
<PAGE>   1
                                                             EXHIBIT 13


[BORG-WARNER AUTOMOTIVE LOGO]

1995 ANNUAL REPORT


ENGINEERED FOR GROWTH
<PAGE>   2
Corporate Profile

BORG-WARNER AUTOMOTIVE, INC. is a technology-driven supplier of highly
engineered components and systems, primarily for automotive drivetrain
applications. The company, which operates 33 manufacturing facilities in 12
countries serving the North American, European and Asian automotive markets, is
an original equipment supplier to every major automaker in the world. Its
products fall into four operating groups: Automatic Transmission Systems,
Control Systems, Morse TEC and Powertrain Systems. The Chicago-based company
employs 8,600 worldwide.



THE COMPANY'S MISSION IS:

- -   To become a $2 billion-plus company by the year 2000;

- -   To undertake an aggressive business development and acquisition program in
    order to reach this goal;

- -   To acquire businesses that complement our existing operations--the
    manufacture of technology-driven, highly engineered automotive components
    and systems for original equipment manufacturers worldwide;

- -   To expand our operations in all significant global markets to balance the
    cyclical nature of our business; and

- -   To continuously improve all facets of our organization, especially research
    and development, to ensure high levels of innovation and efficiency that
    will allow us to remain a productive and competitive supplier to the
    automotive original equipment industry.

[PHOTOS]

AUTOMATIC TRANSMISSION SYSTEMS

Automatic Transmission Systems supplies "shift quality" components and systems
such as one-way clutches, friction plates and bands to virtually every
automatic transmission-maker in the world. The group also produces precision
forged sintered products such as one-way clutch races and engine connecting
rods.

CONTROL SYSTEMS

Control Systems designs and produces electronic and electromechanical products
for passenger cars and light trucks that reduce engine emissions and fuel
evaporation, improve power-train performance, and control ride and handling
characteristics to increase vehicle safety.

MORSE TEC

Morse TEC engineers and manufactures a range of automotive chain components and
systems for engine timing, automatic transmission and four-wheel drive
applications. The group also produces engine turbochargers.

POWERTRAIN SYSTEMS

Powertrain Systems develops and manufactures transfer cases for both four-wheel
and all-wheel drive vehicles, and fully assembled manual transmissions for
high-performance passenger cars and light trucks.
<PAGE>   3
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
(millions of dollars except per share data)              Year ended December 31,              1995        1994
- ----------------------------------------------------------------------------------------------------------------
<S>                                                                                        <C>         <C>

Net sales                                                                                  $1,329.1    $1,223.4
- ----------------------------------------------------------------------------------------------------------------

Net earnings                                                                                   74.2        64.4
- ----------------------------------------------------------------------------------------------------------------

Net earnings per share                                                                         3.15        2.75
- ----------------------------------------------------------------------------------------------------------------

Average number of shares outstanding                                                           23.6        23.4
- ----------------------------------------------------------------------------------------------------------------
</TABLE>

[BAR CHARTS]

*Income and EPS before cumulative effect of accounting change. 
 Borg-Warner Automotive became a public company in August 1993.

CONTENTS

  1   Financial Highlights
  2   Letter to Stockholders
  4   Core Strengths
 12   Operating Information
 13   Management's Discussion and Analysis of Financial Condition and Results
      of Operations
 18   Management's Responsibility for Consolidated Financial Statements
 18   Independent Auditors' Report
 19   Consolidated Statements of Operations
 20   Consolidated Balance Sheets
 21   Consolidated Statements of Cash Flows
 22   Consolidated Statements of Stockholders' Equity
 23   Notes to Financial Statements
 31   Selected Financial Data
 32   Board of Directors and Officers
 IBC  Corporate Information




                                 Borg-Warner Automotive, Inc.        1
<PAGE>   4
[PHOTO OF JOHN F. FIELDER]

Every day millions of people worldwide rely on Borg-Warner Automotive products.
Whether they drive a car, pickup truck or a sport-utility vehicle, our
company's technology and products play a key role in the efficient and reliable
operation of their vehicles' engines and transmissions.

To Our Stockholders: 1995 was another year of solid growth for
Borg-Warner Automotive. Our sales and profits rose to record levels. We
achieved this despite a 3 percent decline in North American automotive
production compared to a year earlier, enabling the company to outperform the
North American auto market for the sixth year in a row. Our European, Japanese
and Korean operations also performed better than their respective markets.

   The company's sales increased 9 percent to $1.3 billion. Earnings improved
15 percent to $74.2 million, or $3.15 per share. We met our own financial
expectations for the year as well as the expectations of the investment
community. The stock market recognized our company's ability to produce
results. Our total return to stockholders increased more than 30 percent during
the year, outperforming many of the companies in our peer group of automotive
suppliers.

        In North America, new product technology and changing trends helped
boost our company's sales. Our new, revolutionary Torque-On-Demand(TM)
four-wheel drive (4WD) transfer case featured on the 1995 Ford Explorer
sport-utility vehicle and our MORSE GEMINI(TM) Transmission Chain System both
contributed to our sales growth. Trends such as the shift to four and
five-speed automatic transmissions, the popularity of 4WD light trucks and
sport-utility vehicles, and more stringent safety and environmental regulations
heightened sales of automatic transmission components, 4WD transfer cases, 4WD
chain, and transmission and emission control devices. Unfortunately, a major
decline in the sales of manual transmissions offset some of this North American
growth.

