Document 8RpE6yJ5YjqgK7GJ4Vb1rX4ba

P I peat, Marwick,MitcheIl &Ca PLAINTIFF'S EXHIBIT Certified Public Accountants Peat Marwick Plaza 303 East Wacker Dnve Chicago, Illinois 60601 (312) 938-1000 July 13, 1981 he Echlin Manufacturing Company ranford, Connecticut and org-Warner Corporation hicago, Illinois ear Sirs: nclosed are 30 copies of the Combined Balance Sheet of the Automotive Aftermarket perations of Borg-Wamer Corporation as of February 28, 1981 and our report thereon nd 30 copies of the calculation of Net Operating Investment of Borg-Wamer Corporation 'ith respect to the Automotive Aftermarket Operations as of February 28, 1981 and our i *. thereon, prepared in connection with the proposed acquisition of the Automotive i,..market Operations by The Echlin Manufacturing Company. i connection with the examination of the aforementioned combined balance sheet, our uditing procedures, including tests of the accounting records, were limited to those ihich we considered necessary in the circumstances on the basis of generally accepted uditing standards approved and adopted by the American Institute of Certified Public accountants. 'he objective of our examination was to express an opinion as to whether the afore mentioned combined balance sheet presents fairly the financial position of the Auto motive Aftermarket Operations of Borg-Wamer Corporation at February 28, 1981 in :onformity with generally accepted accounting principles applied on a basis consistent vith that of the preceding period, and was not directed to the discovery of immaterial :rrors and misstatements. However, the following immaterial errors and misstatements, vhich have not been reflected in the aforementioned combined balance sheet, came to our ittention during the course of our examination and are set forth below for your nformation: E00237 peaL Marwjdt,Mitchdl &Cq 2- - Accounting Matters jstments related to inventories: Unrecorded (shrinkage) gain: APD - International APD Ottawa Canada (Excess) deficiency of recorded cost compared to FIFO: APD BallwinAV ashington Ottawa Net adjustments required Less amounts recorded in combination Allowance for slow-moving goods - Canada Reversal of capitalized Federal sales tax - Canada (In Thousands) Effect on Equity of Borg-Warner Corporation in Automotive Aftermarket Operations (Over) Understatement $(121) (85) (85) 77 (95) 164 20 89 $ 200 $(214) (111) (84) (61) jstments related to prepaid expenses accrued liabilities: Understatement of prepaid freight and packaging-APD Overstatement of accrued sales com missions-APD Understatement of accrued Federal sales tax-Canada Other minor items, net 201 89 (81) (67) 142 -3- Other adjustments: Net effect of sales cutoff errors Ballwin/Washington APD-Intemational Additional allowance for doubtful accounts and reversal of interest income recognized thereon-APDI (43) (29) (72) (233) ------ (305) I (633) Unrecorded work-in-process inventory - Ottawa: The Ottawa division has consistently followed the practice of recording only raw materials and finished goods inventories and of not recording work-in-process inventories. A physical inventory of such work-in-process was taken on January 31, 1981 and was valued, as to raw material content jnly, at $637,000. 'yhoJULs Mb' We have inquired of Ottawa division officials as to the nature of the above described physical inventory and valuation procedures and we have performed limited tests of such procedures. Because such inquiries and limited tests do not constitute an examination made in accordance with generally accepted auditing standards, we do not _ express an opinion on the amount of Ottawa division work-in-process inventory. In connection with such inquiries and limited tests, nothing came to our attention that caused us to believe that the amount of Ottawa division work-in-process inventory should be adjusted, except that no value has been ascribed to the labor and overhead content of such inventory. 637 Mtuvoi/y1 E00239 Ep-at, Marwick,Mitchdl &Cq -4- Contractnal Matters Unrecorded allowances for stock returns and warranties: The Automotive Aftermarket Operations have consistently followed the practice of not accruing for future stock returns or warranties, except for an accrual of $330,000 related to the Ballwin/Washington division. The estimated unrecorded liability for stock returns and warranties of approximately $2,000,000 has not been recorded in the combined balance sheet because it is specifically excluded from the calculation of Borg-Wamer Corporation in net operating investment as defined in section 1.4 of the Agreement for Sale of Assets and in order to remain consistent with prior practices. $(2,000) Unrecorded liabilities for accrued vacation pay: The Automotive Aftermarket Operations have consistently followed the practice of only accruing vacation pay for hourly employees where con tractually obligated. $ (445) Statement of Financial Accounting Standards No. 43, Accounting for Compensated Absences, which is effective for fiscal year beginning after December 15, 1980, would require the accrual of vacation pay for substantially all employees. Such accrual has not been recorded in the combinedbalance sheet because section 6.1 of Exhibit M to the Agreement for Sale of Assets provides for separate settlement of vacation pay liabilities and in order to remain consistent with prior practices. Considering the test character of our examination, you will appreciate that the above listing represents only those immaterial errors and misstatements which came to our attention during the course of our examination and does not necessarily mean that there are no others. Very truly yours, /cd Enclosures PEAT, MARWICK, MITCHELL & CO. E00240