Regulatory Change" shall have the meaning ascribed to such term in Section 9.3(a). "Related Accounts" shall mean, with respect to any Receivable, all deposit accounts and investment accounts into which any Collections or other proceeds of such Receivable are deposited, including all Lock-Box Accounts, and all monies and other funds, certificates, -18- securities, other instruments, general intangibles and other items credited thereto from time to time. "Related Security" shall mean, with respect to any Receivable: (i) all of the Borrower's right, title and interest in goods (including returned goods), if any, the sale or lease of which by an Originator gave rise to such Receivable, and all insurance contracts with respect thereto; (ii) all other security interests or liens and property subject thereto from time to time, if any, purporting to secure payment of such Receivable, whether pursuant to the Contract related to such Receivable or otherwise, together with all financing statements signed by an Obligor describing any collateral securing such Receivable; (iii) all Guaranties, letters of credit, insurance and other agreements or arrangements of whatever character from time to time supporting or securing payment of such Receivable whether pursuant to the Contract related to such Receivable or otherwise; (iv) all service contracts and other contracts and agreements related to such Receivable; and (v) all Records related to such Receivable. "Replacement Bank" shall have the meaning ascribed to such term in Section 11.6(d). "Required Banks" shall mean, at any time, Banks having an aggregate Bank Commitment in excess of sixty-six and two-thirds percent (66-2/3%) of the Aggregate Commitment then in effect or, if the Aggregate Commitments shall then have been terminated, such Banks as together shall then own in excess of sixty-six and two-thirds percent (66-2/3%) of the Bank Loan Amount at such time. "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. "Reserve Percentage" shall mean the greater of (a) thirty percent (30%), or (b) the sum of (i) the Loss Reserve Percentage, plus (ii) the Interest Reserve Percentage, plus (iii) the Collection Reserve Percentage, plus (iv) the Dilution Reserve Percentage. "Retroactive Pricing Adjustment Receivable" shall mean any Receivable owed in connection with a price adjustment for the goods giving rise to such Receivable subsequent to the original invoice sent in respect of such goods. "Section 9.3 Costs" shall have the meaning ascribed to such term in Section 9.3(c). "Secured Interest" is defined in Section 2.1(a). "Settlement Date" means the 25th day of each calendar month. "Special Borrower Subaccount" shall mean the special Borrower subaccount for the Borrower established pursuant to that certain Amended and Restated Depositary Agreement between Windmill and the Depositary, dated as of November 15, 1994. -19- "Specially Pooled Paper" means the aggregate of all commercial paper notes of Windmill issued in connection with Receivables Purchase Facilities designated from time to time by the Agent (in its sole discretion). Specially Pooled Paper will not include Pooled Commercial Paper or Allocated Commercial Paper at any time. "S&P" shall mean Standard & Poor's Ratings Group. "Subordination Agreement" shall mean that certain Subordination Agreement dated as of the date hereof among each Originator and the Agent for the benefit of the Lenders. "Subsidiary" shall mean, for any Person, any corporation or other business organization fifty percent (50%) or more of the outstanding voting securities of which shall at the time be owned or controlled, directly or indirectly, by such Person or by one or more such corporations or organizations or by such Person and one or more such corporations or organizations, and any partnership of which such Person or any such corporation or organization is a general partner; provided, however, NSK-Warner K.K. shall not be considered a Subsidiary of any Person unless such Person shall own or control, directly or indirectly, more than fifty percent (50%) of the outstanding voting securities of NSK-Warner K.K. For purposes of this definition, the term "voting securities" shall mean capital stock or other ownership interests having ordinary voting power under ordinary circumstances for the election of directors (or the equivalent of such corporate association, business organization or other entity). "Taxes" shall mean all taxes, charges, fees, levies or other assessments including income, gross receipts, profits, withholding, excise, property, sales, use, license, occupation and franchise taxes (including, in each such case, any interest, penalties or additions attributable to or imposed on or with respect to any such taxes, charges, fees or other assessments) imposed by the USA or any foreign government or any other jurisdiction or taxing authority. "Termination Date" shall mean (a) with respect to Windmill, the Windmill Termination Date and (b) with respect to the Banks, the Bank Termination Date. "Termination Event" shall mean an event or condition described in Section 8.1. "Tooling Receivable" shall mean any Receivable arising in connection with the tooling of equipment utilized to manufacture the related goods (the sale of which gave rise to such Receivable) or other start-up costs or items related thereto which the Obligor must reimburse the Originator therefor. "Tranche" shall mean a portion of the Aggregate Loan Amount allocated to a Tranche Period. "Tranche Maturity Date" shall mean the last day of a Tranche Period, whether such date is the originally scheduled last day of such Tranche Period or occurs by reason of early termination of such Tranche Period or otherwise; provided, however, that, if any Tranche Maturity Date shall occur on any day which is not a Business Day, such Tranche Maturity Date shall be extended to the next following Business Day and all applicable Interest, interest and fees shall give effect to such extension of such Tranche Maturity Date. -20- "Tranche Period" shall mean a CP Tranche Period, a Eurodollar Tranche Period or a Prime Tranche Period. "Tranche Rate" shall mean the CP Rate, the Eurodollar Rate or the Prime Rate. "Transaction Documents" shall mean this Agreement, the Fee Letter, the Purchase Agreement, the Indemnity Agreement, the Limited Guaranty, the Subordination Agreement, the Transfer Agreement and all other documents, instruments and agreements executed in connection herewith and therewith. "Transfer Agreement" means the Windmill Transfer Agreement dated the date hereof between Windmill, ABN AMRO Bank N.V., in its capacity as Windmill's Agent and a Liquidity Provider and the other Persons who become Liquidity Providers thereunder. "UCC" shall mean, with respect to any state, the Uniform Commercial Code as from time to time in effect in such state. "Unpaid Amount" shall have the meaning ascribed to such term in Section 3.1(b). "Unused Commitment" means, for any Committed Lender at any time, the difference between its Commitment and its Loan Amount then outstanding. "USA" shall mean the United States of America, including all states and political subdivisions thereof. "Windmill" shall have the meaning ascribed to such term in the first paragraph of this Agreement. "Windmill Funding Source" shall mean any insurance company, bank or other financial institution providing liquidity, back-up purchase or credit support for Windmill. "Windmill Settlement" means the sum of all claims and rights to payment pursuant to Section 2.5 or 2.7 or any other provision owed to Windmill (or owed to the Agent or the Collection Agent for the benefit of Windmill) by the Borrower that, if paid, would be applied to reduce Windmill's Loan Amount. "Windmill Termination Date" means the earlier of (a) the Business Day designated by Windmill and (b) the Bank Termination Date. Section 1.2. Other Terms. Except as otherwise specified in this Agreement, all references in this Agreement (i) to any Person (other than the Parent, any Originator or the Borrower) shall be deemed to include such Person's successors and assigns, and (ii) to any law, agreement, statute or contract specifically defined or referred to in this Agreement shall be deemed references to such law, agreement, statute or contract as the same may be supplemented, amended, waived, consolidated, replaced or modified from time to time, but only to the extent permitted by, and effected in accordance with, the terms thereof. The words "herein," "hereof" and "hereunder" and words of similar import, when used in this Agreement, shall refer to this -21- Agreement as a whole and not to any provision of this Agreement, and references to "Article," "Section," "paragraph," "Exhibit," "Schedule" and "Appendix" are references to this Agreement unless otherwise specified. Whenever the context so requires, words importing any gender include the other gender. Any of the defined terms may, unless the context otherwise requires, be used in the singular or the plural depending on the reference; the singular includes the plural and the plural includes the singular. The word "or" shall not be exclusive. All defined terms shall have the defined meanings when used in the Transaction Documents or, except as otherwise expressly stated therein, any certificate, opinion or other document delivered pursuant to a Transaction Document. In the event of a conflict in the defined meanings in a Transaction Document and this Agreement, this Agreement shall govern. For purposes of the Transaction Documents, all accounting terms not otherwise defined in this Agreement or in the relevant Transaction Document shall have the meanings assigned them in conformity with GAAP. For purposes of the Transaction Documents, all terms used in Article 9 of the UCC and not specifically defined in this Agreement or in the relevant Transaction Document shall be defined herein and in the Transaction Documents as such terms are defined in the UCC as in effect in the State of Illinois. For purposes of the Transaction Documents, each reference to this Agreement, any other Transaction Document, any Program Document or any other agreement shall be a reference to such agreement together with all exhibits, schedules, attachments and appendices thereto, in each case as amended, restated, supplemented or otherwise modified from time to time in accordance with the terms thereof and hereof. References to "writing" include telecopying, printing, typing, lithography and other means of reproducing words in a tangible visible form including computer generated information accessible in tangible visible form. References to "written" include faxed, printed, typed, lithographed and other means of reproducing words or symbols in a tangible visible form consistent with the preceding sentence. The words "including," "includes" and "include" shall be deemed to be followed by the words "without limitation." Section 1.3. Computation of Time Periods. Unless otherwise expressly provided herein, any period of time (including each Tranche Period) ending on a day which is not a Business Day shall end on the next succeeding Business Day. Unless otherwise stated in this Agreement or the other Transaction Documents, in the computation of a period of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding." -22- ARTICLE II LOANS TO BORROWER AND SETTLEMENTS Section 2.1. Loans. (a) The Secured Interest. Subject to the terms and conditions hereof, the Borrower may, from time to time before the Bank Termination Date, request Windmill or, only if Windmill denies such request, ratably request that the Committed Lenders make loans secured by an undivided percentage ownership interest in the Receivables and all related Collections. Any such loan made by Windmill or the Committed Lenders (a "Loan") shall be made by each relevant Lender remitting funds to the Borrower, through the Agent, pursuant to Section 2.1(c) or by the Collection Agent remitting Collections to the Borrower pursuant to Section 2.1(d). The aggregate percentage security interest so acquired by a Lender in the Receivables and related Collections (its "Loan Interest") shall equal at any time the following quotient: LA + R ------ NRB where: LA = the outstanding Loan Amount of such Lender at such time; R = the Reserve for such Lender at such time; and NRB = the Net Receivables Balance at such time. Except during a Liquidation Period for a Lender, such Lender's Loan Interest will change whenever its Loan Amount, its Reserve or the Net Receivables Balance changes. During a Liquidation Period for a Lender its Loan Interest shall remain constant, except for redeterminations of the Loan Interests of Lenders to reflect Loan Amounts acquired from or transferred to another Lender hereunder or under the Transfer Agreement. The sum of all Loan Interests of the Lenders at any time is referred to herein as the "Secured Interest", which at any time is the aggregate percentage ownership interest then held by such Lenders in the Receivables and Collections. (b) Windmill Loan Option and Committed Lenders' Commitments. At no time will Windmill have any obligation to make a Loan. Each Bank (a "Committed Lender") severally hereby agrees, subject to the terms and conditions hereof, to make Loans before the Bank Termination Date, based on its Ratable Share of each Loan by the Committed Lenders, to the extent its Loan Amount would not thereby exceed its Commitment, the Aggregate Loan Amount would not thereby exceed the Loan Limit, and the Matured Aggregate Loan Amount would not thereby exceed the Aggregate Commitments. (c) Loans. In order to request a Loan from a Lender, the Borrower must provide to the Agent an irrevocable written request (including by telecopier or other facsimile communication) substantially in the form of Exhibit K, by 10:00 a.m. (Chicago time) three Business Days before -23- the requested date (the " Loan Date") of such Loan, specifying the requested Loan Date (which must be a Business Day) and the requested amount of such Loan, which must be in a minimum amount of $1,000,000 and multiples thereof (or, if less, an amount equal to the Maximum Incremental Loan Amount). A Loan may only be requested from Windmill unless Windmill, in its sole discretion, determines not to make such Loan (and the Borrower shall be notified of such determination by not later than 10:45 a.m. on the date of such request), in which case the Borrower may request such Loan from the Committed Lenders. The Agent shall promptly notify the contents of any such request to each Lender from which the Loan is requested. If the Loan is requested from Windmill and Windmill determines, in its sole discretion, to make the requested Loan, Windmill shall transfer to the Agent's Account the amount of such Loan on the requested Loan Date. If the Loan is requested from the Committed Lenders, subject to the terms and conditions hereof, each Committed Lender shall transfer its Ratable Share of the requested Loan Amount into the Agent's Account by no later than 12:00 noon (Chicago time) on the Loan Date. The Agent shall transfer to the Borrower Account the proceeds of any Loan delivered into the Agent's Account. (d) Security Interest. To secure all of the Borrower's obligations under the Transaction Documents, the Borrower hereby grants to the Agent (for the benefit of the Lenders) a security interest in all of the Borrower's rights in the Receivables, the Collections, and the Lock-Box Accounts. Section 2.2. Optional Liquidations. The Borrower may at any time direct that an Interim Liquidation commence for all Lenders by giving the Agent and the Collection Agent at least three Business Days' written (including telecopy or other facsimile communication) notice specifying the date on which the Interim Liquidation shall commence and, if desired, when such Interim Liquidation shall cease before the Loan Amortization Date (identified as a specific date or as when the Aggregate Loan Amount is reduced to a specified amount). If the Borrower does not so specify the date on which an Interim Liquidation shall cease, it may cause such Interim Liquidation to cease at any time before the Loan Amortization Date by notifying the Agent and the Collection Agent in writing (including by telecopy or other facsimile communication) at least three Business Days before the date on which it desires such Interim Liquidation to cease. Section 2.3. Selection of Interest Rates and Tranche Periods. (a)(1) The provisions of this subsection (a)(1) shall apply to each Loan Amount of Windmill funded with commercial paper issued on or before the Agent makes the election described in clause (a)(2) below: Each Loan Amount shall be allocated to one or more Tranches reflecting the Interest Rates at which such Loan Amount accrues Interest and the Tranche Periods for which such Interest Rates apply. Each Loan Amount of Windmill shall accrue Interest at the CP Rate. Each Tranche shall be in the minimum amount of $1,000,000 and in multiples thereof. All Interest accrued on the Loan Amount of Windmill during a Tranche Period shall be payable by the Borrower on the last day of such Tranche Period. (2) At the Agent's option, the Agent may notify the Borrower that the provisions of this subsection (a)(2) shall apply to each Loan Amount of Windmill funded with Pooled Commercial Paper issued after the Agent delivers a notice to the Borrower that it elects to have the provisions of this clause (a)(2) to be applicable to the Loan Amount of Windmill: The Borrower shall pay Funding Charges with respect to Windmill's Loan Interest for each day that any Loan Amount in respect of such Loan Interest is outstanding. Each such Loan Interest will -24- accrue Funding Charges each day based on the Pooled Allocation. On each Settlement Date the Borrower shall pay to the Agent (for the benefit of Windmill) an aggregate amount equal to all accrued and unpaid Funding Charges in respect of such Loan Interest for the immediately preceding Interest Period; (3) Each Loan Amount of the Committed Lenders shall be allocated to one or more Tranches reflecting the Interest Rates at which such Loan Amount accrues Interest and the Tranche Periods for which such Interest Rates apply. In each request for a Loan from a Committed Lender and three Business Days before the expiration of any Tranche Period applicable to any Committed Lender's Loan Amount, the Borrower may request the Tranche Period(s) to be applicable to such Loan Amount and the Interest Rate(s) applicable thereto. Each Loan Amount of the Committed Lenders may accrue Interest at either the Eurodollar Rate or the Prime Rate, in all cases as established for each Tranche Period applicable to such Loan Amount. Each Tranche shall be in the minimum amount of $1,000,000 and in multiples thereof or, in the case of Interest accruing at the Prime Rate, in any amount that otherwise has not been allocated to another Tranche Period. Any Loan Amount of the Committed Lenders not allocated to a Tranche Period shall be a Prime Tranche. During the pendency of a Termination Event, the Agent may reallocate any outstanding Loans of the Committed Lenders to a Prime Tranche. All Interest accrued on the Loan Amount of the Committed Lenders during a Tranche Period shall be payable by the Borrower on the last day of such Tranche Period or, for a Eurodollar Tranche with a Tranche Period of more than three months, 90 days after the commencement, and on the last day, of such Tranche Period. (b) The Agent shall allocate the Investment of Windmill to Tranche Periods in its sole discretion. If, by the time required in Section 2.3(a), the Borrower fails to select an Interest Rate or Tranche Period for any Loan Amount of the Committed Lenders, such Loans shall automatically accrue Interest at the Prime Rate for a three Business Day Tranche Period. Any Loans purchased from Windmill pursuant to Article III hereof shall accrue interest at the Prime Rate and have an initial Tranche Period of three Business Days. (c) If the Agent or any Committed Lender determines (i) that maintenance of any Eurodollar Tranche would violate any applicable law or regulation, (ii) that deposits of a type and maturity appropriate to match fund any of such Lender's Eurodollar Tranches are not available or (iii) that the maintenance of any Eurodollar Tranche will not adequately and fairly reflect the cost of such Lender of funding Eurodollar Tranches, then the Agent, upon the direction of such Lender, shall suspend the availability of, and terminate any outstanding, Eurodollar Tranche so affected. All Loans allocated to any such terminated Eurodollar Tranche shall be reallocated to a Prime Rate Tranche. Section 2.4. Fees and Other Costs and Expenses. (a) The Borrower shall pay to the Agent for the account of the Committed Lenders and the Agent, such amounts as agreed to with the Committed Lenders and the Agent in the Fee Letter. (b) If any Loan Amount allocated to any CP or Eurodollar Tranche is reduced before the last day of its Tranche Period, or if a requested Loan at the Eurodollar Rate does not take place on its scheduled Loan Date, the Borrower shall pay the Early Collection Fee to each Lender that had its Loan Amount so reduced or scheduled Loan not made. -25- (c) Each Loan Amount shall be payable solely from Collections and from amounts payable under Sections 2.5 and 2.7 (to the extent amounts paid under Section 7.1 indemnify against reductions in or non-payment of Receivables). The Borrower shall pay, as a full recourse obligation, all other amounts payable hereunder, including, without limitation, all Interest, fees described in clauses (a) and (b) above and amounts payable under Article IX. Section 2.5. Maintenance of Secured Interest; Deemed Collection. (a) General. If at any time before the Loan Amortization Date the Net Receivables Balance is less than the sum of 100% plus the Reserve Percentage multiplied by the Aggregate Loan Amount (or, if a Termination Event exists, the Matured Aggregate Loan Amount), the Borrower shall pay to the Agent an amount equal to such deficiency for application to reduce the Loan Amounts of the Lenders ratably in accordance with the principal amount of their respective Loan Amounts, applied first to Prime Tranches and second to the other Tranches with the shortest remaining maturities unless otherwise specified by the Borrower. Any amount so applied to reduce Windmill's Loan Amount shall be deposited in the Special Borrower Subaccount. (b) Deemed Collections. If on any day the outstanding balance of a Receivable is reduced or cancelled as a result of any defective or rejected goods or services, any cash discount or adjustment (including any adjustment resulting from the application of any special refund or other discounts or any reconciliation), any setoff or credit (whether such claim or credit arises out of the same, a related, or an unrelated transaction) or other similar reason not arising from the financial inability of the Obligor to pay undisputed indebtedness, the Borrower shall be deemed to have received on such day a Collection on such Receivable in the amount of such reduction or cancellation. If on any day any representation, warranty, covenant or other agreement of the Borrower related to a Receivable is not true or is not satisfied, the Borrower shall be deemed to have received on such day a Collection in the amount of the outstanding balance of such Receivable. All such Collections deemed received by the Borrower under this Section 2.5(b) shall be remitted by the Borrower to the Collection Agent in accordance with Section 3.3. (c) Adjustment to Secured Interest. At any time before the Loan Amortization Date that the Borrower is deemed to have received any Collection under Section 2.5(b) ("Deemed Collections") that derive from a Receivable that is otherwise reported as an Eligible Receivable, so long as no Liquidation Period then exists, the Borrower may satisfy its obligation to deliver such amount to the Collection Agent by instead notifying the Agent that the Secured Interest should be recalculated by decreasing the Net Receivables Balance by the amount of such Deemed Collections, so long as such adjustment does not cause the Secured Interest to exceed 100%. (d) Payment Assumption. Unless an Obligor otherwise specifies or another application is required by contract or law, any payment received by the Borrower from any Obligor shall be applied as a Collection of Receivables of such Obligor (starting with the oldest such Receivable) and remitted to the Collection Agent as such. Section 2.6. Reduction in Commitments. The Borrower may, upon 30 days' notice to the Agent, reduce the Aggregate Commitment in increments of $1,000,000, so long as the Aggregate Commitment at all times equals at least the outstanding Matured Aggregate Loan Amount. Each such reduction in the Aggregate Commitment shall reduce the Commitment of each Committed -26- Lender in accordance with its Ratable Share and shall ratably reduce the Loan Limit so that the Aggregate Commitment remains equal to 102% of the Loan Limit. Section 2.7. Optional Prepayments. At any time that the Aggregate Loan Amount is less than 10% of the Aggregate Commitment in effect on the date hereof, the Borrower may, upon thirty days' notice to the Agent, prepay the entire Loan Amount at a price equal to the outstanding Matured Aggregate Loan Amount and all other amounts then owed to the Lenders hereunder. Section 2.8. Assignment of Purchase Agreement. The Borrower hereby assigns and otherwise transfers to the Agent (for the benefit of the Agent, each Lender and any other Person to whom any amount is owed hereunder), all of the Borrower's right, title and interest in, to and under the Purchase Agreement. The Borrower shall execute, file and record all financing statements, continuation statements and other documents required to perfect or protect such assignment. This assignment includes (a) all monies due and to become due to the Borrower from the Originators under or in connection with the Purchase Agreement (including fees, expenses, costs, indemnities and damages for the breach of any obligation or representation related to such agreement) and (b) all rights, remedies, powers, privileges and claims of the Borrower against the Originators under or in connection with the Purchase Agreement. All provisions of the Purchase Agreement shall inure to the benefit of, and may be relied upon by, the Agent, each Lender and each such other Person. At any time that a Termination Event has occurred and is continuing, the Agent shall have the sole right to enforce the Borrower's rights and remedies under the Purchase Agreement to the same extent as the Borrower could absent this assignment, but without any obligation on the part of the Agent, any Lender or any other such Person to perform any of the obligations of the Borrower under the Purchase Agreement (or any of the promissory notes executed thereunder). All amounts distributed to the Borrower under the Purchase Agreement from Receivables sold to the Borrower thereunder shall constitute Collections hereunder and shall be applied in accordance herewith. ARTICLE III SALES TO AND FROM WINDMILL; ALLOCATIONS Section 3.1. Required Loans from Windmill. (a) Windmill may, at any time sell to the Committed Lenders pursuant to the Transfer Agreement any percentage designated by Windmill of Windmill's Loan Amount and its related Windmill Settlement (each, a "Put"). (b) Any portion of Windmill's Loan Amount and related Windmill Settlement purchased by a Committed Lender shall be considered part of such Lender's Loan Amount and related Windmill Settlement from the date of the relevant Put. Immediately upon any purchase by the Committed Lenders of any portion of Windmill's Loan Amount, the Borrower shall pay to the Agent (for the ratable benefit of such Lenders) an amount equal to the sum of (i) the Assigned Windmill Settlement and (ii) all unpaid Interest owed to Windmill (whether or not then due) to the end of each applicable Tranche Period to which any Loan Amount being Put has been allocated, (iii) all accrued but unpaid fees (whether or not then due) payable to Windmill in -27- connection herewith at the time of such purchase and (iv) all accrued and unpaid costs, expenses and indemnities due to Windmill from the Borrower in connection herewith. (c) The proceeds from each Put received by Windmill (other than amounts described in clauses (iii) and (iv) of the last sentence of Section 3.1(b)), shall be transferred into the Special Borrower Subaccount and used solely to pay that portion of the outstanding commercial paper of Windmill issued to fund or maintain the Loan Amount of Windmill so transferred. Until used to pay commercial paper notes, all proceeds of any Put pursuant to this Section shall be invested in Permitted Investments. All earnings on such Permitted Investments shall be promptly remitted to the Borrower. Section 3.2. Loans by Windmill. Windmill may at any time deliver to the Agent and each Committed Lender a notification of assignment in substantially the form of Exhibit F. If Windmill delivers such notice, each Committed Lender shall sell to Windmill and Windmill shall purchase in full from each Committed Lender, the Loan Amount of the Committed Lenders on the last day of the relevant Tranche Periods, at a purchase price equal to such Loan Amount plus accrued and unpaid Interest thereon. Any sale from any Committed Lender to Windmill pursuant to this Section 3.2 shall be without recourse, representation or warranty except for the representation and warranty that the Loan Amount sold by such Committed Lender is free and clear of any Adverse Claim created or granted by such Committed Lender and that such Purchaser has not suffered a Bankruptcy Event. Section 3.3. Allocations and Distributions. (a) Settlement Dates. On the Business Day following each Deposit Date occurring prior to the Bank Termination Date (unless an Interim Liquidation is in effect), the Collection Agent shall set aside from Collections the amounts necessary to make all distributions to the Agent, the Committed Lenders and the Collection Agent required by this Section 3.3(a) with respect to the next succeeding Settlement Date. The balance of such Collections shall be released to the Borrower on a daily basis. On each Settlement Date prior to the Bank Termination Date (unless an Interim Liquidation is in effect), all Collections so set aside during the preceding Discount Period shall be applied where applicable by the Collection Agent (or, if the Agent is then in control of any Collections, by the Agent) in the following order: (i) all fees and other amounts due and payable to the Agent; (ii) ratably to the Committed Lenders, all Funding Charges and Discount due and payable on such date; (iii) ratably to the Committed Lenders, all other amounts due and payable to the Committed Lenders under the Transaction Documents; (iv) to the Collection Agent, an amount equal to the Collection Agent Fee due and payable on such date; and (v) to the Seller. -28- On the last day of each Tranche Period for a Eurodollar Tranche or Prime Tranche, the Collection Agent (or, if the Agent is then in control of any Collections, the Agent) shall pay Interest due and payable to such Committed Lenders from accounts set aside for such purpose pursuant to Section 3.2(a). If any part of the Secured Interest in any Collections is applied to pay any amounts that are recourse obligations of the Borrower pursuant to Section 2.4(c) and after giving effect to such application the Secured Interest is greater than 100%, the Borrower shall pay, as a recourse obligation for distribution as part of the Secured Interest in Collections, to the Collection Agent the amount so applied to the extent necessary so that after giving effect to such payment the Secured Interest is no greater than 100%. (b) Bank Termination Date and Interim Liquidations. On each day during any Interim Liquidation and on each day on and after the Bank Termination Date, the Collection Agent shall set aside and hold in trust solely for the account of the Agent, for the benefit of the Agent and the Purchasers, (or deliver to the Agent, if so instructed pursuant to Section 7.2(a)) the Secured Interest in all Collections received on such day and such Collections shall be allocated as follows: (i) first, to the Agent until all amounts owed to the Agent have been paid in full; (ii) second, to the Committed Lenders until all amounts owed to the Committed Lenders have been paid in full; (iii) third, to any other Person (other than the Borrower, the Collection Agent or an Originator) to whom any amounts are owed under the Transaction Documents until all such amounts have been paid in full; and (iv) fourth, to the Collection Agent until all amounts owed to the Collection Agent under the Agreement have been paid in full; and (v) fifth, to the Borrower. On the last day of each Tranche Period (unless otherwise instructed by the Agent pursuant to Section 7.2(a)), the Collection Agent shall deposit into the Agent's Account, from such set aside Collections, all amounts allocated to such Tranche Period and all Tranche Periods that ended before such date that are due in accordance with clause (ii) above. No distributions shall be made to pay amounts under clauses (iii) - (v) until sufficient Collections have been set aside to pay all amounts described in clauses (i) and (ii) that may become payable for all outstanding Tranche Periods. All distributions by the Agent shall be made ratably within each priority level in accordance with the respective amounts then due each Person included in such level unless otherwise agreed by the Agent and all Purchasers. If any part of the Secured Interest in any Collections is applied to pay any amounts payable hereunder that are recourse obligations of the Borrower pursuant to Section 2.4(c) and after giving effect to such application the Secured Interest is greater than 100%, the Borrower shall pay, as a recourse obligation for distribution in -29- respect of each applicable Committed Lender's Loan Amount as part of the Secured Interest in Collections, to the Collection Agent the amount so applied to the extent necessary so that after giving effect to such payment the Secured Interest is no greater than 100%. ARTICLE IV REPRESENTATIONS AND WARRANTIES Section 4.1. Representations and Warranties. The Borrower represents and warrants to the Agent and each Lender that: (a) Corporate Existence and Power. Each of the Borg-Warner Entities is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation and has all corporate power and all governmental licenses, authorizations, consent and approvals required to carry on its business in each jurisdiction in which its business is now conducted except where failure to obtain such licenses, authorizations, consents and approvals would not have (i) an adverse effect on its ability to perform its obligations under each of the Transaction Documents to which it is a party, (ii) an adverse effect on the enforceability of any of the Transaction Documents, (iii) a material adverse effect on its business or financial condition, (iv) a material adverse effect on the interests of the Agent or any Lender hereunder or under any of the other Transaction Documents, or (v) a material adverse effect on the enforceability or collectibility of any Receivable. (b) Corporate and Governmental Authorization; Contravention. The execution, delivery and performance by each of the Borg-Warner Entities of each Transaction Document to which it is (or is stated to be) a party are within its corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any Governmental Authority, and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or by-laws of any such Borg-Warner Entity or of any agreement, judgment, injunction, order, decree or other instrument binding upon it or result in the creation or imposition of any lien on assets of any Borg-Warner Entity or any of its Subsidiaries. (c) Binding Effect. Each of the Transaction Documents constitutes the legal, valid and binding obligation of each Borg-Warner Entity which is (or is stated to be) a party thereto enforceable against each such Borg-Warner Entity in accordance with its terms, except to the extent that such enforcement may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity. (d) Perfection. Immediately preceding the Loans hereunder, each Originator shall have been the owner and shall have effectively sold all receivables and other property that constitute Purchase Assets to the Borrower, free of any Adverse Claim, and the Borrower shall be the owner of all of the receivables purported to be transferred as Receivables hereunder. On or prior to the date hereof and prior to the Borrower's acquisition of any new receivable from an Originator, all financing statements and other documents required to be recorded or filed in order to perfect and maintain the Agent's (for the benefit of the Lender's) interest in the Secured Interest and in any additional property conveyed pursuant to Article II against all creditors of and -30- purchasers from the Borrower and all creditors of and purchasers from any Originator will have been duly filed in each filing office necessary for such purpose and all filing fees and Taxes, if any, payable in connection with such filings shall have been paid in full. Notwithstanding the foregoing, nothing in this Section 4.1(d) shall constitute a representation with respect to any Receivable the Obligor of which is a government or governmental subdivision or agency to the extent that such representation requires compliance with any federal laws of the USA relating to the transfer or perfection of such Receivable. (e) Accuracy of Information. All information heretofore furnished by any Borg-Warner Entity to Windmill, the Agent or any Bank for purposes of or in connection with this Agreement, any of the other Transaction Documents or any transaction contemplated hereby or thereby is, and all such information hereafter furnished by any Borg-Warner Entity to Windmill, the Agent or any Bank will be, true and accurate in every material respect and will not omit any information necessary to make the statements therein not materially misleading, on the date such information is stated or certified. (f) Eligible Receivables. Each Receivable at any time included in the Net Receivables Balance as an Eligible Receivable at the time of any computation hereunder shall in fact be an Eligible Receivable at such time. (g) Actions, Suits. There are no actions, suits or proceedings pending, or to the knowledge of the Borrower threatened, against or affecting the Borrower or any other Borg-Warner Entity or any Subsidiary of any Borg-Warner Entity or any of their respective properties, in or before any Governmental Authority, arbitrator or other body, which may materially adversely affect the financial condition of the Borrower or any other Borg-Warner Entity or the collectibility of the Receivables or materially adversely affect the ability of any Borg-Warner Entity to perform its obligations under each of the Transaction Documents to which it is (or is stated to be) a party; the Borrower is not in default with respect to any contractual obligation or any order of any court, arbitrator or Governmental Authority; and no Borg-Warner Entity nor any Subsidiary of any Borg-Warner Entity is in material default with respect to any material contractual obligation or any order of any court, arbitrator or Governmental Authority. (h) No Material Adverse Change. Since September 30, 1998, there has been no material adverse change in the financial condition, business, operations or prospects of any Borg-Warner Entity, or in the ability of any Borg-Warner Entity to perform its obligations hereunder or under any other Transaction Document or in the collectibility of the Receivables. (i) Credit and Collection Policy. The Borrower and each Originator has complied in all material respects with the Credit and Collection Policy in regard to each Receivable and related Contract and since September 30, 1998, there has been no material change in such Credit and Collection Policy. (j) Use of Proceeds. No proceeds of the Loans will be used by any Borg-Warner Entity to acquire any security in any transaction which is subject to Section 13 or 14 of the Securities Exchange Act of 1934, as amended. -31- (k) Place of Business. The chief place of business and chief executive office of the Borrower and each Originator are located at the respective addresses of each such Person set forth on Exhibit G and such offices have been so located for six months prior to the date hereof. (l) Lock-Box Arrangements. All Lock-Box Banks, Lock-Box numbers and Lock Box Account numbers are listed on Exhibit C or described in a notice provided by the Borrower to the Agent. The Borrower has sent a copy of all Lock-Box Agreements to the Agent. (m) Payments on Receivables. Each Obligor is required to send all payments with respect to each Receivable (other than Tooling Receivables) to a Lock-Box in the exclusive control of the Lock-Box Bank for deposit in a Lock-Box Account, and no funds other than payments with respect to the Receivables (which may be Tooling Receivables) are deposited in any such Lock-Box Account. (n) Good Title. Upon the Loans and upon each Payment, the Agent shall have, for the benefit of the Lenders, a valid and perfected first priority interest in each item comprising the Secured Interest as it exists at the time of the Loans or such Payment and in any additional property conveyed pursuant to Article II, free and clear at all such times of any Adverse Claim. (o) Names. Except as described in Exhibit H, the Borrower has not used any corporate names, tradenames or assumed names other than its name set forth on the signature pages of this Agreement. (p) Coverage Requirement. The product of the Secured Interest (expressed as a percentage) multiplied by the Net Receivables Balance equals or exceeds the Coverage Amount. (q) Net Worth. The Borrower has a positive tangible net worth of at least One Million Dollars ($1,000,000) as determined in accordance with GAAP. (r) Subsidiaries. The Borrower has no Subsidiaries and does not own or hold, directly or indirectly, any capital stock or equity security of, or equity interest in, any Person. (s) Termination Event. No Termination Event or Potential Termination Event has occurred and is continuing. (t) 1933 and 1940 Acts. Each Receivable is an account receivable representing all or part of the sale prices of merchandise, insurance and services within the meaning of Section 3(c)(5) of the Investment Company Act of 1940, as amended, and a purchase price of each Receivable with the proceeds of notes would constitute a "current transaction" within the meaning of Section 3(a)(3) of the Securities Act of 1933, as amended. Section 4.2. Reaffirmation of Representations and Warranties. On each day that a Payment is made hereunder, the Borrower, by accepting such Payment, shall be deemed to have certified that (i) all representations and warranties described in Section 4.1 are correct in all material respects on and as of such day as though made on and as of such day and (ii) no event -32- has occurred or is continuing, or would result from any such Payment, which constitutes a Termination Event or a Potential Termination Event. ARTICLE V CONDITIONS PRECEDENT AND SUBSEQUENT Section 5.1. Conditions to Closing. This Agreement shall become effective on the first date (the "Effective Date") on which all of the conditions set forth in this Section 5.1 shall have been satisfied. On or prior to the Effective Date, the Borrower shall deliver to the Agent, with a copy to each Lender, the following documents, instruments and opinions, all of which shall be in form and substance acceptable to the Agent and each Lender: (a) A certificate of the secretary or any assistant secretary of each of the Borg-Warner Entities certifying (i) the names and signatures of the officers authorized on its behalf to execute each Transaction Document to which it is (or is stated to be) a party (on which certificate the Agent and each Lender may conclusively rely until such time as the Agent and each Lender shall receive from it a revised certificate meeting the requirements of this Section 5.1(a)) and (ii) a copy of its by-laws. (b) Such other approvals, opinions or documents as the Agent may reasonably request. (c) Executed copies of (i) all consents from and authorizations by any Persons and (ii) all waivers and amendments to existing credit facilities, that are necessary in connection with this Agreement. Section 5.2. Condition to Each Loan. Neither the Agent nor Windmill shall have any obligation to make a Loan hereunder. No Bank shall have any obligation to make any Loan, if at the time of such Loan and after giving effect thereto, there shall exist a Termination Event or Potential Termination Event. ARTICLE VI COVENANTS Section 6.1. Affirmative Covenants of the Borrower. The Borrower hereby covenants, undertakes and agrees that at all times from the date hereof until the termination of this Agreement pursuant to Section 11.1, unless the Agent, with the consent of Windmill (at any time that the Windmill Loan Amount is greater than zero), the Required Banks, shall otherwise consent in writing: (a) Financial Reporting. The Borrower will maintain, and will cause each Borg-Warner Entity to maintain, for itself and each of its Subsidiaries, a system of account established and administered in accordance with GAAP, and the Borrower will furnish to the Agent and to each Lender: -33- (i) Annual Financial Statements. Within one hundred twenty (120) days after each fiscal year of the Parent (beginning with the fiscal year ending December 31, 1997), copies of the annual audited financial statement of the Parent certified by an independent certified public accountant satisfactory to the Agent and prepared on a consolidated basis in conformity with GAAP, together with the certificate described in clause (iii) below. Within one hundred twenty (120) days after each fiscal year of each of the Borg-Warner Entities (other than the Parent), copies of the annual balance sheet for such Borg-Warner Entity and, in the case of the Borrower, an annual profit and loss statement, in each case certified by a Designated Financial Officer of such Borg-Warner Entity and prepared on a consolidated basis, together with the certificate described in clause (iii) below. (ii) Quarterly Financial Statement. Within forty-five (45) days after each quarter (except the last quarter) of each fiscal year of the Parent, copies of the unaudited financial statement of the Parent prepared in the same manner as the report referred to in preceding clause (i), signed by a Designated Financial Officer of the Parent and consisting of at least a balance sheet as at the close of such quarter and statements of earnings and source and application of funds for the period from the beginning of such fiscal year to the close of such quarter, together with the certificate described in clause (iii) below. Within forty-five (45) days after each quarter (except the last quarter) of each fiscal year of the Borrower, a quarterly balance sheet and profit and loss statement of the Borrower for the period from the beginning of such fiscal year to the close of such quarter certified by a Designated Financial Officer of the Borrower, together with the certificate described in clause (iii) below. (iii) Officer's Certificate. Together with the balance sheet or financial statements furnished with respect to the Borrower and the Parent under preceding clauses (i) and (ii), a compliance certificate in substantially the form of Exhibit J, signed by a Designated Financial Officer of the Borrower or the Parent, as the case may be, and dated the date of such annual balance sheet or financial statement or such quarterly balance sheet or financial statement, as the case may be, to the effect that no Termination Event or Potential Termination Event has occurred and is continuing, or, if there is any such event, describing it and the steps, if any, being taken to cure it, and containing a computation of, and showing compliance with, each of the financial ratios and restrictions contained in this Agreement and the Indemnity Agreement respectively. (iv) Other Information. Such other information (including non-financial information) as the Agent or any Lender may from time to time reasonably request. (b) Notices. The Borrower will notify the Agent in writing of any of the following immediately upon learning of the occurrence thereof, describing the same and, if applicable, the steps being taken by the Person(s) affected with respect thereto: -34- (i) Termination Events or Potential Termination Events. The occurrence of any Termination Event or Potential Termination Event, and such notice shall include a statement of a Designated Financial Officer of the Borrower, setting forth the date of such occurrence and the nature thereof. (ii) Representations and Warranties. The failure of any representation or warranty to be true (when made or at any time thereafter) in any material respect with respect to any Receivable. (iii) Downgrading. Any lowering in the rating of any indebtedness below the rating that it has on the date hereof of any Approved Obligor or any Borg-Warner Entity or any Subsidiary of any of the foregoing by any rating agency, setting forth the indebtedness affected and the nature of such change. (iv) Litigation. The institution of any litigation, arbitration proceeding or governmental proceeding which is reasonably likely to be material to any Borg-Warner Entity. (v) Judgment. The entry of any judgment or decree against any Borg-Warner Entity or any of their respective Subsidiaries if the aggregate amount of all judgments and decrees then outstanding against the Borg-Warner Entities and their Subsidiaries exceeds Ten Million Dollars ($10,000,000) after deducting (a) the amount with respect to which any Borg-Warner Entity or any such Subsidiary is insured and with respect to which the insurer has assumed responsibility in writing, and (b) the amount for which any Borg-Warner Entity or any such Subsidiary is otherwise indemnified if the terms of such indemnification are satisfactory to the Agent. Promptly upon receipt of any such notice, the Agent will deliver copies thereof to each of the Lenders. (c) Conduct of Business. The Borrower will, and will cause each other Borg-Warner Entity to, do all things necessary to remain duly incorporated, validly existing and in good standing as domestic corporations in its jurisdiction of incorporation and maintain all requisite authority to conduct its business in each jurisdiction in which its business is conducted. (d) Compliance with Laws. The Borrower will, and will cause each other Borg-Warner Entity (in all material respects and in all respects that could have an effect on the enforceability of any Transaction Document) to, comply with all laws, rules, regulations, orders, writs, judgments, injunctions, decrees or awards to which it may be subject. (e) Furnishing of Information and Inspection of Records. The Borrower will furnish to the Agent and the Lenders from time to time such information with respect to the Receivables as the Agent or any Lender shall reasonably request, including listings -35- identifying the Obligor and the Outstanding Balance for each Receivable. The Borrower will permit, at any time and from time to time either (i) upon two (2) days prior notice or (ii) after the occurrence of a Potential Termination Event or a Termination Event, during regular business hours, the Agent or any Lender, or any of their respective agents or representatives, (i) to examine and make copies of and abstracts from all Records and (ii) to visit the offices and properties of the Borrower for the purpose of examining such Records, and to discuss matters relating to Receivables or the Borrower's performance hereunder with any of the officers or employees of the Borrower having knowledge of such matters. The agent will, within sixty (60) days of the receipt of the annual balance sheet of the Borrower delivered pursuant to Section 6.1(a), utilize the services of an independent certified public accounting firm or auditing firm to conduct an annual audit of the Records of the Borrower and/or to make test verifications of the Receivables (at the expense of the Borrower pursuant to Section 9.4). (f) Keeping of Records and Books. (i) The Borrower will, and will cause each Originator as sub-collection agent to, maintain and implement administrative and operating procedures (including an ability to recreate records evidencing Receivables in the event of the destruction of the originals thereof), and keep and maintain all documents, books, records and other information reasonably necessary or advisable for the collection of all Receivables (including records adequate to permit the immediate identification of each new Receivable and all Collections of and adjustments to each existing Receivable). The Borrower will give the Agent notice of any material change in the administrative and operating procedures referred to in the previous sentence. (ii) The Borrower will, and will cause each other Borg-Warner Entity to, keep true books of record and account of itself and its Subsidiaries in which full, true and correct entries in accordance with GAAP will be made of all dealings or transactions in relation to its business and activities, including the setting up on its books, from income, reserves which, on a consolidated basis, are adequate in the judgment of such Person for obsolescence, depreciation, depletion and amortization of its properties during each year. (g) Separate Corporate Existence. The Borrower will take all actions necessary to maintain its identity as a separate legal entity from each other Borg-Warner Entity, including each of the activities listed on Exhibit L. (h) Performance and Compliance with Receivables and Contracts. The Borrower will, and will cause each Originator to, at its expense timely and fully perform and comply in all material respects with all provisions, covenants and other promises required to be observed by it under the Contracts related to the Receivables. -36- (i) Credit and Collection Policy. The Borrower will, and will cause each Originator to, comply in all material respects with the Credit and Collection Policy in regard to each Receivable and the related Contract. Section 6.2. Negative Covenants of the Borrower. Until the termination of this Agreement pursuant to Section 11.1, unless the Agent, with the consent of Windmill (at any time that the Windmill Loan Amount is greater than zero), and the Required Banks, shall otherwise consent in writing: (a) Sales and Liens Relating to Receivables. Except as otherwise provided herein, the Borrower will not transfer, convey, sell, assign (by operation of law or otherwise) or otherwise dispose of, or create or suffer to exist any Adverse Claim upon (including the filing of any financing statement) or with respect to (i) any inventory or goods (other than sales in the ordinary course of business), the sale of which may give rise to a Receivable, (ii) any Receivable or (iii) any related Contract, Related Security, Collection or Related Account with respect to any Receivable, or assign any right to receive income in respect to any of the foregoing. (b) Extension or Amendment of Receivables. Except as otherwise permitted in Section 7.2, the Borrower will not extend, amend or otherwise modify the terms of any Receivable, or amend, modify or waive any term or condition of any Contract related thereto. (c) Change in Business or Credit and Collection Policy. The Borrower will not, and will not permit any Originator to, make any change in the character of its business or in its Credit and Collection Policy, which change would, in either case, impair the collectibility of any Receivable. (d) Merger, etc. The Borrower will not merge with or into or consolidate with or into, or convey, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions), any of its assets (whether now owned or hereafter acquired), or acquire any of the assets or capital stock or other ownership interest of, any Person (other than in connection with asset dispositions and acquisitions contemplated hereunder or in connection herewith or under or in connection with any of the other Transaction Documents), or otherwise enter into any partnership or joint venture arrangement with any other Person. (e) Accounting of Sales under the Purchase Agreement. The Borrower will not, nor will it permit any Originator to, prepare any financial statements which shall account for the transactions contemplated by the Purchase Agreement in any manner other than as a sale of Receivables by the Originators to the Borrower, and will not in any other respect account for or treat the transactions contemplated thereby (including but not limited to for accounting and tax purposes) in any manner other than as a sale of Receivables by the Originators to the Borrower. -37- (f) Change in Purchase Agreement. The Borrower will not amend, modify, waive or terminate any terms or conditions of the Purchase Agreement, which right to amend, modify, waive or terminate has been assigned to the Agent for the benefit of the Agent and the Lenders. (g) Contingent Liabilities. The Borrower will not guarantee, endorse or otherwise be or become contingently liable (including by agreement to maintain balance sheet tests) in connection with the obligations of any other Person, except endorsements of negotiable instruments for collection in the ordinary course of business and reimbursement or indemnification obligations in favor of the Agent or the Lenders as provided for under this Agreement. (h) Limitation on Investments. The Borrower will not make any Financial Investment in any person, including any of its Affiliates, except for: (i) Permitted Investments; and (ii) endorsements of instruments or items of payment for deposit to the Borrower's bank accounts. (i) Limitation on Transactions with Affiliates. The Borrower will not enter into, or be a party to, any transaction with any Affiliate of the Borrower, except for: (i) the transactions contemplated by the Transaction Documents; and (ii) other transactions upon fair and reasonable terms materially no less favorable to the Borrower than would be obtained in a comparable arm's-length transaction with a Person not an Affiliate. (j) Bank Accounts. The Borrower will not maintain any bank accounts other than the Lock-Box Accounts and the Borrower Account. (k) Expenditures. The Borrower will not make any expenditure (by long-term or operating lease or otherwise) for capital assets (both realty and personalty) or any other assets if such expenditure, when added to other such expenditures made by the Borrower during the same calendar year (including as contemplated by Section 6.2(n)) would, in the aggregate, exceed Ten Thousand Dollars ($10,000). (l) Incurrence of Indebtedness. The Borrower shall not incur, assume, suffer to exist or otherwise become or remain directly or indirectly liable with respect to any Indebtedness other than (i) Indebtedness to the Agent or any Lender pursuant to the terms and provisions of this Agreement, (ii) Indebtedness to the Collection Agent hereunder or, if it is then serving as Collection Agent, to any Originator in its capacity as sub-collection agent for the amount of any reasonable collection agency fee, (iii) Indebtedness to each Originator (that is payable solely to the extent that the Borrower has funds that are not necessary to satisfy any obligation hereunder) in connection with the purchase of such -38- Originator's receivables pursuant to the terms and provisions of the Purchase Agreement and (iv) Indebtedness to any Borg-Warner Entity that is expressly subordinated to Indebtedness to the Agent and the Lenders on terms satisfactory to the Agent. (m) Prohibition of Dividends. The Borrower will not declare any dividends on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, retirement or other acquisition of any shares of stock of the Borrower, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of the Borrower. (n) Business Activities. The Borrower will not carry on any business or engage in any business transactions other than the business and transactions contemplated by or related to this Agreement or the other Transaction Documents or incidental to the purposes hereof. The Borrower will not be a party to any documents, agreements or instruments other than the Transaction Documents and any office or equipment leases necessary in connection herewith or incidental to the purposes hereof which office or equipment leases shall not create or evidence an obligation of the Borrower that, when added to the other expenditures made by the Borrower during the same calendar year (including as contemplated by Section 6.2(k)) would, in the aggregate, exceed Ten Thousand Dollars ($10,000). (o) Net Worth. The Borrower shall, at all times, have a tangible net worth of not less than One Million Dollars ($1,000,000) determined in accordance with GAAP. ARTICLE VII ADMINISTRATION AND COLLECTIONS Section 7.1. Appointment of Collection Agent. (a) The servicing, administering and collection of the Receivables shall be conducted by the Person (the "Collection Agent") so designated from time to time in accordance with this Section 7.1. Initially, Borg-Warner Automotive Inc., shall be the Collection Agent. Until the Agent gives notice to the Borrower (in accordance with this Section 7.1) of the designation of a new Collection Agent, the Parent is hereby designated as, and hereby agrees to perform the duties and obligations of, the Collection Agent pursuant to the terms hereof. Either (i) upon thirty (30) days prior written notice to the Borrower or (ii) upon the occurrence and during the continuance of a Termination Event, the Agent may designate as Collection Agent any Person (including itself or any Bank) to succeed the Parent or any successor Collection Agent, on the condition in each case that any such Person so designated shall agree to perform the duties and obligations of the Collection Agent. Whether or not it is then serving as Collection Agent, upon the occurrence and during the continuance of a Termination Event, the Agent may notify any Obligor of the transfer to the Agent of the Secured Interest. (b) In the case of Receivables arising out of the sale or lease of goods or the rendering of services by any Originator, the Parent may, and if requested by the Agent shall, delegate its duties and obligations as Collection Agent with respect to such Receivables to such Originator -39- (acting as sub-collection agent), on the condition in each case that such Originator shall agree in writing to perform the duties and obligations of the Collection Agent; provided, however, that notwithstanding such delegation, the Parent shall remain primarily liable to the Agent and the Lenders for the performance of the duties and obligations so delegated and the Agent and each Lender shall have the right to look solely to the Parent for such performance; provided, further, however, that either (i) upon thirty (30) days prior written notice to the Parent or (ii) upon the occurrence and during the continuance of a Termination Event, the Agent may replace an Originator as sub-collection agent. (c) The Parent agrees that it will terminate its activities as Collection Agent and cause each Originator to terminate such Originator's activities as sub-collection agent in a manner which the Agent determines will facilitate the transition of the performance of such activities to the new Collection Agent, and the Parent shall cooperate with and assist such new Collection Agent. Such cooperation shall include access to, and transfer of, all Records and use by the new Collection Agent of all licenses, hardware or software necessary or desirable to collect the Affected Assets if permitted or not prohibited by the applicable contract. The Parent hereby agrees that if at any time it shall cease to be the Collection Agent, it shall act (if the then current Collection Agent so requests) as the data-processing agent of the Collection Agent and, in such capacity, the Parent shall conduct the data-processing functions of the administration of the Receivables and the Collections in substantially the same way that the Parent conducted such data-processing functions while it acted as the Collection Agent. (d) The Parent acknowledges that the Agent and each Lender have relied on the Borrower's agreement to act as Collection Agent and on each Originator's agreement to act as sub-collection agent with respect to Receivables originated by each such Originator in making their decision to execute and deliver this Agreement. Accordingly, the Parent agrees that it will not voluntarily resign as Collection Agent nor will it permit any Originator to voluntarily resign as a sub-collection agent. Section 7.2. Duties of Collection Agent. (a) The Collection Agent shall take or cause to be taken all such action as may be necessary or advisable to collect each Receivable from time to time, all in accordance with this Agreement and all applicable laws, rules and regulations, with reasonable care and diligence, and in accordance with the Credit and Collection Policy. Each of the Borrower, the Agent and each Lender hereby appoints as its agent the Collection Agent, from time to time designated pursuant to Section 7.1, to enforce its respective rights and interests in and under the Affected Assets. The Collection Agent shall set aside for the accounts of the Borrower, the Agent, the Lenders and any other Person entitled thereto the amount of the Collections to which each is entitled in accordance with Article III. If the amount of the Collections held by the Collection Agent is not sufficient to pay the amount to which a group or class of the Lenders are entitled hereunder, the Collection Agent shall distribute such Collections as provided in Article III on a pro rata basis according to the respective claims of each of the members of such class or group. If instructed by the Agent, the Collection Agent shall segregate and deposit with the Agent the amount of Collections to which all Lenders are entitled pursuant to Article III, on the first (1st) Business Day following receipt by the Collection Agent of such Collections and the Agent shall distribute such amounts in accordance with Article III. So long as no Termination Event shall have occurred and be continuing, the Parent, while it is the -40- Collection Agent may, in accordance with the Credit and Collection Policy, extend the maturity of any Receivable (but not beyond thirty (30) days) and extend the maturity or adjust the Outstanding Balance of any Defaulted Receivable as the Collection Agent may determine to be appropriate to maximize Collections thereof; provided, however, that such extension or adjustment shall not alter the status of such Receivable as a Delinquent Receivable or a Defaulted Receivable or limit the rights of the Agent or the Lenders under any other provision of this Agreement. If a Termination Event has occurred and the Parent is still serving as Collection Agent, the Parent may make such extension or adjustment only upon the prior written approval of the Agent and the Lenders. The Borrower shall deliver to the Collection Agent and the Collection Agent shall hold in trust for the benefit of the Borrower, the Agent and the Lenders in accordance with their respective interests, all Records with respect to each Receivable. Notwithstanding anything to the contrary contained herein, the Agent shall have the absolute, unlimited and unconditional right to, and may, direct the Collection Agent (whether the Collection Agent is the Parent or any other Person) to commence or settle any legal action to enforce collection of any Receivable or to foreclose upon or repossess any Related Security; provided, however, that no such direction may be given unless either (i) a Potential Termination Event or a Termination Event has occurred and is continuing hereunder or (ii) such legal action, foreclosure or repossession shall affect a material portion of the Receivables. (b) The Collection Agent shall, as soon as practicable following receipt, turn over to the Borrower (i) that portion of all Collections which is not part of the Secured Interest, less, in the event the Parent is not the Collection Agent, all reasonable and appropriate out-of-pocket costs and expenses of such Collection Agent of servicing, collecting and administering the Receivables and (ii) the collections of any indebtedness that is not a Receivable; provided, however, that if the Parent is not the Collection Agent, the Collection Agent shall not be under any obligation to remit any such funds to the Borrower unless and until the Collection Agent has received from the Borrower evidence satisfactory to the Agent and the Collection Agent that the Borrower is entitled to such funds hereunder and under applicable law. The Collection Agent, if other than the Parent, shall as soon as practicable upon demand, deliver to the Borrower all records in its possession which evidence or relate to any indebtedness that is not a Receivable, and copies of Records in its possession which evidence or relate to any indebtedness that is a Receivable. (c) Notwithstanding anything to the contrary contained in this Article VII, the Collection Agent, if not the Parent, shall have no obligation to collect, enforce or take any other action described in this Article VII with respect to any indebtedness that is not a Receivable other than to deliver to the Borrower the collections and records with respect to any such indebtedness as described in Section 7.2(b). Section 7.3. Lock-Box Arrangements. The Agent is hereby authorized by all of the other parties hereto, and it is hereby agreed to by such other parties that the Agent shall be entitled, whether or not it is then serving as Collection Agent, to, at any time, do any or all of the following: (i) give notice to each Lock-Box Bank that the Agent is exercising its rights under the Lock-Box Letters, (ii) have the exclusive ownership and control of the Lock-Box Accounts (and all funds deposited, or to be deposited, therein) transferred to the Agent and to exercise exclusive dominion and control over the funds deposited therein, (iii) have the proceeds that are sent to the -41- respective Lock-Boxes be redirected pursuant to its instructions rather than deposited in the applicable Lock-Box Account, and (iv) take all other actions permitted under such Lock-Box Letter. If the Agent, at any time, takes the actions set forth in the preceding sentence, the Agent shall have exclusive ownership and control of the accounts and post office boxes to which the Obligors shall make payments and in which Collections may be concentrated and control of the proceeds (including Collections) of all Receivables and the Borrower agrees to take any action that the Agent may reasonably request to transfer such control. In case any authorized signatory of the Borrower whose signature shall appear on any Lock-Box Letter shall cease to have such authority before the delivery of such Lock-Box Letter, such signature shall nevertheless be valid and sufficient for all purposes as if such authority had remained in force at the time of such delivery. Any proceeds of Receivables received by the Borrower thereafter shall be sent immediately to the Agent. The parties hereto acknowledge that if at any time the Agent takes control of any Lock-Box Account, the Agent shall not have any rights to the funds therein in excess of the Aggregate Unpaids and the Agent shall distribute or cause to be distributed such funds in accordance with Section 7.2(b) and Article II; provided, however, that the Agent shall not be under any obligation to remit any such funds to the Borrower or any other Person unless and until the Agent has received from the Borrower or such Person evidence satisfactory to the Agent that the Borrower or such Person is entitled to such funds hereunder and under applicable law. In the event that the Agent shall then be receiving disbursements from a Lock-Box Account, whether because it is then the Collection Agent or because it has submitted Lock-Box Letters or for any other reason, the Agent shall promptly remit to the Borrower any amounts received by it from a Lock-Box Bank (i) upon its receipt of evidence reasonably satisfactory to it that such amounts do not constitute Collections with respect to Receivables or the proceeds of other Affected Assets and (ii) to the extent of the Borrower's residual interest, if any, therein after accounting for each Interest. In determining whether the Borrower has, in any instance, presented reasonably satisfactory evidence of its ownership of items that do not constitute Collections or the proceeds of other Affected Assets, the Agent shall be entitled to the presumption that, in respect of any collections or other items for which the remitting Obligor has not expressly indicated its intended application on the face of the payment item or the accompanying documentation, the appropriate application thereof shall be to Receivables of such Obligor, and thus subject to the Secured Interest hereunder, and, if there shall be more than one Receivable of such Obligor, to the oldest first. Section 7.4. Enforcement Rights. (a) At any time following the designation of a Collection Agent (other than the Borrower or any of the Borrower's Affiliates) pursuant to Section 7.1: (i) Upon the occurrence and during the continuance of a Termination Event, the Agent may direct the Obligors and the Lock-Box Banks that payment of all amounts payable under any Receivable be made directly to the Agent or its designee. The Agent may, and the Borrower shall at the Agent's request, withhold the identity of the Lenders from any Lock-Box Bank or Obligor. (ii) Upon the occurrence and during the continuance of a Termination Event, the Agent may instruct the Borrower to give, and upon such request the Borrower shall give, at the Borrower's expense notice of the Agent's ownership of the Secured Interest, -42- to each Obligor and direct that payments be made directly to the Agent or its designee. The Borrower shall, at the Agent's request, withhold the identity of the Lenders in any such notification. (iii) The Agent may request the Borrower to, and upon such request the Borrower shall, (A) assemble all of the Records, the Related Security and transfer, or license the use of, to the new Collection Agent all software necessary or desirable to collect the Receivables and the Related Security, and shall make the same available to the Agent or its designee at a place selected by the Agent, and (B) segregate all cash, checks and other instruments received by it from time to time constituting Collections with respect to the Receivables in a manner acceptable to the Agent and shall, promptly upon receipt, remit all such cash, checks and instruments, duly endorsed or with duly executed instruments of transfer, to the Agent or its designee. (b) The Borrower hereby authorizes, and irrevocably appoints, the Agent as its attorney-in-fact coupled with an interest, with full power of substitution and with full authority in the place and stead of the Borrower, to take any and all steps in the name of the Borrower and on behalf of the Borrower necessary or desirable, in the determination of the Agent, (i) to collect any and all amounts or portions thereof due under any and all Receivables or Related Security, including endorsing the name of the Borrower on checks and other instruments representing Collections and enforcing such Receivables, Related Security and the related Contracts and (ii) upon the occurrence and during the continuance of a Termination Event, to exercise any and all of the Borrower's rights and remedies under the Purchase Agreement and the Limited Guaranty. The Borrower's conferring of powers upon the Agent under this Section 7.4(b) shall not subject the Agent to any liability if any action taken by it shall prove to be inadequate or invalid, nor shall they confer any obligations upon the Agent in any manner whatsoever. (c) Neither the Agent nor the Lenders shall have any obligation to take any action or commence any proceedings to realize upon any Receivable (including any Defaulted Receivables) or to enforce any of their respective rights, powers, privileges or remedies with respect thereto. Section 7.5. Responsibilities of the Borrower. (a) Anything herein to the contrary notwithstanding, the Borrower shall, and shall cause each Originator to, (i) perform all of its obligations under the Contracts related to the Receivables to the same extent as if interests in such Receivables had not been transferred hereunder and the exercise by the Agent or any Lender of its rights hereunder shall not relieve the Borrower from such obligations, and (ii) pay when due any and all Taxes, including any and all sales Taxes payable in connection with the Receivables and their creation and satisfaction. The Agent and the Lenders shall not have any obligation or liability with respect to any Receivable, any Related Security or any related Contract, nor shall any of them be obligated to perform any of the obligations of the Borrower under any of the foregoing. (b) The Borrower irrevocably agrees that if at any time it shall cease to be the Collection Agent, it shall act (if the then current Collection Agent so requests) as the data-processing agent of the Collection Agent and, in such capacity, the Borrower shall conduct the -43- data-processing functions of the administration of the Receivables and the Collections in substantially the same way that the Borrower conducted such data-processing functions while it acted as the Collection Agent. Section 7.6. Collection Agent Fee. On or prior to the twenty-fifth (25th) day of each month, the Borrower shall pay to the Collection Agent the Collection Agent Fee with respect to the immediately preceding month as compensation for its services. The Collection Agent may apply only Collections that are not part of the Secured Interest (or that have been reinvested pursuant to Section 2.1(d)) to the payment of the Collection Agent Fee. The Agent may, in its sole and absolute discretion with the prior written consent of the Required Banks and Windmill, pay all or any portion of the Collection Agent Fee to the Collection Agent from Collections that are part of the Secured Interest. Any Collections so applied by the Agent pursuant to the immediately preceding sentence shall not be distributed to the Lenders or to any other Person pursuant to Section 3.3. Section 7.7. Indemnities by the Collection Agent. Without limiting any other rights any Person may have hereunder or under applicable law, the Collection Agent hereby indemnifies and holds harmless the Agent and each Lender and their respective officers, directors, agents and employees (each an "Indemnified Party") from and against any and all damages, losses, claims, liabilities, penalties, Taxes, costs and expenses (including attorneys' fees and court costs) (all of the foregoing collectively, the "Indemnified Losses") at any time imposed on or incurred by any Indemnified Party arising out of or otherwise relating to: (i) any written representation or warranty made by the Collection Agent (or any employee or agent of the Collection Agent) in this Agreement, any other Transaction Document, any Periodic Report or any other information or report delivered by the Collection Agent pursuant hereto, which shall have been false or incorrect in any material respect when made; (ii) the failure by the Collection Agent to comply with any applicable law, rule or regulation related to any Receivable, or the nonconformity of any Receivable with any such applicable law, rule or regulation; (iii) any loss of a perfected security interest (or in the priority of such security interest) as a result of any commingling by the Collection Agent of funds to which the Agent or any Lender is entitled hereunder with any other funds; or (iv) any failure of the Collection Agent, to perform its duties or obligations in accordance with the provisions of this Agreement or any other Transaction Document to which the Collection Agent is a party; whether arising by reason of the acts to be performed by the Collection Agent hereunder or otherwise, excluding only Indemnified Losses to the extent (a) such Indemnified Losses resulted solely from negligence or willful misconduct of the Indemnified Party seeking indemnification, (b) solely due to the credit risk of the Obligor and for which reimbursement would constitute recourse to the Collection Agent for uncollectible Receivables, (c) such Indemnified Losses -44- include Taxes on, or measured by, the overall net income of the Agent or any Lender computed in accordance with the Intended Characterization, (d) the applicable Originator is the plaintiff and the Indemnified Party is the defendant unless such Indemnified Party prevails in such legal action or (e) such Indemnified Losses arise from events occurring after another Person has been designated as a successor Collection Agent; provided, however, that nothing contained in this sentence shall limit the liability of the Collection Agent or limit the recourse of the Agent and each Lender to the Collection Agent for any amounts otherwise specifically provided to be paid by the Collection Agent hereunder. ARTICLE VIII TERMINATION EVENTS Section 8.1. Termination Events. The occurrence of any one or more of the following events shall constitute a Termination Event: (a) (i) the Collection Agent (or any sub-collection agent) shall fail to perform or observe any term, covenant or agreement hereunder (other than as referred to in clause (ii) of this Section 8.1(a)) and such failure shall remain unremedied for three (3) Business Days or (ii) either the Collection Agent or the Borrower shall fail to make any payment or deposit to be made by it hereunder when due; or (b) the Borrower shall default in the observance or performance of any agreement contained in Sections 5.2 or 6.2 or the Parent shall default in the observance or performance of any financial covenant set forth in the Indemnity Agreement; or (c) any representation, warranty, certification or statement made by any Borg-Warner Entity in this Agreement or in any other Transaction Document shall prove to have been incorrect in any material respect when made or deemed made; provided, however, that, with respect to any representation, warranty, certification or statement made pursuant to Section 4.1(p) which shall prove to have been incorrect in any material respect when made or deemed made, a Termination Event shall only occur if such incorrect representation, warranty, certification or statement remains incorrect for more than one (1) day; or (d) any Borg-Warner Entity shall default in the performance of any undertaking hereunder or under any other Transaction Document (other than those covered by Section 7.1(a) or 7.1(b)) and such default shall continue for ten (10) days; or (e) failure of any Borg-Warner Entity or any of their respective Subsidiaries to pay any Indebtedness when due (except for any such payments on account of any such Indebtedness in any aggregate principal amount at any one time outstanding of up to Ten Million Dollars ($10,000,000)); or the default by any Borg-Warner Entity or any of their respective Subsidiaries in the performance of any term, provision or condition contained in any agreement under which any Indebtedness (except for any such Indebtedness in an aggregate principal amount at any one time outstanding of up to Ten Million Dollars ($10,000,000)) was created or is governed, the effect of which is to cause such -45- Indebtedness to become due prior to its stated maturity; or any Indebtedness shall be declared to be due and payable or required to be prepaid (other than by a regularly scheduled payment) prior to the date of maturity thereof; or there shall occur a default, termination event or similar event by or with respect to any Borg-Warner Entity or any of their respective Subsidiaries under any agreement providing for the sale, transfer or conveyance by any Borg-Warner Entity or any of their respective Subsidiaries of any of its financial assets; or (f) (i) any Borg-Warner Entity or any of their respective Subsidiaries shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against any Borg-Warner Entity or any of their respective Subsidiaries seeking to adjudicate it bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or any substantial part of its property which remains unvacated or unstayed for a period of 30 days or (ii) any Borg-Warner Entity or any of their respective Subsidiaries shall take any corporate action to authorize any of the actions set forth in clause (i) above in this Section 8.1(f); or (g) any Borg-Warner Entity or any of their respective Subsidiaries shall generally not pay its debts as such debts become due or shall admit in writing its inability to pay its debts generally; or (h) the Delinquency Ratio at any time shall exceed six and one half percent (6.5%), the Default Ratio at any time shall exceed four percent (4%), or the Loss-to-Liquidation Ratio at the end of any calendar month measured for the three (3) month period then ending shall exceed one percent (1%); or (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 (j) there shall occur a material adverse change in the financial condition, business, operations or prospects of the Parent and its Subsidiaries taken as a whole or in the Borrower, or in the ability of any Borg-Warner Entity to perform its obligations under any Transaction Document to which it is (or is stated to be) a party, including, but not limited to, the collection of the Receivables or in the collectibility of the Receivables; or (k) any Borg-Warner Entity shall, directly or indirectly, disaffirm or contest in any manner the effectiveness, validity, binding nature or enforceability of any of the Transaction Documents, or any of the Transaction Documents shall fail to be the binding and enforceable obligation of any Borg-Warner Entity that is (or is stated to be) a party thereto; or -46- (l) the Parent shall cease to own or control, directly or indirectly, one hundred percent (100%) of the issued and outstanding voting stock of the Borrower and each Originator or the Parent shall enter into any agreement or take any action that would result in such event; or (m) individuals who constitute the board of directors of the Parent on the Effective Date (or individuals whose election or nomination for election was approved by a vote of at least seventy-five percent (75%) of the directors then in office who either were directors on the Effective Date or whose election was previously so approved) cease for any reason to constitute at least a majority of the board of directors of the Parent at any time; or (n) any Borg-Warner Entity shall (i) sell, convey, transfer or otherwise dispose of all or any substantial part of its assets in a single transaction or in a series of related transactions or (ii) enter into any transaction of merger or consolidation (other than a merger or consolidation with respect to any Originator in which such Originator is the surviving Person); or (o) the financial condition of the Parent shall be materially different than the most-recent written projections of the financial condition of the Parent given by any Borg-Warner Entity to the Agent on or prior to the date hereof; or (p) there shall be any amendment to the certificate of incorporation of the Borrower without the prior written consent of the Agent and the Required Banks; or (q) the Purchase Agreement shall fail to vest and maintain vested in the Borrower a valid first priority perfected ownership interest in the receivables (other than receivables the Obligor of which is a government or governmental subdivision or agency to the extent that the transfer thereof requires compliance with any federal laws of the USA) and other assets purported to be sold thereunder; or (r) this Agreement shall fail to vest and maintain vested in the Agent for the benefit of the Lenders a valid first priority perfected interest in the Secured Interest. If (x) such event is a Termination Event described in Section 8.1(f) with respect to any Borg-Warner Entity or any of their respective Subsidiaries, then automatically all of the Bank Commitments to purchase Bank Interests shall thereupon terminate without notice of any kind, which is hereby waived by the Borrower, and (y) such event is any other Termination Event, then the Agent may, and at the direction of the Required Banks shall, by notice to the Borrower terminate all of the Bank Commitments to purchase Bank Interests. Upon the termination of all of the Bank Commitments to purchase Bank Interests, whether pursuant to this Article VIII or otherwise, and the collection or other final resolution of the Secured Interest such that the Aggregate Unpaids and the Loan Amount in respect of each Lender shall have been reduced to zero, the Agent shall, at the expense of the Borrower, execute such UCC termination statements and such other documents as the Borrower may reasonably request to evidence the termination of the Secured Interest. It is expressly understood that the termination of the Bank Commitments -47- under this Section 8.1 shall relate solely to the commitment of the Banks to make purchases from the Borrower. No termination of the Bank Commitments under this Section 8.1 shall waive, release or otherwise affect the commitment of the Banks to make purchases from Windmill under Article III. ARTICLE IX INDEMNIFICATION Section 9.1. Indemnities by the Borrower. Without limiting any other rights that the Agent or any Lender may have hereunder or under applicable law, the Borrower hereby agrees to indemnify the Agent and each Lender and its respective officers, directors, agents and employees (each an "Indemnified Party") from and against any and all damages, losses, claims, liabilities, costs and expenses, including reasonable attorneys' fees (which such attorneys may be employees of the Agent, any Lender, or any assignee, if any) and disbursements (all of the foregoing being collectively referred to as "Indemnified Losses") awarded against or incurred by any of them arising out of or as a result of this Agreement or any other Transaction Document or the acquisition, either directly or indirectly, by the Agent, for the benefit of the Lenders, of the Secured Interest or in respect of any action taken by the Borrower or any Originator (whether acting as Collection Agent or otherwise) relative to any Receivable, excluding, however, (i) Indemnified Losses to the extent final judgment of a court of competent jurisdiction holds such Indemnified Losses resulted solely from gross negligence or willful misconduct on the part of the Indemnified Party seeking indemnification or (ii) Indemnified Losses to the extent the same include losses in respect of uncollectible Receivables solely due to the credit risk of the Obligor and reimbursement therefor would constitute recourse to the Borrower or the Collection Agent for the amount of uncollectible Receivables; provided, however, that nothing contained in this sentence shall limit the liability of the Borrower or the Collection Agent or limit the recourse of the Agent and each Lender to the Borrower or the Collection Agent for any amounts otherwise specifically provided to be paid by the Borrower or the Collection Agent under the terms of this Agreement, including under the terms of the next succeeding sentence. Without limiting the generality of the foregoing indemnification, the Borrower shall indemnify the Agent and each Lender for Indemnified Losses (including losses in respect of uncollectible Receivables, regardless of whether reimbursement therefor would constitute recourse to the Borrower or the Collection Agent) relating to or resulting from: (a) the transfer to the Agent, for the benefit of the Lenders, of an undivided percentage interest in any Receivable other than an Eligible Receivable, if, on the date of the most recent transfer of any interest in a Receivable or a transfer of an Interest from one Lender to another Lender, the product of the Secured Interest multiplied by the Net Receivables Balance was less than the Coverage Amount; (b) any representation or warranty made by any Borg-Warner Entity or the Collection Agent (or any officers of any Borg-Warner Entity or the Collection Agent) under or in connection with any of the Transaction Documents, including any Periodic Report or any other information or report delivered by any Borg-Warner Entity or the Collection Agent pursuant hereto or thereto, that shall have been false or incorrect in any material respect when made or deemed made; -48- (c) any alleged failure by the Borrower, the Collection Agent (if the Collection Agent is the Borrower or any Affiliate of the Borrower), any Originator or any other Person (acting for, on behalf of, or together with, the Borrower or the Collection Agent (if the Collection Agent is the Borrower or any Affiliate of the Borrower)) to comply with any applicable law, rule or regulation with respect to any Receivable, or the collectability thereof, or any Contract related thereto, or imposed by any governmental or regulatory body, including any requirements of licensing, registration, authorizations, consents and approvals necessary or desirable to enter into any Contract or create any Receivable or the transfer to the Agent for the benefit of the Lenders hereunder and including laws, rules and regulations relating to usury, disclosures, truth in lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices, trade practices, consumer protection and privacy, or any of the foregoing which may affect the enforceability of any Receivable, or the nonconformity of any Receivable or Contract included therein or transfer to the Agent, for the benefit of the Lenders, with any such applicable law, rule or regulation; (d) the failure of the Borrower to vest and maintain vested in the Agent, for the benefit of the Lenders, a perfected interest in the Secured Interest and the property conveyed pursuant to Section 2.8, free and clear of any Adverse Claim; (e) the failure of the Borrower to vest and maintain vested in the Agent, for the benefit of the Lenders, a perfected security interest in all of the property listed in Sections 2.1(d) and 2.8, free and clear of any Adverse Claim; (f) the failure of any Originator to vest and maintain vested in the Borrower a perfected ownership interest in and to the Purchased Assets free and clear of any Adverse Claim; (g) the failure of the Borrower, the Collection Agent, any Originator or any sub-collection agent to file, or any delay in filing, financing statements or other similar instruments or documents under the UCC of any applicable jurisdiction or other applicable laws with respect to the Filing Assets; (h) any commingling of funds to which the Agent or any Lender is entitled hereunder with any other funds; (i) failure of any Lock-Box Bank to comply with the terms of the applicable Lock-Box Letter; (j) any dispute, claim, offset or defense (other than discharge in bankruptcy of the Obligor) of the Obligor to the payment of any Receivable included in the Affected Assets (including a defense based on such Receivable or the Contract relating to such Receivable not being a legal, valid and binding obligation of such Obligor enforceable against it in accordance with its terms), or any other claim resulting from the sale or lease of goods or the rendering of services related to such Receivable or the furnishing or failure to furnish any such goods or services; -49- (k) any failure of any Borg-Warner Entity to perform its duties or obligations in accordance with the provisions of this Agreement and each of the other Transaction Documents to which such Borg-Warner Entity is (or is stated to be) a party; (1) any action taken by the Agent as attorney-in-fact for the Borrower pursuant to Section 7.4(b); or (m) any environmental liability claim, products liability claim or personal injury or property damage suit or other similar or related claim or action of whatever sort, whether sounding in tort, contract or other legal theory, arising out of or in connection with any Receivable or the Related Security therefor or any other suit, claim or action of whatever sort relating to any of the Transaction Documents; provided, however, that if any Lender enters into agreements for the transfer of interests in receivables from one or more other Persons ("Other Borrowers"), such Lender shall allocate such Indemnified Losses that are attributable to the Borrower and to the Other Borrowers to the Borrower and to each Other Borrower; and provided, further, that if such Indemnified Losses are attributable to the Borrower and not attributable to any Other Borrower, the Borrower shall be solely liable for such Indemnified Losses, or if such Indemnified Losses are attributable to Other Borrowers and not attributable to the Borrower, such Other Borrowers shall be solely liable for such Indemnified Losses. Section 9.2. Tax Indemnification and Characterization. (a) The Borrower hereby agrees to pay, and to indemnify, protect, save and hold harmless, on an after-Tax basis, the Agent and each Lender from and against any and all (i) Taxes that may at any time be imposed or asserted by reason of, in connection with or in respect of the Receivables or any transactions contemplated hereby or by any of the Transaction Documents or the receipt of payment under this Section 9.2, whether imposed on the Agent, any Lender, the Borrower, the Receivables, any other corporation or entity or otherwise, and whether arising by reason of the acts to be performed by the Borrower hereunder or otherwise and (ii) damages, losses, claims, liabilities and related costs and expenses of the Agent and each Lender in connection with the imposition or assertion of any Tax described in clause (i) above; provided, however, this Section 9.2(a) shall not apply with respect to Taxes on or measured by the overall net income of the Agent or any Lender ("Income Taxes") to the extent that the computation of such Income Taxes is consistent with the Intended Characterization. (b) In addition to and not in limitation of the indemnifications contained in Section 9.2(a), the Borrower hereby agrees to pay to, and to indemnify, protect, save and hold harmless, the Agent and each Lender, on an after-Tax basis from and against, (i) the excess of (x) the aggregate state and local Taxes on or measured by net income or profits (and Taxes in lieu thereof) payable by the Agent and any Lender in connection with or in respect of the Receivables or any transactions contemplated hereby or the receipt of payment under this Section 9.2, over (y) the amount of such state and local Income Taxes that would have been payable on the Agent's and any Lender's net income in connection with or in respect of the Receivables or any transactions contemplated hereby, had the entire amount of such income been subject to Tax in the jurisdiction in which the Agent's and any Lender's respective principal executive office is -50- located, and only in such jurisdiction and (ii) any and all damages, losses, claims, liabilities and related costs and expenses of the Agent and each Lender in connection with clause (i) above. (c) It is the intention of the parties hereto that for the purposes of all Taxes, the transactions with respect to the Borrower, the Agent and the Lenders contemplated hereby shall be treated as a loan by the Agent (on behalf of the Lenders) or the Lenders to the Borrower that is secured by the Receivables (the "Intended Characterization"). The parties hereby agree to report such transactions for the purposes of all Taxes, and otherwise to act for the purposes of all Taxes, in a manner consistent with the Intended Characterization. (d) All payments due pursuant to this Section 9.2 shall be paid no later than ten (10) days after demand for such payment has been made by the Agent or any Lender. Without in any way limiting the Agent's and any Lender's remedies, any such amount not paid when due shall bear interest at a rate equal to the ABN AMRO Prime Rate plus two percent (2%) per annum. Any claim that the Agent or any Lender makes for payment pursuant to this Section 9.2 shall be accompanied by a statement of the Agent's or such Lender's accountants which attests that the claim has been computed in conformity with the requirements of this Section 9.2. Section 9.3. Increased Cost and Reduced Return. If after the date hereof, the adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Windmill Funding Source, the Agent or any Lender with any request or directive (whether or not having the force of law) of any such Governmental Authority, central bank or comparable agency (a "Regulatory Change"): (i) shall subject any Windmill Funding Source, the Agent or any Lender to any charge or withholding on or with respect to the applicable Funding Agreement or this Agreement in connection with the Secured Interest or other property conveyed hereunder or funds advanced in connection therewith, or such Person's obligations under the applicable Funding Agreement or this Agreement, as the case may be, or shall change the basis of taxation of payments to any Windmill Funding Source, the Agent or any Lender of any amounts payable under the applicable Funding Agreement or this Agreement, as the case may be (except for changes in the rate of Tax on the overall net income of such Windmill Funding Source, the Agent or any Lender), (ii) shall impose, modify or deem applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of any Windmill Funding Source, the Agent or any Lender, or credit extended by such Person or (iii) shall impose any other condition, and the result of any of the foregoing is to impose a cost on or increase the cost to any Windmill Funding Source, the Agent or any Lender of its commitment under the applicable Funding Agreement or hereunder, as the case may be, or purchasing, maintaining or funding of any property interests under the applicable Funding Agreement or of the Secured Interest or other property interests hereunder, as the case may be, or to reduce the amount of any sum received or receivable by any Windmill Funding Source, the Agent or any Lender under this Agreement or under the applicable Funding Agreement, as the case may be, or to require any payment calculated by reference to the amount of interests or loans held or interest received by it, then, upon demand by the Agent or any Lender, the Borrower shall pay to the Agent or such Lender such additional amount or amounts as will compensate the Agent or such -51- Lender for such increased cost or reduction or, in the case of Windmill, will enable Windmill to compensate any Windmill Funding Source for such increased cost or reduction. (b) If after the date hereof, any Windmill Funding Source, the Agent or any Lender shall have determined that any Regulatory Change, including any such Regulatory Change that results in or results from or otherwise relates to any transaction in connection with any Funding Agreement or this Agreement or any commitment thereunder or hereunder being classified as a highly leveraged transaction for regulatory or other purposes, has or would have the effect of reducing the rate of return on such Windmill Funding Source's, the Agent's or such Lender's capital as a consequence of such Windmill Funding Source's, the Agent's or such Lender's obligations or commitment under the applicable Funding Agreement or this Agreement, to a level below that which such Windmill Funding Source, the Agent or such Lender could have achieved but for such Regulatory Change (taking into consideration such Windmill Funding Source's, the Agent's or such Lender's policies with respect to capital adequacy), the from time to time, upon demand by the Agent or any Lender, the Borrower shall pay to the Agent or such Lender such additional amount or amounts as will compensate the Agent or such Lender for such reduction or, in the case of Windmill, will enable Windmill to compensate any Windmill Funding Source for such reduction. (c) Anything in this Section 9.3 to the contrary notwithstanding, if the Agent or any Lender enters into agreements with Other Borrowers, the Agent (upon consultation with any applicable Lender) shall allocate the liability for any amounts under this Section 9.3 ("Section 9.3 Costs") to the Borrower and to each Other Borrower; provided, however, that if such Section 9.3 Costs are attributable to the Borrower and not attributable to any Other Borrower, the Borrower shall be solely liable for such Section 9.3 Costs or if such Section 9.3 Costs are attributable to Other Borrowers and not attributable to the Borrower, such Other Borrowers shall be solely liable for such Section 9.3 Costs. Section 9.4. Other Costs and Expenses. The Borrower shall pay to the Agent and Windmill on demand all costs and expenses in connection with the preparation, execution, delivery and administration of this Agreement and the other Transaction Documents, including reasonable fees and out-of-pocket expenses of legal counsel for the Agent and Windmill (which such counsel may be employees of the Agent or Windmill) with respect thereto and with respect to advising the Agent, Windmill and any financial institution providing funding to Windmill as to its rights and remedies under this Agreement, any other Transaction Document or any related funding agreement and all costs and expenses, if any, including reasonable counsel fees and expenses of the Agent, each Lender and each such financial institution in connection with the enforcement of this Agreement, the other Transaction Documents and any such funding agreement and in connection with any restructuring or workout of this Agreement or such other Transaction Documents or the administration of this Agreement and the other Transaction Documents following a Termination Event; provided, however, that the Borrower shall have no obligation to pay any such amounts to the extent such amounts are expressly stated in the Fee Letter not to be payable by the Borrower. The Borrower shall reimburse the Agent for the cost of the Agent's auditors (which such auditors may be employees of the Agent) auditing the books, -52- records and procedures of the Borrower. The Borrower shall reimburse Windmill for any amounts Windmill must pay to any Windmill Funding Source pursuant to any Funding Agreement on account of any Tax described in Section 9.2 and applicable to such Windmill Funding Source. The Borrower shall reimburse Windmill on demand for any and all issuing and paying agents' agent fees and rating agency fees and commissions of placement agents and commercial paper dealers in respect of commercial paper notes issued by Windmill to fund any CP Tranche hereunder. The Borrower shall reimburse Windmill on demand for all other reasonable costs and expenses incurred by Windmill or any shareholder of Windmill ("Other Costs") including the cost of auditing Windmill's books by certified public accountants, the cost of the Ratings, and the reasonable fees and out-of-pocket expenses of counsel for Windmill or any counsel for any shareholder of Windmill with respect to advising Windmill or such shareholder as to matters relating to Windmill's operation; provided, however, that if Windmill enters into agreement with Other Borrowers, Windmill shall allocate the liability for such Other Costs to the Borrower and to each Other Borrower; and provided, further, that if such Other Costs are attributable to the Borrower and not attributable to any Other Borrower, the Borrower shall be solely liable for such Other Costs, or if such Other Costs are attributable to Other Borrowers and not attributable to the Borrower, such Other Borrowers shall be solely liable for such Other Costs. Section 9.5. Withholding Taxes. (a) All payments made by the Borrower under this Agreement shall be made free and clear of, and without reduction or withholding for or on account of, any present or future Taxes, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority or other taxing authority excluding, in the case of the Agent and each Lender, net income taxes imposed on the Agent or such Lender by the jurisdiction under the laws of which the Agent or such Lender is organized or any political subdivision or taxing authority thereof or therein (such non-excluded Taxes being hereinafter called "Non-Excluded Taxes"). If any Non-Excluded Taxes are required to be withheld from any amounts payable to the Agent or any Lender hereunder, the amounts so payable to the Agent or such Lender shall be increased to the extent necessary to yield to the Agent or such Lender (after payment of all Taxes) all such amounts payable hereunder at the rates or in the amounts specified in this Agreement. Whenever any Non-Excluded Taxes are payable by the Borrower, as promptly as possible thereafter the Borrower shall send to the Agent for its own account or for the account of such Lender, as the case may be, a certified copy of an original official receipt received by the Borrower showing payment thereof. If the Borrower fails to pay any Non-Excluded Taxes when due to the appropriate taxing authority or fails to remit to the Agent the required documentary evidence, the Borrower shall indemnify the Agent and the Lenders for such Non-Excluded Taxes and any incremental Taxes that may become payable by the Agent or any Lender as a result of any such failure. The agreements in this Section 9.5(a) shall survive the termination of this Agreement. (b) At least five (5) Business Days prior to the first (1st) date on which any payments, including Interest or fees, are payable under this Agreement for the account of any Lender, each Lender (including each Purchasing Bank that becomes party to this Agreement pursuant to Section 11.6(c)) that is not incorporated under the laws of the United states of America, or a state thereof, agrees that it will deliver to each of the Borrower and the Agent two (2) duly completed copies of (i) United States Internal Revenue Service Form W-8BEN or W-8ECI, certifying in -53- either case that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, and (ii) United States Internal Revenue Service Form W-8 or W-9 or successor applicable form, as the case may be, to establish an exemption from United States backup withholding tax. Each Lender which so delivers a Form W-8BEN or W-8ECI and Form W-8 or W-9 further undertakes to deliver to each of the Borrower and the Agent two (2) additional copies of such form (or a successor form) on or before the date that such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent forms so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by the Borrower or the Agent, in each case certifying that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, unless an event (including any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form with respect to it and such Lender advises the Borrower and the Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax, and in the case of Form W-8 or W-9, establish an exemption from United States backup withholding tax. If a Lender that is not incorporated under the laws of the United States of America, or a state thereof, does not deliver the forms described in this Section 9.5(b), the Borrower or the Agent shall withhold United States federal income taxes from any payments made under this Agreement at the applicable statutory rate. Each Lender agrees to indemnify and hold the Borrower and the Agent harmless for any United States federal income taxes, penalties, interest and other costs and losses incurred or payable by the Borrower or the Agent as a result of either (i) such Lender's failure to submit any form that it is required to provide pursuant to this Section 9.5(b) or (ii) the Borrower's or Agent's reliance on any such form that such Lender has provided pursuant to this Section 9.5(b). Section 9.6. Allocations. All allocations to be made pursuant to the foregoing provisions of this Article IX shall be made by the Agent in its reasonable discretion and shall be binding on the Borrower and each Lender. Upon the reasonable request of the Borrower, the Agent shall provide the Borrower with the basis of any calculations made pursuant to the foregoing provisions of this Article IX (or, to the extent that the Agent determines in its sole discretion that such calculations do not contain proprietary information, such calculations) which, in the absence of manifest error, shall be conclusive and binding for all purposes. ARTICLE X THE AGENT Section 10.1. Appointment. Each Lender hereby irrevocably designates and appoints ABN AMRO Bank N.V. as Agent hereunder, and authorizes the Agent to take such action on its behalf under the provisions of this Agreement and to exercise such powers and perform such duties as are expressly delegated to the Agent by the terms of this Agreement, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement, the Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities on the part of the Agent -54- shall be read into this Agreement or otherwise exist against the Agent. The provisions of this Article X are solely for the benefit of the Agent and the Lenders and the Borrower shall not have any rights as a third-party beneficiary or otherwise under this Article X. In performing its functions and duties, the Agent shall act solely as the agent of the Lenders and does not assume nor shall be deemed to have assumed any obligation or relationship of trust or agency with or for the Borrower or any of its respective successors and assigns. The Agent shall not be required to expend its funds if repayment or adequate indemnity is not assured to it under terms and conditions acceptable to the Agent. The Agent shall hold that portion of the Secured Interest consisting of the Interest of a Lender for the benefit of such Lender. Section 10.2. Delegation of Duties. The Agent may execute any of its duties under this Agreement by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. Section 10.3. Exculpatory Provisions. Neither the Agent nor any of its directors, officers, agents or employees shall be (i) liable for any action lawfully taken or omitted to be taken by it or them or any Person described in Section 10.2 under, or in connection with, this Agreement (except for its, their or such Person's own gross negligence or willful misconduct), or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by the Borrower contained in this Agreement, any other Transaction Document or in any certificate, report, statement or other document referred to or provided for in, or received under or in connection with, this Agreement or any other Transaction Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement, any other Transaction Document or any other document furnished in connection herewith or for any failure of the Borrower to perform its obligations or for the satisfaction of any condition specified in Article V, except receipt of items required to be delivered to the Agent. The Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements or covenants contained in, or conditions of, this Agreement, or to inspect the properties, books or records of the Borrower. This Section 10.3 is intended solely to govern the relationship between the Agent, on the one hand, and the Lenders, on the other. Section 10.4. Reliance by Agent. The Agent shall in all cases be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, facsimile, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person and upon advice and statements of legal counsel (including counsel to the Borrower), independent accountants and other experts selected by the Agent. The Agent shall in all cases be fully justified in failing or refusing to take any action under this Agreement or any other document furnished in connection herewith unless it shall first receive such advice or concurrence of Windmill, any Bank, the Required Banks or all of the Lenders, as applicable, as it deems appropriate or it shall first be indemnified to its satisfaction by the Banks against any and all liability, cost and expense which may be incurred by it by reason of taking or continuing to take any such action (excluding any such liability, cost or expense which shall have been incurred by the Agent as a result of its own gross negligence or willful -55- misconduct in the taking of any such action). The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement in accordance with a request of Windmill, any Bank, the Required Banks or all of the Lenders, as applicable, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders. Section 10.5. Notice of Termination. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Termination Event or Potential Termination Event unless the Agent has received notice from any Lender or the Borrower referring to this Agreement, stating that a Termination Event or Potential Termination Event has occurred hereunder and describing such Termination Event or Potential Termination Event. In the event that the Agent receives such a notice, the Agent shall promptly give notice thereof to each Lender and at all times prior to the Windmill Termination Date and thereafter until the Windmill Interest is reduced to zero, to each CP Dealer and each Rating Agency. The Agent shall take such action with respect to such Termination Event or Potential Termination Event as shall be directed by Windmill and the Required Banks (or, if applicable, all of the Lenders); provided, however, that unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Termination Event or Potential Termination Event as the Agent shall deem advisable and in the best interests of the Lenders. Section 10.6. Non-Reliance on Agent and Other Lenders. Each Lender expressly acknowledges that neither the Agent, nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates has made any representations or warranties to it and that no act by the Agent hereafter taken, including any review of the affairs of the Borrower, shall be deemed to constitute any representation or warranty by the Agent. Each Lender represents and warrants to the Agent that it has, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, prospects, financial and other conditions and creditworthiness of the Borrower, the other Borg-Warner Entities and the Affected Assets and made its own decision to enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under any Transaction Document, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, prospects, financial and other condition and creditworthiness of the Borg-Warner Entities. The Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, prospects, financial and other condition or creditworthiness of the Borrower or any other Person which may come into the possession of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates other than the Periodic Reports provided by the Borrower or the Collection Agent, information received by the Agent pursuant to Section 6.1(a) or 6.1(b) and such additional information as a Lender may reasonably request and which the Agent has obtained on any inspection conducted under Section 6.1(e). Section 10.7. Indemnification. The Banks agree to indemnify, defend, protect, save and hold harmless the Agent and its officers, directors, employees, representatives and agents (to the -56- extent not reimbursed by the Borrower and without limiting the obligation of the Borrower), ratably according to the percentage its Bank Commitment is of the Aggregate Commitment, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, court costs, settlements, expenses or disbursements of any kind or nature whatsoever (including the fees and disbursements of counsel for the Agent or such Person in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not the Agent or such Person shall be designated a party thereto, which counsel may include employees of the Agent or such Person) that may at any time be imposed on, incurred by or asserted against the Agent or such Person as a result of, or arising out of, or in any way related to or by reason of, any of the transactions contemplated under any of the Transaction Documents or the execution, delivery or performance of the Transaction Documents or any other document furnished in connection herewith (but excluding any such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, court costs, settlements, expenses or disbursements resulting solely from the gross negligence or willful misconduct of the Agent or such Person as finally determined by a court of competent jurisdiction). The obligations of the Banks under this Section 10.7 shall survive the termination of this Agreement. Section 10.8. Agent in Its Individual Capacity. The Agent and its affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Borrower or any Affiliate of the Borrower as though the Agent were not the Agent. With respect to the acquisition of the Secured Interest, the Agent shall have the same rights and powers under this Agreement as any Bank and may exercise the same as though it were not the Agent, and the terms Bank and Lender (as the case may be) shall include the Agent in its individual capacity. Moreover, the Agent, in its capacity as Agent, shall be considered a Lender for all purposes and benefits hereunder to the extent that it has advanced funds pursuant to Article II on behalf of any Lender and has not been reimbursed therefor by the Borrower or such Lender. Section 10.9. Successor Agent. The Agent may, upon at least five (5) days written notice to the Borrower and each of the Lenders, and the Agent will, upon the direction of all of the Lenders (for purposes of this reference to Lenders, Lenders shall not include the Agent, in its individual capacity, nor any Lender that is an Affiliate of the then Agent) and with the consent of the Borrower (which consent shall not be unreasonably withheld) resign as Agent; provided, however, that the resignation of the Agent may not become effective until a successor agent is appointed and has succeeded to the rights, powers and duties of the Agent as provided in this Section 10.9. If the Agent shall resign as Agent, then Windmill and the Required Banks, during such notice period, shall, with the consent of the Borrower (which consent shall be unreasonably withheld), appoint from among the Banks a successor agent, whereupon such successor agent shall succeed to the rights, powers and duties of the Agent and the term "Agent" shall mean such successor agent, effective upon its appointment, and the former Agent's rights, powers and duties as Agent shall be terminated, without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article X and Article IX shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent. Section 10.10. ABN AMRO Conflict Waiver. ABN AMRO, as agent for Windmill and subagent of the Management Company, acts as Administrator for Windmill, acts as Referral -57- Agent, provides other backup credit facilities for Windmill, and may provide other services or facilities from time to time (the "ABN AMRO Roles"). Without limiting the generality of Section 10.8, each Lender acknowledges and consents to any and all ABN AMRO Roles, waives any objections it may have to any actual or potential conflict of interest caused by ABN AMRO's acting as Agent and acting as or maintaining any of the ABN AMRO Roles, and agrees that in connection with any ABN AMRO Role, ABN AMRO may take, or refrain from taking, any action which it in its discretion deems appropriate, including in its role as administrative agent for Windmill the giving of notice to the Agent of mandatory or voluntary purchases pursuant to Article III. Nothing contained in this Article X shall limit or alter the duties and obligations that ABN AMRO otherwise owes to Windmill in its role as agent for Windmill under any other agreement or arrangement. Section 10.11. Certain Actions. Upon the direction of Windmill (at any time the Windmill Loan Amount is greater than zero), the Required Banks, the Agent shall make or give any requests, designations, instructions, directions or notices or exercise any other rights it is otherwise entitled to make, give or exercise; provided, however, that the Agent, unless it has obtained the written consent of the Required Banks, shall not give its consent under Section 6.1, 4.1(i) or 6.2(b). Upon the request of any Lender, the Agent shall (i) request information pursuant to Section 6.1(a) or 6.1(e) and (ii) exercise the rights described in Section 6.1(e) (and give any notice required to exercise the same). Following a Termination Event, the Agent promptly shall give a written notice to the Borrower specifying the Bank Termination Date if requested to do so by the Required Banks, whereupon the Bank Commitments shall terminate. Promptly upon receipt of any notice or information received by the Agent pursuant to Section 6.1(b) or 6.1(e), the Agent will deliver copies thereof to each of the Lenders and at all times prior to the Windmill Termination Date and at all times thereafter until the Windmill Interest is reduced to zero, to each CP Dealer and each Rating Agency. ARTICLE XI MISCELLANEOUS Section 11.1. Term of Agreement. Windmill shall cease to be a party to this Agreement on the first (1st) Business Day following the Windmill Termination Date on which the Matured Value of the Windmill Loan Amount has been reduced to zero and all Aggregate Unpaids payable to Windmill have been paid in full. This Agreement shall terminate following the Loan Amortization Date when all amounts payable hereunder have been indefeasibly paid in full. Notwithstanding the foregoing, (i) the rights and remedies of the Agent and each Lender with respect to any representation and warranty made, or deemed to be made, by the Borrower, (ii) the indemnification and payment provisions of Article IX and Article X, and (iii) any other provision which by its own terms survives the termination of this Agreement (including Sections 11.11, 11.16, 11.17 and 11.18), shall be continuing and shall survive any termination of this Agreement. Section 11.2. Waivers; Amendments. (a) No failure or delay on the part of the Agent or any Lender in exercising any power, right, privilege or remedy under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right, privilege or remedy preclude any other or further exercise thereof or the exercise of any other power, right, privilege or remedy. The rights, powers, privileges and remedies herein provided -58- shall be cumulative and not exclusive of any rights, powers, privileges or remedies provided by law. Any waiver of this Agreement shall be effective only in the specific instance and for the specific purpose for which given. (b) This Agreement may not be amended, supplemented, modified or waived except in accordance with the provisions of Section 11.2(b), 11.6(c), 11.6(e) or 11.6(f). No amendment, supplement or other modification to this Agreement shall be effective unless the Borrower and the Required Banks are parties thereto and it is signed by the other required parties. Notwithstanding the foregoing, no amendment, supplement, modification or waiver shall without the written consent of: (i) all the Banks, (A) extend the Bank Termination Date or the date of any payment or deposit of Collections by the Borrower to the Collection Agent or by the Collection Agent to the Agent for the benefit of the Lenders, (B) reduce the rate or extend the time of payment of Interest (or any component thereof) for any Tranche other than a CP Tranche, (C) reduce or extend the time of payment of any fee payable to the Agent for the benefit of the Lenders, (D) release or transfer all or any portion of, or otherwise change (other than as provided herein) the amount of, the Bank Interest, (E) change the amount of any Bank Commitment or increase the Aggregate Commitment, other than as provided herein, (F) amend, modify or waive any provision of the definition of Required Banks or Termination Event or Sections 2.1, 5.2, 9.1, 9.2, 9.3 or 11.2(b) or any provision of the Indemnity Agreement or any obligation of any Borg-Warner Entity thereunder, (G) consent to or permit the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement or of any of its right, title or interest in or to the Receivables, (H) amend, modify or waive any defined term (or any defined term used directly or indirectly in such defined term) used in clauses (A) through (G) above in a manner which would circumvent the intention of the restrictions set forth in such clauses; or (ii) the Agent, amend, modify or waive any provision of this Agreement if the effect thereof is to affect the indemnities to, or the rights or duties of, such Agent or reduce any fee payable to the Agent's own account; or (iii) Windmill, amend, supplement or otherwise modify (A) Sections 11.2(b)(iii), or 11.3 or Articles II or IX or (B) any other provision if the effect of such modification in such other provision shall be to limit the discretion of, or impose any new commitment or obligation on, Windmill. Notwithstanding the foregoing, without the prior consent of any of the Banks (but only with the prior written consent of the Borrower), the Agent or Windmill, as the case may be, may change the amount of any fee or other payment due and payable to either the Agent (solely in its capacity as Agent) or Windmill, as the case may be, from the Borrower under this Agreement, the Fee Letter or any other agreement in connection herewith or therewith. Windmill shall not knowingly issue any waiver of any condition precedent set forth in Article V in respect of any purchase then being made by it without the prior written consent of the Required Banks. Any amendment, supplement, modification or waiver entered into in accordance with this Section 11.2(b) shall apply to each of the Lenders equally and shall be binding upon the Borrower, the Lenders and the Agent. In the case of any waiver, the Borrower, the Lenders and the Agent shall be restored to their former position and rights and any Potential Termination Event or Termination Event waived shall be deemed to be cured and not continuing, but no such waiver shall extend to any subsequent or other Potential Termination Event or Termination Event, or impair any right consequent upon such subsequent or other Potential Termination Event or Termination Event. Notwithstanding the foregoing, any additional Interest that has accrued after a Termination Event prior to the execution of a waiver thereof, solely as a result of the occurrence of such Termination Event, may be waived by the -59- Agent at the direction of Windmill or the Required Banks (in each case, to the extent such additional Interest is payable to such Lender or the Banks, as the case may be). Notwithstanding the foregoing, at all times prior to the Windmill Termination Date and thereafter until the Windmill Interest is reduced to zero, no (a) material amendment, waiver, alteration, modification or supplement of or to any provision of this Agreement, (b) assignment contemplated by Section 11.6, or (c) termination, resignation or removal contemplated by Article V, Section 11.1 or Article X shall be effective unless a written statement is obtained from each Rating Agency that the Rating will not be downgraded or withdrawn or suspended as a result of such amendment, waiver, alteration, modification, supplement, assignment, termination, resignation or removal. At all times prior to the Windmill Termination Date and thereafter until the Windmill Interest is reduced to zero, Windmill shall provide each CP Dealer and each Rating Agency with at least ten (10) Business Days prior notice of each event described in clauses (a), (b) and (c) of the prior sentence, together with a copy of the form of the proposed amendment, waiver, alteration, modification or supplement (other than the Fee Letter). Section 11.3. Notices. Except as provided below, all communications, demands and notices provided for hereunder shall be in writing (including bank wire, telex, telecopy or electronic facsimile transmission or similar writing) and shall be given to each other party at its address, telecopy number or telex number set forth on the signature page hereof or at such other address, telecopy number or telex number as such party may hereafter specify for the purposes of notice to such party. Each such notice or other communication shall be effective (i) if given by telecopy, upon the receipt thereof, (ii) if given by telex, when such telex is transmitted to the telex number specified in this Section 11.3 and the appropriate answerback is received, (iii) if given by mail, three (3) Business Days after the time such communication is deposited in the mails with first-class postage prepaid or (iv) if given by any other means, when received at the address specified in this Section 11.3; provided, however, that, in the case of any notice to be given under Article III, such notice shall not be effective until receipt thereof by the Person to whom such notice is to be given. However, anything in this Section 11.3 to the contrary notwithstanding, the Borrower hereby authorizes the Agent to effect Loans, Payments and Tranche Period and Tranche Rate selections based on telephonic notices made by any Person which the Agent in good faith believes to be acting on behalf of the Borrower. The Borrower agrees to deliver promptly to the Agent a written confirmation of each telephonic notice signed by an authorized officer of the Borrower. However, anything in this Section 11.3 to the contrary notwithstanding, each Lender hereby authorizes the Agent to effect the purchases described in Article II based on telephonic notices made by any Person which the Agent in good faith believes to be acting on behalf of the Lenders. The Borrower and each of the Lenders hereby authorize the Agent, at the Agent's option, to tape record all or any part of telephonic notices and any other related conversations. The Agent's records as to all such matters shall be deemed correct. Each Lender agrees to deliver promptly to the Agent a written confirmation of each telephonic notice signed by an authorized office of said Lender. The absence of any written confirmation shall not affect the validity of the notice. If the written confirmation differs in any material respect from the action taken by the Agent, the records of the Agent shall govern absent manifest error. Section 11.4. Governing Law; Submission to Jurisdiction; Integration. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF ILLINOIS. Each Person party hereto -60- hereby submits to the nonexclusive jurisdiction of any United States District Court for the Northern District of Illinois and of any Illinois state court sitting in Chicago, Illinois for purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. Each Person party hereto hereby irrevocably waives, to the fullest extent it may effectively do so, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. Section 11.5. Severability; Counterparts. Any provisions of this Agreement which are prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same Agreement. Section 11.6. Successors and Assigns; Participations; Assignments. (a) Successors and Assigns. This Agreement shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns, provided, however, that, except as otherwise provided herein, the Borrower may not assign or transfer any of its rights or delegate any of its duties without the prior written consent of the Agent and all the Lenders. The Banks may not participate, assign, transfer or sell any of its Bank Commitment except as required by operation of law, in connection with the merger, consolidation or dissolution of such Person or as provided in this Section 11.6. (b) Participations. Any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time sell to one or more Persons (each a "Participant") participating interests in the interests of such Lender hereunder. Notwithstanding any such sale by a Lender of participating interests to a Participant, such Lender's rights and obligations under this Agreement shall remain unchanged, such Lender shall remain solely responsible for the performance thereof, and the Borrower and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. The Borrower hereby agrees that if any of the Aggregate Unpaids are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence and during the continuance of a Termination Event, each Participant shall be deemed to have the right of setoff in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement; provided, however, that such right of setoff shall be subject to the obligations of such Participant to share with the Lenders, and the Lenders agree to share with such Participant. The Borrower also agrees that each Participant shall be entitled to the benefits of Article IX. Each Lender agrees that any agreement between such Lender and any such Participant in respect of such participating interest shall not restrict such Lender's right to agree to any amendment, supplement, waiver or modification to this Agreement or to the Transfer Agreement, except for any amendment, supplement, waiver or modification described in subclauses (A), (B), (C), (D), (F), (G) or (H) of clause (i) in the third sentence of Section 11.2(b). -61- (c) Assignments to Purchasing Banks. Any Bank may at any time and from time to time, (i) without the consent of the Borrower or the Agent, to any Person that at such time is a Lender or that is an Affiliate of such Lender and (ii) with the prior written consent of the Borrower, which consent shall not be unreasonably withheld, and the prior written consent of the Agent, assign to one or more Persons ("Purchasing Banks") all or any part of its Bank Commitment and all or any portion of the Bank Interest of such Bank relating to such Bank Commitment pursuant to a supplement to this Agreement and to the Transfer Agreement, substantially in the form of Exhibit M with any changes as have been approved by the parties thereto (a "Loans Supplement"), executed by such Purchasing Bank, such selling Bank and the Agent. If required in connection with the maintenance of the Rating, each such Loans Supplement must be accompanied by an opinion of counsel of the Purchasing Bank as to such matters as Windmill and the Agent may reasonably request. Any such assignment of the Bank Commitment cannot be for an amount less than Five Million Dollars ($5,000,000). Such Purchasing Bank must be a depository institution organized under the laws of a country (each an "OECD Country") which is a full member of the Organization of Economic Cooperation and Development, or which has concluded special lending arrangements with the International Monetary Fund (the "IMF") associated with the IMF's General Arrangements to Borrow. Each such Purchasing Bank shall pay a fee of Two Thousand Five Hundred Dollars ($2,500) to the Agent. Any such partial assignment shall be an assignment of an identical percentage of such selling Bank's Interest and its Bank Commitment hereunder and under the Transfer Agreement. Upon (i) such execution of such Loans Supplement, (ii) delivery of an executed copy thereof to the Borrower and the Agent and (iii) payment by such Purchasing Bank to such selling Bank of an amount equal to the purchase price agreed between such selling Bank and such Purchasing Bank, such selling Bank shall be released from its obligations hereunder and under the Transfer Agreement to the extent of such assignment and such Purchasing Bank shall for all purposes be a Bank party to this Agreement and shall have all the rights and obligations of a Bank under this Agreement to the same extent as if it were an original party hereto and to the Transfer Agreement, and no further consent or action by the Borrower, the Lenders or the Agent shall be required. The amount of the Bank Interest allocable to such Purchasing Bank shall be equal to the amount of the Bank Interest transferred regardless of the purchase price paid therefor. Such Loans Supplement shall be an amendment of this Agreement to the extent, and only to the extent, necessary to reflect the addition of such Purchasing Bank as a Bank and the resulting adjustment of the Bank Commitments, if any, arising from the purchase by such Purchasing Bank of all or a portion of the Bank Commitment of such selling Bank. (d) Affected Bank. In the event that any Bank shall cease to have a short-term debt rating of A-1+ or better by S&P and P-1 or better by Moody's (an "Affected Bank"), Windmill may direct the Agent to obtain a replacement Bank (a "Replacement Bank") acceptable to Windmill for such Affected Bank. Upon notice to an Affected Bank by the Agent of the identification of a Replacement Bank willing to accept such assignment, the Affected Bank shall promptly assign all of its rights and obligations hereunder to such Replacement Bank in accordance with Section 11.6(c) or 11.6(f), as the case may be. (e) Windmill. (i) General. Windmill may assign, participate, grant security interests in, or otherwise transfer all or any portion of its beneficial interest in the Windmill Interest, including any such transfer pursuant to the Transfer Agreement. The Borrower, the Agent and -62- each of the Banks further agree and consent to the complete assignment by Windmill of all of its rights under, interest in, title to and obligations under this Agreement to ABN AMRO or any other Person, and upon such assignment Windmill shall be released from all obligations and duties under this Agreement. (ii) Assignment. Except as provided in Article III and 11.6(e)(i), Windmill may, without the consent of the Borrower, assign to any other Person all or any portion of the Windmill Interest. As between Windmill and any such assignee, each such assignment shall be upon such terms and conditions as Windmill and such assignee may mutually agree. Windmill may not, without the prior written consent of the Required Banks, transfer any of its rights under the Transfer Agreement to cause the Banks to purchase the Windmill Interest unless the Lender (A) is a corporation the principal business of which is the purchase of assets of a type like the receivables with the proceeds of commercial paper issued by such corporation, (B) has requested that ABN AMRO agree, and ABN AMRO has agreed, to act as the administrative agent therefor and (C) issues commercial paper with credit ratings assigned by nationally recognized rating agencies in respect thereof which are substantially comparable to the ratings assigned by such rating agencies to the commercial paper issued by Windmill. Windmill shall deliver to the assignee a supplement to this Agreement, substantially in the form of Exhibit N with any changes as have been approved by the parties thereto (also, a "Loans Supplement"), duly executed by Windmill, assigning any such Windmill Interest, or portion thereof, to the assignee, and Windmill shall promptly execute and deliver all further instruments and documents, and take all further action, that the assignee may reasonably request, in order to perfect, protect or more fully evidence the assignee's right, title and interest in and to such Windmill Interest (or portion thereof) and to enable the assignee to exercise or enforce any rights hereunder. Upon the assignment of any Windmill Interest (or portion thereof) from Windmill as described above, the respective assignee receiving such assignment shall have all of the rights of Windmill hereunder with respect to such Windmill Interest, except that the Interest therefor shall thereafter accrue at the rate, or shall be in the amount, determined in accordance with Article II unless the Borrower and the assignee shall have agreed in writing upon a different Interest. Windmill shall promptly notify the Agent of any such assignment by Windmill and the Agent shall in turn give prompt notice thereof to the Borrower. Windmill authorizes the Agent to, and the Agent agrees that it shall, enter an appropriate entry on the Register to reflect any assignments. Section 11.7. Further Assurances. The Borrower agrees, from time to time, to do and perform any and all acts and to execute any and all further instruments required or reasonably requested by the Agent to more fully effect the purposes of this Agreement and the transfer of the Secured Interest, including the execution of any financing statements or continuation statements relating to the Affected Assets for filing under the provisions of the UCC of any applicable jurisdiction. Section 11.8. Right of Setoff. In addition to any rights now or hereafter granted under applicable law or otherwise, and not by way of limitation of any such rights, upon the occurrence and during the continuance of any Termination Event, each Lender is hereby authorized at any time or from time to time, without presentment, demand, protest or other notice of any kind to the Borrower or to any other Person, any such notice being hereby expressly waived, to setoff and to appropriate and apply any and all deposits (general or special, time or demand, provisional -63- or final, and in whatever currency denominated) and any other indebtedness at any time held or owing by such Lender (including by branches and agencies of such Lender wherever located) to or for the credit or the account of the Borrower against and on account of the Aggregate Unpaids of the Borrower to such Lender under this Agreement, including all interests in Aggregate Unpaids purchased by such Lender pursuant to Section 2.6(j), and all other claims of any nature or description arising out of or connected with this Agreement, irrespective of whether or not such Lender shall have made any demand hereunder and although said Aggregate Unpaids, liabilities or claims, or any of them, shall be contingent or unmatured. Section 11.9. Waiver of Confidentiality. Anything herein to the contrary notwithstanding, the Borrower hereby consents to the disclosure of any nonpublic information with respect to it (i) to the Agent or the Lenders by the other, and (ii) by the Agent or the Lenders to any prospective or actual assignee or participant of any of them (only if such nonpublic information is accompanied by a statement that such prospective or actual assignee or participant agrees, by receipt of such information, to maintain the confidentiality of such information) or any rating agency or provider of a surety, guaranty or credit or liquidity enhancement to any of them or any entity organized for the purpose of purchasing, or making loans secured by, financial assets for which ABN AMRO provides managerial services or acts as the administrative agent, or the Administrator, the Management Company, the Referral Agent, the Depositary, any commercial paper dealer or placement agent, or any officers, directors, employees, outside accountants, auditors, Governmental Authorities having jurisdiction over them or lawyers of any of the foregoing. In addition, the Agent and/or the Lenders may disclose any such nonpublic information pursuant to any law, rule, regulation, direction, request or order of any judicial, administrative or regulatory authority or proceedings (whether or not having the force and effect of law). Section 11.10. Confidentiality of Agreement. The parties hereto agree to hold the Transaction Documents or any other confidential or proprietary information received in connection therewith in confidence and agree not to provide any Person with copies of any Transaction Document or such other confidential or proprietary information other than to (i) any officers, directors, members, managers, employees or outside accountants, auditors or attorneys thereof, (ii) any prospective or actual assignee or participant which (in each case) has signed a confidentiality agreement containing provisions substantively identical to this Section, (iii) any rating agency, (iv) any surety, guarantor or credit or liquidity enhancer to the Agent or any Purchaser which (in each case) has signed a confidentiality agreement substantially in the form of the confidentiality agreement signed by the Agent prior to the date hereof, (v) any entity organized to loan, or make loans secured by, financial assets for which ABN AMRO provides managerial services or acts as an administrative agent which (in each case) has signed a confidentiality agreement substantially in the form of the confidentiality agreement signed by the Agent prior to the date hereof, (vi) Windmill's administrator, management company, referral agents, issuing agents or depositaries or CP Dealers and (vii) Governmental Authorities with appropriate jurisdiction. Notwithstanding the above stated obligations, provided that the other parties hereto are given notice of the intended disclosure or use, the parties hereto will not be liable for disclosure or use of such information which such Person can establish by tangible evidence: (i) was required by law, including pursuant to a valid subpoena or other legal process, (ii) was in such Person's possession or known to such Person prior to receipt or (iii) is or -64- becomes known to the public through disclosure in a printed publication (without breach of any of such Person's obligations hereunder). Section 11.11. Bankruptcy Petition Against Windmill. Each of the Lenders, (excluding Windmill), the Agent, the Borrower and the Collection Agent hereby covenants and agrees that, prior to the date which is one (1) year and one (1) day after the payment in full of all outstanding commercial paper of Windmill, such party will not institute against, or join any other Person in instituting against, Windmill any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings or other similar proceeding under the laws of the USA. The provisions of this Section 11.11 shall survive the termination of this Agreement. Section 11.12. Limitation of Liability. No claim may be made by the Borrower, the Collection Agent or any other Person against the Agent or any Lender or their respective Affiliates, directors, officers, employees, attorneys or agents for any special, indirect, consequential or punitive damages in respect of any claim for breach of contract or any other theory of liability arising out of or related to the transactions contemplated by this Agreement, or any act, omission or event occurring in connection therewith; and the Borrower, for itself, the Collection Agent and all other Persons claiming by or through the Borrower, hereby waives, releases and agrees not to sue upon any claim for any such damages, whether or not accrued and whether or not known or suspected to exist in its favor. Section 11.13. Headings. Article and Section headings used herein are for convenience and reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting this Agreement. Section 11.14. WAIVER OF TRIAL BY JURY. TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ALL RIGHT OF TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY MATTER ARISING HEREUNDER. Section 11.15. Administrator. Each of the parties hereto acknowledges and agrees that each and every responsibility, function, duty and agreement of Windmill may be performed by the Administrator for, in the name of and on behalf of Windmill, as Windmill's agent. It is further acknowledged and agreed that notwithstanding the Administrator's undertaking to so perform Windmill's responsibilities, functions, duties and agreements for, in the name of and on behalf of Windmill, as Windmill's agent, Windmill'S responsibilities, functions, duties and agreements shall remain obligations of Windmill and shall not constitute obligations of the Administrator. Section 11.16. No Recourse. The obligations of each of the Management Company, the Administrator, Windmill and the Referral Agent are solely the corporate obligations of such Person. No recourse shall be had with respect to this Agreement or any of the other Transaction Documents, including the enforcement of the obligations of the Management Company, the Administrator, Windmill or the Referral Agent thereunder or for the payment of any fee or other amount payable thereunder for any claim based on, arising out of or relating to any provision of this Agreement or any of the other Transaction Documents, against any stockholder, employee, officer, director, incorporator, affiliate, agent or servant of any of the Management Company, the -65- Administrator, Windmill or the Referral Agent. Each of the parties hereto agrees to look solely to the Management Company, the Administrator, Windmill or the Referral Agent for payment or performance of all obligations of such Person and claims against the Management Company, the Administrator, Windmill or the Referral Agent based on, arising out of or relating to this Agreement, any Program Document to which such Person is (or is intended to be) a party or any other Transaction Document. The provisions of this Section 11.16 shall survive the termination of this Agreement. Section 11.17. Reliance on Information Obtained from Third Parties. Each of the parties hereto recognizes that the accuracy and completeness of the records maintained and the information supplied by Windmill and supplied by the Referral Agent, the Management Company and the Administrator, for, in the name of and on behalf of Windmill as Windmill's agent is dependent upon the accuracy and completeness of the information obtained by Windmill, the Referral Agent, the Management Company and the Administrator from other Persons and other sources and neither Windmill, the Referral Agent, the Management Company nor the Administrator shall be responsible for any inaccuracy in the information so obtained or for any inaccuracy in the records maintained by Windmill, the Referral Agent, the Management Company or the Administrator which may result therefrom. All calculations and determinations made by Windmill or by the Referral Agent, the Management Company or the Administrator for, in the name of or on behalf of Windmill, are based on the most recent information provided to Windmill, the Referral Agent, the Management Company and the Administrator and entered into the Administrator's or the Referral Agent's computerized information system. Consequently, some of the information relied upon in making such calculations and determinations may not reflect the actual current facts and neither Windmill, the Referral Agent, the Management Company nor the Administrator shall be liable for any loss, cost or expense arising, directly or indirectly, as a result of or in connection with any discrepancy attributable to such timing differential. The provisions of this Section 11.17 shall survive the termination of the Agreement. Section 11.18. Excess Funds. Notwithstanding any provisions contained in this Agreement to the contrary, Windmill shall not, and shall not be obligated to, pay any amount pursuant to this Agreement unless (i) Windmill has received funds which may be used to make such payment and which funds are not required to repay its commercial paper notes when due and (ii) after giving effect to such payment, either (x) Windmill could issue commercial paper notes to refinance all of its outstanding commercial paper notes (assuming such outstanding commercial paper notes matured at such time) in accordance with the program documents governing Windmill's securitization program or (y) all of Windmill's commercial paper notes are paid in full. Any amount which Windmill does not pay pursuant to the operation of the preceding sentence shall not constitute a claim (as defined in Section 101 of the United States Bankruptcy Code) against or corporate obligation of Windmill for any such insufficiency unless and until Windmill satisfies the provisions of clauses (i) and (ii) above. This Section shall survive the termination of this Agreement. Section 11.19. Enforceability of Receivables. The obligations of the Borrower under this Agreement shall not be affected by reason of any invalidity, illegality or irregularity of any Receivable or any transfer of a Secured Interest. -66- Section 11.20. Integration. This Agreement contains the final and complete integration of all prior expressions by the parties hereto with respect to the subject matter hereof and shall constitute the entire agreement among the parties hereto with respect to the subject matter hereof superseding all prior oral or written understandings. Section 11.21. Elimination of Program LOC Provider. From and after the date here, the Program LOC Provider shall no longer be a party to this Agreement and shall not have a commitment hereunder. Section 11.22. Original Receivables Loan Agreement. This Agreement amends and replaces in its entirety the Original Receivables Loan Agreement. Reference to this specific Agreement need not be made in any agreement, document, instrument, letter, certificate, the Original Receivables Loan Agreement itself, or any communication issued or made pursuant to or with respect to the Original Receivables Loan Agreement, any reference to the Original Receivables Loan Agreement being sufficient to refer to the Original Receivables Loan Agreement as amended and restated hereby. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] -67- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their duly authorized officers as of the date hereof. ABN AMRO BANK N.V., as a Bank Title: --------------------------------- By: By: --------------------------------- ------------------------------------ Title: Title: ------------------------------ --------------------------------- Address: ABN AMRO BANK N.V. Structured Finance, Asset By: Securitization --------------------------------- 540 West Madison Street Title: Chicago, Illinois 60661 ------------------------------ Attention: Administrator- Address: 540 West Madison Street Program LOC Provider Chicago, Illinois 60661 Telephone: (312) 904-6263 Attention: Lender Agent- Telecopy: (312) 992-1527 Windmill Telephone: (312) 904-6263 Telecopy: (312) 992-1527 ABN AMRO BANK N.V., as the Agent By: --------------------------------- Title: ------------------------------ By: --------------------------------- Title: ------------------------------ Address: Structured Finance, Asset Securitization 540 West Madison Street Chicago, Illinois 60661 Attention: Lender Agent- Windmill Telephone: (312) 904-6263 Telecopy: (312) 992-1527 Consented and Agreed: ABN AMRO BANK N.V., as the Program LOC Provider By: --------------------------------- -68- BWA RECEIVABLES CORPORATION WINDMILL FUNDING CORPORATION By: By: --------------------------------- ------------------------------------ Title: Title: ------------------------------ --------------------------------- Address: 200 South Michigan Avenue Address: c/o Global Securitization Chicago, Illinois 60604 Services, LLC Attention: Vice President 114 West 47th Street, and Treasurer Suite 1715 Telephone: (312) 322-8500 New York, New York 10036 Telecopy: (312) 322-8712 Attention: Andrew L. Stidd Telephone: (212) 302-5151 Telecopy: (212) 302-8767 BORGWARNER INC. With a copy to: By: --------------------------------- ABN AMRO Bank N.V. Title: Structured Finance, Asset ------------------------------ Securitization Address: 200 South Michigan Avenue 540 West Madison Street Chicago, Illinois 60604 Chicago, Illinois 60661 Attention: Vice President Attention: Administrator - and Treasurer Windmill Telephone: (312) 322-8500 Telephone: (312) 904-6263 Telecopy: (312) 322-8712 Telecopy: (312) 992-1527 -69- EXHIBIT A TO SECOND AMENDED AND RESTATED RECEIVABLES LOAN AGREEMENT BWA RECEIVABLES CORPORATION CREDIT AND COLLECTION POLICY EXHIBIT B-1 TO SECOND AMENDED AND RESTATED RECEIVABLES LOAN AGREEMENT FORM OF CONTRACT EXHIBIT B-2 TO SECOND AMENDED AND RESTATED RECEIVABLES LOAN AGREEMENT CONTRACT TERMS EXHIBIT C TO SECOND AMENDED AND RESTATED RECEIVABLES LOAN AGREEMENT LOCKBOXES AND LOCKBOX BANKS
BANK ACCOUNT TITLE ACCOUNT NUMBER LOCKBOX NUMBER LOCKBOX ADDRESS - ---- ------------------------------------ -------------- -------------- -------------------------
EXHIBIT D TO SECOND AMENDED AND RESTATED RECEIVABLES LOAN AGREEMENT FORM OF LOCK-BOX LETTER [Lock-Box Bank] Ladies and Gentlemen: Reference is made to the lock-box numbers ______________ and ___________ in ______________________ and the lock-box account numbers _________ and ___________ respectively maintained with you (such lock-boxes and lock-box accounts being collectively referred to herein as the "Accounts"), each in the name of [Originator]. [Originator] hereby unconditionally transfers exclusive ownership of the Accounts to BWA Receivables Corporation and confirms that [Originator] has sold all Receivables (as defined below) to BWA Receivables Corporation. [Originator] hereby authorizes and directs you to endorse all checks, drafts and other payments remitted to the Accounts to BWA Receivables Corporation. [Originator] shall have control of and access to the Accounts prior to delivery of the Agent's Notice (defined below) solely in its role as collection agent. In connection with a receivables transaction entered into by BWA Receivables Corporation pursuant to a Second Amended and Restated Receivables Loan Agreement, dated as of ____________, 2004, among BWA Receivables Corporation (the "Borrower"), BorgWarner Inc., as Collection Agent, the banks from time to time party thereto (collectively, the "Banks"), Windmill Funding Corporation ("WINDMILL"), and ABN AMRO Bank N.V., as agent (the "Agent") for WINDMILL and the Banks (collectively, the "Lenders"), as amended or otherwise modified from time to time (the "Receivables Loan Agreement"), BWA Receivables Corporation has assigned to the Agent for the benefit of the Lenders an undivided percentage interest in the accounts, chattel paper, instruments or general intangibles (collectively, the "Receivables") with respect to which payments are or may hereafter be made to the Accounts, and has granted to the Agent for the benefit of the Lenders a security interest in its retained interest in such Receivables, and as is the customary practice in this type of transaction, we hereby request that you execute this letter agreement. All references herein to "we" and "us" refer to [Originator] and BWA Receivables Corporation. Your execution hereof is a condition precedent to our continued maintenance of the Accounts with you. We hereby transfer exclusive ownership and control of the Accounts to the Agent, subject only to the condition subsequent that the Agent shall have given you notice of its election to assume such ownership and control, which notice may be in the form attached hereto as Annex A or in any other form that gives you reasonable notice of such election (the "Agent's Notice"). We hereby irrevocably instruct you, at all times from and after the date of your receipt of the Agent's Notice as described above, to make all payments to be made by you out of or in connection with the Accounts directly to the Agent, at its address set forth below its signature hereto or as the Agent otherwise notifies you, or otherwise in accordance with the instructions of the Agent. We also hereby notify you that, at all times from and after the date of your receipt of the Agent's Notice as described above, the Agent shall be irrevocably entitled to exercise in our place and stead any and all rights in respect of or in connection with the Accounts, including, without limitation, (a) the right to specify, when payments are to be made out of or in connection with the Accounts and (b) the right to require preparation of duplicate monthly bank statements on the Accounts for the Agent's audit purposes and mailing of such statements directly to an address specified by the Agent. At all times from and after the date of your receipt of the Agent's notice, neither we nor any of our affiliates shall be given any access to the Accounts. The Agent's Notice may be personally served or sent by Telex, facsimile or U.S. mail, certified return receipt requested, to the address, Telex or facsimile number set forth under your signature to this letter agreement (or to such other address, Telex or facsimile number as to which you shall notify the Agent in writing). If the Agent's Notice is given by Telex or facsimile, it will be deemed to have been received when the Agent's Notice is sent and the answerback is received (in the case of Telex) or receipt is confirmed by telephone or other electronic means (in the case of facsimile). All other notices will be deemed to have been received when actually received or, in the case of personal delivery, delivered. By executing this letter agreement, you acknowledge the existence of the Agent's right to ownership and control of the Accounts and its ownership of and security interest in the amounts from time to time on deposit therein and agree that from the date hereof the Accounts shall be maintained by you for the benefit of, and amounts from time to time therein held by you as agent for, the Agent on the terms provided herein. The Accounts are to be entitled "BWA Receivables Corporation and ABN AMRO Bank N.V., as Agent for the Lenders." Except as otherwise provided in this letter agreement, payments to the Accounts are to be processed in accordance with the standard procedures currently in effect. All service charges and fees with respect to the Accounts shall continue to be payable by us as under the arrangements currently in effect. By executing this letter agreement, you irrevocably waive and agree not to assert, claim or endeavor to exercise, irrevocably bar and estop yourself from asserting, claiming or exercising, and acknowledge that you have not heretofore received a notice, writ, order or any form of legal process from any other party asserting, claiming or exercising, any right of set-off, banker's lien or other purported form of claim with respect to the Accounts or any funds from time to time therein. Except for your right to payment of your service charges and fees and to make deductions for returned items, you shall have no rights in the Accounts or funds therein. To the extent you may ever have such rights, you hereby expressly subordinate all such rights to all rights of the Agent. To the extent that the Agent actually receives funds from you relating directly to a returned item, the Agent agrees to remit such funds to you up to the actual returned amount relating to such returned item (the provisions of this sentence shall survive the termination of the Accounts and this letter agreement). D-2 Notwithstanding any other provision of this letter agreement, unless you are grossly negligent or engaged in willful misconduct in performance or nonperformance in connection with this letter agreement and the Accounts, we and the Agent agree to hold you harmless and we and the Agent agree not to assert a claim against you for any claims, damages, losses or expenses incurred by any party in connection herewith; in the event you breach the standard of care set forth herein, we and the Agent expressly agree that your liability shall be limited to damages directly caused by such breach and in no event shall you be liable for any incidental, indirect, punitive or consequential damages whatsoever. In performing your functions and duties under this letter agreement, you shall not be deemed to have assumed any fiduciary obligation towards or relationship of trust with or for us or the Agent. You may terminate this letter agreement by canceling the Accounts maintained with you, which cancellation and termination shall become effective only upon thirty (30) days prior written notice thereof from you to the Agent. Incoming mail addressed to the Accounts (including, without limitation, any direct funds transfer to the Accounts) received after such cancellation shall be forwarded in accordance with the Agent's instructions. This letter agreement may also be terminated upon written notice to you by the Agent stating that the Receivables Loan Agreement is no longer in effect. Except as otherwise provided in this paragraph, this letter agreement may not be terminated without the prior written consent of the Agent. This letter agreement contains the entire agreement between the parties with respect to the subject matter hereof, and may not be altered, modified or amended in any respect, nor may any right, power or privilege of any party hereunder be waived or released or discharged, except upon execution by you, us and the Agent of a written instrument so providing. The terms and conditions of any agreement between us and you (a "Lock-Box Service Agreement") (whether now existing or executed hereafter) with respect to the lock-box arrangements, to the extent not inconsistent with this letter agreement, are made part of this letter agreement with respect to matters not explicitly covered in this letter agreement. In the event that any provision in this letter agreement is in conflict with, or inconsistent with, any provision of any such Lock-Box Service Agreement, this letter agreement will exclusively govern and control. Each party agrees to take all actions reasonably requested by any other party to carry out the purposes of this letter agreement or to preserve and protect the rights of each party hereunder. THIS LETTER AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER WILL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF STATE OF ILLINOIS. This letter agreement may be executed in any number of counterparts and all of such counterparts taken together will be deemed to constitute one and the same instrument. D-3 Please indicate your agreement to the terms of this letter agreement by signing in the space provided below. This letter agreement will become effective immediately upon execution of a counterpart of this letter agreement by all parties hereto. Very truly yours, [ORIGINATOR] By: ------------------------------------ Title: --------------------------------- BWA RECEIVABLES CORPORATION By: ------------------------------------ Title: --------------------------------- Accepted and confirmed as of the date first written above: By: ABN AMRO BANK N.V., as Agent By: --------------------------------- Title: ------------------------------ By: --------------------------------- Title: ------------------------------ Address of notice: ABN AMRO Bank N.V. Structured Finance, Asset Securitization 540 West Madison Street Chicago, Illinois 60661 Attention: Lender Agent-WINDMILL Telephone Number: (312) 904-6263 Telecopy Number: (312) 992-1527 D-4 Acknowledged and agreed to as of the date first written above: [LOCK-BOX BANK] By --------------------------------- Title: ------------------------------ Address for notice: - --------------------------------- - --------------------------------- - --------------------------------- D-5 ANNEX A to Lock-Box Letter [LOCK-BOX BANK] Re: BWA Receivables Corporation Lock-Box Numbers ___________ and _____________ and Lock-Box Account Numbers _________________ and _____________________ Ladies and Gentlemen: Reference is made to the letter agreement dated _________________ (the "Letter Agreement") among [Originator], BWA Receivables Corporation, the undersigned, as Agent, and you concerning the above-described lock-boxes, and lock-box accounts (collectively, the "Accounts"). We hereby give you notice of our assumption of ownership and control of the Accounts as provided in the Letter Agreement. We hereby instruct you not to permit any other party to have access to the Accounts and to make all payments to be made by you out of or in connection with the Accounts directly to the undersigned upon our instructions, at our address set forth above. Very truly yours, ABN AMRO BANK N.V., as Agent By: ------------------------------------ Title: --------------------------------- By: ------------------------------------ Title: --------------------------------- EXHIBIT E TO SECOND AMENDED AND RESTATED RECEIVABLES LOAN AGREEMENT FORM OF PERIODIC REPORT EXHIBIT F TO SECOND AMENDED AND RESTATED RECEIVABLES LOAN AGREEMENT FORM OF ASSIGNMENT [FROM A BANK TO WINDMILL] This Assignment (this "Assignment"), dated _______________, 20__, is by and between [INSERT NAME OF BANK] (the "Assignor") and Windmill Funding Corporation ("WINDMILL"). Reference is hereby made to that certain Second Amended and Restated Receivables Loan Agreement (as amended, supplemented or otherwise modified through the date hereof, the "Loan Agreement"), dated as of ___________, 2004, by and among WINDMILL, BWA Receivables Corporation (the "Borrower"), BorgWarner Inc., as Collection Agent, the banks from time to time party thereto (collectively, the "Banks"), and ABN AMRO Bank N.V., as agent (the "Agent") for the Banks and WINDMILL. Unless otherwise defined herein, capitalized terms used herein shall have the meaning ascribed to such term in the Loan Agreement. WITNESSETH THAT: WHEREAS, this Assignment is being executed and delivered in accordance with Section 3.2 of the Loan Agreement, NOW, THEREFORE, the parties hereto hereby agree as follows: 1. On the terms and subject to the conditions of this Assignment and the Loan Agreement, the Assignor hereby sells, transfers, assigns, sets over and otherwise conveys to WINDMILL, and WINDMILL hereby acquires from the Assignor, all of the Assignor's right, title and interest in and to the Interest designated in the Notice attached hereto (the "Purchased Interest"), after giving effect to the payment (or exchange) of the purchase price as calculated in accordance with Section 3.2 of the Loan Agreement (the "Loan Price"), all without recourse, representation or warranty (except as explicitly described below). 2. Each of the parties to this Assignment agrees that at any time and from time to time upon the written request of any other party it will execute and deliver such further documents and do such further acts and things as such other party may reasonably request in order to effect the purposes of this Assignment. 3. By executing and delivering this Assignment, each of WINDMILL and the Assignor confirms and agrees with the other as follows: other than the representation and warranty that the Assignor is transferring the Purchased Interest free and clear of any Adverse Claim created or granted by the Assignor, the Assignor makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Purchased Interest or the Loan Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Purchased Interest or the Loan Agreement or any other instrument or document furnished pursuant thereto or in connection therewith. 4. THIS ASSIGNMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS. IN WITNESS WHEREOF, the parties hereto have caused this Assignment to be executed by their respective duly authorized officers. WINDMILL FUNDING CORPORATION By: ------------------------------------ Title: --------------------------------- [INSERT NAME OF ASSIGNOR] By: ------------------------------------ Title: --------------------------------- [By: ---------------------------------- Title: --------------------------------] Acknowledged: ABN AMRO Bank N.V., as Agent under the Loan Agreement By: ------------------------------------ Title: --------------------------------- By: ------------------------------------ Title: --------------------------------- F-2 FORM OF SECTION 3.2 WINDMILL PURCHASE NOTICE Dated _____________, 200__ ABN AMRO Bank N.V., as Agent for the Lenders Asset Securitization, Structured Finance 540 West Madison Street Chicago, Illinois 60661 Attention: Lender Agent - WINDMILL BWA Receivables Corporation 200 South Michigan Avenue Chicago, Illinois 60604 Attention: Vice President and Treasurer Ladies and Gentlemen: Reference is made to the Second Amended and Restated Receivables Loan Agreement, dated as of ___________, 2004 (as amended, the "Loan Agreement"), among BWA Receivables Corporation, a Delaware corporation (the "Borrower"), BorgWarner Inc., a Delaware corporation, as Collection Agent, Windmill Funding Corporation, a Delaware corporation ("WINDMILL"), the banks from time to time party thereto (collectively, the "Banks"), ABN AMRO Bank N.V., as agent (the "Agent") for WINDMILL and the Banks. Unless expressly otherwise defined herein, terms defined in the Loan Agreement are used herein with the same meaning. WINDMILL hereby advises the Agent that, at the request of the Borrower, it intends to exercise its right under Section 3.2 of the Loan Agreement to acquire the portion of the other Lenders' Interest identified below on _______________, 200__ (the "WINDMILL Purchase Date"). The purchase price as calculated in accordance with Section 3.2 of the Loan Agreement (the "Loan Price") in the amount of ____________ Dollars ($____________) shall be payable in full to the Agent, for the account of the applicable Lender, on such WINDMILL Purchase Date. The Loan Price has been calculated in the manner described on Schedule I attached hereto and made a part hereof. In connection with the transfer of the Interest described above (the "Assigned Interest"), the undersigned Assignor agrees as follows: 1. The Assignor hereby assigns to the Agent for the account of WINDMILL, effective as of the WINDMILL Purchase Date specified above, all right, title and interest of the Assignor in the Assigned Interest in consideration of the payment to the Assignor of the Loan Price specified above. F-3 ABN AMRO Bank N.V., BWA Receivables Corporation Dated _____________, 200__ 2. The Assignor (i) represents and warrants that it is the legal and beneficial owner of the Assigned Interest and that such interest is free and clear of any Adverse Claim created by the Assignor; (ii) represents and warrants that, on and as of the WINDMILL Purchase Date, it is not the subject of any bankruptcy, insolvency or other similar proceeding, (iii) makes no representation and warranty and assumes no responsibility with respect to any statements, warranties, or representations made in or in connection with the Loan Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Agreement, any Interest (whether the Assigned Interest or otherwise), any Receivables, or Related Security or any other instrument or document or other Affected Asset related to the foregoing; and (iv) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower, the Parent, any Originator or any Obligor, the collectibility of any Receivable or the performance or observance by the Borrower (whether as the Borrower, in its capacity as Collection Agent or otherwise) of any of its obligations under the Loan Agreement or any other instrument or document related thereto. 3. This notice is delivered to the Agent for, among other purposes, recording by the Agent. From and after the later to occur of the WINDMILL Purchase Date specified above, the date the Assignor shall receive payment in full of the Loan Price specified above, and the execution and delivery of an Assignment in the form of Exhibit F of the Loan Agreement, the Agent shall make all payments under the Loan Agreement in respect of the Assigned Interest (including, without limitation, all payments on account of the Receivables and of Interest with respect thereto) to WINDMILL. 4. THIS NOTICE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS. F-4 ABN AMRO Bank N.V., BWA Receivables Corporation Dated _____________, 200__ IN WITNESS WHEREOF, the Assignor and WINDMILL have caused this notice to be executed by an authorized signatory as of the date first above written. WINDMILL FUNDING CORPORATION By: ------------------------------------ Title: --------------------------------- ASSIGNOR: [INSERT NAME OF ASSIGNOR] By: ------------------------------------ Title: --------------------------------- [By: ---------------------------------- Title: --------------------------------] F-5 SCHEDULE I TO NOTICE Dated _____________, 200_ CALCULATION OF THE LOAN PRICE (AS SPECIFIED IN SECTION 3.2 OF THE LOAN AGREEMENT) (To be attached at the time the notice is submitted, demonstrating compliance with the requirements for calculation set forth in the Loan Agreement) EXHIBIT G TO SECOND AMENDED AND RESTATED RECEIVABLES LOAN AGREEMENT ADDRESSES OF BORROWER AND ORIGINATOR BorgWarner Inc. (HEADQUARTERS) 200 South Michigan Avenue Chicago, Illinois 60604 A/R Records: N/A BorgWarner Diversified Transmission Products Inc. (Executive Office): 3800 Automation Avenue Auburn Hills, MI 48326 A/R Records: N/A (OPERATING DIVISION) Muncie, Indiana 5401 Kilgore Avenue Muncie, IN 47304 A/R Records: Muncie, Indiana (see address above) BorgWarner Emissions Systems Inc. (Executive Office): 3800 Automation Avenue Auburn Hills, MI 48326 A/R Records: N/A (OPERATING DIVISION) Dixon, Illinois 1350 Franklin Road Dixon, Illinois 61021 A/R Records: Dixon, Illinois (see address above) (OPERATING DIVISION) Water Valley, Mississippi State Highway 32 Water Valley, Mississippi 38965 A/R Records: Water Valley, Mississippi (see address above) BorgWarner TorqTransfer Systems Inc. (Executive Office): 3800 Automation Avenue Auburn Hills, MI 48326 A/R Records: N/A (OPERATING DIVISION) Seneca, South Carolina 15545 Wells Highway Seneca, South Carolina 29678 A/R Records: Seneca, South Carolina (see address above) (OPERATING DIVISION) Longview, Texas Rt. 3 Box 168 Highway 349 Longview, Texas 75603 A/R Records: Longview, Texas (see address above) BorgWarner Morse TEC Inc. (Executive Office/Tech Center): 800 Warren Road Ithaca, NY 14850 A/R Records: N/A Sales Office 3800 Automation Avenue Auburn Hills, MI 48326 A/R Records: N/A (OPERATING DIVISION) Ithaca, New York 800 Warren Road Ithaca, NY 14850 (OPERATING DIVISION) Cortland, NY 3690 Luken Road Cortland, NY 13045 A/R Records: Cortland, NY (see address above) (OPERATING DIVISION) Sallisaw, Oklahoma 1300 South Opdyke Sallisaw, Oklahoma 74955 A/R Records: Sallisaw, OK (see address above) G-2 BorgWarner Transmission Systems Inc. (Executive Office): 3800 Automation Avenue Auburn Hills, MI 48326 A/R Records: N/A Aftermarket Center 1140 N. DuPage Avenue Lombard, IL 60148 A/R Records: Lombard, IL (see above address) North American Sales Office 3800 Automation Avenue Auburn Hills, MI 48326 A/R Records: N/A (OPERATING DIVISION): Bellwood, Illinois 700 25th Avenue Bellwood, Illinois 60104 A/R Records: Bellwood, Illinois (see address above) (OPERATING DIVISION): Frankfort, Illinois 300 South Maple Street Frankfort, Illinois 60423 A/R Records: Frankfort, Illinois (see address above) BorgWarner Turbo Systems Inc. (Executive Office/Operating Division): Asheville, North Carolina P.O. Box 15075 Asheville, North Carolina 28813 A/R Records Asheville, North Carolina: (see address above) BWA Receivables Corporation 200 South Michigan Avenue Chicago, Illinois 60604 A/R Records: N/A G-3 BorgWarner Thermal Systems Inc. (Executive Office): 3800 Automation Avenue Auburn Hills, MI 48326 (TECH CENTER) 19218 B Drive South Marshall, Michigan 49245 A/R Records: N/A (OPERATING DIVISION) Cadillac, Michigan 1100 West Wright Street Cadillac, Michigan 49601 A/R Records: Cadillac, Michigan: (see address above) (OPERATING DIVISION) Fletcher, North Carolina (remanufacturing) 269 Cane Creek Road Fletcher, North Carolina 28732 A/R Records: Fletcher, North Carolina Sales Office: 3800 Automation Avenue Auburn Hills, MI 48326 A/R Records: N/A G-4 EXHIBIT H TO SECOND AMENDED AND RESTATED RECEIVABLES LOAN AGREEMENT BORROWER'S AND BORG-WARNER ENTITIES' CORPORATE NAMES; TRADE NAMES; ASSUMED NAMES 1.) BorgWarner Inc. 2.) BorgWarner TorqTransfer Systems Inc. 3.) BorgWarner Diversified Transmission Products Inc. 4.) BorgWarner Emissions Systems Inc. - BorgWarner Emissions/Thermal Systems, "E/TS" 5.) BorgWarner Morse TEC Inc. - Morse Chain Systems 6.) BorgWarner Transmission Systems Inc. 7.) BorgWarner Turbo Systems Inc. 8.) BorgWarner Thermal Systems Inc. - BorgWarner Emissions/Thermal Systems, "E/TS" EXHIBIT I TO SECOND AMENDED AND RESTATED RECEIVABLES LOAN AGREEMENT INTENTIONALLY OMITTED EXHIBIT J FORM OF COMPLIANCE CERTIFICATE To: ABN AMRO Bank N.V., as Agent, and each Lender This Compliance Certificate is furnished pursuant to Section [5.1(d)], [6.1(a)(iii)] of that certain Second Amended and Restated Receivables Loan Agreement, dated as of December 6, 2004 (as amended, supplemented or otherwise modified through the date hereof, the "Loan Agreement"), among BWA Receivables Corporation (the "Borrower"), BorgWarner Inc., as Collection Agent, the banks from time to time party thereto (collectively, the "Banks"), Windmill Funding Corporation ("WINDMILL") and ABN AMRO Bank N.V. as agent for the Lenders (in such capacity, the "Agent"). Terms used in this Compliance Certificate and not otherwise defined herein shall have the respective meanings ascribed thereto in the Loan Agreement. THE UNDERSIGNED HEREBY REPRESENTS, WARRANTS, CERTIFIES AND CONFIRMS THAT: 1. I am a duly elected Designated Financial Officer of ____________. 2. Attached hereto is a copy of the [BALANCE SHEET] [FINANCIAL STATEMENTS] described in Section 6.1(a)(i) or 6.1(a)(ii) of the Loan Agreement. 3. I have reviewed the terms of the Transaction Documents and I have made, or have caused to be made under my supervision, a detailed review of the transactions and the conditions of the Borrower and each other Borg-Warner Entity during and at the end of the accounting period covered by the attached [BALANCE SHEET] [FINANCIAL STATEMENTS]. 4. The examinations described in paragraph 3 hereof did not disclose, and I have no knowledge of, the existence of any condition or event which constitutes a Termination Event or Potential Termination Event, during or at the end of the accounting period covered by the attached [BALANCE SHEET] [FINANCIAL STATEMENTS] or as of the date of this Compliance Certificate, except as set forth below. [5. SCHEDULE I ATTACHED HERETO SETS FORTH DATA AND COMPUTATIONS WITH RESPECT TO THE FINANCIAL COVENANTS SET FORTH IN THE LOAN AGREEMENT AND/OR IN SECTION 4.2 OF THE INDEMNITY AGREEMENT, EVIDENCING THE COMPLIANCE WITH EACH SUCH FINANCIAL COVENANT, ALL OF WHICH DATA AND COMPUTATIONS ARE TRUE, COMPLETE AND CORRECT, AND ALL INFORMATION WHICH IS BASED ON ESTIMATES HAS BEEN CALCULATED USING METHODS OF ESTIMATION ON A CONSISTENT BASIS AND WITHOUT ANY INTENT TO CHANGE OR DISTORT SUCH INFORMATION TO SHOW COMPLIANCE WITH SUCH FINANCIAL COVENANTS.] Described below are the exceptions, if any, to paragraph 4 listing, in detail, the nature of the condition or event, the period during which it has existed and the action which _____________________________ has taken, is taking or proposes to take with respect to each such condition or event: The foregoing certifications, together with the computations set forth in Schedule I hereto and the [BALANCE SHEET] [FINANCIAL STATEMENTS] delivered with this Compliance Certificate in support hereof, are made and delivered this ____ day of ___________, 20__. [NAME OF BORROWER or PARENT] By: ------------------------------------ Designated Financial Officer J-2 EXHIBIT K TO SECOND AMENDED AND RESTATED RECEIVABLES LOAN AGREEMENT FORM OF LOAN REQUEST ______________, 200_ ABN AMRO BANK N.V., as Agent Asset Securitization, Structured Finance 540 West Madison Street Chicago, Illinois 60661 Attn: Lender Agent--WINDMILL Re: BWA Receivables Corporation Ladies and Gentlemen: The undersigned, BWA Receivables Corporation, a Delaware corporation (the "Borrower"), hereby refers to the Second Amended and Restated Receivables Loan Agreement, dated as of December 6, 2004 (the "Loan Agreement"; capitalized terms used and not otherwise defined herein shall have the meanings ascribed to such terms in the Loan Agreement), among the Borrower, BorgWarner Inc., a Delaware corporation, as Collection Agent, the banks from time to time party thereto (collectively, the "Banks"), Windmill Funding Corporation, a Delaware corporation ("WINDMILL"), and ABN AMRO Bank N.V., as agent (the "Agent") for the Banks and WINDMILL, and hereby gives the Agent notice, irrevocably, pursuant to Section 2.1(c) of the Loan Agreement, of a proposed (the "Proposed Loan(s)"). In connection therewith, please find attached hereto as Exhibit A, the information relating to the Proposed Loan(s) required by Section 2.1(c) of the Loan Agreement. In the event that, on the date of this Loan Request ("Notice"), any Interim Liquidation shall then be in effect, this Notice shall be revoked, effective immediately, and Collections shall be set aside in accordance with Section 3.3(b) of the Loan Agreement. The Borrower hereby certifies that the following statements are true on the date hereof, and will be true on [each of] the proposed Loan Date(s) referenced on Exhibit A: (i) Both before and after giving effect to [each of] the Proposed Loan[s] contemplated hereby and the use of the proceeds therefrom, the representations and warranties contained in Section 4.1 of the Loan Agreement are true and correct in all material respects on and as of such Loan Date as though made on and as of such Loan Date; (ii) Both before and after giving effect to [each of] the Proposed Loan[s] contemplated hereby, no Termination Event or Potential Termination Event has occurred and is continuing, or would result in connection with such Proposed Loan or the use of the proceeds therefrom; and (iii) All of the requirements of Section 5.2 of the Loan Agreement have been satisfied in connection with each Loan. Very truly yours, BWA RECEIVABLES CORPORATION By: ------------------------------------ Title: --------------------------------- K-2 EXHIBIT A TO LOAN REQUESTS SUMMARY OF INFORMATION RELATING TO PROPOSED LOAN(S) 1. Dates, Amounts, Lender(s), Proposed Tranche Periods A1 Date of Notice _________ A2 Measurement Date (the last Business Day of the week immediately preceding the week in which the Date of Notice occurs) _________ A3 Proposed Loan Dates (each of which is a Business Day) _________ _________ _________ _________ A4 Respective Proposed Loan on each such Loan Date $_________ $_________ $_________ $_________ (A4A) (A4B) (A4C) (A4D) A5 Proposed Allocation among Lenders WINDMILL $_________ $_________ $_________ $_________ Banks $_________ $_________ $_________ $_________ A6 Tranche Period Starting Date _________ _________ _________ _________ Ending Date _________ _________ _________ _________ Number of Days _________ _________ _________ _________ Notes:

