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BorgWarner
Employees Retirement Savings Plan
Financial
Statements as of December 31, 2007
and 2006, and
for the Year Ended
December 31,
2007, Supplemental Schedule as of December 31, 2007,
and Report of
Independent Registered Public Accounting
Firm
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BORGWARNER
EMPLOYEES RETIREMENT SAVINGS PLAN
TABLE
OF CONTENTS
Page
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REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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1
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Statements of Assets Available for Benefits as of December 31, 2007
and 2006
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2
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Statement of Changes in Assets Available for Benefits for the Year Ended
December 31, 2007
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3
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Notes to Financial Statements as of December 31, 2007 and 2006, and for
the Year Ended December 31, 2007
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4–10
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SUPPLEMENTAL
SCHEDULE:
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11
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Form 5500 - Schedule H, Part IV, Line 4i - Schedule of Assets (Held
at End of Year) as of December 31, 2007
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12
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NOTE:
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All other
schedules required by section 2520.103-10 of the Department of
Labor’s Rules and Regulations for Reporting and Disclosure under the
Employee Retirement Income Security Act of 1974 have been omitted due to
the absence of conditions under which they are
required.
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REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
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To
the Employee Benefits Committee and
the BorgWarner
Employees Retirement Savings Plan
Auburn Hills,
MI
We
have audited the accompanying statements of assets available for benefits of the
BorgWarner Employees Retirement Savings Plan (the “Plan”) as of
December 31, 2007 and 2006, and the related statement of changes in assets
available for benefits for the year ended December 31, 2007. These
financial statements are the responsibility of the Plan’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with 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. The Plan is not required to have,
nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Plan’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, 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 financial statements present fairly, in all material respects,
the assets available for benefits of the Plan as of December 31, 2007 and
2006, and the changes in assets available for benefits for the year ended
December 31, 2007, in conformity with accounting principles generally
accepted in the United States of America.
Our audits were
conducted for the purpose of forming an opinion on the basic financial
statements taken as a whole. The supplemental schedule of assets (held at end of
year) as of December 31, 2007, is presented for the purpose of additional
analysis and is not a required part of the basic financial statements, but is
supplementary information required by the Department of Labor’s Rules and
Regulations for Reporting and Disclosure under the Employee Retirement Income
Security Act of 1974. This schedule is the responsibility of the Plan’s
management. Such schedule has been subjected to the auditing procedures applied
in our audit of the basic 2007 financial statements and, in our opinion, is
fairly stated in all material respects when considered in relation to the basic
financial statements taken as a whole.
/s/ Deloitte & Touche
LLP
Detroit,
MI
June 3,
2008
BORGWARNER
EMPLOYEES RETIREMENT SAVINGS PLAN
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STATEMENTS
OF ASSETS AVAILABLE FOR BENEFITS
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AS
OF DECEMBER 31, 2007 AND 2006
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(In
thousands)
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2007
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2006
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ASSETS:
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Participant-directed
investments in BorgWarner Inc. Retirement
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Savings
Master Trust (“Master Trust”)
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$
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102,523
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$
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88,975
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Participant
loans
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2,553
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2,315
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Investments
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105,076
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91,290
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Participant
contributions receivable
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98
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79
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Company
contributions receivable
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35
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169
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ASSETS
AVAILABLE FOR BENEFITS AT FAIR VALUE
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105,209
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91,538
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Adjustments
from fair value to contract value for fully benefit-
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responsive
investment contracts
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(98
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)
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130
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ASSETS
AVAILABLE FOR BENEFITS
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$
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105,111
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$
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91,668
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See notes to
financial statements.