   Our European and Korean automatic transmission component and 4WD transfer
case businesses and our Japanese chain operation contributed to improved sales
abroad. In addition, the company's unconsolidated NSK-Warner Japanese automatic
transmission component 50/50 joint venture recorded a 16 percent increase in
sales in a flat market.

   Last year I outlined our company's plan to increase stockholder value by
growing our business and strengthening our product lines around the world.
Successful acquisitions and the expansion of products into new markets in 1995
brought us closer to reaching our goal of being a more globally balanced, $2
billion revenue-producing company by the year 2000.

   In North America, we acquired Federal-Mogul's Precision Forged Products
Division. This purchase allows us to expand our company's automatic
transmission systems capability. In Europe, we completed an acquisition of
Societe de l'Usine de la Marque'


[PHOTO OF TROPHY]

The Borg-Warner Indianapolis 500 Trophy* is one of the most famous symbols in
all of sports.

*The Indianapolis 500 Trophy is a registered trademark of Borg-Warner
Automotive, Inc.

2   Borg-Warner Automotive


<PAGE>   5
(SUM), a French manufacturer of electronic and electromechanical control
devices. This gives our Control Systems operating group a European presence
needed to serve new and existing customers in the region. We also established a
turbocharger joint venture in Italy, Warner-Ishi Europe, and purchased all the
shares of the company's existing Italian chain joint venture, renaming it Morse
TEC Europe. Both of these moves position the company to supply products for
diesel and overhead-cam engine expansion in Europe. In Asia, we established
joint ventures in India and China to participate in emerging market growth for
manual transmissions and four-wheel drive transfer cases, and a joint venture
in Taiwan to produce chain for the growing Asian chain market.

   Looking ahead in 1996, we will continue to pursue other strategic and
complementary business alignments in order to grow our business and strengthen
our product lines. On the pages that follow, our company's core strengths are
outlined. By concentrating on these core strengths--our technological
expertise, our ability to provide systems solutions, our broad global presence
and our long-standing relationships with original equipment manufacturers
around the world--Borg-Warner Automotive will continue to enhance its position
as a leading global automotive supplier.

   For 1996, we expect flat to slightly declining automotive production in
North America and Europe, and slightly improved production in Asia. We will
continue to control our operating expenses to keep them in line with the types
of automotive production cycles we are now entering in each of the markets we
serve.

   To maximize stockholder value, we continue to look for new acquisition
opportunities as well as to divest ourselves of businesses that no longer fit
with our product lines or contribute to our bottom line. To that end, we
recently announced our intention to sell our North American manual transmission
business. The decline in sales of sporty cars--our only real market
niche--combined with the rise of in-house suppliers in the shrinking manual
transmission business in North America has led us to pursue the sale of this
business. We hope to conclude this sale before the end of 1996, thereby putting
an end to the drag this business had on our company's overall results in the
last half of 1995.

   In closing, I would like to take a moment to remember someone very special
to our company. Last July, we suffered a painful loss with the death of our
Chairman, J. Gordon Amedee. Gordon was a great leader and a dear friend to us.
He unselfishly came out of retirement in 1993 to run this company, and we are
indebted to him for moving Borg-Warner Automotive in the right direction as a
new, independent company. On behalf of all Borg-Warner Automotive employees, I
would like to pay tribute to a great man for the critical role he played in the
transformation of our company.

   I am committed to follow the direction that Gordon and I laid out together
in 1994 and 1995. I thank you for your continued investment in our company, and
look forward to the challenges and opportunities that lie ahead for Borg-Warner
Automotive in the changing global automotive industry.



February 23, 1996



John F. Fiedler
Chairman and Chief Executive Officer

[LINE GRAPH]                                  [PHOTO OF GEARS]
                                              The acquisition of the Precision
                                              Forged Products Division expanded
                                              our product line in 1995.


                                                  Borg-Warner Automotive      3
<PAGE>   6
[PHOTO OF FORD EXPLORER]

Powertrain Systems' revolutionary Torque-On-Demand(TM) four-wheel
drive transfer case is an integral feature in the new top-selling Ford
Explorer.


Borg-Warner Automotive has made significant advances in products to meet
expanding vehicle environmental regulation in the U.S. and Europe.


[PHOTO OF AUTOMOTIVE PARTS]




[PHOTO OF TRANSMISSION CHAIN]

Beginning in 1997, the innovative MORSE GEMINI(TM) Transmission Chain System,
currently in Chrysler's LH vehicles, will also be incorporated in GM's
front-wheel drive vehicles.


[PICTURE OF MAN IN FRONT OF A COMPUTER]



4    A CAD engineer from our Automatic Transmission Systems operating group
     examines a one-way clutch assembly prototype. This and other new
     technologies are enabling us to engineer and manufacture entire systems.


<PAGE>   7
[PHOTO OF FOUR-WHEEL DRIVE TRANSFER CASE]

Superior design and manufacturing technology set Borg-Warner Automotive apart
from other automotive suppliers. Commitment to research and development is key
to our success. This is evident at our Powertrain Systems operating group,
where engineers are developing lighter and better-performing four-wheel drive
transfer cases.