(i) Each proposed Loan Date must be a Business Day, and must occur no later than two (2) weeks after the Measurement Date set forth above. The choice of Measurement Date is a risk undertaken by the Borrower. If a selected Measurement Date is other than the applicable Loan Date, notwithstanding the disclosure of such choice herein, such choice shall not in any manner diminish, waive, reduce or otherwise affect the obligation of the Borrower to assure the Lenders that, after giving effect to the Proposed Loan, the actual Percentage Factor (including the aggregate for all Lenders) as of the date of such Proposed Transfer shall not exceed one hundred percent (100%), such assurance being a fundamental condition on which the willingness of any Lender to make the related purchase shall be based. (ii) Except as set forth in Section 2.1(c) of the Loan Agreement, each Loan shall not be less than One Million Dollars ($1,000,000). A-2 EXHIBIT L TO SECOND AMENDED AND RESTATED RECEIVABLES LOAN AGREEMENT ACTIVITIES TO MAINTAIN SEPARATE CORPORATE EXISTENCE OF BORG-WARNER ENTITIES The Borrower shall: 1. compensate all employees, consultants and agents directly, from the Borrower's bank accounts, for services provided to the Borrower by such employees, consultants and agents and, to the extent any employee, consultant or agent of the Borrower is also an employee, consultant or agent of any other Borg-Warner Entity, allocate the compensation of such employee, consultant or agent between the Borrower and such Borg-Warner Entity on a basis which reflects the services rendered to the Borrower and such Borg-Warner Entity; 2. clearly identify and occupy space that is separate and distinct from any space occupied by any other Borg-Warner Entity even if such space is leased or subleased from, or is on or near premises occupied by, any other Borg-Warner Entity; 3. have separate stationery and other business forms; 4. conduct its business solely in its own name through its duly authorized officers or agents including, without limitation, in all oral and written communications such as letters, invoices, purchase orders, contracts, statements and applications; 5. make independent decisions with respect to its daily business and affairs and not be controlled in making such decisions by any other Borg-Warner Entity; 6. allocate all overhead expenses (including, without limitation, telephone and other utility charges) for items shared between the Borrower and any other Borg-Warner Entity on the basis of actual use to the extent practicable and, to the extent such allocation is not practicable, on a basis reasonably related to actual use; 7. at all times have at least two member of its board of directors (each, an "Independent Director") (which Independent Director shall have a fiduciary duty to creditors of the Borrower) who is not (A) a director, officer or employee of any other Borg-Warner Entity, (B) a person related to any officer or director of any Borg-Warner Entity, (C) a holder (directly or indirectly) of more than one percent (1%) of any voting securities of any Borg-Warner Entity, or (D) a person related to a holder (directly or indirectly) of more than one percent (1%) of any voting securities of any other Borg-Warner Entity; 8. ensure that all corporate actions with respect to (i) the filing for any petition of bankruptcy of the Borrower, (ii) transactions with Affiliates of the Borrower and (iii) compensation of officers of the Borrower, are duly authorized by unanimous vote of its board of directors (and duly authorized by its stockholders when necessary); 9. maintain complete and correct books and records of account and minutes of meetings and other proceedings of its stockholder and board of directors; 10. maintain its financial, corporate and other books and records separate from those of any other Borg-Warner Entity; 11. prepare its financial statements separately from those of other Borg-Warner Entities and insure that any consolidated financial statements of any other Borg-Warner Entity that include the Borrower have detailed notes clearly stating that the Borrower is a separate corporate entity; 12. maintain a cash management system separate from any other Borg-Warner Entity and not commingle funds or other assets of Borrower with those of any other Borg-Warner Entity and not maintain bank accounts or other depository accounts to which any other Borg-Warner Entity is an account party, into which any other Borg-Warner Entity makes deposits or from which any other Borg-Warner Entity has the power to make withdrawals (except as agent to the special purpose corporation as specifically contemplated by any servicing agreement between such parties approved by WINDMILL); 13. pay operating expenses and liabilities from its own funds and not permit any other Borg-Warner Entity to pay any of the Borrower's operating expenses or liabilities (except pursuant to allocation arrangements that comply with the requirements of paragraph 2 above); 14. maintain adequate capitalization in light of its business and purpose; 15. not hold itself out or permit itself to be held out as having agreed to pay or as being liable for the debts of any other Borg-Warner Entity nor will it hold any other Borg-Warner Entity out or permit any other Borg-Warner Entity to be held out as having agreed to pay or as being liable for the debts of the Borrower (except as contemplated by the Receivables Loan Agreement) nor will it fail to correct any known misrepresentation with respect to the foregoing; 16. not operate or purport to operate as an integrated, single economic unit with one or more of the other Borg-Warner Entities; 17. not seek or obtain credit or incur any obligation to any third party based upon the assets of one or more of the other Borg-Warner Entities or induce any such third party to reasonably rely on the creditworthiness of one or more of the other Borg-Warner Entities; L-2 18. not guaranty or otherwise become liable with respect to indebtedness of any other Borg-Warner Entity nor permit guaranties or liability by any other Borg-Warner Entity of the indebtedness of the Borrower (except as contemplated by the Receivables Loan Agreement); 19. maintain an arm's-length relationship with each other Borg-Warner Entity, including, without limitation, payment of an arm's-length servicing fee for any receivables-servicing functions performed by any other Borg-Warner Entity on behalf of the Borrower; and 20. not, directly or indirectly, be named and shall not enter into any agreement to be named as a direct or contingent beneficiary or loss payee on any insurance policy covering the property of any other Borg-Warner Entity. L-3 EXHIBIT M TO SECOND AMENDED AND RESTATED RECEIVABLES LOAN AGREEMENT LOANS SUPPLEMENT [FORM OF ASSIGNMENT FOR BANK COMMITMENT] LOANS SUPPLEMENT, dated as of the date set forth in Item 1 of Schedule I hereto, between the Selling Bank set forth in Item 2 of Schedule I hereto (the "Selling Bank"), and the Purchasing Bank set forth in Item 3 of Schedule I hereto (the "Purchasing Bank"). WITNESSETH: WHEREAS, this Loans Supplement is being executed and delivered in accordance with Section 11.6(c) of the Second Amended and Restated Receivables Loan Agreement, dated as of December 6, 2004, among BWA Receivables Corporation, a Delaware corporation (the "Borrower"), BorgWarner Inc., a Delaware corporation, as Collection Agent, ABN AMRO Bank N.V., as agent for the Lenders (in such capacity on behalf of the Lenders, the "Agent"), and the banks from time to time party thereto (collectively the "Banks"), and Windmill Funding Corporation, a Delaware corporation ("WINDMILL") (WINDMILL together with the Banks, the "Lenders") (as amended, supplemented or otherwise modified from time to time, the "Loan Agreement"). Terms defined therein being used herein (and in the Schedules hereto) have the same meaning as defined in the Loan Agreement). WHEREAS, the Purchasing Bank wishes to become a Bank party to the Loan Agreement; and WHEREAS, the Selling Bank is selling and assigning to the Purchasing Bank certain rights and obligations under the Loan Agreement as set forth herein; NOW, THEREFORE, the parties hereto hereby agree as follows: 1. Upon receipt by the Agent of ten (10) counterparts of this Loans Supplement, to each of which is attached a fully completed Schedule I and Schedule II, and each of which has been executed by the Selling Bank, the Purchasing Bank, the Agent and the Borrower, and upon the satisfaction of all of the requirements set forth in clauses (i) through (iii) of Section 11.6(c) of the Loan Agreement and delivery of an opinion of counsel of the Purchasing Bank as described therein, the Agent will transmit to the Borrower, the Selling Bank and the Purchasing Bank a Transfer Effective Notice, substantially in the form of Schedule III to this Loans Supplement (a "Transfer Effective Notice"). Such Transfer Effective Notice shall set forth, inter alia, the date on which the transfer effected by this Loans Supplement shall become effective (the "Transfer Effective Date"), which date shall be two (2) Business Days following the date of such Transfer Effective Notice (or such other date selected by the Agent in its sole discretion). From and after the Transfer Effective Date, the Purchasing Bank shall be a Bank party to the Loan Agreement for all purposes thereof as if the Purchasing Bank were an original party thereto and the Purchasing Bank agrees to be bound by all of the terms and provisions contained therein. 2. At or before 12:00 noon, local time of the Selling Bank, on the Transfer Effective Date, if the Selling Bank owns any Loan Amount under the Loan Agreement, the Purchasing Bank shall pay to the Selling Bank, in immediately available funds, an amount equal to the sum of (i) that portion of the Selling Bank's Loan Amount based upon that portion of its Bank Commitment hereby transferred (the "Purchasing Bank Investment"), plus (ii) all accrued but unpaid (whether or not then due) Interest attributable to such Purchasing Bank Investment, plus (iii) all accrued but unpaid fees and other costs and expenses (whether or not then due) payable in respect of the Bank Commitment hereby transferred, plus (iv) any breakfunding cost incurred by the Selling Bank as a result of any reduction in such Selling Bank's Loan Amount in a Eurodollar Tranche due to the reduction of such Selling Bank's allocable portion of the Bank Loan Amount pursuant hereto (the "Loan Price"). Effective upon receipt by the Selling Bank of the Loan Price from the Purchasing Bank, the Selling Bank hereby transfers and assigns to the Purchasing Bank, without recourse, representation or warranty (except as explicitly set forth below), and the Purchasing Bank hereby irrevocably takes, receives and assumes from the Selling Bank, that portion of the Selling Bank's beneficial interest in the Secured Interest held by the Agent on its behalf, if any, allocable to the portion of the Bank Commitment hereby transferred. 3. Concurrently with the execution and delivery hereof, the Selling Bank will provide to the Purchasing Bank copies of all documents requested by such Purchasing Bank which were delivered to such Selling Bank pursuant to the conditions precedent set forth in Article V of the Loan Agreement. 4. Each of the parties to this Loans Supplement agrees that at any time and from time to time upon the written request of any other party, it will execute and deliver such further documents and do such further acts and things as such other party may reasonably request in order to effect the purposes of this Loans Supplement. 5. By executing and delivering this Loans Supplement, the Selling Bank and the Purchasing Bank confirm to and agree with each other and the Agent and the other Lenders as follows: (i) other than the representation and warranty that it has not created any Adverse Claim upon any interest being transferred hereunder, the Selling Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Loan Agreement or any other Transaction Document or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Agreement, any other Transaction Document, any Interest, any Receivable, or any other Affected Asset or any other instrument or document furnished pursuant thereto or the perfection, priority, condition, value or sufficiency of any collateral; (ii) the Selling Bank makes no M-2 representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or any other Borg-Warner Entity or any other Affiliate of the Borrower or any other Borg-Warner Entity or any Obligor or the performance or observance by the Borrower or any other Borg-Warner Entity or any other Affiliate of the Borrower or any other Borg-Warner Entity of any of its obligations under the Loan Agreement, any other Transaction Document or any other instrument or document furnished pursuant thereto or the collectibility of any Receivable; (iii) the Purchasing Bank confirms that it has received a copy of the Loan Agreement (other than the Fee Letter), together with such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Loans Supplement; (iv) the Purchasing Bank will, independently and without reliance upon the Agent, the Selling Bank or any other and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under, or in connection with, the Loan Agreement; (v) the Purchasing Bank appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under, or in connection with, the Loan Agreement as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto, all in accordance with Article X of the Loan Agreement; (vi) the Purchasing Bank agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Loan Agreement are required to be performed by it as a Bank; and (vii) the Purchasing Bank specifies as its address for notices the address set forth in Schedule II hereto. 6. Each party hereto represents and warrants to and agrees with the Agent that each party hereto is aware of and will comply with all of the provisions of the Loan Agreement. 7. Schedule II hereto sets forth the revised Bank Commitment of the Selling Bank and the Purchasing Bank, respectively, as well as administrative information with respect to the Purchasing Bank. 8. Following the execution of this Loans Supplement by the Selling Bank and the Purchasing Bank, it will be delivered to the Agent for acceptance and recording by the Agent. This Loans Supplement shall be effective as of the Transfer Effective Date but only after it has been accepted and recorded by the Agent. 9. Upon acceptance and recording of this Loans Supplement by the Agent, as of the Transfer Effective Date, (i) the Purchasing Bank shall be a party to the Loan Agreement and, to the extent provided in this Loans Supplement and in the Loan Agreement and to the extent transferred hereunder, have the rights and obligations of the Selling Bank thereunder and (ii) the Selling Bank shall, to the extent provided in this Loans Supplement and the Loan Agreement, relinquish its rights and be released from its obligations under the Loan Agreement. 10. From and after the later of the Transfer Effective Date and the date of acceptance and recording of this Loans Supplement by the Agent, the Agent shall make M-3 all payments under the Loan Agreement in respect of the interest assigned hereby (including, without limitation, all payments on account of the Purchasing Bank Investment and of Interest with respect thereto) to the Purchasing Bank. The Selling Bank and the Purchasing Bank shall make directly between themselves all appropriate adjustments in payments under the Transfer Agreement for periods, if any, prior to the later of the dates specified in the preceding sentence. 11. The Selling Bank and the Purchasing Bank hereby advise the Agent that, to the extent the consent of the Borrower or any other Person is required for the transfer contemplated herein, such consent has been duly obtained and remains in full force and effect. 12. This Loans Supplement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same Loans Supplement. 13. THIS LOANS SUPPLEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS. IN WITNESS WHEREOF, the parties hereto have caused this LOANS SUPPLEMENT to be executed by their respective duly authorized officers on Schedule I hereto as of the date set forth in Item 1 of Schedule I hereto. M-4 SCHEDULE I TO LOANS SUPPLEMENT COMPLETION OF INFORMATION AND SIGNATURES FOR LOANS SUPPLEMENT Re: Second Amended and Restated Receivables Loan Agreement, dated as of __________, 2004, with BWA Receivables Corporation Item 1 Date of Loans Supplement: Item 2 Selling Bank: Item 3 Purchasing Bank: , as ------------------------------------ Selling Bank By: ------------------------------------ Title: --------------------------------- [By: ---------------------------------- Title: --------------------------------] , as ------------------------------------ Purchasing Bank By: ------------------------------------ Title: --------------------------------- Consented To and Acknowledged: ABN AMRO BANK N.V., as Agent By: --------------------------------- Title: ------------------------------ By: --------------------------------- Title: ------------------------------ BWA RECEIVABLES CORPORATION By: --------------------------------- Title: ------------------------------ SCHEDULE II TO LOANS SUPPLEMENT LIST OF OFFICES AND ADDRESSES FOR NOTICES AND COMMITMENT AMOUNTS Selling Bank: Revised Bank Commitment: Purchasing Bank: Bank Commitment: Address for Notices for Purchasing Bank: - ------------------------------------- - ------------------------------------- - ------------------------------------- Attention: -------------------------- Telephone: -------------------------- Telecopy: --------------------------- SCHEDULE III TO LOANS SUPPLEMENT TRANSFER EFFECTIVE NOTICE To: THE PURCHASING BANK LISTED ON SCHEDULE I HERETO The undersigned, as Agent under the Second Amended and Restated Receivables Loan Agreement, dated as of December 6, 2004, among BWA Receivables Corporation, BorgWarner Inc., as Collection Agent, ABN AMRO Bank N.V., as Agent, the banks from time to time party thereto and Windmill Funding Corporation (as amended, supplemented, or otherwise modified from time to time, the "Loan Agreement") acknowledges receipt of ten (10) executed counterparts of a completed Loans Supplement, dated as of the date set forth in Item 1 of Schedule I hereto, between the Selling Bank set forth in Item 2 of Schedule I hereto and the Purchasing Bank set forth in Item 3 of Schedule I hereto, and schedules thereto. Terms defined in such Loans Supplement are used herein as therein defined. 1. Pursuant to such Loans Supplement, you are advised that the Transfer Effective Date will be __________________. 2. Pursuant to such Loans Supplement the Purchasing Bank is required to pay its Loan Price, if any, to the Selling Bank at or before 12:00 noon, local time of the Selling Bank, on the Transfer Effective Date in immediately available funds. Very truly yours, ABN AMRO BANK N.V., as Agent By: ------------------------------------ Title: --------------------------------- By: ------------------------------------ Title: --------------------------------- EXHIBIT N TO SECOND AMENDED AND RESTATED RECEIVABLES LOAN AGREEMENT LOANS SUPPLEMENT [FORM OF ASSIGNMENT FOR WINDMILL] LOANS SUPPLEMENT, dated as of the date set forth in Item 1 of Schedule I hereto, between the Assignor set forth in Item 2 of Schedule I hereto (the "Assignor"), and the Assignee set forth in Item 3 of Schedule I hereto (the "Assignee"). WITNESSETH: WHEREAS, this Loans Supplement is being executed and delivered in accordance with Section 11.6(e)(ii) of the Second Amended and Restated Receivables Loan Agreement, dated as of December 6, 2004, among BWA Receivables Corporation, a Delaware corporation (the "Borrower"), BorgWarner Inc., a Delaware corporation, as Collection Agent, ABN AMRO Bank N.V., as agent for the Lenders (in such capacity on behalf of the Lenders, the "Agent"), and the banks from time to time party thereto (collectively the "Banks"), and Windmill Funding Corporation, a Delaware corporation ("WINDMILL") (WINDMILL together with the Banks, the "Lenders") (as amended, supplemented or otherwise modified from time to time, the "Loan Agreement"). Terms defined therein being used herein (and in the Schedules hereto) have the same meaning as defined in the Loan Agreement). WHEREAS, the Assignee wishes to become a party to the Loan Agreement; and WHEREAS, the Assignor is selling and assigning to the Assignee all of its Loan Amount and Interest and all rights and obligations related thereto under the Loan Agreement as set forth herein; NOW, THEREFORE, the parties hereto hereby agree as follows: 1. Upon receipt by the Agent of ten (10) counterparts of this Loans Supplement, to each of which is attached a fully completed Schedule I and Schedule II, and each of which has been executed by the Assignor, the Assignee, the Agent and the Borrower, and upon the satisfaction of all of the requirements set forth in Section 11.6(e)(ii) of the Loan Agreement, including delivery of an opinion of counsel of the Assignee as described therein, the Agent will transmit to the Borrower, the Assignor and the Assignee a Transfer Effective Notice, substantially in the form of Schedule III to this Loans Supplement (a "Transfer Effective Notice"). Such Transfer Effective Notice shall set forth, inter alia, the date on which the transfer effected by this Loans Supplement shall become effective (the "Transfer Effective Date"), which date shall be two (2) Business Days following the date of such Transfer Effective Notice (or such other date selected by the Agent in its sole discretion). From and after the Transfer Effective Date, (i) the Assignee shall be a party to the Loan Agreement for all purposes thereof as if the Assignee were an original party thereto, all references to "WINDMILL" in the Loan Agreement and all other Transaction Documents shall be references to the Assignee and the Assignee agrees to be bound by all of the terms and provisions contained therein, and the Assignor shall be substituted, released and discharged from any further obligations under the Loan Agreement. 2. At or before 12:00 noon, local time of the Assignor, on the Transfer Effective Date, if the Assignor owns any Loan Amount under the Loan Agreement, the Assignee shall pay to the Assignor, in immediately available funds, an amount equal to the sum of (i) the Loan Amount of the Assignor, plus (ii) all unpaid Interest owed to, or which may become payable to, the Assignor under the Loan Agreement to the end of all Tranche Periods applicable to such Loan Amount, plus (iii) all accrued but unpaid fees and other costs and expenses (whether or not then due) payable to the Assignor under or in connection with the Loan Agreement (the "Loan Price"). Effective upon receipt by the Assignor of the Loan Price from the Assignee, the Assignor hereby transfers and assigns to the Assignee, without recourse, representation or warranty (except as explicitly set forth below), and the Assignee hereby irrevocably takes, receives and assumes from the Assignor, all of the Assignor's beneficial interest in the Secured Interest held by the Agent on its behalf, if any. 3. Concurrently with the execution and delivery hereof, the Assignor will provide to the Assignee copies of all documents requested by the Assignee which were delivered to the Assignor pursuant to the conditions precedent set forth in Article V of the Loan Agreement. 4. Each of the parties to this Loans Supplement agrees that at any time and from time to time upon the written request of any other party, it will execute and deliver such further documents and do such further acts and things as such other party may reasonably request in order to effect the purposes of this Loans Supplement. 5. By executing and delivering this Loans Supplement, the Assignor and the Assignee confirm to and agree with each other and the Agent and the other Lenders as follows: (i) other than the representation and warranty that it has not created any Adverse Claim upon any interest being transferred hereunder, the Assignor makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Loan Agreement or any other Transaction Document or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Agreement, any other Transaction Document, any Interest, any Receivable, or any other Affected Asset or any other instrument or document furnished pursuant thereto or the perfection, priority, condition, value or sufficiency of any collateral; (ii) the Assignor makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or any other Borg-Warner Entity or any other Affiliate of the Borrower or any other Borg-Warner Entity or any Obligor or the performance or observance by the N-2 Borrower or any other Borg-Warner Entity or any other Affiliate of the Borrower or any other Borg-Warner Entity of any of its obligations under the Loan Agreement, any other Transaction Document or any other instrument or document furnished pursuant thereto or the collectibility of any Receivable; (iii) the Assignee confirms that it has received a copy of the Loan Agreement (other than the Fee Letter), together with such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Loans Supplement; (iv) the Assignee will, independently and without reliance upon the Agent, the Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under, or in connection with, the Loan Agreement; (v) the Assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under, or in connection with, the Loan Agreement as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto, all in accordance with Article X of the Loan Agreement; (vi) the Assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Loan Agreement are required to be performed by it as "WINDMILL" under the Loan Agreement; and (vii) the Assignee specifies as its address for notices the address set forth in Schedule II hereto. 6. Each party hereto represents and warrants to and agrees with the Agent that each party hereto is aware of and will comply with all of the provisions of the Loan Agreement. 7. Schedule II hereto sets forth administrative information with respect to the Assignee. 8. Following the execution of this Loans Supplement by the Assignor and the Assignee, it will be delivered to the Agent for acceptance and recording by the Agent. This Loans Supplement shall be effective as of the Transfer Effective Date but only after it has been accepted and recorded by the Agent. 9. Upon acceptance and recording of this Loans Supplement by the Agent, as of the Transfer Effective Date, (i) the Assignee shall be a party to the Loan Agreement and, to the extent provided in this Loans Supplement and in the Loan Agreement and to the extent transferred hereunder, have the rights and obligations of the Assignor thereunder and (ii) the Assignor shall, to the extent provided in this Loans Supplement and the Loan Agreement, relinquish its rights and be released from its obligations under the Loan Agreement. 10. From and after the later of the Transfer Effective Date and the date of acceptance and recording of this Loans Supplement by the Agent, the Agent shall make all payments under the Loan Agreement in respect of the interest assigned hereby (including, without limitation, all payments on account of the Assignor and of Interest with respect thereto) to the Assignee. The Assignor and the Assignee shall make directly between themselves all appropriate adjustments in payments under the Loan Agreement for periods, if any, prior to the later of the dates specified in the preceding sentence. N-3 11. The Assignor and the Assignee hereby advise the Agent that, to the extent the consent of the Borrower or any other Person is required for the transfer contemplated herein, such consent has been duly obtained and remains in full force and effect. 12. This Loans Supplement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same Loans Supplement. 13. THIS LOANS SUPPLEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS. IN WITNESS WHEREOF, the parties hereto have caused this Loans Supplement to be executed by their respective duly authorized officers on Schedule I hereto as of the date set forth in Item 1 of Schedule I hereto. N-4 SCHEDULE I TO LOANS SUPPLEMENT COMPLETION OF INFORMATION AND SIGNATURES FOR LOANS SUPPLEMENT Re: Second Amended and Restated Receivables Loan Agreement, dated as of December 6, 2004, with BWA Receivables Corporation Item 1 Date of Loans Supplement: Item 2 Assignor: Item 3 Assignee: , as ----------------------------------- Assignor By: ------------------------------------ Title: --------------------------------- , as ----------------------------------- Assignee By: ------------------------------------ Title: --------------------------------- Consented To and Acknowledged: ABN AMRO BANK N.V., as Agent By: -------------------------------- Title: ------------------------------ By: -------------------------------- Title: ------------------------------ BWA RECEIVABLES CORPORATION By: -------------------------------- Title: ------------------------------ SCHEDULE II TO LOANS SUPPLEMENT LIST OF OFFICES AND ADDRESSES FOR NOTICES Address for Notices: - ------------------------------------- - ------------------------------------- - ------------------------------------- Attention: -------------------------- Telephone: -------------------------- Telecopy: --------------------------- SCHEDULE III TO LOANS SUPPLEMENT TRANSFER EFFECTIVE NOTICE To: THE ASSIGNEE LISTED ON SCHEDULE I HERETO The undersigned, as Agent under the Second Amended and Restated Receivables Loan Agreement, dated as of December 6, 2004, among BWA Receivables Corporation, BorgWarner Inc., as Collection Agent, ABN AMRO Bank N.V., as Agent, the banks from time to time party thereto and Windmill Funding Corporation (as amended, supplemented, or otherwise modified from time to time, the "Loan Agreement"), acknowledges receipt of ten (10) executed counterparts of a completed Loans Supplement, dated as of the date set forth in Item 1 of Schedule I hereto, between the Assignor set forth in Item 2 of Schedule I hereto, and the Assignee set forth in Item 3 of Schedule I hereto, and schedules thereto. Terms defined in such Loans Supplement are used herein as therein defined. 1. Pursuant to such Loans Supplement, you are advised that the Transfer Effective Date will be __________________. 2. Pursuant to such Loans Supplement the Assignee is required to pay its Loan Price, if any, to the Assignor at or before 12:00 noon, local time of the Assignor, on the Transfer Effective Date in immediately available funds. Very truly yours, ABN AMRO BANK N.V., as Agent By: ------------------------------------ Title: --------------------------------- By: ------------------------------------ Title: --------------------------------- SCHEDULE I TO SECOND AMENDED AND RESTATED RECEIVABLES LOAN AGREEMENT BANKS AND BANK COMMITMENTS ~~Name of Liquidity Provider Commitment - -------------------------- ---------- ABN AMRO Bank N.V. $51,000,000~~