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BORGWARNER
EMPLOYEES RETIREMENT SAVINGS PLAN
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STATEMENT
OF CHANGES IN ASSETS AVAILABLE FOR BENEFITS
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FOR
THE YEAR ENDED DECEMBER 31, 2007
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(In
thousands)
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ADDITIONS TO
ASSETS:
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Investment
income from the Master Trust
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$
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16,809
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Loan
interest repayments
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199
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Contributions
from participants
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3,622
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Contributions
from the Company
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3,580
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Net
transfers from other BorgWarner Inc. plans
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827
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Total
additions
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25,037
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DEDUCTIONS
FROM ASSETS:
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Participants’
withdrawals
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11,444
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Administrative
expenses
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150
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Total
deductions
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11,594
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NET
INCREASE
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13,443
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ASSETS
AVAILABLE FOR BENEFITS — Beginning of year
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91,668
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ASSETS
AVAILABLE FOR BENEFITS — End of year
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$
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105,111
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See notes to
financial statements.
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BORGWARNER
EMPLOYEES RETIREMENT SAVINGS PLAN
NOTES
TO FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2007 AND 2006, AND FOR THE YEAR ENDED DECEMBER 31,
2007
The following
description of the BorgWarner Employees Retirement Savings Plan
(the “Plan”) provides only general information. Participants should refer
to the Plan document for a more complete description of the Plan’s
provisions.
General
— The Plan was established on
July 1, 1989 as the BorgWarner Dixon Plant Retirement Savings Plan.
Effective June 17, 1996, the Plan was renamed as the Borg-Warner Automotive
Air/Fluid Systems Corporation Retirement Savings Plan and later changed to the
BorgWarner Air/Fluid Systems Inc. Retirement Savings Plan effective May 22,
2000. Effective December 1, 2003, the Plan was renamed as the BorgWarner
Employees Retirement Savings Plan and the BorgWarner TorqTransfer Systems Inc.
Retirement Savings Plan (the “TorqTransfer plan”), the BorgWarner Cooling
Systems Inc. Retirement Savings Plan (the “Cooling Systems plan”), the
BorgWarner Turbo Systems Inc. Retirement Savings Plan (the “Turbo Systems
plan”), and the BorgWarner Medallion Retirement Savings Plan
(the “Medallion plan”) were merged into the Plan. The Plan, which
participates under the BorgWarner Inc. Retirement Savings Master Trust
(the “Master Trust”), is sponsored by BorgWarner Inc. (the “Company”
or the “Corporation”).
The Plan was
established as a defined contribution plan under Section 401(a) of the
Internal Revenue Code (IRC), designed to provide eligible employees of the
Company with systematic savings and tax-advantaged long-term savings for
retirement. The Corporation has assigned the Employee Benefit Committee
(the “Committee”) to oversee the Plan and the Master Trust.
The Committee
appointed T. Rowe Price Retirement Plan Services, Inc. and T. Rowe Price Trust
Co. (the “Trustee”) to perform the administrative, investment, and trustee
services for the Plan and the Master Trust.
The Plan is subject
to the provisions of the Employee Retirement Income Security Act of 1974
(ERISA).
Eligibility
— Employees of the Company, or
a subsidiary of the Company, provided the plant at which the employee works has
adopted the Plan, are immediately eligible to start making employee
contributions as of their date of hire.
Participants’ Accounts
— Individual
accounts are maintained for each Plan participant. Each participant’s account is
credited with the participant’s contributions, the Company’s matching
contributions and
an allocation
of
Plan earnings, and charged with withdrawals and an allocation
of Plan losses. Allocations are based on participant earnings or account
balances. The benefit to which a participant is entitled is the benefit that can
be provided from the participant’s vested account, including:
Company Retirement
Account
— The Company makes contributions as a percentage of
a participant’s compensation, based on years of vested service and age, to this
account on behalf of each eligible participant. No employee contributions are
made to this account.
Savings Account
—
Participants may voluntarily contribute from 1% to 28% of their compensation to
this account, subject to IRC limitations. Pretax deferrals into this account are
limited to 12% for highly compensated employees. New employees are automatically
enrolled at 3% upon completing 60 days of service, unless they elect not to
participate or they elect a different percentage rate. The Company makes
contributions equal to 100% of the first 3% of participant pre-tax
contributions.