TECHNOLOGY

Technological improvements lead directly to superior products and
refined manufacturing processes. In 1995, $37 million was invested in research
and development in addition to another $11 million on special customer-funded
projects. We continually strive to introduce new patented designs and
streamline manufacturing processes at our own technology centers as well as
through alliances with Original Equipment Manufacturer (OEM) engineering
laboratories and university research facilities around the globe. This
commitment to technological innovation has never been more important to
Borg-Warner Automotive because it also enables us to meet our OEM customers'
annual price reduction goals.

   Engineers at our Automatic Transmission Systems group have developed new
ways to stamp friction material to reduce waste. The expensive material used in
producing friction plates was traditionally stamped in circular forms and
bonded to the metal plate in one round piece. Gains in manufacturing technology
have allowed us to begin stamping and bonding the material in segments,
reducing the amount of unusable friction material and saving millions of
dollars a year.

   Engineers are also developing carbon-based technology as well as different
resins for next-generation friction material. These would provide higher
performance and more durable products while bringing even greater efficiency to
our production process.

   Technological advances are also being made at our Powertrain Systems
operating group. Engineers are studying how to change both the shape and
material of four-wheel drive transfer case covers.

   These housings, which are currently die-cast aluminum or magnesium, may be
replaced with injection-molded materials in the future, providing significant
reduction in weight and improved strength and performance characteristics.

   Today at Borg-Warner Automotive there is a renewed dedication to
cutting-edge research and development. Product and process innovation will
enable us to remain an industry leader by providing our customers around the
world with technologically advanced products at more competitive prices.



                                        Borg-Warner Automotive         5
<PAGE>   8
Automatic Transmission Systems has the ability to supply preassembled
packages of friction and separator plates called sandwich packs.

In 1995, Morse TEC increased its engine timing systems capability by introducing
a new generation of Morse designed hydraulic tensioners.


[PICTURE OF CAR WITH ENGINE AND PARTS SHOWING]


Borg-Warner Automotive is now able to produce one-way clutch systems, including
inner and outer races, with the 1995 acquisition of the Precision Forged
Products Division.

Control Systems continues to pursue methods to combine a vehicle's performance
components--like our transmission solenoid--into more integrated systems.



6        Borg-Warner Automotive

<PAGE>   9
[PHOTO OF ENGINE TIMING CHAIN]

Borg-Warner Automotive continues to provide systems solutions by taking
advantage of greater outsourcing by our customers and the consolidation of
worldwide automotive suppliers. The company's Morse TEC operating group has
taken the lead in this area by expanding its product line to include complete
engine timing chain systems for Ford's family of modular engines.

SYSTEMS

Automotive suppliers have traditionally designed and produced
individual parts that required further assembly by the OEMs. Redundancies in
product design and production often occurred. To improve quality and reduce
overall costs, OEMs increasingly rely on suppliers to design and manufacture
entire systems.

   Our Automatic Transmission Systems operating group recently expanded its
relationship with Ford Europe. In the past, we provided the friction plates and
one-way clutches for Ford's automatic transmissions. This year, our Ketsch,
Germany, plant installed new equipment and began the production of housings for
a one-way clutch/drum assembly, including the drum, one-way clutch, races and
housing. The entire system assembly is scheduled to be in production by
mid-1996.

   Technological innovations have also provided the opportunity for systems
growth. Ford's shift to overhead-cam engines--the engines featured in its new
Contour, Taurus, Continental and F-150 vehicles--has given our Morse TEC
operating group new opportunities to expand its engine timing systems
capability.

   Providing these timing systems, which consist of chains, sprockets, snubbers
and tensioners, allows us to increase our content per vehicle tenfold compared
to the supply of a single timing chain on pushrod-style engines. In 1995, we
further increased our systems capability with the installation of equipment to
produce a new generation of Morse-designed hydraulic tensioners.

   Acquisitions are also allowing us to combine complementary technology and
components to build systems. Our recent purchase of Federal-Mogul's Precision
Forged Products Division gives Automatic Transmission Systems the ability to
produce an entire one-way clutch system, including precision forged sintered
metal inner and outer races. This new capability permits the design of races
and a one-way clutch as a unit, providing a higher quality product with reduced
system costs.

   Borg-Warner Automotive will continue to provide system solutions to OEMs
around the world. This gives us the opportunity to reengineer our products and
increase our content per vehicle while providing productivity and technological
improvements for our customers.






                                          Borg-Warner Automotive        7
<PAGE>   10
[PICTURE OF TWO FLAGS]

In 1995, we established joint ventures in China and India to meet manual
transmission and transfer case growth in two significant emerging markets.

For over 30 years we have been supplying Toyota with automatic transmission
components from our $350 million revenue-producing NSK-Warner joint venture,
located in Japan.

The four-wheel drive SsangYong Musso, a popular sport-utility vehicle in Korea,
features a new Borg-Warner Automotive trans- fer case.

[PICTURE OF SSANG YOUNG MUSSO]

[TOYOTO TRADEMARK]

For over 30 years we have been supplying Toyota with automatic transmission
components from our $350 million revenue-producing NSK-Warner joint venture,
located in Japan.

[PICTURE OF FOUR-WHEEL DRIVE CHAIN]

Morse TEC engineers and produces HY-VO(R) four-wheel drive chain in North
America, Europe and Japan for customers around the globe.