EX-10.11 3 c02047exv10w11.txt 1ST AMENDMENT TO 2ND AMENDED AND RESTATED RECIEVABLES LOAN AGREEMENT Exhibit 10.11 FIRST AMENDMENT DATED AS OF APRIL 29, 2005 TO SECOND AMENDED AND RESTATED RECEIVABLES LOAN AGREEMENT This First Amendment (the "Amendment"), dated as of April 29, 2005, 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"), the Bank listed on the signature page hereof (the "Bank") and ABN AMRO Bank N.V., as agent for Windmill, and the Banks (the "Agent"). Reference is hereby made to that certain Second Amended and Restated Receivables Loan Agreement, dated as of December 6, 2004 (as amended, supplemented or otherwise modified through the date hereof, the "Loan Agreement"), among the Borrower, the Collection Agent, Windmill, the Bank and the Agent. Terms used herein and not otherwise defined herein which are defined in each Amended Agreement or the other Transaction Documents (as defined in the Loan Agreement) shall have the same meaning herein as defined therein. For good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: Section 1. Upon execution by the parties hereto in the space provided for that purpose below, the Loan Agreement shall be, and it hereby is, amended as follows: (a) The date "April 29, 2005" 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 "April 28, 2006". (b) The date "April 29, 2005" 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 "April 28, 2006". Section 2. This Amendment shall become effective once the Agent has received executed counterparts hereof from each of the parties hereto. Section 3. 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, are 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 4. 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 5. This Amendment shall be governed and construed in accordance with the internal laws of the State of Illinois. [Signature Pages to Follow] 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 and as a Bank By: ------------------------------------ Title: --------------------------------- By: ------------------------------------ Title: --------------------------------- WINDMILL FUNDING CORPORATION By: ------------------------------------ Title: --------------------------------- BWA RECEIVABLES CORPORATION By: ------------------------------------ Title: --------------------------------- BORGWARNER INC. By: ------------------------------------ Title: --------------------------------- EX-13.1 4 c02047exv13w1.txt ANNUAL REPORT TO STOCKHOLDERS Exhibit 13.1 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 (OEMs) of light vehicles (i.e. passenger cars, sport-utility vehicles, cross-over vehicles, vans and light-trucks). Our products are also manufactured and sold to OEMs of commercial trucks, buses and agricultural and off-highway vehicles. We also manufacture and sell our products into the aftermarket for light and commercial vehicles. We operate manufacturing facilities serving customers in the Americas, Europe and Asia, and are an original equipment supplier to every major automaker in the world. The Company's products fall into two reportable operating segments: Engine and Drivetrain. The Engine segment's products include turbochargers, timing chain systems, air management, emissions systems, thermal systems, as well as diesel and gas ignition systems. The Drivetrain segment is comprised of all-wheel drive transfer cases, torque management systems, and components and systems for automated transmissions. BERU TRANSACTION On January 4, 2005, the Company acquired 62.2% of the outstanding shares of Beru Aktiengesellschaft (Beru), headquartered in Ludwigsburg, Germany, from the Carlyle Group and certain family shareholders. In conjunction with the acquisition, the Company launched a tender offer for the remaining outstanding shares of Beru, which ended in February 2005. Presently the Company holds 69.4% of the shares of Beru at a gross cost of $554.8 million, or $477.2 million net of cash and cash equivalents acquired (the Beru Acquisition). Beru is a leading global automotive supplier of diesel cold starting technology (glow plugs and instant starting systems); gasoline ignition technology (spark plugs and ignition coils); and electronic and sensor technology (tire pressure sensors, diesel cabin heaters and selected sensors). The operating results of Beru have been reported within the Engine segment for 2005. The Company considers the Beru Acquisition to be material to the results of operations, financial position and cash flows from the date of acquisition through December 31, 2005 and believes that the internal controls and procedures of Beru have a material effect on internal control over financial reporting. Throughout 2005 the Company went through a process to coordinate the internal control processes at Beru and has extended its Sarbanes-Oxley Act Section 404 compliance program to include Beru at December 31, 2005. See Note 18 to the Consolidated Financial Statements for a discussion of this transaction and related restatement of 2005 interim consolidated financial statements. Page 1 RESULTS OF OPERATIONS OVERVIEW A summary of our operating results for the years ended December 31, 2005, 2004 and 2003 is as follows: millions of dollars, except per share data
Year ended December 31, 2005 2004 2003 - ----------------------- ------- ------ ------ Engine $ 354.5 $281.7 $239.6 Drivetrain 97.6 106.9 98.4 ------- ------ ------ Segment earnings before interest and taxes 452.1 388.6 338.0 Corporate, including litigation settlement and equity in affiliates earnings (100.8) (50.3) (48.0) ------- ------ ------ Consolidated earnings before interest and taxes 351.3 338.3 290.0 Interest expense and finance charges 37.1 29.7 33.3 ------- ------ ------ Earnings before income taxes and minority interest 314.2 308.6 256.7 Provision for income taxes 55.1 81.2 73.2 Minority interest, net of tax 19.5 9.1 8.6 ------- ------ ------ Net earnings $ 239.6 $218.3 $174.9 ======= ====== ====== Per share data - assuming dilution: $ 4.17 $ 3.86 $ 3.20 ======= ====== ======
A summary of major factors impacting the Company's net earnings for the year ended December 31, 2005 in comparison to 2004 and 2003 is as follows: - Continued demand for our products in both Engine and Drivetrain segments. - Lower domestic production of light trucks and sport-utility vehicles equipped with torque transfer products. - Continued benefits of our cost reduction programs, including containment of selling, general & administrative expenses, which partially offset continued raw material and energy cost increases, rising health care costs and the costs related to global expansion. - Inclusion in Engine's results of operations of 69.4% interest in Beru (acquired in January and February 2005) and the related write-off of the excess purchase price allocated to Beru's in-process research and development (IPR&D), order backlog and beginning inventory. - Gain from the 2005 sale of shares in Aktiengesellschaft Kuhnle, Kopp & Kausch (AGK), an unconsolidated subsidiary carried on the cost basis. - Recognition in 2005 of a $45.5 million charge related to the anticipated cost of settling all alleged Crystal Springs-related environmental contamination personal injury and property damage claims. See Contingencies in Management's Discussion and Analysis for more information on Crystal Springs. - Higher interest expense due primarily to increased debt levels from funding the Beru Acquisition and, to a lesser extent, higher short-term interest rates. - Favorable currency impact of $3.1 million in 2005 and $11.0 million in 2004. - Release of tax accrual accounts upon conclusion of certain tax audits. Page 2 The following table is provided for comparison with results from prior reporting periods. It details a number of non-recurring items that impacted earnings in 2005 and reconciles non-U.S. Generally Accepted Accounting Principle (GAAP) amounts to the most directly comparable U.S. GAAP amounts: millions of dollars, except per share amounts
DILUTED EARNINGS For the Year Ended December 31, 2005 NET EARNINGS PER SHARE(1) - ------------------------------------ ------------ ---------------- Non-U.S. GAAP: BorgWarner base business $238.7 $ 4.16 Beru's contribution to net earnings 9.7 0.17 ------ ------ Base business plus Beru 248.4 4.33 One-time write-off of the excess purchase price associated with Beru's IPR&D, order backlog and beginning inventory (12.1) (0.21) Net gain from divestitures 6.3 0.11 Adjustments to tax accruals 25.7 0.45 Crystal Springs related settlement (28.7) (0.50) ------ ------ U.S. GAAP $239.6 $ 4.17 ====== ======
(1) Does not add due to rounding and quarterly changes in the number of weighted-average outstanding diluted shares NET SALES The table below summarizes the overall worldwide global light vehicle production percentage changes for 2005 and 2004: WORLDWIDE LIGHT VEHICLE YEAR OVER YEAR CHANGE IN PRODUCTION*
2005 2004 ---- ---- North America 0.0% -0.7% Europe -0.2% 3.7% Japan, South Korea and China 7.9% 5.0% Total Worldwide 3.9% 4.7%
* Data provided by CSM Worldwide. ~~BorgWarner Year Over Year Net Sales Change 21.8% 14.9%~~