Retiree Health
Account
— Participants may voluntarily contribute from 1% to
3% of their compensation to this account, depending on their date of hire and
when their facility adopted this provision of the Plan. The Company makes
contributions equal to 100% of participants’ contributions to this account, up
to $500 per year. No after-tax contributions are allowed.
Investment Options
— Participants elect to
invest their account balances (including current and accumulated contributions,
current and accumulated Company contributions on behalf of participants and
earnings) into various investment options offered by the Plan, including
collective-trust funds, investment contracts, mutual funds and the BorgWarner
Inc. Stock Fund.
Vesting
— Fund assets attributable to
voluntary participant contributions are fully vested at all times. Fund assets
attributable to Company contributions vest 100% upon: three years of vested
service; or permanent disability, death or attaining age 65 provided the
participant is employed by the Company on that date.
Withdrawals
— While a participant is
employed, no hardship withdrawals may be made from the Company Retirement
Account or the Retiree Health Account. Hardship withdrawals may be made from the
Savings Account at participants’ discretion subject to certain limitations.
Distribution of benefits is made upon retirement, death or other termination of
employment as permitted by the Plan and by ERISA regulations. Participants may
elect to receive distributions in installments or a lump sum.
Loans
— Participants may borrow from their
Savings Account a minimum of $500 and a maximum of the lesser of (a) 50% of the
vested balance or (b) $50,000 reduced by the highest outstanding loan balance in
the last 12 months.
Loan terms range
from six months to five years, with interest charged at the rate established by
the Trustee for similar loans on the origination date. Interest rates on loans
outstanding as of December 31, 2007, range from 5.0% to 10.0%. No loans are
permitted from the Company Retirement Account or Retiree Health Account. Loans
are secured by the remaining balance in the participant’s Savings Account.
Principal and interest are paid ratably through payroll deductions.
Priorities Upon Termination
— Though the
Company has expressed no intent to discontinue the Plan, it has the right to do
so at any time, subject to provisions set forth in ERISA. In the event of
termination, the interests of affected participants shall become fully vested.
The Plan assets then remaining shall be used to pay administrative expenses and
benefits equal to the balance in participant accounts.
Forfeited Accounts
— At December 31,
2007 and 2006, there were approximately $320,000 and $120,000, respectively in
forfeited nonvested accounts. During the year ended December 31, 2007,
employer contributions were reduced by approximately $85,000 from forfeited
nonvested accounts.
2.
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SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
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Basis of Presentation
— The financial
statements of the Plan are prepared under the accrual method of accounting and
in accordance with accounting principles generally accepted in the United States
of America (GAAP).
Adoption of New Accounting Guidance
— In
September 2006, the FASB issued Statement on Financial Accounting Standards No.
157, Fair Value Measurements (“FAS 157”). FAS 157 defines fair value,
establishes a framework for measuring fair value in GAAP and expands disclosures
about fair value measurement. FAS 157 is effective for the Plan beginning
with its year ending December 31, 2008. The adoption of FAS 157 is
not expected to have a material impact on the Plan’s statement of assets
available for benefits or statement of changes in assets available for
benefits.
Investments
— The contract value of the
Investment Contracts Fund (ICF) of the Master Trust was approximately
$144,248,000 and $147,596,000 at December 31, 2007 and 2006. The
fair value of the ICF was approximately $145,106,000 and $146,403,000 at
December 31, 2007 and 2006. In 2006, the ICF of the Master Trust
contains guaranteed investment contracts (“GIC’s”) which are stated at contract
value (cost plus interest earned to date, less withdrawals and administrative
expenses) as reported by the Trustee. The fair value of the GIC’s were
approximately $14,000,000 and were calculated by discounting the related cash
flows based on current yields of similar instruments with comparable durations.