[PICTURE OF THE EARTH]



8         Borg-Warner Automotive

<PAGE>   11
[PHOTO OF AUTOMOTIVE PARTS]

Borg-Warner Automotive continued to strengthen and expand its product lines in
North America, Europe and Asia in 1995 through joint ventures and acquisitions.
In Europe, we broadened our reach by acquiring SUM, a French manufacturer of
control devices. This gives us greater global balance and will allow us to take
advantage of growth opportunities in the region.

GLOBAL

Greater global outsourcing, shifting technological trends, emerging
markets and the desire to balance the cyclical nature of the automotive
business all drive Borg-Warner Automotive's global expansion efforts.


   Our company continues to take advantage of trends around the world. During
the past year, Morse TEC bought out its Italian joint venture partner, creating
Morse TEC Europe. This operating group also established a new joint venture in
Italy, Warner-Ishi Europe. These actions better position Borg-Warner Automotive
for European engine timing chain and turbocharger growth, as vehicles in the
region increasingly turn to overhead-cam and diesel engine configurations for
greater fuel economy.

   Tapping emerging markets is an important source of growth, and our company
continues to seek opportunities around the globe. In 1995, our Powertrain
Systems operating group established a joint venture, Divgi-Warner, in India to
supply manual transmissions and four-wheel drive transfer cases to two major
Indian automotive manufacturers. Production is expected to begin in mid-1996.
A joint venture was also formed in central China. Huazhong Warner will begin
producing a newly designed, five-speed manual transmission for a Chinese
vehicle starting in late 1997. In addition, Morse TEC started a new operation
in Taiwan to produce chain systems.

   Borg-Warner Automotive also benefits from a strong global position because
the world's automotive cycles are not synchronized. Different markets follow
different cycles, and by serving numerous regions, our dependence on any one
market is reduced. To that end, our Control Systems operating group recently
purchased SUM, a French manufacturer of electronic and electromechanical
control devices that enhance vehicle performance while ensuring that
environmental regulations are met. This acquisition gives us the ability to
serve our existing European customers from a local base while adding new
products and expanding our relationship with customers such as Renault and
Peugeot.

   Borg-Warner Automotive has conducted business in the global arena for over
five decades. We continue to position our company to respond to technological
trends, shifting automotive cycles and emerging growth opportunities around the
world.




                                       Borg-Warner Automotive          9
<PAGE>   12
Borg-Warner Automotive's top five customers (unconsolidated) in 1995 were Ford,
GM, Toyota, Chrysler and Nissan, accounting for over 80 percent of our total
revenue.

Beginning in 1996, our partnership with Mercedes will expand to include the
transfer case for its new All-Activity Vehicle and additional automatic
transmission components for its passenger cars.

Our relationships with Korean OEMs continue to grow. We produce automatic
transmission components for Hyundai, Daewoo and Kia, a four-wheel drive
transfer case for Ssang-Yong and recently were chosen to develop a transfer
case for Hyundai Precision.


[FORD, GM, TOYOTA, CHRYSLER AND NISSAN LOGOS]





10           Borg-Warner Automotive

<PAGE>   13
[PHOTO OF FRICTION PLATE]

Our ability to build strong working partnerships with new and existing global
customers is instrumental to Borg-Warner Automotive's success. Engineers at our
Automatic Transmission Systems operating group teamed with its NSK-Warner joint
venture to produce a more durable friction plate for Toyota that will soon be
incorporated into our customer's automatic transmissions.

RELATIONSHIPS

Borg-Warner Automotive engineering and design are integral parts of the
vehicle development process. Because our components are located in a model's
engine or transmission, they are typically designed in for the life of the
model. To manufacture such important products, it is critical for our engineers
to understand our customers' needs in terms of performance, quality and cost
early in the development process.

   To facilitate the development of innovative products and systems,
Borg-Warner Automotive engineers are often placed on site at customer vehicle
development centers and manufacturing facilities. They guide the application
and development of our components and systems and, ultimately, the integration
of our products into our customers' vehicles.

   Ford--our company's largest customer--relies on us to develop and produce a
number of its key components. In 1992, engineers at our Powertrain Systems
operating group teamed with Ford to introduce a new four-wheel drive transfer
case for its Explorer sport-utility vehicle. We developed over 250 prototypes
in extensive proving ground and laboratory testing leading up to the successful
1995 launch of this top-selling vehicle.

   Our dedication to building strong relationships with customers and our
ability to deliver superior-quality products has led to new opportunities for
our operating groups. In 1995, Chrysler selected our Control Systems operating
group to supply 100 percent of the four-speed transmission solenoids for all
its front-wheel drive vehicles. This extended working partnership has led to
our recent development of a secondary seal module for Chrysler's on-board
diagnostic systems, which warn if fuel is evaporating or leaking from the fuel
tank.

   Our relationships are as strong globally as they are in North America.
Automatic Transmission Systems has engineers working closely with our Japanese
NSK-Warner joint venture, recently yielding several new products for the Asian
market.  Additionally, our German engineering center developed new friction
products for Mercedes and Volkswagen that will expand our European business in
1996.

   Relationships with our customers are essential to maintaining and expanding
successful operations around the world.  Borg-Warner Automotive stands
committed to strengthening these working partnerships.