Our net sales increases in 2005 and 2004 were strong compared to the estimated worldwide market production increase of approximately 3.9% in 2005 and approximately 4.7% in 2004. The Company's net sales increased 21.8% in 2005 from 2004, or 7.3% excluding the effect of the Beru Acquisition, and increased 14.9% in 2004 from 2003. The increase in 2005 was driven by European and Asian automaker demand for turbochargers, timing systems and emissions products, stronger commercial vehicle production in both Europe and North America, and sales growth of Drivetrain products outside of North America, including increased sales of dual-clutch transmission products. Sales in 2005 were negatively impacted by lower domestic production of light trucks and sport-utility vehicles equipped with BorgWarner torque transfer products. The effect of changing currency rates also had a positive impact on net sales and net earnings in 2005 and 2004. The effect of non-U.S. currencies, primarily the South Korean Won, added $23.9 Page 3 million to net sales and $3.1 million to net earnings in 2005. In 2004, non-U.S. currencies, primarily the Euro, British Pound and Japanese Yen added $114.0 million to net sales and $11.0 million to net earnings. The year over year increase in net sales excluding the favorable impact of currency was 21.1% in 2005 and 11.1% in 2004. Excluding the favorable impacts of both currency and the Beru Acquisition, the year over year increase in net sales was 6.6% in 2005. Consolidated net sales included sales to Ford Motor Company of approximately 16%, 21%, and 23%; to Volkswagen of approximately 13%, 10%, and 8%; to DaimlerChrysler of approximately 12%, 14%, and 17%; and to General Motors Corporation of approximately 9%, 10%, and 12% for the years ended December 31, 2005, 2004 and 2003, respectively. Both of our operating segments had significant sales to all four of the customers listed above. Such sales consisted of a variety of products to a variety of customer locations and regions. No other single customer accounted for more than 10% of consolidated sales in any year of the periods presented. Over the past several years as the demand for our technologies in Europe and Asia has grown, we have increased our sales to several other global OEMs, bringing us more in line with our customers' share of the global vehicle market. As a result, sales to Ford, DaimlerChrysler and General Motors have become a smaller percentage of total sales. Our overall outlook for 2006 is positive. BorgWarner sales are expected to grow in excess of a projected moderate global vehicle production growth rate. The outlook for North American and European vehicle production is flat, but solid growth is anticipated in the Asian market. We expect to benefit from strong European and Asian automaker demand for turbochargers, timing systems, ignition systems and emissions products, as well as stronger commercial vehicle production in both Europe and North America. Growing demand for drivetrain products outside of North America, including increased sales of dual-clutch transmission products, is also a positive trend for the Company. Sales growth outside of the U.S. is expected to be partially offset by weaker foreign currencies in 2006. Assuming no major changes to the above assumptions, we expect continued long-term sales and net earnings growth. RESULTS BY OPERATING SEGMENT The Company's business is comprised of two operating segments: Engine and Drivetrain. These reportable segments are strategic business groups, which are managed separately as each represents a specific grouping of related automotive components and systems. The Company allocates resources to each segment based upon the projected after-tax return on invested capital (ROIC) of its business initiatives. The ROIC is comprised of projected earnings before interest and taxes (EBIT) adjusted for taxes compared to the projected average capital investment required. EBIT is considered a "non-GAAP financial measure." Generally, a non-GAAP financial measure is a numerical measure of a company's financial performance, financial position or cash flows that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. EBIT is defined as earnings before interest, taxes and minority interest. "Earnings" is intended to mean net earnings as presented in the Consolidated Statements of Operations under GAAP. The Company believes that EBIT is useful to demonstrate the operational profitability of our segments by excluding interest and taxes, which are generally accounted for across the entire Company on a consolidated basis. EBIT is also one of the measures used by the Company to determine resource allocation within the Company. Although the Company believes that EBIT Page 4 enhances understanding of our business and performance, it should not be considered an alternative to, or more meaningful than, net earnings or cash flows from operations as determined in accordance with GAAP. The following tables present net sales and EBIT by segment for the years 2005, 2004 and 2003: NET SALES millions of dollars
Year ended December 31, 2005 2004 2003 - ----------------------- -------- -------- -------- Engine $3,004.7 $2,217.0 $1,869.7 Drivetrain 1,333.7 1,358.6 1,245.6 Inter-segment eliminations (44.6) (50.3) (46.1) -------- -------- -------- Net Sales $4,293.8 $3,525.3 $3,069.2 ======== ======== ========
EARNINGS BEFORE INTEREST AND TAXES millions of dollars
Year ended December 31, 2005 2004 2003 - ----------------------- ------ ------ ------ Engine $ 354.5 $281.7 $239.6 Drivetrain 97.6 106.9 98.4 ------- ------ ------ Segment earnings before interest and taxes (Segment EBIT) 452.1 388.6 338.0 Corporate, including litigation settlement and equity in affiliates' earnings (100.8) (50.3) (48.0) ------- ------ ------ Consolidated earnings before interest and taxes (EBIT) 351.3 338.3 290.0 Interest expense and finance charges 37.1 29.7 33.3 ------- ------ ------ Earnings before income taxes and minority interest 314.2 308.6 256.7 Provision for income taxes 55.1 81.2 73.2 Minority interest, net of tax 19.5 9.1 8.6 ------- ------ ------ Net earnings $ 239.6 $218.3 $174.9 ======= ====== ======
The ENGINE segment 2005 net sales were up 35.5% from 2004 with a 25.8% increase in segment EBIT over the same period. The 2005 increases were, in part, due to the inclusion of our majority stake in Beru whose operating results are now included in this segment. Excluding the impacts of foreign currency and Beru, sales were up 11.9% with a 13.2% increase in segment EBIT. The Engine segment continued to benefit from European and Asian automaker demand for turbochargers, timing systems and emissions products, and from stronger commercial vehicle production in both Europe and North America. The segment EBIT was impacted by increased volume, productivity, positive currency impact and reduced royalty expenses to Honeywell, which offset commodity price increases of approximately $24.0 million and start up costs in South Korea and China. The Engine segment 2004 net sales increased 18.6% from 2003 and segment EBIT increased 17.6% over the same period. This segment benefited from continued demand for the Company's turbochargers for European passenger cars and commercial vehicles as well as continued growth of our timing chain and emissions products. The EBIT was impacted by increased productivity and production in the turbocharger business, which translated into higher profitability. This was partially offset by start up costs for variable cam timing (VCT) systems launched in 2004 and for new South Korean operations. For 2006, the Engine segment expects to deliver continued growth from further penetration of diesel engines in Europe, which will continue to boost demand for turbochargers and Beru Page 5 technologies, and the continued ramp-up of our first high-volume VCT system. Investments in South Korea and China are expected to begin to contribute to sales and EBIT. This growth is expected to help offset anticipated weakness in North American light vehicle production. The DRIVETRAIN segment 2005 net sales decreased 1.8% from 2004 with an 8.7% decrease in segment EBIT over the same period. The sales and segment EBIT decreases were primarily due to weaker North American production of light trucks and sport-utility vehicles equipped with our torque transfer products. Partially offsetting those decreases was the continued ramp-up of the Company's DualTronic(TM) transmission modules in Europe. In addition to the loss of contribution margin on the lower sales volumes, commodity price increases of approximately $23.0 million, as well as health care cost increases, impacted EBIT unfavorably. The Company continues to focus on its cost reduction efforts to help offset these cost challenges. The Drivetrain segment 2004 net sales increased 9.1% from 2003, with an 8.6% increase in segment EBIT over the same period. The sales increase was the result of strong global demand for transmission components and all-wheel drive systems. The Company's new DualTronic(TM) transmission modules continued to ramp-up volume in Europe. The increase in EBIT was due to increased volume and continued focus on cost reductions in our operations. These positive trends were offset by commodity price increases of approximately $20.0 million, which were primarily steel and start up costs. The Drivetrain segment is expected to grow slightly in 2006 as stagnant demand for our rear-wheel-drive based four-wheel-drive systems in North America is expected to be offset by higher sales of front-wheel-drive based all-wheel-drive systems, increased penetration of automatic transmissions in Europe and Asia, including increased sales of dual-clutch transmission products, and new rear-wheel-drive based four-wheel-drive programs outside of North America. CORPORATE is the difference between calculated total Company EBIT and the total of the segments' EBIT. It represents corporate headquarters expenses and expenses not directly attributable to the individual segments and also includes equity in affiliate earnings. This net expense was $100.8 million in 2005, $50.3 million in 2004, and $48.0 million in 2003. The primary driver of the $50.5 million increase in 2005 from 2004 was the $45.5 million charge associated with the anticipated cost of settling all Crystal Springs-related alleged environmental contamination personal injury and property damage claims. The $2.3 million increase in 2004 from 2003 was due to higher pension and post retirement health care costs for discontinued operations, which are recorded at the corporate level. Page 6 OTHER FACTORS AFFECTING RESULTS OF OPERATIONS The following table details our results of operations as a percentage of sales:
Year Ended December 31, 2005 2004 2003 - ----------------------- ----- ----- ----- Net sales 100.0% 100.0% 100.0% Cost of sales 80.1 81.5 80.9 - ----------------------------------------------------- ----- ----- ----- Gross profit 19.9 18.5 19.1 Selling, general and administrative expenses 11.5 9.6 10.3 Other (income) expense 0.8 0.1 -- - ----------------------------------------------------- ----- ----- ----- Operating income 7.6 8.8 8.8 Equity in affiliate earnings, net of tax (0.7) (0.8) (0.7) Interest expense and finance charges 0.9 0.8 1.1 - ----------------------------------------------------- ----- ----- ----- Earnings before income taxes and minority interest 7.4 8.8 8.4 Provision for income taxes 1.3 2.3 2.4 Minority interest, net of tax 0.5 0.3 0.3 - ----------------------------------------------------- ----- ----- ----- Net earnings 5.6% 6.2% 5.7% ===================================================== ===== ===== =====
GROSS PROFIT for 2005 was 19.9%, up from 18.5% in 2004 and up from 19.1% in 2003. The increase in gross profit in 2005 was largely due to the Beru Acquisition. Excluding the impact of Beru, the Company's gross margin decreased slightly to 18.0% in 2005 from 18.5% in 2004. The decrease in gross margin is due to several factors, including higher raw material, health care and energy costs, a change in sales mix and geographic expansion. The geographic expansion includes new facilities in Europe and Asia for both operating segments. We anticipate 2006 margins to be impacted by higher raw material, health care and energy costs, the continued shift from components to systems sales and continued results from our cost reduction initiatives. Also impacting gross margins in 2005, 2004 and 2003 is the effect of a royalty agreement the Company entered into with Honeywell International for certain variable turbine geometry (VTG) turbochargers after a German court ruled in favor of Honeywell in a patent infringement action. In order to continue shipping to its OEM customers, the Company and Honeywell entered into two separate royalty agreements, signed in July 2002 and June 2003, respectively. The June 2003 agreement runs through 2006 with a minimum royalty for shipments up to certain volume levels and a per unit royalty for any units sold above these stated amounts. The royalty agreement costs recognized under the agreements were $1.9 million in 2005, $14.2 million in 2004 and $23.2 million in 2003. These costs were based on units shipped and were recorded in cost of goods sold. It is anticipated that these costs will again be at minimal levels in 2006 as the Company's primary customers have converted most of their requirements to the next generation VTG turbocharger. SELLING, GENERAL AND ADMINISTRATIVE expenses (SG&A) as a percentage of net sales increased to 11.5% in 2005. The increase in SG&A spending in 2005 is due primarily to the acquisition of Beru. Excluding the impact of Beru, SG&A spending in 2005 was 9.4% of sales, down slightly from 9.6% in 2004 and 10.3% in 2003. We expect that the growth in sales will continue to outpace the future increases in SG&A spending due to the Company's ongoing focus on cost controls, and leveraging the existing infrastructure to support the increased sales. Page 7 Research and development (R&D) is a major component of the Company's SG&A expenses. R&D spending was $161.0 million, or 3.8% of sales in 2005, compared to $123.1 million, or 3.5% of sales in 2004, and $118.2 million, or 3.9% of sales in 2003. Beru is responsible for $32.0 million of the $37.9 million increase in R&D spending over 2004. We continue to increase our spending in R&D, although the growth rate in the future may not necessarily match the rate of our sales growth. We also continue to invest in a number of cross-business R&D programs, as well as a number of other key programs, all of which are necessary for short and long-term growth. Our long-term expectation for R&D spending is approximately 4.0% of sales. We intend to maintain our commitment to R&D spending while continuing to focus on controlling other SG&A costs. OTHER (INCOME) EXPENSE increased to a loss of $34.8 million in 2005, from a loss of $3.0 million in 2004 and $(0.1) million of income in 2003. The 2005 loss was primarily due to the $45.5 million charge associated with the anticipated cost of settling all Crystal Springs-related alleged environmental contamination personal injury and property damage claims, which was offset in part by the $6.3 million gain on the sale of businesses, primarily the Company's interest in AGK, and interest income of $4.2 million. The major item in 2004 was losses from capital asset disposals of $3.5 million. EQUITY IN AFFILIATES EARNINGS, NET OF TAX of $28.2 million in 2005 decreased by $1.0 million from 2004, and increased by $9.1 million in 2004 from 2003. This line item is primarily driven by the results of our 50% owned Japanese joint venture, NSK-Warner, and our 32.6% owned Indian joint venture, Turbo Energy Limited (TEL). Equity in affiliate earnings in 2005 was negatively impacted by net adjustments to the carrying values of our equity investments that were partially offset by improved operating results of both NSK-Warner and TEL. For more discussion of NSK-Warner, see Note 6 of the Consolidated Financial Statements. INTEREST EXPENSE AND FINANCE CHARGES increased by $7.4 million in 2005 from 2004 and decreased by $3.6 million in 2004 from 2003. The increase in 2005 was due primarily to the $156.0 million increase in debt levels from funding the Beru Acquisition and, to a lesser extent, higher short-term interest rates. The decrease in 2004 was due to lower debt levels, as we used cash generated from operations to pay off debt. In 2004, our balance sheet debt decreased $71.0 million excluding the fair value adjustment for interest rate swaps, and we reduced the amount of securitized accounts receivable sold by $40.0 million. We took advantage of lower interest rates through the use of interest rate and cross-currency swap arrangements described more fully in Note 10 to the Consolidated Financial Statements. THE PROVISION FOR INCOME TAXES resulted in an effective tax rate for 2005 of 17.5% compared with rates of 26.3% in 2004 and 28.5% in 2003. The effective tax rate of 17.5% for 2005 differs from the U.S. statutory rate primarily due to the following factors: - The release of tax accrual accounts upon conclusion of certain tax audits. - The tax effects of the disposition of AGK and other miscellaneous dispositions. - Foreign rates which differ from those in the U.S. - The realization of certain business tax credits including R&D and foreign tax credits. - Other permanent items, including equity in affiliates earnings. If the effects of the tax accrual release, the Crystal Springs related settlement, the one-time amortization of certain Beru accounting items, the disposition of AGK and other miscellaneous dispositions are not taken into account, the Company's effective tax rate associated with its on-going business operations was approximately 27.8%. This rate was lower than the 2004 tax rate Page 8 for on-going operations of 30.0% primarily due to changes in the mix of global pre-tax income among taxing jurisdictions including withholding taxes. MINORITY INTEREST, NET OF TAX of $19.5 million increased by $10.4 million from 2004 and by $10.9 million from 2003. The increase is primarily related to the 30.6% minority interest in Beru, in addition to the earnings growth in our Asian majority-owned subsidiaries. LIQUIDITY AND CAPITAL RESOURCES CAPITALIZATION
millions of dollars 2005 2004 % CHANGE - ------------------- -------- -------- -------- Notes payable and current portion of long-term debt $ 299.9 $ 16.5 Long-term debt 440.6 568.0 -------- -------- ---- Total debt 740.5 584.5 26.7% -------- -------- ---- Minority interest in consolidated subsidiaries 136.1 22.2 Total stockholders' equity 1,644.2 1,534.2 -------- -------- ---- Total capitalization $2,520.8 $2,140.9 17.7% ======== ======== ==== Total debt to capital ratio 29.4% 27.3% ======== ========
Stockholders' equity increased by $110.0 million in 2005. The increase was primarily caused by net income of $239.6 million, along with stock option exercises of $17.6 million. These factors were somewhat offset by currency translation adjustments of $97.4 million, hedge instrument adjustments of $0.3 million, and dividend payments of $31.8 million. In relation to the U.S. Dollar, the currencies in foreign countries where we conduct business, particularly the Euro and Japanese Yen, weakened, causing the currency translation component of other comprehensive income to decrease in 2005. The $156.0 million increase in debt was primarily due to the funding of the Beru Acquisition at a cost of $554.8 million, $477.2 million net of cash and cash equivalents acquired. OPERATING ACTIVITIES Net cash provided by operating activities of $396.5 million is $30.1 million less than in 2004, primarily as a result of higher cash tax payments of $86.5 million in 2005 versus 2004, payment of $28.5 million of Crystal Springs-related settlements in 2005 and the funding of post retirement related liabilities with cash in 2005 instead of the $25.8 million of Company stock used in 2004. The $396.5 million consists of net earnings of $239.6 million, increased for non-cash charges of $224.4 million and offset by a $67.5 million increase in net operating assets and liabilities. Non-cash charges are primarily comprised of $255.5 million in depreciation and amortization expense. Accounts receivable, excluding the impact of currency and the Beru Acquisition, increased a total of $79.6 million due to higher business levels, particularly in Europe. Certain of our European customers tend to have longer payment terms than our North American customers. Inventory increased by $30.1 million excluding the impact of currency and Beru, while our inventory turns decreased slightly to 12.5 times from 12.9 in 2004. INVESTING ACTIVITIES Page 9 Net cash used in investing activities totaled $700.1 million, compared with $257.2 million in the prior year. The majority of the increase was due to payments for the Beru Acquisition. Capital spending of $246.7 million in 2005, or 5.7% of sales, increased $41.8 million over the 2004 level of $204.9 million, or 5.8% of sales. Selective capital spending remains an area of focus for the Company, both in order to support our book of new business and for cost reduction and other purposes. Heading into 2006, we plan to continue to spend on capital to support the launch of our new applications and for cost reductions and productivity improvement projects. Our target for capital spending is approximately 5.5% of sales. On March 11, 2005, the Company completed the sale of its holdings in AGK for $57.0 million to Turbo Group GmbH. The proceeds, net of closing costs, were approximately $54.2 million, resulting in a gain of $10.1 million on the sale. The 2003 investing uses of cash includes $12.8 million of payments to resolve a valuation dispute regarding the value of the turbocharger business of AGK. The valuation payment resulted from the settlement in 2003 of a lawsuit brought by certain minority shareholders of AGK related to the automotive turbocharger business of AGK, which the Company purchased from AGK in 1998. FINANCING ACTIVITIES AND LIQUIDITY In 2005 the Company financed the $554.8 million Beru Acquisition ($477.2 million net of cash and cash equivalents acquired) and subsequently repaid $160.2 million of those borrowings. See Note 18 to the Consolidated Financial Statements for a discussion of the transaction. Net debt repayments were $55.9 million and $21.3 million in 2004 and 2003, respectively. Proceeds from the exercise of employee stock options provided $17.6 million, $14.4 million and $39.3 million in 2005, 2004 and 2003, respectively. The Company also paid dividends, including payments to minority shareholders, of $40.0 million, $27.9 million and $19.4 million in 2005, 2004 and 2003, respectively. The Company has a revolving multi-currency credit facility, which provides for borrowings up to $600 million through July 2009. The credit facility agreement is subject to the usual terms and conditions applied by banks to an investment grade company. The Company was in compliance with all covenants for all periods presented. In addition to the credit facility, we have $300 million available under a universal shelf registration statement on file with the Securities and Exchange Commission through which a variety of debt and/or equity instruments could be issued. The Company also has access to the commercial paper market through a $50 million accounts receivable securitization facility, which is rolled over annually. From a credit quality perspective, we have an investment grade credit rating of A- from Standard & Poor's and Baa2 from Moody's. The Company's significant contractual obligation payments at December 31, 2005, are as follows:
millions of dollars TOTAL 2006 2007-2008 2009-2010 AFTER 2010 - ------------------- -------- ------ --------- --------- ---------- Other post retirement benefits excluding pensions (a) $2,273.4 $ 34.1 $ 74.3 $ 81.3 $2,083.7 Notes payable and long-term debt 742.7 299.9 17.8 164.8 260.2 Projected minimum interest costs (b) 102.9 27.4 42.5 26.1 6.9 Non-cancelable operating leases (c) 69.7 28.4 15.1 13.0 13.2 Capital spending obligations 59.1 59.1 -- -- -- -------- ------ ------ ------ -------- Total (d) $3,247.8 $448.9 $149.7 $285.2 $2,364.0 ======== ====== ====== ====== ========
(a) Other post retirement benefits (excluding pensions) include anticipated future payments to cover retiree medical and life insurance benefits. Since the timing and amount of payments for pension plans are not certain for future years, such payments have been excluded from this table. The Company expects to contribute a total of $25 million to $30 million into all pension plans during 2006. See Note 11 to the Consolidated Financial Statements for disclosures related to the Company's pension and other post retirement benefits. Page 10 (b) Projection is based upon an average debt portfolio interest rate of 5.00%. (c) 2006 includes $16.6 million for the guaranteed residual value of production equipment with a lease that expires in 2006. Please see Note 15 to the Consolidated Financial Statements for details concerning this lease. (d) The Company does not have any long-term or fixed purchase obligations for inventories. We believe that the combination of cash from operations, cash balances, available credit facilities and the universal shelf registration 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, external growth, debt reduction, dividends and share repurchase. OFF BALANCE SHEET ARRANGEMENTS As of December 31, 2005, the accounts receivable securitization facility was sized at $50 million and has been in place with its current funding partner since January 1994. This facility sells accounts receivable without recourse. The Company has certain leases that are recorded as operating leases. Types of operating leases include leases on the headquarters facility, an airplane, vehicles, and certain office equipment. The Company also has a lease obligation for production equipment at one of its facilities. The total expected future cash outlays for all lease obligations at the end of 2005 is $69.7 million. See Note 15 to the Consolidated Financial Statements for more information on operating leases, including future minimum payments. The Company has guaranteed the residual values of the leased production equipment. The guarantees extend through the maturity of the underlying lease, which is in 2006. In the event the Company exercises its option not to purchase the production equipment, the Company has guaranteed a residual value of $16.6 million. The equipment is currently fully utilized and we do not believe we have any potential loss due to this guarantee. PENSION AND OTHER POST RETIREMENT BENEFITS The Company's policy is to fund its defined benefit pension plans in accordance with applicable government regulations and to make additional contributions when management deems it appropriate. At December 31, 2005, all legal funding requirements had been met. The Company contributed $26.0 million to its pension plans in 2005 and $36.3 million in 2004. The Company expects to contribute a total of $25 million to $30 million in 2006. The funded status of all pension plans decreased from an unfunded position of $(116.4) million at the end of 2004 to $(144.5) million at the end of 2005. The main reason for the $28.1 million increase in the net underfunding is the inclusion of the Beru pension plans in 2005. Beru's pension plans, like our other pension plans in Germany, are unfunded plans. Other post retirement benefits primarily consist of post retirement health care benefits for certain employees and retirees of the Company's U.S. operations. The Company funds these benefits as retiree claims are incurred. Other post retirement benefits had an unfunded status of $(679.9) million at the end of 2005, and $(537.2) million at the end of 2004. The unfunded levels increased due to the decrease in the discount rate assumption and the increase in the health care inflation assumption. These increases were somewhat offset by changes in certain plan designs during 2005. Page 11 The Company believes it will be able to fund the requirements of these plans through cash generated from operations or other available sources of financing for the foreseeable future. OTHER MATTERS CONTINGENCIES In the normal course of business the Company and its subsidiaries are parties to various legal claims, actions and complaints, including matters involving intellectual property claims, general liability and various other risks. It is not possible to predict with certainty whether or not the Company and its subsidiaries will ultimately be successful in any of these legal matters or, if not, what the impact might be. The Company's environmental and product liability contingencies are discussed separately below. The Company's management does not expect that the results in any of these legal proceedings will have a material adverse effect on the Company's results of operations, financial position or cash flows. ENVIRONMENTAL The Company and certain of its current and former direct and indirect corporate predecessors, subsidiaries and divisions have been identified by the United States Environmental Protection Agency and certain state environmental agencies and private parties as 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 38 such sites. Responsibility for clean-up and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula. The Company believes that none of these matters, individually or in the aggregate, will have a material adverse effect on its results of operations, financial position, or cash flows, 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. Based on information available to us, 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 and consulting costs; remediation alternatives; estimated legal fees; and other factors, the Company has established an accrual for indicated environmental liabilities with a balance at December 31, 2005, of approximately $38.3 million. Included in the total accrued liability is the $16.1 million anticipated cost to settle all outstanding claims related to Crystal Springs described below, which was recorded in the second quarter of 2005. For the other 37 sites, we have accrued amounts that do not exceed $3.0 million related to any individual site and management does not believe that the costs related to any of these other individual sites will have a material adverse effect on the Company's results of operations, cash flows or financial condition. The Company expects to expend substantially all of the $38.3 million environmental accrued liability over the next three to five years. 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. The liabilities at issue result from operations of Kuhlman Electric that pre-date Page 12 the Company's acquisition of Kuhlman Electric's parent company, Kuhlman Corporation, in 1999. During 2000, Kuhlman Electric notified us that it discovered potential environmental contamination at its Crystal Springs, Mississippi plant while undertaking an expansion of the plant. Kuhlman Electric and others, including the Company, were sued in numerous related lawsuits, in which multiple claimants alleged personal injury and property damage. The Company and other defendants, including the Company's subsidiary, Kuhlman Corporation, entered into a settlement in July 2005 regarding approximately 90% of personal injury and property damage claims relating to the alleged environmental contamination. In exchange for, among other things, the dismissal with prejudice of these lawsuits, the defendants agreed to pay a total sum of up to $39.0 million in settlement funds. The settlement was paid in three approximately equal installments. The first two payments of $12.9 million were made in the third and fourth quarters of 2005 and the remaining installment of $13.0 million was paid in the first quarter of 2006. The same group of defendants entered into a settlement in October 2005 regarding approximately 9% of personal injury and property damage claims relating to the alleged environmental contamination. In exchange for, among other things, the dismissal with prejudice of these lawsuits, the defendants agreed to pay a total sum of up to $5.4 million in settlement funds. The settlement was paid in two approximately equal installments in the fourth quarter of 2005 and the first quarter of 2006. With this settlement, the Company and other defendants have resolved about 99% of the known personal injury and property damage claims relating to the alleged environmental contamination. The cost of this settlement has been recorded in other income in the Consolidated Statements of Operations. CONDITIONAL ASSET RETIREMENT OBLIGATIONS In 2005, the FASB issued Interpretation (FIN) No. 47, "Accounting for Conditional Asset Retirement Obligations" an interpretation of Statement of Financial Accounting Standards (SFAS) 143, which requires the Company to recognize legal obligations to perform asset retirements in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. Certain government regulations require the removal and disposal of asbestos from an existing facility at the time the facility undergoes major renovations or is demolished. The liability exists because the facility will not last forever, but it is conditional on future renovations, even if there are no immediate plans to remove the materials which pose no health or safety hazard in their current condition. Similarly, government regulations require the removal or closure of underground storage tanks (USTs) when their use ceases, the disposal of polychlorinated biphenyl (PCBs) transformers and capacitors when their use ceases, and the disposal of lead-based paint in conjunction with facility renovations or demolition. We currently have 11 manufacturing locations within our Company, which have been identified as containing asbestos-related building materials, USTs, PCB transformers or capacitors, or lead-based paint. The fair value to remove and dispose of this material has been estimated and recorded at $0.8 million as of December 31, 2005. PRODUCT LIABILITY Like many other industrial companies who have historically operated in the United States, the Company (or parties the Company indemnifies) continues to be named as one of many defendants in asbestos-related personal injury actions. Management believes that the Company's involvement is limited because, in general, these claims relate to a few types of automotive friction products, manufactured many years ago that contained encapsulated asbestos. The nature of the fibers, the Page 13 encapsulation and the manner of use lead the Company to believe that these products are highly unlikely to cause harm. As of December 31, 2005, the Company had approximately 67,000 pending asbestos-related product liability claims. Of these outstanding claims, approximately 58,000 are pending in just three jurisdictions, where significant tort reform activities are underway. The Company's policy is to aggressively defend against these lawsuits and the Company has been successful in obtaining dismissal of many claims without any payment. The Company expects that the vast majority of the pending asbestos-related product liability claims where it is a defendant (or has an obligation to indemnify a defendant) will result in no payment being made by the Company or its insurers. In 2005, of the approximately 38,000 claims resolved, only 295 (0.8%) resulted in any payment being made to a claimant by or on behalf of the Company. In 2004 of the 4,062 claims resolved, only 255 (6.3%) resulted in any payment being made to a claimant by or on behalf of the Company. Prior to June 2004, the settlement and defense costs associated with all claims were covered by the Company's primary layer insurance coverage, and these carriers administered, defended, settled and paid all claims under a funding agreement. In June 2004, primary layer insurance carriers notified the Company of the exhaustion of their policy limits. This led the Company to access the next available layer of insurance coverage. Since June 2004, secondary layer insurers have paid asbestos-related litigation defense and settlement expenses pursuant to a funding agreement. The Company paid $2.9 million in 2005 and $1.0 million in 2004 as a result of the funding agreement for claims that have been resolved. The Company is expecting to fully recover these amounts. Recovery is dependent on the completion of an audit proving the exhaustion of primary insurance coverage and the successful resolution of the declaratory judgment action referred to below. At December 31, 2005 an amount of $3.9 million was owed by insurance carriers in respect of claims settled and funded by the Company in advance of the insurers' reimbursement. This amount has been submitted to carriers for reimbursement and the Company expects to be fully reimbursed. At December 31, 2005, the Company has an estimated liability of $41.0 million for future claims resolutions, with a related asset of $41.0 million to recognize the insurance proceeds receivable by the Company for estimated losses related to claims that have yet to be resolved. Insurance carrier reimbursement of 100% is expected based on the Company's experience, its insurance contracts and decisions received to date in the declaratory judgment action referred to below. At December 31, 2004, the comparable value of the insurance receivable and accrued liability was $40.8 million. The amounts recorded in the Condensed Consolidated Balance Sheets related to the estimated future settlement of existing claims are as follows: Page 14
millions of dollars 2005 2004 - ------------------- ----- ----- Assets: Prepayments and other current assets $20.8 $13.5 Other non-current assets 20.2 27.3 ----- ----- Total insurance receivable $41.0 $40.8 ===== ===== Liabilities: Accounts payable and accrued expenses $20.8 $13.5 Long-term liabilities - other 20.2 27.3 ----- ----- Total accrued liability $41.0 $40.8 ===== =====
We cannot reasonably estimate possible losses, if any, in excess of those for which we have accrued, because we cannot predict how many additional claims may be brought against the Company (or parties the Company has an obligation to indemnify) in the future, the allegations in such claims, the possible outcomes, or the impact of tort reform legislation currently being considered at the State and Federal levels. A declaratory judgment action was filed in January 2004 in the Circuit Court of Cook County, Illinois by Continental Casualty Company and related companies (CNA) against the Company and certain of its other historical general liability insurers. CNA provided the Company with both primary and additional layer insurance, and, in conjunction with other insurers, is currently defending and indemnifying the Company in its pending asbestos-related product liability claims. The lawsuit seeks to determine the extent of insurance coverage available to the Company including whether the available limits exhaust on a "per occurrence" or an "aggregate" basis, and to determine how the applicable coverage responsibilities should be apportioned. On August 15, 2005, the Court issued an interim order regarding the apportionment matter. The interim order has the effect of making insurers responsible for all defense and settlement costs pro rata to time-on-the-risk, with the pro-ration method to hold the insured harmless for periods of bankrupt or unavailable coverage. Appeals of the interim order were denied. However, the issue is reserved for appellate review at the end of the action. In addition to the primary insurance available for asbestos-related claims, the Company has substantial additional layers of insurance available for potential future asbestos-related product claims. As such, the Company continues to believe that its coverage is sufficient to meet foreseeable liabilities. Although it is impossible to predict the outcome of pending or future claims or the impact of tort reform legislation being considered at the State and Federal levels; due to the encapsulated nature of the products, our experiences in aggressively defending and resolving claims in the past, and our significant insurance coverage with solvent carriers as of the date of this filing, management does not believe that asbestos-related product liability claims are likely to have a material adverse effect on the Company's results of operations, cash flows or financial condition. CRITICAL ACCOUNTING POLICIES The consolidated financial statements are prepared in conformity with GAAP. 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. Critical accounting policies are those that are most important to the portrayal of the Company's financial condition and results of operations. These policies require management's most difficult, subjective or complex judgments in the preparation of the financial statements and accompanying notes. Management makes estimates and assumptions about the effect of matters that are inherently Page 15 uncertain, relating to the reporting of assets, liabilities, revenues, expenses and the disclosure of contingent assets and liabilities. Our most critical accounting policies are discussed below. 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. IMPAIRMENT OF LONG-LIVED ASSETS The Company periodically reviews the carrying value of its long-lived assets, whether held for use or disposal, 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 assumptions are reasonable; however, changes in assumptions underlying these estimates could affect the evaluations. Long-lived assets held for sale are recorded at the lower of their carrying amount or fair value less cost to sell. Significant judgments and estimates used by management when evaluating long-lived assets for impairment include (i) an assessment as to whether an adverse event or circumstance has triggered the need for an impairment review; and (ii) undiscounted future cash flows generated by the asset. GOODWILL The Company annually reviews its goodwill for impairment in the fourth quarter of each year for all of its reporting units, or when events and circumstances warrant such a review. This review requires us to make significant assumptions and estimates about the extent and timing of future cash flows, discount rates, and growth rates. The cash flows are estimated over a significant future period of time, which makes those estimates and assumptions subject to an even higher degree of uncertainty. We also utilize market valuation models and other financial ratios, which require us to make certain assumptions and estimates regarding the applicability of those models to our assets and businesses. We believe that the assumptions and estimates used to determine the estimated fair values of each of our reporting units are reasonable. However, different assumptions could materially affect the estimated fair value. The goodwill impairment test was performed in December 2005, 2004 and 2003 and no impairment was found each time. Amortization continues to be recorded for other intangible assets with definite lives. See Note 7 to the Consolidated Financial Statements for more information regarding goodwill. ENVIRONMENTAL ACCRUAL We work with outside experts to determine a range of potential liability for environmental sites. The ranges for each individual site are then aggregated into a loss range for the total accrued liability. Management's estimate of the loss range for 2005 is between $36.5 million and $50.8 million. We record an accrual at the most probable amount within the range unless one cannot be determined; in which case we record the accrual at the low end of the range. At the end of 2005, our total accrued environmental liability was $38.3 million. See Note 14 to the Consolidated Financial Statements for more information regarding environmental accrual. Page 16 PRODUCT WARRANTY 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 claim settlements; as well as product manufacturing and industry developments and recoveries from third parties. Management actively studies trends of warranty claims and takes action to improve product quality and minimize warranty claims. Management believes that the warranty accrual is appropriate; however, actual claims incurred could differ from the original estimates, requiring adjustments to the accrual. The accrual is represented in both long-term and short-term liabilities on the balance sheet. See Note 8 to the Consolidated Financial Statements for more information regarding product warranty. OTHER LOSS ACCRUALS AND VALUATION ALLOWANCES The Company has numerous other loss exposures, such as customer claims, workers' compensation claims, litigation, and recoverability of assets. Establishing loss accruals or valuation allowances for these matters requires the use of estimates and judgment in regard to the risk exposure and ultimate realization. We estimate losses under the programs using consistent and appropriate methods; however, changes to our assumptions could materially affect our recorded accrued liabilities for loss or asset valuation allowances. PENSION AND OTHER POST RETIREMENT DEFINED BENEFITS The Company provides post retirement defined benefits to a substantial portion of its current and former employees. Costs associated with post retirement defined benefits include pension and post retirement health care expenses for employees, retirees and surviving spouses and dependents. The Company's employee defined benefit pension and post retirement health care expenses 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. 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. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when appropriate. The effects of the modifications are recorded currently or amortized over future periods in accordance with U.S. GAAP. The Company's approach to establishing the discount rate is based upon the market yields of high-quality corporate bonds, with appropriate consideration of each plan's defined benefit payment terms and duration of the liabilities. The discount rate assumption is typically rounded up or down to the nearest 25 basis points. Based on this approach, at December 31, 2005, the Company lowered the discount rate for its U.S. pension and other defined benefit plans to 5.50% from 5.75% at December 31, 2004. The decrease of 25 basis points in the discount rate increased the Company's U.S. pension plan projected benefit obligation by approximately $7.9 million at December 31, 2005 and is expected to increase pension expense in fiscal year 2006 by approximately $0.6 million. The decrease of 25 basis points in the discount rate increased the Company's other post retirement benefit obligation by $20.0 million at December 31, 2005 and is Page 17 expected to increase the other post retirement expense by approximately $1.7 million in 2006. As a sensitivity measure for the non-U.S. defined benefit pension plans, a decrease of 25 basis points would increase the Company's projected benefit obligation by approximately $14.6 million at December 31, 2005, and would increase the non-U.S. pension expense by approximately $1.8 million in 2006. The Company determines its expected return on plan asset assumptions by evaluating estimates of future market returns and the plans' asset allocation. The Company also considers the impact of active management of the plans' invested assets. The Company's expected return on assets assumption reflects the asset allocation of each plan. The Company's assumed long-term rate of return on assets for its U.S. pension plans was 8.75% for 2005, 2004 and 2003. The Company does not anticipate a change in the long-term rate of return on assets for pension benefits for 2006. The Company's assumed the long-term rate of return on assets for its U.K. pension plan was 6.75% for 2005, 2004 and 2003. The Company anticipates increasing its assumed long-term rate of return on U.K. plan assets to 7.25% for 2006, due to both recent and long-term asset performance and the plan's asset allocation. This change is expected to decrease pension expense by $0.7 million in 2006. For sensitivity purposes, a 25 basis point decrease in the long-term return on assets would increase total pension expense by $1.2 million in 2006. The Company determines its health care inflation rate for its other post retirement benefit plans by evaluating the circumstances surrounding the plan design, recent experience and health care economics. For December 31, 2005 the health care inflation assumption has changed from 8% in 2005 (grading down to 4.5% by 2009) to 10% for 2006 (grading down to 5% by 2011.) This change has increased the Company's other postretirement benefit obligation by approximately $93.5 million at December 31, 2005 and is expected to increase other postretirement benefit expense in fiscal year 2006 by approximately $14.4 million. Based on the information provided by its independent actuaries and other relevant sources, the Company believes that the assumptions used are reasonable; however, changes in these assumptions, or experience different from that assumed, could impact the Company's financial position, results of operations, or cash flows. See Note 11 to the Consolidated Financial Statements for more information regarding costs and assumptions for employee retirement benefits. INCOME TAXES The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company records a valuation allowance that primarily represents foreign operating and other loss carryforwards for which utilization is uncertain. Management judgment is required in determining the Company's provision for income taxes, deferred tax assets and liabilities and the valuation allowance recorded against the Company's net deferred tax assets. In calculating the provision for income taxes on an interim basis, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances known at each interim period. In determining the need for a valuation allowance, the historical and projected financial performance of the operation Page 18 recording the net deferred tax asset is considered along with any other pertinent information. Since future financial results may differ from previous estimates, periodic adjustments to the Company's valuation allowance may be necessary. The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is less than certain. We are regularly under audit by the various applicable tax authorities. Accruals for tax contingencies are provided for in accordance with the requirements of SFAS No. 5 "Accounting for Contingencies". The Company's federal and certain state income tax returns and certain non-U.S. income tax returns are currently under various stages of audit by applicable tax authorities. Although the outcome of tax audits is always uncertain, management believes that it has appropriate support for the positions taken on its tax returns and that its annual tax provisions included amounts sufficient to pay assessments, if any, which may be proposed by the taxing authorities. At December 31, 2005, the Company has recorded a liability for its best estimate of the probable loss on certain of its tax positions, the majority of which is included in other current liabilities. Nonetheless, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. See Note 4 to the Consolidated Financial Statements for more information regarding income taxes. NEW ACCOUNTING PRONOUNCEMENTS In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151, "Inventory Costs" which is an amendment of ARB No. 43, Chapter 4. This statement provides clarification of accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. Generally, this statement requires that those items be recognized as current period charges. SFAS 151 becomes effective for the Company on January 1, 2006. The Company does not expect that this pronouncement will have a material impact on its consolidated financial position, results of operations and cash flows. In December 2004, the FASB issued SFAS No. 123(R), "Shared-Based Payment" (FAS 123R) which requires companies to measure and recognize compensation expense for all share-based payments at fair value. In addition, the FASB has issued a number of supplements to FAS 123R to guide the implementation of this new accounting pronouncement. Share-based payments include stock option grants and certain transactions under other Company stock plans. The Company grants options to purchase common stock of the Company to some of its employees and directors under various plans at prices equal to the market value of the stock on the dates the options are granted. FAS 123R will be effective for the Company beginning January 1, 2006. The Company will use the modified prospective transition method, which requires that compensation cost be recognized in the financial statements for all awards granted after the date of adoption as well as for existing awards for which the requisite service has not been rendered as of the date of adoption and requires that prior periods not be restated. FAS 123R also requires an entity to calculate the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to adopting FAS 123R (the APIC Pool.) The Company is currently evaluating acceptable methods for calculating its APIC Pool. The Company expects that the implementation of this pronouncement will lower 2006 earnings by approximately ($0.16) to ($0.18) per diluted share. For 2005, stock option expense would increase by approximately ($.05) to ($.07) per diluted share if the Company adopted FAS 123R as of January 1, 2005 due to the appreciation of the stock price during the past few years and increases in the number of incentive stock options issued. Page 19 In March 2005, the FASB issued FIN No. 47, "Accounting for Conditional Asset Retirement Obligations" an interpretation of SFAS 143 (the Interpretation.) FIN 47 clarifies the manner in which uncertainties concerning the timing and the method of settlement of an asset retirement obligation should be accounted for. In addition, the Interpretation clarifies the circumstances under which fair value of an asset retirement obligation is considered subject to reasonable estimation. The Interpretation is effective no later than the end of fiscal years ending after December 15, 2005. The Company recorded a $0.8 million loss accrual upon adoption of this pronouncement in December 2005. QUALITATIVE AND QUANTITIVE 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. The Company enters into derivative instruments only with high credit quality counterparties and diversifies its positions across such counterparties in order to reduce its exposure to credit losses. We do not engage in any derivative instruments for purposes other than hedging specific operating risks. We have established policies and procedures to manage sensitivity to interest rate, foreign currency exchange rate and commodity purchase price risk, which include monitoring the level of exposure to each market risk. INTEREST RATE RISK Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. The Company manages its interest rate risk by balancing its exposure to fixed and variable rates while attempting to minimize its interest costs. The Company selectively uses interest rate swaps to reduce market value risk associated with changes in interest rates (fair value hedges). At the end of 2005, the amount of net debt with fixed interest rates was 50% of total debt, including the impact of the interest rate swaps. 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 for 2005 of approximately $1.8 million, and $1.3 million in 2004. 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 discounted cash flow analysis. Assuming a hypothetical instantaneous 10% change in interest rates as of December 31, 2005, the net fair value of these instruments would increase by approximately $22.2 million if interest rates decreased and would decrease by approximately $20.5 million if interest rates increased. Our interest rate sensitivity analysis assumes a constant 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, 2004, measured in a similar manner, was slightly greater than at December 31, 2005. Page 20 FOREIGN CURRENCY EXCHANGE RATE RISK Foreign currency risk is the risk that we will incur economic losses due to adverse changes in foreign currency exchange rates. Currently, our most significant currency exposures relate to the British Pound, the Euro, the Hungarian Forint, the Japanese Yen, and the South Korean Won. We mitigate our foreign currency exchange rate risk principally by establishing local production facilities and related supply chain participants in the 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 and cross currency swaps. Such non-U.S. Dollar debt was $478.0 million as of December 31, 2005 and $324.6 million as of December 31, 2004. 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 currency 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 2005 and 2004. COMMODITY PRICE RISK Commodity price risk is the possibility that we will incur economic losses due to adverse changes in the cost of raw materials used in the production of our products. Commodity forward and option contracts are executed to offset our exposure to the potential change in prices mainly for various non-ferrous metals and natural gas consumption used in the manufacturing of vehicle components. In the aggregate, our exposure related to such transactions was not material to our financial position, results of operations or cash flows in both 2005 and 2004. 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, many of which are difficult to predict and generally beyond the control of the Company, 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 factors identified under Item 1A, "Risk Factors," in the Form 10-K for the fiscal year ended December 31, 2005. The Company does not undertake any obligation to update any forward-looking statement. Page 21 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, an independent registered public accounting firm. 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 registered public accounting firm in connection with their annual audit of the financial statements. The independent registered public accounting firm conducts their evaluation in accordance with the standards of the Public Company Accounting Oversight Board (United States) and performs such tests of transactions and balances as they deem necessary. Management considers the recommendations of its internal auditors and independent registered public accounting firm 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, 2005, the Company's system of internal control was effective to accomplish the objectives set forth in the first sentence of this paragraph. The Company's Audit Committee, composed entirely of directors of the Company who are not employees, meets periodically with the Company's management and independent registered public accounting firm to review financial results and procedures, internal financial controls and internal and external audit plans and recommendations. In carrying out these responsibilities, the Audit Committee and the independent registered public accounting firm have unrestricted access to each other with or without the presence of management representatives. /s/ TIMOTHY M. MANGANELLO - ------------------------------------- Timothy M. Manganello Chairman and Chief Executive Officer /s/ ROBIN J. ADAMS - ------------------------------------- Robin J. Adams Executive Vice President, Chief Financial Officer & Chief Administrative Officer February 17, 2006 Page 22 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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, 2005 and 2004, and the related consolidated statements of operations, cash flows and stockholders' equity and comprehensive income for each of the three years in the period ended December 31, 2005. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of BorgWarner Inc. and Consolidated Subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report (not presented in this Annual Report to Stockholders) dated February 17, 2006 expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. /s/ DELOITTE & TOUCHE LLP Detroit, Michigan February 17, 2006 CONSOLIDATED STATEMENTS OF OPERATIONS BorgWarner Inc. and Consolidated Subsidiaries millions of dollars, except share and per share amounts
For the Year Ended December 31, 2005 2004 2003 - ------------------------------- -------- -------- -------- Net sales $4,293.8 $3,525.3 $3,069.2 Cost of sales 3,440.0 2,874.2 2,482.5 -------- -------- -------- Gross profit 853.8 651.1 586.7 Selling, general and administrative expenses 495.9 339.0 316.9 Other (income) expense 34.8 3.0 (0.1) -------- -------- -------- Operating income 323.1 309.1 269.9 Equity in affiliates earnings, net of tax (28.2) (29.2) (20.1) Interest expense and finance charges 37.1 29.7 33.3 -------- -------- -------- Earnings before income taxes and minority interest 314.2 308.6 256.7 Provision for income taxes 55.1 81.2 73.2 Minority interest, net of tax 19.5 9.1 8.6 -------- -------- -------- Net earnings $ 239.6 $ 218.3 $ 174.9 ======== ======== ======== Earnings per share - basic $ 4.23 $ 3.91 $ 3.23 ======== ======== ======== Earnings per share - diluted $ 4.17 $ 3.86 $ 3.20 ======== ======== ======== Average shares outstanding (thousands): Basic 56,708 55,872 54,116 Diluted 57,398 56,537 54,604
See Accompanying Notes to Consolidated Financial Statements. Page 26 CONSOLIDATED BALANCE SHEETS BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES millions of dollars
December 31, 2005 2004 - ------------ -------- -------- ASSETS Cash and cash equivalents $ 89.7 $ 229.7 Marketable securities 40.6 -- Receivables 626.1 499.1 Inventories 332.0 223.4 Deferred income taxes 28.0 22.6 Investment in business held for sale -- 44.2 Prepayments and other current assets 52.3 55.3 -------- -------- Total current assets 1,168.7 1,074.3 Property, plant and equipment - net of accumulated depreciation 1,294.9 1,077.2 Tooling - net 106.2 102.1 Investments and advances 197.7 193.7 Goodwill 1,029.8 860.8 Other non-current assets 292.1 221.0 -------- -------- Total other assets 1,625.8 1,377.6 -------- -------- Total assets $4,089.4 $3,529.1 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Notes payable and current portion of long-term debt $ 299.9 $ 16.5 Accounts payable and accrued expenses 786.4 608.0 Income taxes payable 35.8 39.3 -------- -------- Total current liabilities 1,122.1 663.8 Long-term debt 440.6 568.0 Long-term liabilities: Retirement-related liabilities 522.1 498.0 Other 224.3 242.9 -------- -------- Total long-term liabilities 746.4 740.9 Minority interest in consolidated subsidiaries 136.1 22.2 Capital stock: Preferred stock, $0.01 par value; authorized shares: 5,000,000; none issued -- -- Common stock, $0.01 par value; authorized shares: 150,000,000; issued shares: 2005, 57,138,475 and 2004, 56,361,167; outstanding shares: 2005, 57,134,491 and 2004, 56,357,183 0.6 0.6 Non-voting common stock, $0.01 par value; authorized shares: 25,000,000; none issued and outstanding -- -- Capital in excess of par value 828.7 797.1 Unearned compensation on restricted stock (1.1) -- Retained earnings 889.2 681.4 Accumulated other comprehensive (loss) income (73.1) 55.2 Common stock held in treasury, at cost: 3,984 shares in 2005 and 2004 (0.1) (0.1) -------- -------- Total stockholders' equity 1,644.2 1,534.2 Total liabilities and stockholders' equity $4,089.4 $3,529.1 ======== ======== See Accompanying Notes to Consolidated Financial Statements.
Page 27 CONSOLIDATED STATEMENTS OF CASH FLOWS BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES millions of dollars
For the Year Ended December 31, 2005 2004 2003 - ------------------------------- ------- ------- ------- OPERATING Net earnings $ 239.6 $ 218.3 $ 174.9 Adjustments to reconcile net earnings to net cash flows from operations: Non-cash charges (credits) to operations: Depreciation 185.6 138.8 124.5 Amortization of tooling 38.2 38.2 36.8 Amortization of intangible assets and other 31.7 1.1 1.1 Gain on sale of businesses, net of tax (6.3) -- -- Gain on asset disposals (0.5) -- -- Employee retirement benefits funded with common stock -- 25.8 12.9 Deferred income tax (benefit) provision (32.4) 13.8 40.0 Equity in affiliate earnings, net of dividends received, minority interest and other 8.1 4.7 (4.8) ------- ------- ------- Net earnings adjusted for non-cash charges 464.0 440.7 385.4 Changes in assets and liabilities, net of effects of acquisitions and divestitures: (Increase) in receivables (79.6) (60.4) (90.4) (Increase) in inventories (30.1) (12.7) (9.1) (Increase) decrease in prepayments and other current assets 19.9 (7.0) 7.3 Increase (decrease) in accounts payable and accrued expenses 137.6 113.1 (0.3) Increase (decrease) in income taxes payable (61.7) 36.0 (0.2) Net change in other long-term assets and liabilities (53.6) (83.1) 14.2 ------- ------- ------- Net cash provided by operating activities 396.5 426.6 306.9 INVESTING Capital expenditures (246.7) (204.9) (172.0) Tooling outlays, net of customer reimbursements (45.8) (47.5) (42.4) Payments for business acquired, net of cash and cash equivalents acquired (477.2) -- -- Net proceeds from asset disposals 9.5 4.2 8.0 Purchases of marketable securities (52.3) -- -- Proceeds from sales of marketable securities 58.2 -- -- Proceeds from sale of businesses 54.2 -- 5.4 Contingent valuation payment on acquired business -- -- (12.8) Investment in unconsolidated subsidiary -- (9.0) (14.4) ------- ------- ------- Net cash used in investing activities (700.1) (257.2) (228.2) FINANCING Net increase (decrease) in notes payable 136.2 5.3 (5.5) Additions to long-term debt 168.7 0.6 0.3 Repayments of long-term debt (160.2) (61.8) (16.1) Payments for purchase of treasury stock -- -- (2.5) Proceeds from stock options exercised 17.6 14.4 39.3 Dividends paid, including minority shareholders (40.0) (27.9) (19.4) ------- ------- ------- Net cash provided by (used in) financing activities 122.3 (69.4) (3.9) Effect of exchange rate changes on cash and cash equivalents 41.3 16.6 1.7 ------- ------- ------- Net increase (decrease) in cash and cash equivalents (140.0) 116.6 76.5 Cash and cash equivalents at beginning of year 229.7 113.1 36.6 ------- ------- ------- Cash and cash equivalents at end of year $ 89.7 $ 229.7 $ 113.1 ======= ======= ======= SUPPLEMENTAL CASH FLOW INFORMATION Net cash paid during the year for: Interest $ 41.5 $ 29.3 $ 34.5 Income taxes 121.5 35.0 24.4 Non-cash financing transactions: Issuance of common stock for Executive Stock Performance Plan $ 2.6 $ 1.7 $ 3.3 Issuance of restricted common stock for non-employee directors 0.9 0.3 -- Total debt assumed from business acquired 30.0 -- --
See Accompanying Notes to Consolidated Financial Statements. Page 28 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
Number of shares ---------------------- Issued Common common stock in stock treasury ---------- ---------- Balance, January 1, 2003 54,797,782 (1,637,774) Purchase of treasury stock -- (83,860) Dividends declared -- -- Management shareholder notes -- -- Shares issued under stock incentive plans -- 1,517,208 Shares issued under executive stock plan -- 131,762 Shares issued under retirement savings plans 432,072 -- Net income -- -- Adjustment for minimum pension liability -- -- Currency translation and hedge instruments adjustment -- -- ---------- ---------- Balance, December 31, 2003 55,229,854 (72,664) Dividends declared -- -- Stock split -- -- Shares issued under stock incentive plans 523,994 68,680 Shares issued under executive stock plan 41,252 -- Restricted shares issued under stock incentive plan 6,400 -- Shares issued under retirement savings plans 559,667 -- Net income -- -- Adjustment for minimum pension liability -- -- Currency translation and hedge instruments adjustment -- -- ---------- ---------- Balance, December 31, 2004 56,361,167 (3,984) Dividends declared -- -- Shares issued under stock incentive plans 712,640 -- Shares issued under executive stock plan 48,569 -- Net issuance of restricted stock, less amortization 16,099 -- Net income -- -- Adjustment for minimum pension liability -- -- Net unrealized loss on available-for- sale securities -- -- Currency translation and hedge instruments adjustment -- -- ---------- ---------- BALANCE, DECEMBER 31, 2005 57,138,475 (3,984) ========== ========== millions of dollars ----------------------------------------------------------------------------------------------- Stockholders' equity ----------------------------------------------------------------- Unearned compensation Accumulated Issued Capital in Management on other common excess of Treasury shareholder restricted Retained comprehensive Comprehensive stock par value stock notes stock earnings income/(loss) income/(loss) ------ ---------- -------- ----------- ------------ -------- ------------- ------------- Balance, January 1, 2003 $0.3 $737.7 ($35.9) ($2.0) $ 0.0 $335.8 ($54.5) ($120.5) -------- Purchase of treasury stock -- -- (2.5) -- -- -- -- -- Dividends declared -- -- -- -- -- (19.4) -- -- Management shareholder notes -- -- -- 2.0 -- -- -- -- Shares issued under stock incentive plans -- 5.3 34.0 -- -- -- -- -- Shares issued under executive stock plan -- 0.4 2.9 -- -- -- -- -- Shares issued under retirement savings plans -- 12.9 -- -- -- -- -- -- Net income -- -- -- -- -- 174.9 -- $ 174.9 Adjustment for minimum pension liability -- -- -- -- -- -- 0.7 0.7 Currency translation and hedge instruments adjustment -- -- -- -- -- -- 67.8 67.8 ---- ------ ----- ------ ------ ------ ------- -------- Balance, December 31, 2003 $0.3 $756.3 ($1.5) $ -- $ -- $491.3 $ 14.0 $ 243.4 -------- Dividends declared -- -- -- -- -- (27.9) -- -- Stock split 0.3 -- -- -- -- (0.3) -- -- Shares issued under stock incentive plans -- 13.0 1.4 -- -- -- -- -- Shares issued under executive stock plan -- 1.7 -- -- -- -- -- -- Restricted shares issued under stock incentive plan -- 0.3 -- -- -- -- -- -- Shares issued under retirement savings plans -- 25.8 -- -- -- -- -- -- Net income -- -- -- -- -- 218.3 -- 218.3 Adjustment for minimum pension liability -- -- -- -- -- -- 12.8 12.8 Currency translation and hedge instruments adjustment -- -- -- -- -- -- 28.4 28.4 ---- ------ ----- ------ ------ ------ ------- -------- Balance, December 31, 2004 $0.6 $797.1 ($0.1) $ -- $ -- $681.4 $ 55.2 $ 259.5 -------- Dividends declared -- -- -- -- -- (31.8) -- -- Shares issued under stock incentive plans -- 28.1 -- -- -- -- -- -- Shares issued under executive stock plan -- 2.6 -- -- -- -- -- -- Net issuance of restricted stock, less amortization -- 0.9 -- -- (1.1) -- -- -- Net income -- -- -- -- -- 239.6 -- $ 239.6 Adjustment for minimum pension liability -- -- -- -- -- -- (30.3) (30.3) Net unrealized loss on available-for- sale securities -- -- -- -- -- -- (0.3) ($0.3) Currency translation and hedge instruments adjustment -- -- -- -- -- -- (97.7) (97.7) ---- ------ ----- ------ ------ ------ ------- -------- BALANCE, DECEMBER 31, 2005 $0.6 $828.7 ($0.1) -- ($1.1) $889.2 ($73.1) $ 111.3 ==== ====== ===== ====== ====== ====== ======= ========
See Accompanying Notes to Consolidated Financial Statements. Page 29 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, crossover vehicles, trucks, commercial transportation products and industrial equipment. Our products fall into two reportable operating segments: Engine and Drivetrain. NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following paragraphs briefly describe the Company's 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 inter-company accounts and transactions have been eliminated in consolidation. 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. CASH AND CASH EQUIVALENTS Cash and cash equivalents are valued at cost, which approximates fair market value. It is the Company's policy to classify all highly liquid investments with original maturities of three months or less as cash and cash equivalents. MARKETABLE SECURITIES The marketable securities acquired as a part of the Beru Acquisition are classified as available-for-sale. These investments are stated at fair value with any unrealized holding gains or losses, net of tax, included as a component of stockholders' equity until realized. See Note 5 to the Consolidated Financial Statements for more information on marketable securities. 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. The maximum size of the facility has been set at $50 million since the fourth quarter of 2003. During the years ended December 31, 2005 and 2004, total cash proceeds from sales of accounts receivable were $600 million. The Company paid servicing fees related to these receivables of $1.8 million, $0.9 million and $1.3 million in 2005, 2004 and 2003, respectively. These amounts are recorded in interest expense and finance charges in the Consolidated Statements of Operations. At December 31, 2005 and 2004, the Company had sold $50 million of receivables under a Receivables Transfer Agreement for face value without recourse. Page 30 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) or average-cost methods. Inventory held by U.S. operations was $108.0 million in 2005 and $106.1 million in 2004. Such inventories, if valued at current cost instead of LIFO, would have been greater by $9.1 million in 2005 and $6.6 million in 2004. See Note 6 to the Consolidated Financial Statements for more information on inventories. 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. See Note 6 to the Consolidated Financial Statements for more information on property, plant and equipment and depreciation. IMPAIRMENT OF LONG-LIVED ASSETS The Company periodically reviews the carrying value of its long-lived assets, whether held for use or disposal, 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 assumptions are reasonable; however, changes in assumptions underlying these estimates could affect the evaluations. Long-lived assets held for sale are recorded at the lower of their carrying amount or fair value less cost to sell. Significant judgments and estimates used by management when evaluating long-lived assets for impairment include (i) an assessment as to whether an adverse event or circumstances has triggered the need for an impairment review; and (ii) undiscounted future cash flows generated by the asset. GOODWILL AND OTHER INTANGIBLE ASSETS Under Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," goodwill is no longer amortized; however, it must be tested for impairment at least annually. In the fourth quarter of each year, or when events and circumstances warrant such a review, the Company reviews the goodwill for all of its reporting units for impairment. The fair value of the Company's businesses used in determination of the goodwill impairment is computed using the expected present value of associated future cash flows. This review requires us to make significant assumptions and estimates about the extent and timing of future cash flows, discount rates and growth rates. The cash flows are estimated over a significant future period of time, which makes those estimates and assumptions subject to an even higher degree of uncertainty. We also utilize market valuation models and other financial ratios, which require us to make certain assumptions and estimates regarding the applicability of those models to our assets and businesses. We believe that the assumptions and estimates used to determine the estimated fair values of each of our reporting units are reasonable. However, different assumptions could materially affect the estimated fair value. The results of the analysis performed in December 2005 did not indicate an impairment of the book value of the Company's goodwill. See Note 7 to the Consolidated Financial Statements for more information on goodwill and other intangibles. PRODUCT WARRANTY 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 claim settlements; as well as product manufacturing and industry developments and recoveries from third parties. Management actively studies trends of warranty claims and takes action to improve product quality and minimize warranty claims. Management believes that the warranty accrual is appropriate; however, actual claims incurred could differ from the original estimates, requiring adjustments to the accrual. The accrual is represented in both long-term and short-term liabilities on the balance sheet. See Note 8 to the Consolidated Financial Statements for more information regarding product warranty. OTHER LOSS ACCRUALS AND VALUATION ALLOWANCES The Company has numerous other loss exposures, such as customer claims, workers' compensation claims, litigation, and recoverability of assets. Establishing loss accruals or valuation allowances for these matters requires the use of estimates and judgment in regard to the risk exposure and ultimate realization. We estimate losses under the programs using consistent and appropriate methods; however, changes to our assumptions could materially affect our recorded accrued liabilities for loss or asset valuation allowances. 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. Virtually 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 qualifying hedge fair values are matched with the underlying transactions. All hedge instruments are carried at their fair value based on quoted market prices for contracts with similar maturities. The Company does not engage in any derivative transactions for purposes other than hedging specific risks. Page 31 See Note 10 to the Consolidated Financial Statements for more information on derivative financial instruments. STOCK BASED COMPENSATION SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," encourage, but do not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation in accordance with Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, no compensation cost has been recognized for fixed stock options because the exercise prices of the stock options equal the market value of the Company's common stock at the date of grant, which is the measurement date. Further disclosure about the Company's stock compensation plans can be found in Note 12. The following table illustrates the effect on the Company's net earnings and net earnings per share if the Company had applied the fair value recognition provision of SFAS No. 123:
millions of dollars, except per share data 2005 2004 2003 - ------------------------------------------ ------ ------ ------ Net earnings, as reported $239.6 $218.3 $174.9 ADD: Stock-based employee compensation expense included in net income, net of income tax 5.5 1.6 2.7 DEDUCT: Total stock-based employee compensation expense determined under fair value based method for all awards, net of income tax (12.2) (7.7) (7.7) ------ ------ ------ Pro forma net earnings $232.9 $212.2 $169.9 ====== ====== ====== Earnings per share: Basic - as reported $ 4.23 $ 3.91 $ 3.23 Basic - pro forma $ 4.11 $ 3.80 $ 3.14 Diluted - as reported $ 4.17 $ 3.86 $ 3.20 Diluted - pro forma $ 4.06 $ 3.75 $ 3.11
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, expenses, and capital expenditures. 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. See Note 13 to the Consolidated Financial Statements for more information on other comprehensive income. NEW ACCOUNTING PRONOUNCEMENTS In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, "Inventory Costs" which is an amendment of ARB No.43, Chapter 4. This statement provides clarification of accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. Generally, this statement requires that those items be recognized as current period charges. SFAS 151 becomes effective for the Company on January 1, 2006. The Company does not expect the adoption of SFAS 151 to have a material impact on its consolidated financial position, results of operations and cash flows. Page 32 In December 2004, the FASB issued SFAS No. 123(R), "Shared-Based Payment" (FAS 123R) which requires companies to measure and recognize compensation expense for all share-based payments at fair value. In addition, the FASB has issued a number of supplements to FAS 123R to guide the implementation of this new accounting pronouncement. Share-based payments include stock option grants and certain transactions under other Company stock plans. The Company grants options to purchase common stock of the Company to some of its employees and directors under various plans at prices equal to the market value of the stock on the dates the options are granted. FAS 123R will be effective for the Company beginning January 1, 2006. The Company will use the modified prospective transition method, which requires that compensation cost be recognized in the financial statements for all awards granted after the date of adoption as well as for existing awards for which the requisite service has not been rendered as of the date of adoption and requires that prior periods not be restated. FAS 123R also requires an entity to calculate the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to adopting FAS 123R (the APIC Pool.) The Company is currently evaluating acceptable methods for calculating its APIC Pool. The Company expects that the implementation of this pronouncement will lower 2006 earnings by approximately ($0.16) to ($0.18) per diluted share. For 2005, stock option expense would increase by approximately ($.05) to ($.07) per diluted share if the Company adopted FAS 123R as of January 1, 2005 due to the appreciation of the stock price during the past few years and increases in the number of incentive stock options issued. In March 2005, the FASB issued Interpretation (FIN) No. 47, "Accounting for Conditional Asset Retirement Obligations" an interpretation of SFAS 143 (the Interpretation.) FIN 47 clarifies the manner in which uncertainties concerning the timing and the method of settlement of an asset retirement obligation should be accounted for. In addition, the Interpretation clarifies the circumstances under which fair value of an asset retirement obligation is considered subject to reasonable estimation. The Interpretation is effective no later than the end of fiscal years ending after December 15, 2005. The Company recorded a $0.8 million loss accrual upon adoption of this pronouncement in December 2005. RECLASSIFICATION Certain prior period amounts have been reclassified to conform to the current year's presentation and are not material to the Company's consolidated financial statements. NOTE 2 RESEARCH AND DEVELOPMENT COSTS The Company spent approximately $161.0 million, $123.1 million, and $118.2 million in 2005, 2004 and 2003, respectively, on research and development (R&D) activities. R&D costs are included primarily in the selling, general, and administrative expenses of the Consolidated Statements of Operations. Not included in these amounts were customer-sponsored R&D activities of approximately $33.3 million, $31.8 million, and $22.3 million in 2005, 2004, and 2003, respectively. NOTE 3 OTHER (INCOME) EXPENSE Items included in other (income) expense consist of: Page 33 millions of dollars
Year Ended December 31, 2005 2004 2003 - ----------------------- ------ ----- ----- Net gain on sale of businesses ($4.7) $ -- ($0.5) Interest income (4.2) (0.7) (0.8) Net (gain)/loss on asset disposals (1.4) 3.5 1.7 Crystal Springs related settlement 45.5 -- -- Other (0.4) 0.2 (0.5) ------ ----- ----- Total other (income) expense $ 34.8 $ 3.0 ($0.1) ====== ===== =====
NOTE 4 INCOME TAXES Earnings before income taxes and the provision for income taxes are presented in the following table. The earnings before income taxes amounts for 2003 have been presented to conform to the 2004 and 2005 U.S. versus non-U.S. presentation.
2005 2004 2003 --------------------------- -------------------------- -------------------------- millions of dollars U.S. Non-U.S. Total U.S. Non-U.S. Total U.S. Non-U.S. Total - ------------------- ------- -------- ------ ------ -------- ------ ------ -------- ------ Earnings before taxes $ 46.8 $267.4 $314.2 $117.8 $190.8 $308.6 $120.5 $136.2 $256.7 ======= ====== ====== ====== ====== ====== ====== ====== ====== Provision for income taxes: Current: Federal/foreign (10.0) 94.6 84.6 1.4 63.8 65.2 18.5 13.1 31.6 State 2.9 -- 2.9 2.2 -- 2.2 1.6 -- 1.6 ------- ------ ------ ------ ------ ------ ------ ------ ------ Total Current (7.1) 94.6 87.5 3.6 63.8 67.4 20.1 13.1 33.2 Deferred (17.9) (14.5) (32.4) 11.1 2.7 13.8 18.5 21.5 40.0 ------- ------ ------ ------ ------ ------ ------ ------ ------ Total provision for income taxes ($25.0) $ 80.1 $ 55.1 $ 14.7 $ 66.5 $ 81.2 $ 38.6 $ 34.6 $ 73.2 ======= ====== ====== ====== ====== ====== ====== ====== ====== Effective tax rate (53.4)% 30.0% 17.5% 12.4% 34.9% 26.3% 32.0% 25.4% 28.5% ======= ====== ====== ====== ====== ====== ====== ====== ======
The provision for income taxes resulted in an effective tax rate for 2005 of 17.5% compared with rates of 26.3% in 2004 and 28.5% in 2003. The effective tax rate of 17.5% for 2005 differs from the U.S. statutory rate primarily due to a) the release of tax accrual accounts upon conclusion of certain tax audits, b) the tax effects of the disposition of Aktiengesellschaft Kuhnle Kopp and Kausch (AGK) and other miscellaneous dispositions, c) foreign rates which differ from those in the U.S. d) realization of certain business tax credits including R&D and foreign tax credits, and e) other permanent items, including equity in affiliates earnings. If the effects of the tax accrual release, the disposition of AGK and other miscellaneous dispositions are not taken into account, the Company's effective tax rate associated with its on-going business operations was approximately 27.8%. This rate was lower than the 2004 tax rate for on-going operations of 30.0% primarily due to changes in the mix of global pre-tax income among taxing jurisdictions including withholding taxes. In December 2004, the FASB issued FSP 109-1, "Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004" (AJCA), and FSP 109-2 "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the AJCA." These two FSPs Page 34 provide guidance on the application of the new provisions of the AJCA, which was signed into law on October 22, 2004. The AJCA provides a deduction for income from qualified domestic production activities, which will be phased in from 2005 through 2010. In return, the AJCA provides for a two-year phase-out of the existing extra-territorial income exclusion (ETI) for foreign sales that was viewed to be inconsistent with international trade protocols by the European Union. Under the guidance in FSP 109-1, the deduction will be treated as a "special deduction" as described in SFAS 109. As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date. Rather, the impact of this deduction will be reported in the period in which the deduction is claimed on our tax return. The Company does not expect the net effect of the phase out of the ETI and the phase in of this new deduction to have a material impact on its effective tax rate. FSP 109-2 provides guidance on the accounting for the deduction of 85% of certain foreign earnings that are repatriated, as defined in the AJCA. The Company has elected to apply this provision ("the election") to qualifying earnings repatriated in 2005. The Company has decided on a plan for reinvestment of repatriated foreign earnings (as a result of the repatriation provision) and obtained approval for the repatriation plan from the Board of Directors on July 26, 2005. The Company repatriated foreign earnings of $72.2 million from its non-US subsidiaries during 2005. Of the $72.2 million, the Company made an election under the AJCA with respect to $15.0 million to pay down its US debt obligations and invest in R&D. The election had a de minimis effect on income tax expense for 2005. 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:
millions of dollars 2005 2004 2003 - ------------------- ------ ------ ------ Income taxes at U.S. statutory rate of 35% $110.0 $108.0 $89.8 Increases (decreases) resulting from: Income from non-U.S. sources including withholding taxes (11.0) 3.6 (8.5) State taxes, net of federal benefit 1.7 2.1 1.0 Business tax credits, net (4.2) (6.2) (6.3) Affiliate earnings (9.6) (10.2) (7.0) Accrual adjustment and settlement of prior year tax matters (26.7) (6.0) -- Medicare prescription drug benefit (2.6) -- -- Capital loss limitation (3.5) -- -- Non-temporary differences and other 1.0 (10.1) 4.2 ------ ------ ----- Provision for income taxes as reported $ 55.1 $ 81.2 $73.2 ====== ====== =====
Page 35 Following are the gross components of deferred tax assets and liabilities as of December 31, 2005 and 2004.
millions of dollars 2005 2004 - ------------------- -------- -------- Current deferred tax assets: Foreign tax credits $ 3.5 $ 9.0 Research and development credits 1.6 6.0 Employee related 8.9 5.1 Warranties 4.0 -- Litigation & Environmental 9.8 -- Net operating loss carryforwards 0.2 1.4 Other 1.0 1.1 -------- -------- Total current deferred tax assets $ 29.0 $ 22.6 Current deferred tax liabilities: Inventory ($5.4) -- Other (1.7) -- -------- -------- Total current deferred tax liabilities ($7.1) -- Non-current deferred tax assets: Pension and other post retirement benefits $ 96.1 $ 92.1 Other comprehensive income 44.6 36.3 Employee related 7.6 9.0 Goodwill -- 3.5 Litigation and environmental 5.4 9.2 Warranties 3.6 7.7 Foreign tax credits 23.2 2.6 Research and development credits 12.2 4.9 Capital loss carryforwards 6.5 -- Net operating loss carryforwards 5.1 -- Other 5.2 5.3 -------- -------- Total non-current deferred tax assets $ 209.5 $ 170.6 Non-current deferred tax liabilities: Fixed assets ($173.2) ($163.4) Goodwill & intangibles (47.6) -- Other Comprehensive income (8.9) -- Lease obligation-production equipment (6.9) (9.0) Other (2.2) (7.0) -------- -------- Total non-current deferred tax liabilities ($238.8) ($179.4) Total ($7.4) $ 13.8 Valuation allowances (10.8) -- -------- -------- Net deferred tax asset (liability) ($18.2) $ 13.8 ======== ========
Page 36 The deferred tax assets and liabilities recognized in the Company's Consolidated Balance Sheets are as follows:
millions of dollars 2005 2004 - ------------------- ------- ------ Deferred income taxes-current assets $ 28.0 $ 22.6 Deferred income taxes-current liabilities (6.1) -- Other non-current assets 65.6 51.8 Other long-term liabilities (105.7) (60.6) ------- ------ Net deferred tax asset (liability) (current and non-current) ($18.2) $ 13.8 ======= ======
The deferred income taxes - current assets are primarily comprised of amounts from the U.S., France, and Japan. The deferred income taxes - current liabilities are primarily comprised of amounts from Germany. The other non-current assets are primarily comprised of amounts from the U.S. The other long-term liabilities are primarily comprised of amounts from Germany, Italy, Japan and the U.K. The Company has a U.S. capital loss carryforward of $17.0 million, which will expire in 2010. A valuation allowance of $6.5 million has been recorded for the tax effect of this loss carryforward. The foreign tax credits will expire beginning in 2012 through 2015. The R&D tax credits will expire beginning in 2022 through 2025. The Company also has deferred tax assets for minimum tax credits of $2.0 million, which can be carried forward indefinitely. At December 31, 2005, certain non-U.S. subsidiaries have net operating loss carryforwards totaling $17.0 million that are available to offset future taxable income. Carryforwards of $3.6 million expire at various dates from 2007 through 2010 and the balance has no expiration date. A valuation allowance of $4.3 million has been recorded for the tax effect on $12.9 million of the loss carryforwards. Any benefit resulting from the utilization of $5.0 million of the operating loss carryforwards will be applied to reduce goodwill. No deferred income taxes have been provided on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries or foreign corporate joint ventures totaling $552.2 million in 2005, as these amounts are essentially permanent in nature. The excess amount will become taxable on a repatriation of assets or sale or liquidation of the investment. It is not practicable to determine the unrecognized deferred tax liability on the excess amount because the actual tax liability on the excess amount, if any, is dependent on circumstances existing when remittance occurs. NOTE 5 MARKETABLE SECURITIES As of December 31, 2005, the Company had $40.6 million of highly liquid investments in marketable securities, primarily bank notes, acquired as part of the Beru Acquisition. The securities are carried at fair value with the unrealized gain or loss, net of tax, reported in other comprehensive income. Although $27.7 million of the contractual maturities are within one to five years and $12.9 million are due beyond five years, the Company does not intend to hold these investments until maturity. Gross proceeds from sales of marketable securities were $58.2 million in 2005. Net realized gains of $0.3 million, based on specific identification of securities sold, have been reported in other income for the year ended December 31, 2005. Page 37 NOTE 6 BALANCE SHEET INFORMATION Detailed balance sheet data are as follows: millions of dollars
December 31, 2005 2004 - ------------ -------- -------- Receivables: Customers $ 567.1 $ 453.9 Other 67.3 56.1 -------- -------- Gross receivables 634.4 510.0 Bad debt allowance (8.3) (10.9) -------- -------- Net receivables $ 626.1 $ 499.1 ======== ======== Inventories: Raw material and supplies $ 163.9 $ 107.6 Work in progress 84.9 71.9 Finished goods 92.3 50.5 -------- -------- FIFO inventories 341.1 230.0 LIFO reserve (9.1) (6.6) -------- -------- Total inventories $ 332.0 $ 223.4 ======== ======== Property, plant & equipment: Land $ 43.6 $ 45.0 Buildings 443.7 358.2 Machinery and equipment 1,529.4 1,352.3 Capital leases 1.1 1.1 Construction in progress 141.6 103.0 -------- -------- Total property, plant & equipment 2,159.4 1,859.6 Accumulated depreciation (864.5) (782.4) -------- -------- Property, plant & equipment-net $1,294.9 $1,077.2 ======== ======== Investments and advances: Investment in equity affiliates $ 189.1 $ 189.5 Other investments and advances 8.6 4.2 -------- -------- Total investments and advances $ 197.7 $ 193.7 ======== ======== Other non-current assets: Deferred pension assets $ 70.6 $ 113.1 Product liability insurance receivable 20.2 27.3 Deferred income taxes, net 65.6 51.8 Other intangible assets 99.7 4.9 Other 36.0 23.9 -------- -------- Total other non-current assets $ 292.1 $ 221.0 ======== ========
Page 38 Accounts payable and accrued expenses: Trade payables $450.0 $390.6 Payroll and related 107.9 74.5 Environmental 26.1 0.0 Product liability accrual 20.8 13.5 Warranties 25.4 16.1 Insurance 16.4 25.2 Customer related accruals 22.1 4.5 Interest 15.1 9.6 Dividends payable to minority shareholders 8.8 2.4 Current deferred income taxes 6.1 -- Other 87.7 71.6 ------ ------ Total accounts payable and accrued expenses $786.4 $608.0 ====== ====== Other long-term liabilities: Environmental accruals $ 13.0 $ 25.7 Warranties 18.6 10.3 Deferred income taxes, net 105.7 60.6 Product liability accrual 20.2 27.3 Other 66.8 119.0 ------ ------ Total other long-term liabilities $224.3 $242.9 ====== ======