The GIC’s in the ICF are fully benefit-responsive, meaning participants may
ordinarily direct the withdrawal or transfer of all or a portion of their
investment at contract value. The average yield for the
GIC’s in the ICF
was between 3.6% and 5.7% for the
year
ended
December 31, 2006.
The GIC’s in the
ICF of the Master Trust matured in 2007. Therefore, all ICF assets as
of December 31, 2007 were invested in the T. Rowe Price Stable Value Common
Trust Fund.
The crediting
interest rate was 4.7% and 4.8% at December 31, 2007 and 2006,
respectively. Crediting interest rates are influenced by the yield and any gain
or loss on investment contracts underlying the ICF. The yield on the ICF is an
average of the crediting rates of interest for the underlying investment
contracts and the blended yields of the T. Rowe Price Stable Value Common Trust
Fund and the Putnam Stable Value Fund. The crediting interest rates for
investment contracts
held
directly by the ICF are expected to be fixed for the duration of the contracts.
Yields for the T. Rowe Price Stable Value Common Trust Fund and the Putnam
Stable Value Fund change daily.
The fair value of
the T. Rowe Price Stable Value Common Trust Fund and Putnam Stable Value Fund is
determined based on the fair value of the underlying assets in the funds on the
close of business on the valuation
date
.
Employer-directed withdrawals may result in
limits on book-value payments based on corridors listed in individual contracts.
There are no reserves against contract value for credit risk of the contract
issuer or otherwise.
The Loan Fund is
valued at cost plus accrued interest, which approximates fair
value.
Investments in all
other funds of the Master Trust, except collective trust funds, are stated at
fair value, based on quoted market prices as reported by the Trustee. Collective
trust funds are stated at estimated fair value, based on the fair values of the
underlying assets, as reported by the Trustee.
Estimates
— The preparation of financial
statements in conformity with GAAP requires Plan management to make estimates
and assumptions that affect the reported amounts of assets available for
benefits as of the date of the financial statements, and the reported amounts of
changes in assets available for benefits during the reporting period. Actual
results could differ from those estimates.
Risks and Uncertainties
— The Plan
utilizes various investment instruments, including mutual funds, collective
trusts and investment contracts. Investment securities, in general, are exposed
to various risks, such as interest rate, credit, and overall market volatility.
Due to the level of risk associated with certain investment securities, it is
reasonably possible that changes in the values of investment securities will
occur in the near term and that such changes could materially affect the amounts
reported in the financial statements.
Administrative Expenses
— Transfer taxes
and brokerage expenses attributable to the Master Trust assets are charged to
the applicable fund as a reduction of the return on that fund. Any other
expenses incurred with respect to Master Trust income or property are charged to
participant accounts, where applicable, or are paid in such manner as the
Company determines, and is in accordance with the plan documents.
Payment of Benefits
— Benefits are
recorded when paid. There were no amounts allocated to accounts of persons who
had elected to withdraw from the Plan but had not yet been paid at
December 31, 2007 and 2006.
Transfers
— Other entities of the
Corporation sponsor defined contribution plans, besides the Plan. When an
employee transfers to any other BorgWarner entity covered by a different
BorgWarner-sponsored plan, that participant’s account balance is transferred to
the corresponding plan.
3.
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EXEMPT
PARTIES-IN-INTEREST TRANSACTIONS
|
The Master Trust
invests in BorgWarner Inc. common stock and makes loans to participants, which
are permitted party-in-interest transactions. Certain Master Trust investments
are shares of mutual funds and other investments managed by the Trustee and,
therefore, these transactions qualify as party-in-interest transactions. Fees
paid by the Plan to the Trustee for administrative services amounted to
approximately $150,000 for the year ended December 31, 2007, and are
included in administrative expenses. Fees paid by the Plan to the Trustee for
investment management services were included as a reduction of return earned on
each fund.