                                             Borg-Warner Automotive       11
<PAGE>   14

<TABLE>
<CAPTION>

Headquarters and           Automatic                    Control Systems         Morse TEC                 Powertrain Systems        
Advanced Engineering       Transmission Systems         Dixon, Illinois         Ithaca, New York          Sterling Heights, Michigan
Centers                    Lombard, Illinois           

- ---------------------------------------------------------------------------------------------------------------------------------
<S>                        <C>                          <C>                     <C>                       <C>
NORTH AMERICA              Bellwood, Illinois           Blytheville, Arkansas   Shelbyville, Illinois     Blytheville, Arkansas 
                           Frankfort, Illinois          Dixon, Illinois         (50% JV)                  Muncie, Indiana       
                           Lombard, Illinois            Cary, North Carolina    Ithaca, New York          Livonia, Michigan     
                           (Aftermarket)                                        Simcoe, Ontario, Canada   Seneca, South Carolina
                           Coldwater, Michigan                                  Guadalajara, Mexico       
                           Plymouth, Michigan                                   (85% JV)                  
                           Romulus, Michigan                                    Mexico City, Mexico       
                           Sterling Heights, Michigan   
                           Gallipolis, Ohio             
- ---------------------------------------------------------------------------------------------------------------------------------
EUROPE                     Heidelberg, Germany          Tulle, France           Como, Italy               Margam, Wales
                           Ketsch, Germany                                      Milan, Italy (50% JV)
                           Margam, Wales      

- ---------------------------------------------------------------------------------------------------------------------------------
ASIA                       Fukuroi City, Japan                                  Nabari City, Japan         Beijing, China (39% JV)
                           (50% JV)                                             Tainan Ken, Taiwan         Shiyan, China (60% JV) 
                           Eumsung, Korea                                                                  Pune, India (60% JV)   
                           (60% JV)     
                           Taegu, Korea 
                           (20% JV)       


</TABLE>

[PICTURE OF THE EARTH]



[BAR CHARTS]

12         Borg-Warner Automotive
<PAGE>   15

INTRODUCTION

Borg-Warner Automotive, Inc. (the "Company") became an independent company on
January 27, 1993, when its common stock was distributed to the stockholders of
its then parent, Borg-Warner Security Corporation ("BW-Security") as a dividend
(the "Spin-Off"). The initial capital structure was established with $480
million of equity and $251 million of debt. In August 1993, the Company
completed an initial public offering of 3.66 million shares of common stock,
yielding net proceeds of $83.2 million.

   The Company operates as a major supplier to automotive original equipment
manufacturers ("OEMs") in the North American, European and various Asian
markets. Its products include a wide variety of highly engineered components
and systems primarily related to drivetrain applications. Examples include
"shift quality" automatic transmission components and systems, four-wheel drive
transfer cases, automotive chain, engine timing components and systems, and
sensors, valves and other engine and fuel systems control devices.

   This Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with the historical Consolidated
Financial Statements of the Company. See "Index to Financial Statements."

RESULTS OF OPERATIONS

The following table details the Company's results of operations as a percentage
of sales:

<TABLE>
<CAPTION>
    Year Ended December 31,                     1995      1994      1993 
    ------------------------------------------------------------------------
    <S>                                        <C>       <C>       <C>        
    Net sales                                  100.0%    100.0%    100.0%
    ------------------------------------------------------------------------
                                                                           
    Cost of sales                               78.6      77.5      78.1 
    ------------------------------------------------------------------------
    Depreciation                                 5.1       5.0       5.8  
    ------------------------------------------------------------------------
    Selling, general and                                                 
        administrative expenses                  7.4       7.5       8.5 
    ------------------------------------------------------------------------
    Goodwill amortization                        0.7       0.8       1.0  
    ------------------------------------------------------------------------
    Minority interest, affiliate earnings                                
        and other income, net                   (1.2)     (0.8)     (1.1)
    ------------------------------------------------------------------------
                                                                         
</TABLE>

   Historically, the Company's sales have been seasonal in nature, with the
fourth quarter of each year generally having higher sales. This trend is less
prevalent in recent years. The fourth quarter has traditionally been the
quarter for new model introduction by the automotive industry, but this trend
is diminishing as the auto industry becomes more global and competitive
pressure for continual model updates intensifies.

1995 compared with 1994

North American automotive production was down 3% in 1995 versus 1994,
while Japan was down about 3%, Korea was up 12% and Europe was flat. Against
this backdrop, the Company was able to register gains in sales of 9% and
earnings of 15%.  The gains were the result of the Company's participation in
one of the most rapidly growing segments in the overall automotive
marketplace--sport-utility vehicles and light trucks--and the Company's
ability to increase the value of components supplied per vehicle through ongoing
aggressive marketing and engineering programs. The Company's acquisition of the
Precision Forged Products Division ("PFPD") of Federal-Mogul in 1995 was
responsible for approximately 40% of the sales gain, or $52 million. After
adjusting for the acquisition and the 1994 disposition of a marine and
industrial business, sales increased 7%.