Interest costs capitalized during 2005 and 2004 were $6.9 million and $4.3 million, respectively. As of December 31, 2005 and December 31, 2004 accounts payable of $41.6 million and $37.3 million, respectively, were related to property, plant and equipment purchases. As of December 31, 2005 and December 31, 2004 specific assets of $32.6 million and $38.7 million, respectively, were pledged as collateral under certain of the Company's long-term debt agreements. NSK-WARNER 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. NSK-Warner is the joint venture partner with a 40% interest in the Drivetrain Group's South Korean subsidiary, BorgWarner Transmission Systems Korea Inc. Dividends received from NSK-Warner were $12.7 million in 2005, $23.9 million in 2004, and $9.7 million in 2003. Following are summarized financial data for NSK-Warner, translated using the ending or periodic rates as of and for the years ended November 30, 2005, 2004 and 2003 (unaudited): Page 39
millions of dollars 2005 2004 2003 - ------------------- ------ ------ ------ Balance sheets: Current assets $236.7 $242.3 $210.7 Non-current assets 168.7 180.7 173.3 Current liabilities 120.8 126.2 108.8 Non-current liabilities 18.4 18.5 14.8 Statements of operations: Net sales $471.8 $443.5 $356.5 Gross profit 94.5 97.3 71.4 Net income 55.6 52.6 34.5
The equity of NSK-Warner as of November 30, 2005, was $266.2 million, there was no debt and their cash and securities were $92.2 million. Purchases from NSK-Warner for the years ended December 31, 2005, 2004 and 2003 were $25.4 million, $19.9 million and $16.9 million, respectively. INVESTMENT IN BUSINESS HELD FOR SALE On March 11, 2005, the Company completed the sale of its holdings in AGK for $57.0 million to Turbo Group GmbH. BorgWarner Europe Inc. acquired the stake in AGK, a turbomachinery company, from Penske Corporation in 1997. Since that time, AGK was treated as an unconsolidated subsidiary of the Company and recorded in "Investment in business held for sale" in the Consolidated Balance Sheets. The investment was carried on a cost basis, with dividends received from AGK applied against the carrying value of the asset. The proceeds, net of closing costs, were approximately $54.2 million, resulting in a pre-tax gain of approximately $10.1 million on the sale. Page 40 NOTE 7 GOODWILL AND OTHER INTANGIBLES The changes in the carrying amount of goodwill for the twelve months ended December 31, 2003, 2004 and 2005, are as follows:
millions of dollars DRIVETRAIN ENGINE TOTAL - ------------------- ---------- ------ -------- Balance at January 1, 2003 $133.7 $693.3 $ 827.0 Contingent valuation payment on acquired business -- 12.8 12.8 Translation adjustment 0.6 11.6 12.2 ------ ------ -------- Balance at December 31, 2003 $134.3 $717.7 $ 852.0 Translation adjustment 0.3 8.5 8.8 ------ ------ -------- Balance at December 31, 2004 $134.6 $726.2 $ 860.8 Beru acquisition -- 204.7 204.7 Translation adjustment (0.5) (35.2) (35.7) ------ ------ -------- Balance at December 31, 2005 $134.1 $895.7 $1,029.8 ====== ====== ========
The Company's other intangible assets, primarily from acquisitions, are valued based on independent appraisals and consisted of the following:
DECEMBER 31, 2005 DECEMBER 31, 2004 ---------------------------------- ---------------------------------- GROSS NET GROSS NET CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING millions of dollars AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT - ------------------- -------- ------------ -------- -------- ------------ -------- Amortized intangible assets Patented technology $ 9.4 $ 0.8 $ 8.6 $ -- $ -- $ -- Unpatented technology 1.1 0.3 0.8 -- -- -- Customer relationships 54.5 5.7 48.8 -- -- -- Distribution network 31.2 6.6 24.6 -- -- -- Miscellaneous 14.7 11.8 2.9 14.7 9.8 4.9 ------ ----- ----- ----- ---- ---- Total amortized intangible assets $110.9 $25.2 $85.7 $14.7 $9.8 $4.9 Unamortized trade names 14.0 -- 14.0 -- -- -- ------ ----- ----- ----- ---- ---- Total intangible assets $124.9 $25.2 $99.7 $14.7 $9.8 $4.9 ====== ===== ===== ===== ==== ====
Amortization of other intangible assets was approximately $31.7 million for the year ended December 31, 2005, including non-recurring charges directly attributable to the Beru Acquisition, and $1.1 million for the year ended December 31, 2004. The estimated useful lives of the Company's amortized intangible assets range from 4 to 12 years. The estimated future annual amortization expense, primarily for acquired intangible assets, is as follows: $14.5 million in 2006, $12.9 million in 2007, $12.7 million in 2008, $12.2 million in 2009 and $6.1 million in 2010. Page 41 A roll-forward of accumulated amortization at December 31, 2005 is presented below.
millions of dollars 2005 - ------------------- ------ Beginning balance $ 9.8 Provisions 31.7 Non-recurring charges (15.5) Translation adjustment (0.8) ------ Ending balance $ 25.2 ------
NOTE 8 PRODUCT WARRANTY The changes in the carrying amount of the Company's total product warranty liability for the years ended December 31, 2005 and 2004 were as follows:
millions of dollars 2005 2004 - ------------------- ------ ------ Beginning balance $ 26.4 $ 28.7 Acquisition 12.0 -- Provisions 30.0 10.2 Payments (20.3) (13.4) Translation adjustment (4.1) 0.9 ------ ------ Ending balance $ 44.0 $ 26.4 ====== ======
Classified in the Consolidated Balance Sheets as: ~~Accounts payable and accrued expenses $25.4 $16.1 Other long term liability $18.6 $10.3~~