On November 14,
2007, the Company’s Board of Directors approved a two-for-one stock split
effected in the form of a stock dividend on its common stock. To
implement this stock split, shares of common stock were issued on December 17,
2007 to stockholders of record as of the close of business on December 6,
2007. All prior year share amounts disclosed in this document have
been restated to reflect the two-for-one stock split.
At
December 31, 2007 and 2006, the Master Trust held approximately 638,000 and
734,000 shares, respectively, of BorgWarner Inc. common stock, the sponsoring
employer, on behalf of the Plan. These shares had a fair value of approximately
$30,887,000 and $21,642,000 at December 31, 2007 and 2006,
respectively. During the year ended December 31, 2007, the Master
Trust recorded dividends of approximately $214,000 on BorgWarner Inc. common
stock on behalf of the Plan.
The costs and
expenses incurred by the Trustee under the Plan and the fee charged by the
Trustee shall be charged to the Plan. The Company shall have the right to be
reimbursed each year from the Plan for the cost to the Company of bank fees and
auditing fees.
The Plan obtained a
determination letter, dated June 16, 2006, in which the Internal Revenue
Service (IRS) stated the Plan complied with applicable requirements of the
IRC. On January 7, 2008, the Plan
requested an
updated determination letter from the IRS. To date, there has not
been a response from the IRS.
5.
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RECONCILIATION
OF FINANCIAL STATEMENTS TO FORM
5500
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The following is a
reconciliation of assets available for benefits per the financial statements to
the Form 5500 as of December 31, 2007 (in thousands).
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2007
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2006
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Assets
available for benefits per the financial statements
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$
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105,111
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$
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91,668
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Adjustment
from contract value to fair value for fully
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|
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benefit-responsive
investment contracts
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98
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(130
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)
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Assets
available for benefits per the Form 5500
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$
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105,209
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$
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91,538
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For the year ended
December 31, 2007, the following is a reconciliation of net investment
income per the financial statements to the Form 5500 (in thousands):
Total net
investment income per the financial statements
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$
|
17,008
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Change in
adjustment from contract value to fair value for fully
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benefit-responsive
investment contracts
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228
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Total
earnings on investments per the Form 5500
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$
|
17,236
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6.
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VOLUNTARY
COMPLIANCE RESOLUTION
|
For the 2006 Plan
year, the Company excluded certain forms of compensation from eligible
compensation in applying participants’ deferral elections and in calculating
employer matching and profit sharing contributions. In order to resolve this
issue the Company filed an application for a compliance statement with the IRS
under its Voluntary Compliance Resolution program in 2007. The Company corrected
the exclusion by contributing approximately $57,000 to the Plan
during
2007
. This
contribution represents the amount that
should have been withheld from effected participants; the Company match
associated with these amounts; the Company retirement account contribution; and
the estimated earnings that could have been realized had such withholdings and
Company contributions occurred (collectively, the “Retroactive Contribution”).
On November 16, 2007, the Voluntary Compliance Resolution was filed with the
IRS. To date, there has not been a response from the
IRS.
The Company
contributions receivable on the Statement of Assets Available for Benefits as of
December 31, 2006, contains approximately $93,000 for the Retroactive
Contribution. This receivable balance was the Company’s best estimate of the
exclusion at the time the 2006 financial statements were issued.
7.
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MASTER
TRUST INFORMATION
|
Use of the Master
Trust permits commingling of trust assets of a number of defined contribution
plans of the Corporation for investment and administrative purposes. Although
assets are commingled in the Master Trust, the Trustee maintains supporting
records for the purpose of allocating the
total investment
income
of the
Master Trust
to the various participating plans.
Purchases and sales
of securities in the Master Trust are recorded on a trade-date basis. Interest
income is recorded on an accrual basis. Dividends are recorded on the
ex-dividend date.
At
December 31, 2007 and 2006, the Master Trust consisted of the investments
of five defined contribution plans sponsored by
entities of the Corporation. The
investments held by the Master Trust are valued at fair value at the end of each
business day, with the exception of Investment Contracts held in the ICF, which
are valued at
contract
value
. The
total investment
income
in the Master Trust is allocated by the Trustee to each
participating plan based on the relationship of the interest of each plan to the
total of the interests of all participating plans.