   The following table shows net sales by product grouping:


<TABLE>
<CAPTION>

Year Ended December 31,                    1995       1994       1993
- ------------------------------------------------------------------------
(millions of dollars)     
- ------------------------------------------------------------------------
<S>                                       <C>        <C>        <C>
Powertrain Systems                        $544.8     $529.9     $418.4
- ------------------------------------------------------------------------
Automatic Transmission Systems             454.4      378.5      307.6
- ------------------------------------------------------------------------
Morse TEC                                  257.6      239.9      202.3
- ------------------------------------------------------------------------
Control Systems                            107.6       97.3       83.7
- ------------------------------------------------------------------------
Interbusiness eliminations                 (35.3)     (22.2)     (26.6)
- ------------------------------------------------------------------------

</TABLE>

        Powertrain Systems' sales grew by 3% in 1995 (8% excluding a 1994
disposition). In the 4WD transfer case business, the Torque-On-Demand(TM)
transfer case for the Ford Explorer yielded higher volume due to Ford's
increased capacity for this sport-utility vehicle. Increased features over the
transfer case model it replaced also improved the Company's revenue per unit.
Volume increases in large transfer cases for full-size pickup truck
applications were, in part, offset by the loss of the automatic locking hub
business. In 1995, the Company sold 452,000 small transfer cases and 395,000
large transfer cases compared with 398,000 and 343,000, respectively, in 1994.
Revenue from manual transmissions declined by $29 million to $148 million in
1995 because of the loss of the GM S-Truck business combined with declines in
volume for the principal remaining North American
applications--high-performance five-speed sporty cars such as Ford Mustang,
Chevrolet Camaro, Pontiac Firebird and Dodge Viper. See page 17 for a
discussion of the Company's decision to seek a buyer for the North American
manual transmission business.

   The Automatic Transmission Systems group realized a $75.9 million increase
in sales over 1994, up 20%. Of the increase, $52 million resulted from the
acquisition of the PFPD business in April 1995. The remainder of the increase
(6% over 1994) resulted from volume gains in North America, Germany and Korea,
which was offset by approximately $2.3 million in price reductions to
customers. In Korea, the volume increase was market driven. In North America
and Europe, the volume gains were the result of the Company's increased content
per vehicle.


                                                   Borg-Warner Automotive     13
<PAGE>   16
This group sells to the widest array of OEMs and is most susceptible to trends
in the marketplace. In 1995, it benefited from the move to four and five-speed
automatic transmissions from three-speed models, which increases the Company's
componentry even if market volumes are flat. During 1995, the Company saw the
first of what it believes will be an increasing number of five-speed
transmission models, again affording the opportunity to improve volume without
being dependent upon overall market growth. The acquisition of the PFPD
business also should lead to opportunities to bundle components into a system,
thereby increasing the Company's content per vehicle. PFPD also offers a
promising product line in engine connecting rods, a new area for the Company.

   The Morse TEC group continued its sales growth in 1995 with a 7% gain.
Two percentage points of the gain resulted from favorable exchange rates for
the yen. The remainder is the result of increased volume and improved product
mix. The group realized a full year of sales of the MORSE GEMINI(TM)
Transmission Chain System, which it began providing for the Chrysler LH series
in mid-1994. However, monthly volumes for the Chrysler LH fell in 1995 versus
1994. In 1995, the group was selected to provide the GEMINI system for all of
GM's front-wheel drive automatic transmission applications beginning in 1997.
The transmission chain business benefited from increased sales of sport-utility
vehicles, which use the Morse HY-VO(R) chain. Engine timing systems sales also
grew as Ford expanded its modular engine program to the Taurus/Sable as well as
the new F-Series pickup truck, which was introduced in the beginning of 1996.
The modular engine series uses a Morse engine timing system, consisting of
chains, sprockets, tensioners and snubbers. Previously the Company provided
only a single chain. The modular engine series at Ford now consists of 2.5
liter and 3.0 liter V-6s and 4.6 liter and 5.2 liter V-8s.

   Control Systems realized an 11% sales increase in 1995. The group received a
full year of benefit of providing 100% of certain Chrysler transmission
solenoid requirements for its front-wheel drive vehicles. The group also
increased its volume of Ford EGR valves (required for emission regulations) and
began providing the clutch coil incorporated in the Company's Torque-On-Demand
transfer case. With the recent acquisition of SUM, the Control Systems business
is expected to contribute a greater portion of consolidated revenues in 1996
and beyond.

   Because of the nature of the OEM marketplace, the Company's sales tend to be
concentrated among a small number of large customers. In 1995, the Company's
top ten customers constituted about 86% of total consolidated sales compared
with 83% in 1994. Ford, the Company's largest customer, accounted for 41% of
sales in 1995 and 39% of sales in 1994.  General Motors accounted for 25% of
1995 sales and 27% of 1994 sales. These sales represent a variety of different
products to a number of OEM divisions worldwide.

   Gross margin in 1995 slipped to 21.4% versus 22.5% in 1994. Four factors
were responsible for the decline. First, the decline in volume in the manual
transmission business had a material impact on margins. Excluding the manual
transmission business, gross margin would have been 23.5% in 1995 versus 24.5%
in 1994. Next, raw material prices increased at a faster rate than the
Company's ability to pass through such increases. For example, aluminum went
from $.63 per pound at the beginning of 1994 to $.97 at the beginning of 1995
to $.77 at the end of 1995. Aluminum is a key component of the Company's
transfer cases and cases for solenoids. The Company's contracts with OEMs have
economic pass-through clauses, but these do not provide for 100% recovery, and
in many cases, recovery takes place on a delayed basis. The Company has sought
to minimize its exposure to material cost fluctuations through pass-through
clauses, and through the use of alternative materials where feasible. The third
factor affecting the margin comparison is price reductions to customers where
the Company has not been able to achieve offsetting cost reductions. The timing
required to implement and get approval for cost reduction proposals is
partially responsible for this factor. The final significant factor in the
margin comparison is that the newly acquired PFPD business has a relatively
lower margin than the Company as a whole.