NOTE 9 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 2005 and 2004 was 4.9% and 5.1%, respectively. Page 42
2005 2004 ------------------- ------------------- millions of dollars December 31, Current Long-Term Current Long-Term - -------------------------------- ------- --------- ------- --------- Bank borrowings and other $136.2 $ 21.0 $ 9.2 $ 6.1 Term loans due through 2013 (at an average rate of 3.2% in 2005 and 3.3% in 2004) 24.3 30.4 7.3 26.9 7% Senior Notes due 11/01/06, net of unamortized discount ($139 million converted to floating rate of 6.4% by interest rate swap at 12/31/05) 139.0 -- -- 139.0 6.5% Senior Notes due 02/15/09, net of unamortized discount ($100 million converted to floating rate of 7.1% by interest rate swap at 12/31/05) -- 136.2 -- 136.1 8% Senior Notes due 10/01/19, net of unamortized discount ($75 million converted to floating rate of 7.3% by interest rate swap at 12/31/05) -- 133.9 -- 133.9 7.125% Senior Notes due 02/15/29, net of unamortized discount -- 119.1 -- 119.1 ------ ------ ----- ------ Carrying amount of notes payable and long-term debt 299.5 440.6 16.5 561.1 Impact of derivatives on debt 0.4 -- -- 6.9 ------ ------ ----- ------ Total notes payable and long-term debt $299.9 $440.6 $16.5 $568.0 ====== ====== ===== ======
Annual principal payments required as of December 31, 2005 are as follows (in millions of dollars): 2006 $299.9 2007 10.3 2008 7.5 2009 161.7 2010 3.1 After 2010 260.2 ------ Total Payments $742.7 Less: Unamortized Discounts (2.2) ------ Total $740.5 ======