At
December 31, 2007 and 2006, the Plan’s interest in the assets of the Master
Trust was 11.47% and 10.87%, respectively.
The following
tables present the carrying value of investments of the Master Trust as of
December 31, 2007 and 2006, and the components of investment income for the
Master Trust for the year ended December 31, 2007 (in
thousands):
|
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2007
|
|
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2006
|
|
|
|
|
|
|
|
|
Fair value of
investments:
|
|
|
|
|
|
|
Collective
trust funds
|
|
$
|
223,663
|
|
|
$
|
202,545
|
|
Barclay’s
Equity Index
|
|
|
201,659
|
|
|
|
204,485
|
|
BorgWarner
Inc. Stock Fund
|
|
|
152,733
|
|
|
|
108,196
|
|
Investment
Contracts Fund
|
|
|
145,106
|
|
|
|
146,403
|
|
Harbor
International Fund
|
|
|
75,250
|
|
|
|
56,785
|
|
Vanguard
Mid-Cap Index
|
|
|
51,681
|
|
|
|
52,840
|
|
Buffalo
Small Cap
|
|
|
43,267
|
|
|
|
47,026
|
|
Cash
and other
|
|
|
485
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
Assets
reflecting all investments at fair value
|
|
|
893,844
|
|
|
|
818,440
|
|
|
|
|
|
|
|
|
|
|
Adjustments
from fair value to contract value
|
|
|
(858
|
)
|
|
|
1,193
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
892,986
|
|
|
$
|
819,633
|
|
Investment
income:
|
|
|
|
Net
appreciation (depreciation) in fair
|
|
|
|
value
of investments:
|
|
|
|
Collective
trust funds
|
|
$
|
9,593
|
|
Barclay's
Equity Index
|
|
|
10,915
|
|
BorgWarner
Inc. Stock Fund
|
|
|
62,150
|
|
Investment
Contracts Fund
|
|
|
108
|
|
Harbor
International Fund
|
|
|
9,082
|
|
Vanguard
Mid-Cap Index
|
|
|
2,429
|
|
Buffalo
Small Cap
|
|
|
(4,275
|
)
|
|
|
|
|
|
Net
appreciation in fair value of investments
|
|
|
90,002
|
|
|
|
|
|
|
Dividend
income:
|
|
|
|
|
BorgWarner
Inc. Stock Fund
|
|
|
1,075
|
|
Investment
Contracts Fund
|
|
|
6,772
|
|
Harbor
International Fund
|
|
|
4,053
|
|
Vanguard
Mid-Cap Index
|
|
|
735
|
|
Buffalo
Small Cap
|
|
|
4,273
|
|
|
|
|
|
|
Total
dividend income
|
|
|
16,908
|
|
|
|
|
|
|
Total
investment income
|
|
$
|
106,910
|
|
|
|
|
|
|
SUPPLEMENTAL
SCHEDULE
BORGWARNER
EMPLOYEES RETIREMENT SAVINGS PLAN
|
|
|
|
|
FORM
5500 — SCHEDULE H, PART IV, LINE 4i — SCHEDULE OF ASSETS
|
|
(HELD
AT END OF YEAR)
AS
OF DECEMBER 31, 2007
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Identity
of Issues,
|
Description
of Investment Including
|
|
Borrower,
Lessor, or
|
Maturity
Date, Rate of Interest,
|
Current
|
Similar
Party
|
Collateral,
Par, or Maturity Value
|
Value
|
|
|
|
* Participants
Loans
|
Loans to
participants, interest rates
|
|
|
ranging
from 5.00% to 10.00%; maturities ranging
|
|
|
from
6 months to 5 years
|
$ 2,553
|
|
|
|
* Denotes
party-in-interest.
|
|
|