   Annual price reductions to customers have become a permanent feature of the
Company's business environment. Price reductions granted in 1995 totaled
approximately $8.0 million. Contractual price reductions can in some cases be
offset by economic pass-through of material costs and credit for other product
features or savings realized by the customer. To maintain margins, the Company
has a three-part strategy. The first is to reduce costs by continual
improvement in the Company's production processes and by price reductions from
suppliers. The next is to update product designs to reduce cost and/or improve
productivity by the OEM customer in the final application. Finally, the Company
makes an ongoing effort to develop new products whose benefits support the
pricing.

   The increase in sales, offset by the margin decline, translated into
earnings before interest and taxes ("EBIT") of $125.4 million, a $3.8 million,
or 3%, increase over 1994. Other trends affecting EBIT include higher
depreciation from increased capital spending in recent years. Depreciation
increased $7.1 million, or 12%, in 1995. Selling, general and administrative
expenses increased by $5.7 million, or 6%, in 1995. As a percentage of sales,
such expenses declined to 7.4% in 1995 from 7.5% in 1994. Included in the 1995
expenses was $36.7 million in research and development ("R&D") spending, a 9%
increase over 1994. The Company continued to invest in R&D at a rate in excess
of 2.7% of sales, recognizing that a key corporate strategy is to position the
Company on the leading technological edge. Examples of new products resulting
from the R&D investments in recent years




14        Borg-Warner Automotive
<PAGE>   17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 
OPERATIONS
- --------------------------------------------------------------------------------

include the Torque-On-Demand transfer case, the MORSE GEMINI Chain System and
the new Ford one-way clutch/drum system, which the Company will begin to
produce in mid-1996. In 1994, the Company provided approximately $5.2 million
of additional accruals for environmental and other liabilities. No similar
accruals were provided for in 1995.
   Equity in affiliate earnings and other income jumped to $18.6 million in
1995 compared with $10.6 million in 1994.  The Company's 50%-owned joint
venture in Japan, NSK-Warner, continued to outperform the Japanese automotive
marketplace.  The Company's share of earnings for this venture increased to
$19.0 million in 1995 versus $13.9 million in 1994. The venture experienced 16%
sales growth in 1995 to $352 million. Earnings were up approximately 25% in
local currency, with the rest of the increase attributable to the strong yen in
1995. The remainder of the increase resulted from the net loss in 1994 of $3.5
million from the disposition of certain non-core investments and assets. No
similar losses were realized in 1995.
   Interest expense was essentially flat between the two years at around $14
million. Higher debt levels resulting from acquisitions during 1995 were offset
by lower interest rates on foreign debt outstanding. The Company benefited from
the general decline in foreign interest rates throughout 1995 and improved
spreads versus nominal borrowing rates in 1995. As a result of the above items,
pretax earnings were $111.2 million in 1995, a 3% increase over $107.7 million
in 1994.
   Income taxes totaled $37.0 million in 1995, an effective rate of 33.3%,
versus an effective rate of 40.2% in 1994. A significant reason for the
improved tax rate was substantially higher credits against taxes otherwise
payable, particularly for research and development spending and foreign
credits. The Company has available approximately $22 million of foreign tax
credits, which can be offset only against foreign source income. Other factors
affecting the nominal tax rate were the level of affiliate earnings, which are
recognized on an after-tax basis, and goodwill amortization, which is
non-deductible.

1994 compared with 1993
The overall growth in the North American automotive market was 11% in 1994.
Europe was up slightly and Japan was essentially flat. Compared with these
market trends, Company sales of $1.2 billion increased 24% from 1993. Each of
the Company's four business groups contributed to the overall increase.
   The Powertrain Systems group increased sales by $111.5 million, or 27% over
the prior year. This increase was driven by substantial volume growth in both
transfer cases and manual transmissions. Transfer case sales volume growth
resulted from increased installations in pickup trucks, as Ford Explorer sport-
utility sales were essentially flat at full capacity. The increase in manual
transmission sales resulted from gains in GM pickup truck installations, sporty
car installations and the introduction of the new Ford Mustang.
   The Automatic Transmission Systems group reported sizable growth in U.S.
sales in 1994, while European sales increased only marginally as the region was
emerging from a recession. This group's products are on a large variety of
models from all major OEMs, so the group benefited from industry growth. A
higher rate of four-speed automatic transmission applications, which require
more of the Company's components, also caused sales to increase.
   The Company's Morse TEC group continued its sales growth in 1994 with
increased volume of transmission chain and engine timing chain components and
systems. The group introduced the MORSE GEMINI Transmission Chain System in
mid-1994 on the Chrysler LH series, yielding substantial incremental 1994
sales. The timing system for the Ford modular engine program was expanded to
the 2.5 liter V-6 Duratec model for the Contour/ Mystique vehicles in mid-1994.
The group also benefited from increased popularity of four-wheel drive
vehicles, most of which use the Company's chain in their transfer cases.
   Control Systems group sales have increased with the improving demand for
various solenoids and valves. The group provided 100% of Chrysler's
requirements for certain transmission solenoids.
   Gross margin in 1994 of 22.5% improved over the prior year's 21.9%. This
translated to a greater gain in EBIT. EBIT of $121.6 million in 1994 increased
61.1% over 1993 levels of $75.5 million, and the EBIT margin increased to 10.0%
from 7.7%. The EBIT gains were the result of ongoing cost reduction programs,
as well as operating leverage due to the somewhat fixed nature of certain
elements of the cost structure. The Company continues to focus on its
manufacturing processes for opportunities to reduce cost.
   As in 1993, the Company has adapted to the industry-wide practice of
continuous price reduction pressures from its customers, causing the Company to
give actual price reductions, as well as forego some recovery of inflationary
costs.
   Selling, general and administrative expenses increased from $83.5 million in
1993 to $92.1 million in 1994 but decreased as a percentage of sales from 8.5%
in 1993 to 7.5% in 1994. The Company provided approximately $5.2 million of
additional accruals for environmental and other liabilities in 1994 and $3.3
million in 1993. Overall selling, general and administrative spending increased
at a much lower rate than the level of business increased.
   Depreciation increased from $57.9 million in 1993 to $60.9 million in 1994.
The increase can be attributed to higher capital expenditures over the past two
years.