The Company has a multi-currency revolving credit facility, which provides for borrowings up to $600 million through July 2009. At December 31, 2005, $15.0 million of borrowings under the facility were outstanding. The credit agreement is subject to the usual terms and conditions applied by banks to an investment grade company. The Company was in compliance with all covenants at December 31, 2005 and expects to be compliant in future periods. The 7% Senior Notes with a face value of $139.0 million mature in November 2006. Management plans to refinance this amount at that time. At December 31, 2005 and 2004, the Company had outstanding letters of credit of $25.7 million and $23.7 million, respectively. The letters of credit typically act as a guarantee of payment to certain third parties in accordance with specified terms and conditions. As of December 31, 2005 and 2004, the estimated fair values of the Company's senior unsecured notes totaled $574.7 million and $589.0 million, respectively. The estimated fair values were $46.6 million higher in 2005, and $60.9 million higher in 2004, than their respective carrying values. Fair market values are developed by the use of estimates obtained from brokers and other Page 43 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. NOTE 10 FINANCIAL INSTRUMENTS The Company's financial instruments include cash and cash equivalents, trade receivables, trade payables, and notes payable. Due to the short-term nature of these instruments, the book value approximates fair value. The Company's financial instruments also include long-term debt, interest rate and currency swaps, commodity swap contracts, and foreign currency forward contracts. The Company manages its interest rate risk by balancing its exposure to fixed and variable rates while attempting to minimize its interest costs. The Company selectively uses interest rate swaps to reduce market value risk associated with changes in interest rates (fair value hedges). We also selectively use cross-currency swaps to hedge the foreign currency exposure associated with our net investment in certain foreign operations (net investment hedges). A summary of these instruments outstanding at December 31, 2005 follows (currency in millions):
Interest Rates (b) Notional ------------------ Floating Interest Hedge Type Amount Receive Pay Rate Basis -------------- -------- ------- ----- -------------------- Interest rate swaps (a) - ----------------------- Fixed to floating Fair value $ 139 7.0% 6.4% 6 mo. USD LIBOR+1.7% Fixed to floating Fair value $ 100 6.5% 7.1% 6 mo. USD LIBOR+2.4% Fixed to floating Fair value $ 75 8.0% 7.3% 6 mo. USD LIBOR+2.6% Cross currency swap (matures 11/01/06) - -------------------------------------- Floating $ Net Investment $ 125 6.1% -- 6 mo. USD LIBOR+1.4% to floating Y Y14,930 -- 1.7% 6 mo. JPY LIBOR+1.6% Cross currency swap (matures 02/15/09) - -------------------------------------- Floating $ Net Investment $ 100 7.1% -- 6 mo. USD LIBOR+2.4% to floating E E 75 -- 5.0% 6 mo. EURIBOR+2.4% Cross currency swap (matures 10/01/19) - -------------------------------------- Floating $ Net Investment $ 75 7.3% -- 6 mo. USD LIBOR+2.6% to floating E E 61 -- 5.2% 6 mo. EURIBOR+2.6%
(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, 2005. As of December 31, 2005, the fair value of the fixed to floating interest rate swaps was recorded as a current asset of $1.0 million and a current liability of $(0.6) million, and a non-current asset of $2.9 million and a non-current liability of $(2.9) million. As of December 31, 2004, the fair value of the fixed to floating interest rate swaps was recorded as a non-current asset of $6.9 million. No hedge ineffectiveness was recognized in relation to fixed to floating swaps. Page 44 The cross currency swaps were recorded at their fair values of $3.9 million included in other current assets, $14.9 million included in non-current assets and $(5.1) million included in other current liabilities at December 31, 2005 and $(33.1) million in other non-current liabilities at December 31, 2004. Hedge ineffectiveness of $0.1 million was recognized as of December 31, 2005 in relation to cross currency swaps. Fair value is based on quoted market prices for contracts with similar maturities. The Company also entered into certain commodity derivative instruments to protect against commodity price changes related to forecasted raw material and supplies purchases. The primary purpose of the commodity price hedging activities is to manage the volatility associated with these forecasted purchases. The Company primarily utilizes forward and option contracts, which are designated as cash flow hedges. As of December 31, 2005 the Company had forward and option commodity contracts with a total notional value of $5.8 million. The fair market value of the swap contracts was $2.1 million ($2.0 million maturing in less than one year) as of December 31, 2005, which is deferred in other comprehensive income and will be reclassified and matched into income as the underlying operating transactions are realized. As of December 31, 2004 the Company had commodity forward contracts with a total notional value of $3.4 million. The fair market value of the forward contracts was $0.4 million as of December 31, 2004, which was deferred in other comprehensive income. During the twelve months ended December 31, 2005 and 2004, hedge ineffectiveness associated with these contracts was not significant. The Company uses foreign exchange forward and option contracts to protect against exchange rate movements for forecasted cash flows for purchases, operating expenses or sales transactions designated in currencies other than the functional currency of the operating unit. Most contracts mature in less than one year, however certain long-term commitments are covered by forward currency arrangements to protect against currency risk through the second quarter of 2009. Foreign currency contracts require the Company, at a future date, to either buy or sell foreign currency in exchange for the operating units local currency. At December 31, 2005 contracts were outstanding to buy or sell U.S. Dollars, Euros, British Pounds Sterling, South Korean Won, Japanese Yen and Hungarian Forints. Gains and losses arising from these contracts are deferred in other comprehensive income and will be reclassified and matched into income as the underlying operating transactions are realized. As of December 31, 2005 unrealized gains amounted to $3.0 million, ($1.6 million maturing in less than one year) and unrealized losses amounted to $(1.6) million ($(1.4) million maturing in less than one year). As of December 31, 2004 unrealized gains amounted to $8.8 million and unrealized losses amounted to $(4.1) million. Hedge ineffectiveness associated with these contracts during 2005 amounted to a loss of $(0.5) million. Hedge ineffectiveness associated with these contracts during 2004 was not significant. Page 45 NOTE 11 RETIREMENT BENEFIT PLANS The Company sponsors various defined contribution savings plans primarily in the U.S. that allow employees to contribute a portion of their pre-tax and/or after-tax income in accordance with plan specified guidelines. Under specified conditions, the Company will make contributions to the plans and/or match a percentage of the employee contributions up to certain limits. Total expense related to the defined contribution plans was $23.1 million in 2005, $22.4 million in 2004, and $21.1 million in 2003. The Company has a number of defined benefit pension plans and other post retirement benefit plans covering eligible salaried and hourly employees and their dependents. The defined pension benefits provided are primarily based on (i) years of service and (ii) average compensation or a monthly retirement benefit amount. The Company provides defined benefit plans in the U.S., UK, Germany, Japan, South Korea, Italy, France, and Mexico. The other post retirement benefit plans, which provide medical and life insurance benefits, are unfunded plans. The pension and other post retirement benefit plans in the U.S. have been closed to new employees since 1995. The measurement date for all plans is December 31. The following table summarizes the expenses for the Company's defined contribution and defined benefit pension plans and the other post retirement defined benefit plans.
millions of dollars 2005 2004 2003 - ------------------- ----- ----- ----- Defined contribution pension expense $23.1 $22.4 $21.1 Defined benefit pension expense 17.6 16.7 23.2 Other post-retirement benefit expenses 48.8 43.2 40.7 ----- ----- ----- Total $89.5 $82.3 $85.0 ===== ===== =====
Page 46 The following provides a reconciliation of the plans' benefit obligations, plan assets, funded status and recognition in the Consolidated Balance Sheets.
OTHER POST PENSION BENEFITS RETIREMENT BENEFITS ------------------------------------- ------------------- millions of dollars 2005 2004 2005 2004 - ------------------- ----------------- ----------------- ------------------- US NON-US US Non-US ------ -------- ------ ------ CHANGE IN PROJECTED BENEFIT OBLIGATION: Projected benefit obligation at beginning of year $305.3 $ 260.2 $316.5 $ 217.1 $ 537.2 $ 537.4 Service cost 2.5 12.1 2.4 9.3 7.9 6.0 Interest cost 16.9 13.7 17.3 11.5 30.6 28.8 Plan participants' contributions -- 0.3 -- 0.3 -- -- Plan amendments (2.8) -- -- -- (22.6) -- Actuarial (gain)/loss 17.6 23.9 (8.3) 12.2 165.9 (2.1) Currency translation -- (34.8) -- 17.9 -- -- Acquisition/business combination -- 35.5 -- -- -- -- Benefits paid (23.4) (11.0) (22.6) (8.1) (39.1) (32.9) ------ -------- ------ -------- -------- -------- Projected benefit obligation at end of year $316.1 $ 299.9 $305.3 $ 260.2 679.9 $ 537.2 ====== ======== ====== ======== ======== ======== CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year $324.4 $ 124.7 $288.0 $ 103.4 Actual return on plan assets 21.6 22.6 34.7 8.9 Employer contribution 10.0 16.0 24.3 12.0 Plan participants' contribution -- 0.3 -- 0.3 Currency translation -- (13.7) -- 8.2 Benefits paid (23.4) (11.0) (22.6) (8.1) ------ -------- ------ -------- Fair value of plan assets at end of year $332.6 $ 138.9 $324.4 $ 124.7 ====== ======== ====== ======== FUNDED STATUS: Funded status at end of year $ 16.5 ($161.0) $ 19.1 ($135.5) ($679.9) ($537.2) Unrecognized net actuarial (gain)/loss 98.4 58.7 79.1 57.2 356.8 203.7 Unrecognized transition obligation (asset) -- 0.3 -- -- -- -- Unrecognized prior service cost (benefit) 3.6 -- 7.5 0.3 (22.2) (2.1) ------ -------- ------ -------- -------- -------- Net amount recognized $118.5 ($102.0) $105.7 ($78.0) ($345.3) ($335.6) ====== ======== ====== ======== ======== ======== AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS CONSIST OF: Prepaid benefit cost $ 67.3 $ -- $105.7 $ -- $ -- $ -- Accrued benefit liability (32.0) (144.8) (63.2) (99.2) (345.3) (335.6) Intangible asset 3.3 -- 7.2 0.2 -- -- Accumulated reduction in stockholders equity 79.9 42.8 56.0 21.0 -- -- ------ -------- ------ -------- -------- -------- Net amount recognized $118.5 ($102.0) $105.7 ($78.0) ($345.3) ($335.6) ====== ======== ====== ======== ======== ======== Total accumulated benefit obligation for all plans $315.9 $ 282.2 $301.8 $ 229.6 ====== ======== ====== ========
During 2005, the Company implemented amendments to certain pension and post retirement health care plans. These amendments decreased the pension obligation by $2.8 million and the post retirement health care obligation by $22.6 million. These amendments are being recognized over the remaining service lives of the affected employees. Page 47 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 2005 2004 - ------------------- ------- ------- Accumulated benefit obligation ($519.8) ($449.7) Plan assets 343.6 321.9 ------- ------- Deficiency ($176.2) ($127.8) ======= ======= Pension deficiency by country: United States ($32.0) ($19.4) United Kingdom (30.7) (29.0) Germany (97.9) (72.5) Other (15.6) (6.9) ------- ------- Total pension deficiency ($176.2) ($127.8) ======= =======
The weighted average asset allocations of the Company's funded pension plans at December 31, 2005 and 2004, and target allocations by asset category are as follows:
TARGET percent 2005 2004 ALLOCATION - ------- ---- ---- ---------- U.S. Plans Cash, real estate and other 10% 9% 0%-15% Fixed income securities 33% 33% 25%-45% Equity securities 57% 58% 45%-65% --- --- 100% 100% === === Non-U.S. Plans Cash, real estate and other 1% 0% 0%-10% Fixed income securities 35% 35% 30%-40% Equity Securities 64% 65% 60%-70% --- --- 100% 100% === ===
The Company's investment strategy is to maintain actual asset weightings within a preset range of target allocations. The Company believes these ranges represent an appropriate risk profile for the planned benefit payments of the plans based on the timing of the estimated benefit payments. Within each asset category, separate portfolios are maintained for additional diversification. Investment managers are retained within each asset category to manage each portfolio against its benchmark. Each investment manager has appropriate investment guidelines. In addition, the entire portfolio is evaluated against a relevant peer group. The pension plans did not hold any Company securities as investments as of December 31, 2005 and 2004. The Company expects to contribute a total of $25 million to $30 million into all of its defined benefit pension plans during 2006. Page 48 See the table below for a breakout between U.S. and non-U.S. pension plans. millions of dollars
PENSION BENEFITS --------------------------------------------------- OTHER POST 2005 2004 2003 RETIREMENT BENEFITS --------------- --------------- --------------- ---------------------- For the year ended December 31, US NON-US US NON-US US NON-US 2005 2004 2003 - ------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ----- COMPONENTS OF NET PERIODIC BENEFIT COST: Service cost $ 2.6 $12.1 $ 2.4 $ 9.3 $ 2.5 $ 7.5 $ 7.9 $ 6.0 $ 5.3 Interest cost 16.9 13.7 17.3 11.5 18.5 9.5 30.6 28.8 29.7 Expected return on plan assets (28.0) (8.1) (26.1) (7.3) (20.7) (5.7) -- -- -- Amortization of unrecognized transition obligation -- -- -- 0.3 -- 0.3 -- -- -- Amortization of unrecognized prior service cost (benefit) 1.1 0.3 1.5 0.2 1.5 0.2 (2.4) (0.2) (0.2) Amortization of unrecognized loss 4.7 2.3 5.2 2.4 7.8 1.8 12.7 8.6 5.9 ------ ----- ------ ----- ------ ----- ----- ----- ----- Net periodic benefit cost/(benefit) ($2.7) $20.3 $ 0.3 $16.4 $ 9.6 $13.6 $48.8 $43.2 $40.7 ====== ===== ====== ===== ====== ===== ===== ===== =====
The Company's weighted-average assumptions used to determine the benefit obligations for our defined benefit pension and other post retirement plans as of December 31, 2005 and 2004 were as follows:
percent 2005 2004 - ------- ---- ---- U.S. plans Discount rate 5.50 5.75 Rate of compensation increase 3.50 3.50 Non-U.S. plans Discount rate 4.43 5.04 Rate of compensation increase 2.95 3.36
The Company's weighted-average assumptions used to determine the net periodic benefit cost (income) for our defined benefit pension and other post retirement benefit plans for the three years ended December 31, 2005 were as follows:
percent 2005 2004 2003 - ------- ---- ---- ---- U.S. plans Discount rate 5.75 6.00 6.75 Rate of compensation increase 3.50 3.50 4.50 Expected return on plan assets 8.75 8.75 8.75 Non-U.S. plans Discount rate 5.04 5.49 5.45 Rate of compensation increase 3.36 3.40 3.36 Expected return on plan assets 6.63 6.62 6.82
The Company determines its expected return on plan asset assumptions by evaluating estimates of future market returns and the plans' asset allocation. The Company also considers the impact of active management of the plans' invested assets. The Company's expected return on assets assumption reflects the asset allocation of each plan. The Company's assumed long-term rate of Page 49 return on assets for its U.S. pension plans was 8.75% for 2005, 2004 and 2003. The Company does not anticipate a change in the long-term rate of return on U.S. plan assets for pension benefits for 2006. The Company's assumed long-term rate of return on assets for its U.K. pension plan was 6.75% for 2005, 2004 and 2003. The Company anticipates increasing its assumed long-term rate of return on U.K. plan assets to 7.25% for 2006, due to both recent and long-term asset performance and the plan's asset allocation. The estimated future benefit payments for the pension and other post retirement benefits are as follows: millions of dollars
Other post retirement benefits ------------------------------- Pension Benefits w/o Medicare With Medicare ----------------- Part D Part D Year U.S. Non-U.S. reimbursements reimbursements - ---- ------ -------- -------------- -------------- 2006 $ 23.3 $10.4 $ 36.7 $ 34.1 2007 23.1 10.4 39.0 36.3 2008 22.9 11.8 41.0 38.0 2009 22.9 11.5 42.7 39.6 2010 22.9 11.8 45.0 41.7 2011-2015 114.7 68.1 251.8 234.2
The weighted-average rate of increase in the per capita cost of covered health care benefits is projected to be 10.0% in 2006 decreasing to 5.0% by the year 2011. A one-percentage point change in the assumed health care cost trend would have the following effects:
One percentage point -------------------- millions of dollars Increase Decrease - ------------------- -------- -------- ~~Effect on post retirement benefit obligation $98.0 ($80.3) Effect on total service and interest cost components $ 4.4 ($5.8)~~
NOTE 12 STOCK INCENTIVE PLANS Under the Company's 1993 Stock Incentive Plan, the Company granted options to purchase shares of the Company's common stock at the fair market value on the date of grant. The options vest over periods up to three years and have a term of ten years from date of grant. As of December 31, 2003, there were no options available for future grants under the 1993 plan. The 1993 plan expired at the end of 2003 and was replaced by the Company's 2004 Stock Incentive Plan. Under the 2004 Stock Incentive Plan, the number of shares originally authorized for grant was 2,700,000. As of December 31, 2005, there are a total of 3,209,000 outstanding options under the 1993 and 2004 Stock Incentive Plans. Under the 2004 Stock Incentive Plan, the Company issues restricted shares of common stock to its non-employee directors that vest and become unrestricted shares in one to three years from the date of grant. The Company issued 16,099 such shares in 2005 and 6,400 in 2004. The market Page 50 value of the Company's common stock determines the value of the restricted stock. The value of the awards are recorded as unearned compensation on restricted stock in a separate component of stockholders' equity, which is amortized as compensation expense over the restriction periods. During 2005, $0.2 million was charged to compensation expense under the plan. The Company accounts for stock options in accordance with APB 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, which is the measurement date. A summary of the plans' shares under option at December 31, 2005, 2004 and 2003 follows:
2005 2004 2003 ---------------------------- ---------------------------- ---------------------------- Weighted- Weighted- Weighted- Shares average Shares average Shares average (thousands) exercise price (thousands) exercise price (thousands) exercise price ----------- -------------- ----------- -------------- ----------- -------------- Outstanding at beginning of year 2,995 $33.24 2,685 $26.39 3,650 $23.29 Granted 968 58.08 1,063 44.56 687 32.74 Exercised (713) 26.04 (593) 24.22 (1,517) 21.80 Forfeited (41) 31.43 (160) 26.74 (135) 25.03 ----- ------ ----- ------ ------ ------ Outstanding at end of year 3,209 $42.41 2,995 $33.24 2,685 $26.39 ----- ------ ----- ------ ------ ------ Options exercisable at year-end 876 $26.02 793 $23.78 554 $22.57 ----- ------ ----- ------ ------ ------ Options available for future grants 569 =====
The following table summarizes information about stock options outstanding at December 31, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------- ------------------------------------- Range of Number outstanding Weighted-average Weighted-average Number exercisable Weighted-average exercise prices (thousands) remaining contractual life exercise price (thousands) exercise price - --------------- ------------------ -------------------------- ---------------- ------------------ ---------------- $16.34 - 21.13 94 4.0 $18.45 94 $18.45 $24.14 - 26.56 589 6.1 $25.20 575 $25.17 $26.94 - 58.08 2,526 8.7 $47.32 207 $31.85 ----- --- ------ --- ------ 3,209 8.1 $42.41 876 $26.02 ===== === ====== === ======
The weighted average fair value at date of grant for options granted during 2005, 2004, and 2003 were $14.63, $16.28, and $11.91, respectively, and were estimated using the Black-Scholes options pricing model with the following weighted average assumptions:
2005 2004 2003 --------- --------- --------- Risk-free interest rate 4.07% 4.14% 3.58% Dividend yield 1.09% 1.26% 1.27% Volatility factor 27.02% 32.89% 34.38% Weighted average expected life 4.0 YEARS 6.5 years 6.5 years
The expected lives of the awards are based on historical exercise patterns and the terms of the options. The assumption for weighted average expected lives was adjusted in 2005 based on a third-party evaluation of the Company's historical exercise patterns, which revealed that the Page 51 awards have been exercised earlier in recent years. The risk-free interest rate is based on zero coupon treasury bond rates corresponding to the expected life of the awards. The expected volatility assumption was derived by referring to changes in the Company's historical common stock prices over the same timeframe as the expected life of the awards. The expected dividend yield of stock is based on the Company's historical dividend yield. The Company has no reason to believe that future stock volatility or the expected dividend yield is likely to differ from historical patterns. STOCK COMPENSATION PLANS During 2005, the Company adopted a Performance Share Plan that provides payouts to members of senior management at the end of successive three-year periods based on the Company's performance in terms of total shareholder return relative to a peer group of automotive companies. Payouts earned are payable 40% in cash and 60% in the Company's common stock. The Performance Share Plan replaces, and is very similar in structure, to the Executive Stock Performance Plan that was in effect during 2003 and 2004. For the three-year measurement periods ended December 31, 2005, 2004 and 2003, the amounts expensed under the plans and the related share issuances were as follows:
2005 2004 2003 ------- ------- ------- ~~Expense ($ millions) $ 8.8 $ 2.0 $ 2.7 Number of shares* 54,806 48,569 41,252~~
* Shares are issued in February of the following year The increase in expense in 2005 in comparison to 2004 and 2003 was primarily related to the Company stock's performance measured by total shareholder return relative to its peer group. Estimated shares issuable under the plans are included in the computation of diluted earnings per share as earned. Under the terms of the Executive Stock Performance Plan, the final three-year period for which awards have been granted was for the period beginning January 1, 2004 and ending on December 31, 2006. The Performance Share Plan is a provision of the 2004 Stock Incentive Plan, which expires on December 31, 2014. NOTE 13 OTHER COMPREHENSIVE INCOME The components of accumulated other comprehensive income/(loss), net of tax, in the consolidated balance sheets are as follows:
millions of dollars 2005 2004 - ------------------- ------- ------ Foreign currency translation adjustments, net $ 2.3 $ 99.7 Market value of hedge instruments, net 2.9 3.2 Unrealized loss on available-for-sale securities, net (0.3) 0.0 Minimum pension liability adjustment, net (78.0) (47.7) ------- ------ Accumulated other comprehensive income ($73.1) $ 55.2 ------- ------
The changes in the components of other comprehensive income/(loss) in the Consolidated Statements of Stockholders' Equity are as follows: Page 52
millions of dollars 2005 2004 2003 - ------------------- ------- ----- ----- Foreign currency translation adjustments ($97.4) $10.7 $67.6 Market value change in hedge instruments (1.1) 4.7 0.4 Income taxes 0.8 13.0 (0.2) ------- ----- ----- Net foreign currency translation and hedge instruments adjustment (97.7) 28.4 67.8 Unrealized loss on available-for-sale securities (0.4) -- -- Income taxes 0.1 -- -- ------- ----- ----- Net unrealized loss on available-for-sale securities (0.3) -- -- Minimum pension liability adjustment (45.7) 17.2 1.1 Income taxes 15.4 (4.4) (0.4) ------- ----- ----- Net minimum pension liability adjustment (30.3) 12.8 0.7 ------- ----- ----- Other comprehensive income/(loss) ($128.3) $41.2 $68.5 ======= ===== =====
NOTE 14 CONTINGENCIES In the normal course of business the Company and its subsidiaries are parties to various legal claims, actions and complaints, including matters involving intellectual property claims, general liability and various other risks. It is not possible to predict with certainty whether or not the Company and its subsidiaries will ultimately be successful in any of these legal matters or, if not, what the impact might be. The Company's environmental and product liability contingencies are discussed separately below. The Company's management does not expect that the results in any of these legal proceedings will have a material adverse effect on the Company's results of operations, financial position or cash flows. ENVIRONMENTAL The Company and certain of its current and former direct and indirect corporate predecessors, subsidiaries and divisions have been identified by the United States Environmental Protection Agency and certain state environmental agencies and private parties as 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 38 such sites. Responsibility for clean-up and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula. 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. Based on information available to us, 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 Page 53 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 and consulting costs; remediation alternatives; estimated legal fees; and other factors, the Company has established an accrual for indicated environmental liabilities with a balance at December 31, 2005, of approximately $38.3 million. Included in the total accrued liability is the $16.1 million anticipated cost to settle all outstanding claims related to Crystal Springs described below, which was recorded in the second quarter of 2005. For the other 37 sites, we have accrued amounts that do not exceed $3.0 million related to any individual site and management does not believe that the costs related to any of these other individual sites will have a material adverse effect on the Company's results of operations, cash flows or financial condition. The Company expects to expend substantially all of the $38.3 million environmental accrued liability over the next three to five years. 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. The liabilities at issue result from operations of Kuhlman Electric that pre-date the Company's acquisition of Kuhlman Electric's parent company, Kuhlman Corporation, during 1999. During 2000, Kuhlman Electric notified us that it discovered potential environmental contamination at its Crystal Springs, Mississippi plant while undertaking an expansion of the plant. Kuhlman Electric and others, including the Company, have been sued in numerous related lawsuits, in which multiple claimants allege personal injury and property damage. The Company and other defendants, including the Company's subsidiary Kuhlman Corporation, entered into a settlement in July 2005 regarding approximately 90% of personal injury and property damage claims relating to the alleged environmental contamination. In exchange for, among other things, the dismissal with prejudice of these lawsuits, the defendants agreed to pay a total sum of up to $39.0 million in settlement funds. The settlement was paid in three approximately equal installments. The first two payments of $12.9 million were made in the third and fourth quarters of 2005 and the remaining installment of $13.0 million was paid in the first quarter of 2006. The same group of defendants entered into a settlement in October 2005 regarding approximately 9% of personal injury and property damage claims relating to the alleged environmental contamination. In exchange for, among other things, the dismissal with prejudice of these lawsuits, the defendants agreed to pay a total sum of up to $5.4 million in settlement funds. The settlement was paid in two approximately equal installments in the fourth quarter of 2005 and the first quarter of 2006. With this settlement, the Company and other defendants have resolved about 99% of the known personal injury and property damage claims relating to the alleged environmental contamination. The cost of this settlement has been recorded in other income in the Consolidated Statements of Operations. CONDITIONAL ASSET RETIREMENT OBLIGATIONS In 2005, the FASB issued Interpretation (FIN) No. 47, "Accounting for Conditional Asset Retirement Obligations" an interpretation of SFAS 143, which requires the Company to recognize legal obligations to perform asset retirements in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. Certain government regulations require the removal of asbestos from an existing facility at the time the facility undergoes major renovations or is demolished. The liability exists because the facility will not last forever, but it is conditional on future renovations, even if there are no immediate plans to remove the materials which pose no health or safety hazard in their current condition. Similarly, government regulations require the removal or closure of Page 54 underground storage tanks (USTs) when their use ceases, the disposal of polychlorinated biphenyl (PCBs) transformers and capacitors when their use ceases, and the disposal of lead-based paint in conjunction with facility renovations or demolition. We currently have 11 manufacturing locations within our Company, which have been identified as containing asbestos-related building materials, USTs, PCB transformers or capacitors, or lead-based paint. The fair value of special handling costs to remove, transport and dispose of this material has been estimated and recorded at $0.8 million as of December 31, 2005. PRODUCT LIABILITY Like many other industrial companies who have historically operated in the United States, the Company (or parties the Company indemnifies) continues to be named as one of many defendants in asbestos-related personal injury actions. Management believes that the Company's involvement is limited because, in general, these claims relate to a few types of automotive friction products, manufactured many years ago that contained encapsulated asbestos. The nature of the fibers, the encapsulation and the manner of use lead the Company to believe that these products are highly unlikely to cause harm. As of December 31, 2005, the Company had approximately 67,000 pending asbestos-related product liability claims. Of these outstanding claims, approximately 58,000 are pending in just three jurisdictions, where significant tort reform activities are underway. The Company's policy is to aggressively defend against these lawsuits and the Company has been successful in obtaining dismissal of many claims without any payment. The Company expects that the vast majority of the pending asbestos-related product liability claims where it is a defendant (or has an obligation to indemnify a defendant) will result in no payment being made by the Company or its insurers. In 2005, of the approximately 38,000 claims resolved, only 295 (0.8%) resulted in any payment being made to a claimant by or on behalf of the Company. In 2004 of the 4,062 claims resolved, only 255 (6.3%) resulted in any payment being made to a claimant by or on behalf of the Company. Prior to June 2004, the settlement and defense costs associated with all claims were covered by the Company's primary layer insurance coverage, and these carriers administered, defended, settled and paid all claims under a funding agreement. In June 2004, primary layer insurance carriers notified the Company of the exhaustion of their policy limits. This led the Company to access the next available layer of insurance coverage. Since June 2004, secondary layer insurers have paid asbestos-related litigation defense and settlement expenses pursuant to a funding agreement. The Company has paid $2.9 million in 2005 and $1.0 million in 2004 as a result of the funding agreement for claims that have been resolved. The Company is expecting to fully recover these amounts. Recovery is dependent on the completion of an audit proving the exhaustion of primary insurance coverage and the successful resolution of the declaratory judgment action referred to below. At December 31, 2005 an amount of $3.9 million was owed by insurance carriers in respect of claims settled and funded by the Company in advance of the insurers' reimbursement. This amount has been submitted to carriers for reimbursement and the Company expects to be fully reimbursed. At December 31, 2005, the Company has an estimated liability of $41.0 million for future claims resolutions, with a related asset of $41.0 million to recognize the insurance proceeds receivable by the Company for estimated losses related to claims that have yet to be resolved. Insurance carrier reimbursement of 100% is expected based on the Company's experience, its insurance contracts and decisions received to date in the declaratory judgment action referred to below. At December 31, 2004, the comparable value of the insurance receivable and accrued liability was $40.8 million. Page 55 The amounts recorded in the Condensed Consolidated Balance Sheets related to the estimated future settlement of existing claims are as follows:
millions of dollars 2005 2004 - ------------------- ----- ----- Assets: Prepayments and other current assets $20.8 $13.5 Other non-current assets 20.2 27.3 ----- ----- Total insurance receivable $41.0 $40.8 ===== ===== Liabilities: Accounts payable and accrued expenses $20.8 $13.5 Long-term liabilities - other 20.2 27.3 ----- ----- Total accrued liability $41.0 $40.8 ===== =====
We cannot reasonably estimate possible losses, if any, in excess of those for which we have accrued, because we cannot predict how many additional claims may be brought against the Company (or parties the Company has an obligation to indemnify) in the future, the allegations in such claims, the possible outcomes, or the impact of tort reform legislation currently being considered at the State and Federal levels. A declaratory judgment action was filed in January 2004 in the Circuit Court of Cook County, Illinois by Continental Casualty Company and related companies (CNA) against the Company and certain of its other historical general liability insurers. CNA provided the Company with both primary and additional layer insurance, and, in conjunction with other insurers, is currently defending and indemnifying the Company in its pending asbestos-related product liability claims. The lawsuit seeks to determine the extent of insurance coverage available to the Company including whether the available limits exhaust on a "per occurrence" or an "aggregate" basis, and to determine how the applicable coverage responsibilities should be apportioned. On August 15, 2005, the Court issued an interim order regarding the apportionment matter. The interim order has the effect of making insurers responsible for all defense and settlement costs pro rata to time-on-the-risk, with the pro-ration method to hold the insured harmless for periods of bankrupt or unavailable coverage. Appeals of the interim order were denied. However, the issue is reserved for appellate review at the end of the action. In addition to the primary insurance available for asbestos-related claims, the Company has substantial additional layers of insurance available for potential future asbestos-related product claims. As such, the Company continues to believe that its coverage is sufficient to meet foreseeable liabilities. Although it is impossible to predict the outcome of pending or future claims or the impact of tort reform legislation being considered at the State and Federal levels; due to the encapsulated nature of the products, our experiences in aggressively defending and resolving claims in the past, and our significant insurance coverage with solvent carriers as of the date of this filing, management does not believe that asbestos-related product liability claims are likely to have a material adverse effect on the Company's results of operations, cash flows or financial condition. NOTE 15 LEASES AND COMMITMENTS Certain assets are leased under long-term operating leases. These include production equipment at one plant, rent for the corporate headquarters and an airplane. Most leases contain renewal options Page 56 for various periods. Leases generally require the Company to pay for insurance, taxes and maintenance of the leased property. The Company leases other equipment such as vehicles and certain office equipment under short-term leases. Total rent expense was $21.9 million in 2005, $18.0 million in 2004, and $13.4 million in 2003. The Company does not have any material capital leases. The Company has guaranteed the residual values of certain leased production equipment at one of its facilities. The guarantees extend through the maturity of the underlying lease, which is in 2006. In the event the Company exercises its option not to purchase the production equipment, the Company has guaranteed a residual value of $16.6 million. We do not believe we have any loss exposure due to this guarantee. Future minimum operating lease payments at December 31, 2005 were as follows:
millions of dollars - ------------------- 2006 28.4(a) 2007 7.8 2008 7.3 2009 6.8 2010 6.2 After 2010 13.2 ----- Total minimum lease payments $69.7 =====
(a) 2006 includes $16.6 million for the guaranteed residual value of production equipment with a lease that expires in 2006. The Company entered into two separate royalty agreements with Honeywell International for certain variable turbine geometry (VTG) turbochargers in order to continue shipping to its OEM customers after a German court ruled in favor of Honeywell in a patent infringement action. The two separate royalty agreements were signed in July 2002 and June 2003, respectively. The July 2002 agreement was effective immediately and expired in June 2003. The June 2003 agreement was effective July 2003 and covers the period through 2006 with a minimum royalty for shipments up to certain volume levels and a per unit royalty for any units sold above these stated amounts. The royalty costs recognized under the agreements were $1.9 million in 2005, $14.2 million in 2004 and $23.2 million in 2003. These costs were all recognized as part of cost of goods sold. These costs will remain at minimal levels in 2006 as the Company's primary customers have converted most of their requirements to the next generation VTG turbocharger. NOTE 16 STOCK SPLIT On April 21, 2004 the Company's stockholders approved an amendment to the Company's Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 50,000,000 to 150,000,000. The approval of the amendment allowed the Company to proceed with its two-for-one stock split on May 17, 2004 to stockholders of record on May 3, 2004. All prior year share and per share amounts disclosed in this document have been restated to reflect the two-for-one stock split. Page 57 NOTE 17 EARNINGS PER SHARE Earnings per share of common stock outstanding were computed as follows:
(in millions except per share amounts) 2005 2004 2003 - -------------------------------------- ------- ------- ------- Basic earnings per share Net income $ 239.6 $ 218.3 $ 174.9 ======= ======= ======= Shares of common stock outstanding 56.708 55.872 54.116 ======= ======= ======= Earnings per share of common stock $ 4.23 $ 3.91 $ 3.23 ======= ======= ======= Diluted earnings per share Net income $ 239.6 $ 218.3 $ 174.9 ======= ======= ======= Shares of common stock outstanding 56.708 55.872 54.116 Effect of dilutive securities: Stock options 0.690 0.665 0.488 ------- ------- ------- Shares of common stock outstanding including dilutive shares 57.398 56.537 54.604 ======= ======= ======= Earnings per share of common stock $ 4.17 $ 3.86 $ 3.20 ======= ======= =======
Options to purchase 966,087 shares of common stock at $58.08 per share awarded in July 2005 were outstanding at September 30, 2005, but were not included in the computation of third quarter 2005 diluted EPS because the options' exercise price was greater than the average market price of the common shares for the period. All options to purchase the Company's common stock outstanding at the end of 2005 were included in the fourth quarter 2005 computation of diluted EPS as the average market price of the Company's common shares for the period was greater than the exercise price of the options. Page 58 NOTE 18 ACQUISITION OF BERU AKTIENGESELLSCHAFT On January 4, 2005, the Company acquired 62.2% of the outstanding shares of Beru, headquartered in Ludwigsburg, Germany, from the Carlyle Group and certain family shareholders. In conjunction with the acquisition, the Company launched a tender offer for the remaining outstanding shares of Beru, which ended in February 2005. Presently, the Company holds 69.4% of the shares of Beru at a gross cost of approximately $554.8 million, or $477.2 million net of cash and cash equivalents acquired. Beru is a leading global automotive supplier of diesel cold starting technology (glow plugs and instant starting systems); gasoline ignition technology (spark plugs and ignition coils); and electronic and sensor technology (tire pressure sensors, diesel cabin heaters and selected sensors.) The acquisition gives the Company additional access to the growing diesel market and enhances sensor and engine electronics expertise. In addition, Beru's technology and product expertise complements and strengthens the Company's market presence with global automakers. The Company's Consolidated Financial Statements include the operating results of Beru within the Engine segment from the date of the acquisition. Page 59 PURCHASE PRICE ALLOCATION The purchase price has been allocated to the assets acquired and liabilities assumed based on estimated fair values as of the acquisition date as set forth below:
millions of dollars Initial Allocation Adjustments Final Allocation - ------------------- ------------------ ----------- ---------------- Marketable securities $ -- $ 52.9 $ 52.9 Other current assets, net of cash acquired 190.1 14.5 204.6 Property, plant and equipment 249.1 (13.1) 236.0 Goodwill 200.4 4.3 204.7 Intangible assets: Tradenames (indefinite useful life) 14.5 1.0 15.5 Unpatented technology (estimated useful life of 4 years) 1.2 -- 1.2 Customer relationships (estimated useful lives of 5 - 10 years) 98.1 (3.0) 95.1 Patents (estimated useful life of 12 years) 10.5 -- 10.5 Sales order backlog (estimated useful life of 3 months) 2.3 3.2 5.5 Acquired in-process research & development ("IPR&D") 10.3 (4.8) 5.5 ------- ------ ------- Total intangible assets 136.9 (3.6) 133.3 Other non-current assets 30.6 (5.4) 25.2 ------- ------ ------- Total Assets 807.1 49.6 856.7 Current liabilities (81.8) (51.4) (133.2) Deferred income taxes (108.1) 26.5 (81.6) Other long-term liabilities (73.0) 13.7 (59.3) Minority interests (114.8) 9.4 (105.4) ------- ------ ------- Total Liabilities (377.7) (1.8) (379.5) ------- ------ ------- Total purchase price, net of cash and cash equivalents acquired 429.4 47.8 477.2 Cash and cash equivalents acquired 130.5 (52.9) 77.6 ------- ------ ------- Gross purchase price $ 559.9 ($5.1) $ 554.8 ======= ====== =======
The excess of the purchase price over the fair values of assets acquired and liabilities assumed has been allocated to goodwill. Management used a variety of assessments for evaluating the fair values of the assets and liabilities acquired, including independent appraisals. The Company knew at the time of the preliminary asset allocation that a more comprehensive, detailed, thorough and integrated review would be needed of the following items during the allocation process: current assets, property, plant and equipment, sales order backlog, in-process research and development ("IPR&D"), customer relationships, current liabilities and goodwill. This was due to the numerous legal entities, joint ventures, and the multi-national scope of Beru; and the fact that the Company holds only a majority position in a German publicly traded company, (which reports in German statutory accounting principles at several locations, before converting their results into International Financial Reporting Standards (IFRS) for reporting to their shareholders as opposed to US GAAP), and also management's commitment to fulfill the requirements of SFAS 141. Upon completion of the third party valuation specialists' work and review by the Company's management in the fourth quarter of 2005, we finalized all adjustments related to the acquisition. The change in the gross purchase price from the initial allocation reflects the finalization of all transaction payments and investing activities, including the currency impact thereon. Of the $133.3 million of acquired intangible assets, approximately $5.5 million has been allocated to IPR&D and was also considered as part of a third party preliminary valuation. The Company Page 60 identified and valued five core IPR&D projects. Each of the five core projects generally consists of several sub-projects that have not reached technological feasibility. Three of the core projects concern the market for diesel engines, one for gasoline engines and another for a product that can be used in diesel and gasoline engines. Management believes no alternative future uses of the technology are possible for each of these projects in the combined entity. Per paragraph 5 of FASB Interpretation No. 4, the fair value of the IPR&D was written off at the date of acquisition. The write-off is included in SG&A expense in the Consolidated Statements of Operations for the year ended December 31, 2005. In addition, purchase accounting adjustments of $5.5 million and $4.7 million related to sales order backlog and beginning inventory, respectively, were fully amortized during 2005. RESTATEMENT OF MARKETABLE SECURITIES In the preparation of the Company's 2005 annual financial statements, the Company determined that marketable securities which are part of the Beru Acquisition, which amounted to $46.4 million, $53.9 million and $46.3 million as of March 31, June 30 and September 30, 2005, respectively, and had previously been reported as cash and cash equivalents in the Company's interim financial statements included in the quarterly filings during 2005, should have been reported as marketable securities. The Company will correct its interim financial statements for the first three quarters of fiscal 2005 when filing its Quarterly Reports on Form 10-Q for the first three quarters of fiscal 2006. This restatement has no impact on current assets or total assets, but does impact our presentation in the interim Consolidated Statements of Cash Flows. The effects of this restatement on the previously reported interim Consolidated Statements of Cash Flows were to change (a) the net (increase)/decrease in marketable securities to $4.2 million, $(7.1) million, and $0.2 million for the March 31, June 30, and September 30, 2005 reporting periods, respectively, from $0.0 in each period; (b) payments for businesses acquired, net of cash and cash equivalents to $477.2 million in each of the three reporting periods from the $429.4 million previously reported; (c) net cash used in investing activities to $(478.7) million, $(547.5) million, and $(604.5) million for the periods ended March 31, June 30, and September 30, 2005, respectively, from $(435.1) million, $(492.6) million, and $(556.9) million, respectively, for the same periods; (d) effect of exchange rate changes on cash and cash equivalents to $(11.3) million, $(16.5) million, and $(15.3) million for the periods ended March 31, June 30, and September 30, 2005, respectively from $(8.5) million, $(17.5) million and $(16.6) million, respectively, for the same three periods; and (e) cash and cash equivalents at the end of period to $116.8 million, $92.7 million and $93.2 million, respectively, for the periods ended March 31, June 30, and September 30, 2005 from $163.2 million, $146.6 million, and $139.5 million, respectively, for the same three periods. Page 61 PRO FORMA FINANCIAL INFORMATION The following pro forma information assumes the Beru Acquisition occurred as of the beginning of each year presented. Adjustments have been made to exclude non-recurring charges directly attributable to the acquisition, including the immediate write-off of the purchase price allocation associated with Beru's in-process research and development and the full amortization of the sales order backlog and the beginning inventory written up in purchase accounting. The recurring adjustments reflected in the pro forma statements include the amortization of the amounts allocated to customer relationships, patents, technology, property, plant and equipment and the Company's acquisition financing costs. The pro forma results are not necessarily indicative of the results that actually would have been obtained had the acquisition been in effect for the periods presented or that may be obtained in the future.
(Pro forma, unaudited, in millions, except per share amounts) 2005 2004 2003 - ----------------------------------- -------- -------- -------- Net sales $4,293.8 $4,008.4 $3,462.9 -------- -------- -------- Net earnings $ 251.7 $ 231.1 $ 192.5 ======== ======== ======== Earnings per share - basic $ 4.44 $ 4.14 $ 3.56 ======== ======== ======== Earnings per share - diluted $ 4.38 $ 4.09 $ 3.53 ======== ======== ========
NOTE 19 OPERATING SEGMENTS AND RELATED INFORMATION The Company's business is comprised of two operating segments: Engine and Drivetrain. These reportable segments are strategic business units, which are managed separately because each represents a specific grouping of automotive components and systems. The Company evaluated the operating segments' performance based upon return on invested capital. The return on invested capital is comprised of earnings before interest and income taxes and the average capital invested in each operating segment. Inter-segment sales, which are not significant, are recorded at market prices. This footnote presents summary segment information. Page 62 OPERATING SEGMENTS
Net sales Earnings ------------------------------- before Long-lived Inter- interest Year end Depr./ asset millions of dollars Customers segment Net and taxes assets amort. expenditures (b) - ------------------- --------- -------- -------- --------- -------- ------ ---------------- 2005 Engine $2,960.1 $ 44.6 $3,004.7 $ 354.5 $3,088.5 $179.3 $209.1 Drivetrain 1,333.7 -- 1,333.7 97.6 918.8 65.9 68.2 Inter-segment eliminations -- (44.6) (44.6) -- -- -- -- -------- ------ -------- ------- -------- ------ ------ Total 4,293.8 -- 4,293.8 452.1 4,007.3 245.2 277.3 Corporate -- -- -- (100.8) 82.1(a) 10.3 19.5 -------- ------ -------- ------- -------- ------ ------ Consolidated $4,293.8 -- $4,293.8 $ 351.3 $4,089.4 $255.5 $296.8(c) ======== ====== ======== ======== ====== ====== Interest expense and finance charges 37.1 ------- Earnings before income taxes $ 314.2 Provision for income taxes 55.1 Minority interest, net of tax 19.5 ------- Net earnings $ 239.6 =======

Net sales Earnings ------------------------------- before Long-lived Inter- interest Year end Depr./ asset millions of dollars Customers segment Net and taxes assets amort. expenditures (b) - ------------------- --------- -------- -------- --------- -------- ------ ---------------- 2004 Engine $2,166.7 $ 50.3 $2,217.0 $281.7 $2,208.4 $107.3 $167.7 Drivetrain 1,358.6 -- 1,358.6 106.9 810.0 66.1 75.3 Inter-segment eliminations 0.0 (50.3) (50.3) -- -- -- -- -------- ------ -------- ------- -------- ------ ------ Total 3,525.3 -- 3,525.3 388.6 3,018.4 173.4 243.0 Corporate -- -- -- (50.3) 510.7(a) 4.7 9.4 -------- ------ -------- ------- -------- ------ ------ Consolidated $3,525.3 -- $3,525.3 $338.3 $3,529.1 $178.1 $252.4 ======== ====== ======== ======== ====== ====== Interest expense and finance charges 29.7 ------- Earnings before income taxes $308.6 Provision for income taxes 81.2 Minority interest, net of tax 9.1 ------- Net earnings $218.3 =======

Net sales Earnings ------------------------------- before Long-lived Inter- interest Year end Depr./ asset millions of dollars Customers segment Net and taxes assets amort. expenditures (b) - ------------------- --------- -------- -------- --------- -------- ------ ---------------- 2003 Engine $1,823.7 $ 46.0 $1,869.7 $239.6 $1,925.1 $ 93.8 $133.3 Drivetrain 1,245.5 0.1 1,245.6 98.4 778.8 60.1 66.4 Inter-segment eliminations -- (46.1) (46.1) -- -- -- -- -------- ------ -------- ------ -------- ------ ------ Total 3,069.2 -- 3,069.2 338.0 2,703.9 153.9 199.7 Corporate -- -- -- (48.0) 436.6(a) 8.5 14.7 -------- ------ -------- ------ -------- ------ ------ Consolidated $3,069.2 -- $3,069.2 $290.0 $3,140.5 $162.4 $214.4 ======== ====== ======== ======== ====== ====== Interest expense and finance charges 33.3 ------ Earnings before income taxes $256.7 Provision for income taxes 73.2 Minority interest, net of tax 8.6 ------ Net earnings $174.9 ======
(a) Corporate assets, including equity in affiliates, are net of trade receivables securitized and sold to third parties, and include cash, cash equivalents, deferred income taxes and investments and advances. (b) Long-lived asset expenditures includes capital expenditures and tooling outlays, net of customer reimbursements. (c) Amount differs from those shown on Consolidated Statement of Cash Flows by $4.3 million related to expenditures which have not yet been funded. Page 63 GEOGRAPHIC INFORMATION No country outside the U.S., other than Germany and the United Kingdom, 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. Also, the Company's 50% equity investment in NSK-Warner (see Note 6) amounting to $175.3 million at December 31, 2005 is excluded from the definition of long-lived assets, as are goodwill and certain other non-current assets.
Net sales Long-lived assets ------------------------------ ------------------------------ millions of dollars 2005 2004 2003 2005 2004 2003 - ------------------- -------- -------- -------- -------- -------- -------- United States $1,929.6 $1,964.9 $1,889.2 $ 661.8 $ 637.1 $ 636.9 -------- -------- -------- -------- -------- -------- Europe: Germany 1,405.7 834.1 637.7 457.4 278.7 234.6 United Kingdom 173.2 186.0 146.3 43.6 39.5 36.4 Other Europe 379.4 237.1 167.7 107.0 106.1 78.3 -------- -------- -------- -------- -------- -------- Total Europe 1,958.3 1,257.2 951.7 608.0 424.3 349.3 Other foreign 405.9 303.2 228.3 131.3 117.9 89.6 -------- -------- -------- -------- -------- -------- Total $4,293.8 $3,525.3 $3,069.2 $1,401.1 $1,179.3 $1,075.8 ======== ======== ======== ======== ======== ========
SALES TO MAJOR CUSTOMERS Consolidated sales included sales to Ford Motor Company of approximately 16%, 21%, and 23%; to Volkswagen of approximately 13%, 10%, and 8%; to DaimlerChrysler of approximately 12%, 14%, and 17%; and to General Motors Corporation of approximately 9%, 10%, and 12% for the years ended December 31, 2005, 2004 and 2003, respectively. Both of our operating segments had significant sales to all four of the customers listed above. Accounts receivable from these customers at December 31, 2005 comprised approximately 29% of total Accounts receivable. Such sales consisted of a variety of products to a variety of customer locations and regions. No other single customer accounted for more than 10% of consolidated sales in any year of the periods presented. Page 64 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 2005 and 2004 interim results of operations. Certain 2005 and 2004 quarterly amounts have been reclassified to conform to the annual presentation. millions of dollars, except per share amounts
2005 2004 ------------------------------------------------ ---------------------------------------- Quarter Ended MAR-30 JUN-30 SEP-30 DEC-31 YEAR MAR-31 JUN-30 SEP-30 DEC-31 YEAR - ------------- -------- -------- -------- -------- -------- ------ ------ ------ ------ -------- Net sales $1,083.5 $1,111.4 $1,050.9 $1,048.0 $4,293.8 $903.1 $893.2 $839.8 $889.2 $3,525.3 Cost of sales 869.8 879.0 842.7 848.5 3,440.0 730.5 723.4 694.7 725.5 2,874.2 -------- -------- -------- -------- -------- ------ ------ ------ ------ -------- Gross profit 213.7 232.4 208.2 199.5 853.8 172.6 169.8 145.1 163.7 651.1 Selling, general and administrative expenses 134.2 131.6 120.0 110.1 495.9 94.7 87.8 77.4 79.1 339.0 Other (income) expense (4.1) 42.1 (2.3) (0.9) 34.8 0.3 0.6 (0.5) 2.7 3.0 -------- -------- -------- -------- -------- ------ ------ ------ ------ -------- Operating income 83.6 58.7 90.5 90.3 323.1 77.6 81.4 68.2 81.9 309.1 Equity in affiliate earnings, net of tax (4.0) (8.0) (5.7) (10.5) (28.2) (6.5) (8.4) (6.2) (8.1) (29.2) Interest expense, net 9.3 9.9 9.6 8.3 37.1 7.5 7.7 7.5 7.0 29.7 -------- -------- -------- -------- -------- ------ ------ ------ ------ -------- Income before income taxes and minority interest 78.3 56.8 86.6 92.5 314.2 76.6 82.1 66.9 83.0 308.6 Provision for income taxes (0.3) 12.8 19.6 23.1 55.1 22.9 24.6 20.1 13.5 81.2 Minority interest, net of tax 1.0 8.1 5.6 4.8 19.5 2.6 2.8 2.0 1.8 9.1 -------- -------- -------- -------- -------- ------ ------ ------ ------ -------- Net earnings $ 77.6 $ 35.9 $ 61.4 $ 64.6 $ 239.6 $ 51.1 $ 54.7 $ 44.8 $ 67.7 $ 218.3 ======== ======== ======== ======== ======== ====== ====== ====== ====== ======== Earnings/(loss) per share - basic $ 1.38 $ 0.64 $ 1.08 $ 1.13 $ 4.23 $ 0.92 $ 0.98 $ 0.80 $ 1.20 $ 3.91 Earnings/(loss) per share - diluted $ 1.36 $ 0.63 $ 1.07 $ 1.12 $ 4.17 $ 0.91 $ 0.97 $ 0.79 $ 1.19 $ 3.86
Page 65 SELECTED FINANCIAL DATA millions of dollars, except per share data
For the Year Ended December 31, STATEMENT OF OPERATIONS DATA 2005 2004 2003 2002 2001 - ---------------------------- -------- -------- -------- -------- -------- Net sales $4,293.8 $3,525.3 $3,069.2 $2,731.1 $2,351.6 Cost of sales 3,440.0 2,874.2 2,482.5 2,176.5 1,890.8 -------- -------- -------- -------- -------- Gross profit 853.8 651.1 586.7 554.6 460.8 Selling, general and administrative expenses 495.9 339.0 316.9 303.5 249.7 Goodwill amortization 42.0 Other (income) expense 34.8 3.0 (0.1) (0.9) (2.1) Restructuring and other non-recurring charges 28.4(b) -------- -------- -------- -------- -------- Operating income 323.1 309.1 269.9 252.0 142.8 Equity in affiliate earnings, net of tax (28.2) (29.2) (20.1) (19.5) (14.9) Interest expense, net 37.1 29.7 33.3 37.7 47.8 -------- -------- -------- -------- -------- Earnings before income taxes and minority interest 314.2 308.6 256.7 233.8 109.9 Provision for income taxes 55.1 81.2 73.2 77.2 39.7 Minority interest, net of tax 19.5 9.1 8.6 6.7 3.8 -------- -------- -------- -------- -------- Net earnings before cumulative effect of accounting change 239.6 218.3 174.9 149.9 66.4 Cumulative effect of change in accounting principle, net of tax (269.0)(a) -------- -------- -------- -------- -------- Net earnings/(loss) $ 239.6 $ 218.3 $ 174.9 ($119.1) $ 66.4 ======== ======== ======== ======== ======== Earnings/(loss) per share - basic $ 4.23 $ 3.91 $ 3.23 $ (2.23)(a) $ 1.26(b) ======== ======== ======== ======== ======== Average shares outstanding (thousands) - basic 56,708 55,872 54,116 53,250 52,630 Earnings/(loss) per share - diluted $ 4.17 $ 3.86 $ 3.20 $ (2.22)(a) $ 1.26(b) ======== ======== ======== ======== ======== Average shares outstanding (thousands) - diluted 57,398 56,537 54,604 53,708 52,926 Cash dividend declared per share $ 0.58 $ 0.50 $ 0.36 $ 0.30 $ 0.30 BALANCE SHEET DATA Total assets $4,089.4 $3,529.1 $3,140.5 $2,682.9 $2,770.9 Total debt 740.5 584.5 655.5 646.7 737.0
(a) In 2002, upon the adoption of SFAS No. 142, the Company recorded a $269.0 million after tax charge for cumulative effect of accounting principle related to goodwill. This charge was $5.01 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 $0.36 per diluted share. Page 66 EX-21.1 5 c02047exv21w1.txt 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 Limited BorgWarner Automotive Components (Ningbo) Co. Ltd. BorgWarner TorqTransfer Systems Korea Inc. BorgWarner Shenglong (Ningbo) Co. Ltd. BorgWarner TorqTransfer Systems Beijing Co. Ltd. BorgWarner Diversified Transmission Products Inc. BorgWarner Diversified Transmission Products Services Inc. BorgWarner TorqTransfer Systems Ochang Inc. BorgWarner Emissions Systems Inc. BorgWarner Emissions Systems of Michigan Inc. BorgWarner Emissions Systems Holding Inc. BorgWarner Thermal Systems Inc. BorgWarner Thermal 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. NSK-Warner (Shanghi) Co. Ltd. NSK-Warner U.S.A., Inc. Lapeer Warner, LLC BorgWarner Europe Inc. AG Kuhnle, Kopp & Kausch BorgWarner Holding Inc. BorgWarner France S.A.S. BorgWarner Transmission Systems Tulle S.A.S. BW Holding Ltd. BorgWarner Europe GmbH BorgWarner Holdings Ltd. BorgWarner Limited Kysor Europe Limited Morse TEC Europe S.r.l. BorgWarner Germany GmbH Beru AG BERU Italia S.r.l. BERU ELECTRONICS GmbH BERU Mexico S.A. de C.V. IMPCO-BERU Technologies B.V. BERU Diesel Start Systems Pvt. Ltd. BERU-Eichenauer GmbH B 80 S.r.l. Hakertherm Elektronik Verwaltungs-GmbH BERU Japan Corp. REMIX Korea Co. Ltd. BERU Corp. BERU Automotive Co., Ltd. BERU Microelectronica S.A. TecCom GmbH Beru Motorsport Holdings Ltd. BERU F1 Systems Ltd. BERU Eyquem SAS BERU TDA SAS Beru SAS Eyquem SNC BorgWarner Cooling Systems GmbH BorgWarner Transmission Systems Arnstadt GmbH BorgWarner Transmission Systems GmbH BorgWarner Vertriebs und Verwaltungs GmbH BorgWarner Turbo Systems Worldwide Headquarters GmbH BorgWarner Turbosystems GmbH TSA Turbochargers of South Africa Pty. Ltd. BorgWarner Turbo Systems Alkatreszgyarto Kft. Hitachi Warner Turbo Systems Ltd. Turbo Energy Ltd. BorgWarner Turbo Systems Engineering GmbH Creon Insurance Agency Limited BorgWarner Trustees Limited Kuhlman Corporation BWA Turbo Systems Holding Corporation BorgWarner Turbo Systems Inc. BorgWarner Cooling Systems Korea, Inc. BorgWarner Brasil, Ltda. Kysor DO BRASIL LTDA. Seohan Warner Turbo Systems, Ltd. Kuhlman Plastics of Canada, Ltd. Spring Products Corporation Bronson Specialties Inc. EX-23.1 6 c02047exv23w1.txt INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM'S CONSENT Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement Nos. 333-45423 dated February 2, 1998; 333-117171 dated July 6, 2004; 333-117707 dated July 28, 2004; 333-118203, 333-118202, 333-118201 and 333-118200 dated August 13, 2004; 333-122204 dated January 21, 2005 and 333-124086 dated April 15, 2005 all on Form S-8; and Registration Statement Nos. 333-31259 dated July 14, 1997 on Form S-3 and dated August 1, 1997 on Form S-3/A; 333-73840 dated November 21, 2001 on Form S-3; 333-106787 dated July 3, 2003 and dated February 11, 2004 on Form S-3/A of BorgWarner Inc., of our reports dated February 17, 2006, relating to the financial statements and financial statement schedules of BorgWarner Inc., and management's report on the effectiveness of internal control over financial reporting appearing in and incorporated by reference in the Annual Report on Form 10-K of BorgWarner Inc. for the year ended December 31, 2005. /s/ DELOITTE & TOUCHE LLP Detroit, Michigan February 17, 2006 EX-31.1 7 c02047exv31w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 31.1 CERTIFICATION I, Timothy M. Manganello, certify that: 1. I have reviewed this annual report on Form 10-K of BorgWarner Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; 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 over financial reporting. Date: February 17, 2006 /s/ Timothy M. Manganello - ------------------------------------ Timothy M. Manganello Chairman and Chief Executive Officer EX-31.2 8 c02047exv31w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 31.2 CERTIFICATION I, Robin J. Adams, certify that: 1. I have reviewed this annual report on Form 10-K of BorgWarner Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; 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 over financial reporting. Date: February 17, 2006 /s/ Robin J. Adams - -------------------------------------------------- Robin J. Adams Executive Vice President, Chief Financial Officer and Chief Administrative Officer & Director EX-32.1 9 c02047exv32w1.txt SECTION 1350 CERTIFICATIONS EXHIBIT 32 CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the Annual Report of BorgWarner Inc. (the "Company") on Form 10-K for the year ended December 31, 2005 (the "Report"), each of the undersigned officers of the Company certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of such officer's knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; 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: February 17, 2006 /s/ Timothy M. Manganello - ------------------------------------- Timothy M. Manganello Chairman & Chief Executive Officer /s/ Robin J. Adams - ------------------------------------- Robin J. Adams Executive Vice President, Chief Financial Officer & Chief Administrative Officer & Director A signed original of this written statement required by Section 906 has been provided to BorgWarner Inc. and will be retained by BorgWarner Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----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 $0.01 per share		New York Stock Exchange


		Part of Form 10-K
		into which
Document		incorporated

BorgWarner Inc. 2005 Annual Report to Stockholders		Parts I, II and IV
BorgWarner Inc. Proxy Statement for the 2006 Annual Meeting of Stockholders		Part III


					Percentage
					Owned by			Location		Fiscal 2005
			Year		the			of		Sales ($ in
Joint Venture		Products	Organized		Company(a)			Operation	Joint Venture Partner	millions)(b)

Unconsolidated:
	NSK-Warner K.K.	Transmission components		1964		50%		Japan	Nippon Seiko K.K.	$	471.8

	Turbo Energy Limited(c)	Turbochargers		1987		32.6%		India	Sundaram Finance Limited; Brakes India Limited	$	73.0

	Hitachi Warner Turbo Systems, Ltd.	Turbochargers		2001		50%		Japan	Hitachi	$	51.2

	Impco-Beru Technologies B.V.	Alternative Drive Systems and equipment for gas engines		1999		49%		Netherlands	Impco Technologies Inc.	$	18.1

	Beru Diesel Start Systems Pvt. Ltd.	Glow Plugs		1996		49%		India	Jayant Drive	$	3.0

	Beru-Eichenauer GmbH	PTC Heaters		2000		50%		Germany	Frizt Eichenauer GmbH & Co. KG	$	17.9

Consolidated:

	BorgWarner Transmission Systems Korea, Inc.	Transmission components		1987		60%	(d)	Korea	NSK-Warner K.K.	$	124.0

	Divgi-Warner Limited	Transfer cases and automatic locking hubs		1995		60%		India	Divgi Metalwares, Ltd.	$	11.0

	Borg-Warner Shenglong (Ningbo) Co. Ltd	Fans, fan drives		1999		70%		China	Ningbo Shenglong Group Co., Ltd.	$	19.0

	BorgWarner TorqTransfer Systems Beijing Co. Ltd.	Transfer cases		2000		80%		China	Beijing Automotive Industry Corporation	$	12.0

	BorgWarner Morse TEC Murugappa Pvt. Ltd	Chain products and engine timing system components		2002		74%		India	TI Diamond Chain Ltd.	$	4.0

	SeohanWarner TurboSystems Ltd.	Turbochargers		2003		71%		Korea	Korea Flange Company	$	3.0

	Beru Korea Co. Ltd.	Ignition coils and pumps		2001		51%		Korea	Mr. Koo Bon Mo and Mr. D.H. Kim	$	19.8


Product Type		Name of Competitor

Turbochargers:		Honeywell International Inc. Mitsubishi Heavy Industries, Ltd.
Chains:		Tsubaki Group Iwis
Torque transfer products:		Magna International Inc. Toyoda Koki
Transmission products:		Dynax Corporation INA-Schaeffler
Emissions products:		Kolbenschmidt Pierburg AG Valeo Bosch
Thermal products:		Behr GmbH & Co. Horton Iusi
Diesel cold start technology:		Bosch NGK

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Item
Number		Page

PART I
1.	Business		4
1A.	Risk Factors		15
1B.	Unresolved Staff Comments		17
2.	Properties		18
3.	Legal Proceedings		19
4.	Submission of Matters to a Vote of Security Holders		19
PART II
5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		19
6.	Selected Financial Data		20
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
7A.	Quantitative and Qualitative Disclosure About Market Risk		20
8.	Financial Statements and Supplementary Data		20
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		21
9A.	Controls and Procedures		21
9B.	Other Information		24
PART III
10.	Directors and Executive Officers of the Registrant		24
11.	Executive Compensation		24
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		24
13.	Certain Relationships and Related Transactions		24
14.	Principal Accountant Fees and Services		24
PART IV
15.	Exhibits and Financial Statement Schedules		25
Second Amendment and Restated Recievables Loan Agreement
1st Amendment to 2nd Amended and Restated Recievables Loan Agreement
Annual Report to Stockholders
Subsidiaries of the Company
Independent Registered Public Accounting Firm's Consent
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Section 1350 Certifications


	Year Ended December 31,

	2005			2004			2003

Engine	$	3,004.7		$	2,217.0		$	1,869.7
Drivetrain		1,333.7			1,358.6			1,245.6
Inter-segment eliminations		(44.6	)		(50.3	)		(46.1	)

Net sales	$	4,293.8		$	3,525.3		$	3,069.2


(a)	The Company owns 69.4% of the outstanding shares of Beru. For the joint ventures in which Beru is a party, the percentage of ownership for each joint venture reflects Beru’s ownership percentage.


(b)		All sales figures are for the year ended December 31, 2005, except for NSK-Warner and Turbo Energy Limited. NSK-Warner’s sales are reported for the 12 months ended November 30, 2005. Turbo Energy Limited’s sales are reported for the 12 months ended September 30, 2005.

(c)		The Company made purchases from Turbo Energy Limited totaling $18.7 million, $17.4 million, and $0.4 million for the years ended December 31, 2005, 2004, and 2003, respectively.

(d)		BorgWarner Inc. owns 50% of NSK-Warner, which has a 40% interest in BorgWarner Transmission Systems Korea, Inc. This gives the Company an additional indirect effective ownership percentage of 20%. This results in a total indirect effective ownership interest of 80%.


Customer	2005		2004		2003

Ford		16%		21%		23%
Volkswagen		13%		10%		8%
DaimlerChrysler		12%		14%		17%
General Motors		9%		10%		12%


Name	Age		Position With Company

Timothy M. Manganello		56	Chairman and Chief Executive Officer
Robin J. Adams		52	Executive Vice President, Chief Financial Officer and Chief Administrative Officer
Mary E. Brevard		59	Vice President, Investor Relations and Corporate Communications
William C. Cline		56	Vice President, Acquisition Coordination
Angela D’Aversa		59	Vice President, Human Resources
Jamal M. Farhat		46	Vice President, Chief Information Officer
Anthony D. Hensel		47	Vice President and Treasurer
Laurene H. Horiszny		50	Vice President, General Counsel and Secretary
Bernd W. Matthes		45	Vice President
John J. McGill		51	Vice President, Global Supply Chain
Cynthia A. Niekamp		46	Vice President
Jeffrey L. Obermayer		50	Vice President and Controller
Mark A. Perlick		59	Vice President, Technology
Christopher H. Vance		46	Vice President, Business Development and M&A
Alfred Weber		48	Vice President
Roger J. Wood		43	Vice President


Americas:	Europe:	Asia:
Asheville, North Carolina	Arcore, Italy	Aoyama, Japan
Auburn Hills, Michigan	Biassano, Italy(2)(3)	Changwon, South Korea(2)
Cadillac, Michigan	Bradford, England	Chennai, India
Campinas Sao Paolo, Brazil	Bretten, Germany(3)	Chungju-City, South Korea (50% JV)(3)
Civac-Juitepec, Mexico(2)(3)	Chazelles-sur-Lyon, France(3)	Hitachinaka City, Japan (50% JV)
Cortland, New York	Diss, England(3)	Kakkalur, India (74% JV)
Dixon, Illinois	Kandel, Germany (50% JV)(2)(3)	Nabari City, Japan
Fletcher, North Carolina	Kirchheimbolanden, Germany	Ningbo, China (70% JV)
Guadalajara, Mexico	La Ferte Mace, France(3)	Pyongtaek, South Korea(2)
Ithaca, New York	Ludwigsburg, Germany(3)	Shihung-City, South Korea(3)
Marshall, Michigan	Markdorf, Germany	Tainan Shien, Taiwan
Sallisaw, Oklahoma	Muggendorf, Germany(3)
Simcoe, Ontario, Canada	Neuhas, Germany(3)
Water Valley, Mississippi	Oroszlany, Hungary
	Tiszakecske, Hungary(3)
	Tralee, Ireland(3)
	Vitoria, Spain(3)


(1)	The table excludes joint ventures owned less than 50%.

(2)	Indicates a leased facility.

(3)	Indicates a Beru facility.


Quarter Ended	High		Low

March 31, 2004	$	49.32	$	39.84
June 30, 2004	$	45.08	$	38.35
September 30, 2004	$	48.77	$	40.73
December 31, 2004	$	54.68	$	39.50
March 31, 2005	$	54.50	$	48.13
June 30, 2005	$	56.07	$	44.85
September 30, 2005	$	61.07	$	53.41
December 31, 2005	$	61.73	$	53.46


*	The 2004 first quarter shares prices were adjusted for the stock split effective May 17, 2004.


Item 1.	Business


Item 3.	Legal Proceedings


Item 10.	Directors and Executive Officers of the Registrant


Item 11.	Executive Compensation


	•	Implementation of additional reporting from the reporting units to the corporate treasury group related to liquidity, including financial instruments. This information requires details on any marketable securities with maturity dates greater than 90 days.

	•	The maturity profile of financial instruments received from the reporting units is reviewed and any marketable securities with maturity dates greater than 90 days is noted. This procedure is reviewed and documented on a quarterly basis.

	•	Internal reporting was changed to facilitate the reporting of marketable securities in the financial information received by corporate treasury from the reporting units.

	•	The status of any marketable securities with maturities greater than 90 days is reviewed during quarterly balance sheet review meetings.


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


Item 13.	Certain Relationships and Related Transactions


	(a) 1. The following consolidated financial statements of the Company in the Company’s Annual Report are incorporated herein by reference:


Independent Registered Public Accounting Firm’s Report
Consolidated Statements of Operations — years ended December 31, 2005, 2004 and 2003
Consolidated Balance Sheets — December 31, 2005 and 2004
Consolidated Statements of Cash Flows — years ended December 31, 2005, 2004 and 2003
Consolidated Statements of Stockholders’ Equity and Comprehensive Income — years ended December 31, 2005, 2004 and 2003
Notes to Consolidated Financial Statements


	2. Consolidated Financial Statement Schedule. All other schedules are omitted because they are not applicable, or the required information is shown in the financial statements or notes thereto.

	Financial statements of 50 percent or less-owned companies have been omitted because the proportionate share of their profit before income taxes and total assets are less than 20 percent of the respective consolidated amounts and investments in such companies are less than 20 percent of total consolidated assets.

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


Signature				Title


/s/ Timothy M. Manganello Timothy M. Manganello				Chairman and Chief Executive Officer (Principal Executive Officer)

/s/ Robin J. Adams Robin J. Adams				Executive Vice President, Chief Financial Officer and Chief Administrative Officer (Principal Financial Officer)

/s/ Jeffrey L. Obermayer Jeffrey L. Obermayer				Vice President and Controller (Principal Accounting Officer)

/s/ Phyllis O. Bonanno Phyllis O. Bonanno				Director

/s/ Andrew F. Brimmer Andrew F. Brimmer				Director

/s/ David T. Brown David T. Brown				Director

/s/ Jere A. Drummond Jere A. Drummond				Director

/s/ Paul E. Glaske Paul E. Glaske				Director

/s/ Alexis P. Michas Alexis P. Michas				Director

/s/ Ernest J. Novak, Jr. Ernest J. Novak, Jr.				Director


Signature				Title


/s/ Richard O. Schaum Richard O. Schaum				Director

/s/ Thomas T. Stallkamp Thomas T. Stallkamp				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	Amended and Restated By-laws of the Company (incorporated by reference to Exhibit No. 3.2 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2003).
	*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 November 23, 2004 among BorgWarner Inc., The Lenders Party Hereto Morgan Stanley Senior Funding, Inc., as Administrative Agent and Syndication Agent, Euro 700,000,000 Senior Bridge Term Credit Facility, Morgan Stanley Senior Funding, Inc., as Lead Arranger and Book Runner (incorporated by reference to Exhibit No. 10.1 to the Company’s Current Report on Form 8-K dated November 30, 2004).
	*10	.2	Credit Agreement dated as of July 22, 2004 among BorgWarner Inc., as Borrower, the Lenders Party Hereto, JPMorgan Chase Bank, Administrative Agent, Bank of America, N.A. as Syndication Agent and Calyon New York Branch (incorporated by reference to Exhibit No. 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004).
	†*10	.3	BorgWarner Inc. 2004 Deferred Compensation Plan (incorporated by reference to Exhibit No. 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004).
	*10	.4	Form of BorgWarner Inc. 2004 Stock Incentive Plan, Non-Qualified Stock Option Award Agreement (incorporated by reference to Exhibit No. 99.1 to the Current Report on Form 8-K dated July 27, 2005.
	†*10	.5	BorgWarner Inc. 2004 Stock Incentive Plan (incorporated by reference to Appendix B of the Company’s Proxy Statement dated March 22, 2004 for its 2004 Annual Meeting of Stockholders).
	*10	.6	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	.7	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	.8	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).


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