                                                       Borg-Warner Automotive 15
<PAGE>   18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------

   Equity in affiliate earnings and other income for both 1994 and 1993 was
$10.6 million. Even though the Japanese economy was essentially flat, the
Company's portion of its Japanese joint venture's earnings increased $4.5
million to $13.9 million in 1994. The increase in earnings from affiliates was
partially offset by a net loss of $3.5 million attributed to the sales of
certain non-core investments and assets in 1994.
   Interest expense and finance charges decreased $4.5 million from 1993 to
$13.9 million in 1994. The decrease was due to lower debt levels, resulting
from higher operating cash flows in 1994 and proceeds from the initial public
offering in August 1993.
   Pretax income improved $50.6 million, or 88.6% from the prior year income of
$57.1 million. The improvement can be attributed to the large increase in sales
volume, the improved margins and the decrease in interest expense and finance
charges offset by an increase in selling, general and administrative expenses.
   Income taxes increased from $24.3 million in 1993 to $43.3 million in 1994.
However, the effective tax rate for 1994 decreased to 40.2% compared to 42.6%
in 1993. The income tax rate for both 1994 and 1993 exceeded the U.S. statutory
rate due to state taxes, foreign taxes that exceed U.S.  rates and the
non-deductibility of goodwill amortization.
   In 1993, the Company recorded a $130.8 million charge, net of tax benefit of
$76.8 million, for the cumulative effect of the adoption of Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" ("SFAS 106").

FINANCIAL CONDITION AND LIQUIDITY

The Company was able to maintain a strong financial position in 1995 despite
spending $46 million for various acquisitions during the year. The Company
ended the year with $135 million in balance sheet debt, an increase of $27
million over year-end 1994. The Company generated approximately $112 million in
cash from operations, compared with $158 million in 1994. The decrease
reflected a higher level of working capital offset by overall increased
business levels. This operating cash was used to fund $93 million in capital
spending and the acquisition program, with the shortfall necessitating the debt
increase.
   In April 1995, the Company acquired PFPD, a maker of forged sintered
transmission and engine components, including races and connecting rods. The
price was $28 million plus certain working capital. In early 1995, the Company
acquired the remaining 47% of its Italian chain joint venture for $5 million.
In December, the Company acquired SUM, a French maker of control components
such as solenoids and sensors, for $13 million. The results of PFPD were
included in consolidated results beginning in May 1995. No results were
included for SUM, but its accounts were included in the December 31, 1995
balance sheet.
   Capital spending for 1995 totaled $93 million, a slight reduction from the
$99 million in 1994 but substantially larger than the $66 million in 1993.
Major spending programs included the Ford large transfer case, expansion of the
MORSE GEMINI program, continued spending on the Ford modular engine timing
system, the Chrysler solenoid program, the Ford one-way clutch/drum program in
Germany and the purchase of the Seneca, South Carolina, plant for future
Mercedes-Benz transfer case business. Spending in 1995 was at a ratio of 1.4
times depreciation versus 1.6 times in 1994. The Company remains committed to
be a net investor in its continuing businesses. The Company believes that the
combination of cash flow from its operations and available credit facilities
will be adequate to satisfy cash needs for 1996. The credit facility, if
necessary, can be used for future acquisitions.
   The Company's objective is to reach $2 billion in sales by the end of the
decade. Achievement of this goal will require both internal growth and selected
acquisitions similar to those made in 1995. The Company believes that it will
have adequate sources of capital, including funds from operations, borrowing
capacity and access to equity markets, if necessary, to support this program
growth.
   At December 31, 1995, net working capital increased by $19 million,
excluding notes payable. This is in part the result of working capital of
acquisitions and in part a weakness in managing payables and accruals in line
with the levels of business. The Company increased the amount of its
receivables sold under its receivables transfer agreement by $10 million to $85
million.  The increase in net property, plant and equipment of $61 million was
primarily due to net spending of $25 million and fixed assets of acquisitions
of $42 million, offset by disposals of $9 million.
   The increase in investments and advances reflected the earnings from the
NSK-Warner joint venture, net of dividends of $13 million and an increase due
to the change in exchange rates. The Company entered into two other ventures in
1995 but has not yet invested in them. Divgi-Warner Private, Ltd. will be a
60%-owned joint venture making transfer cases and manual transmissions for the
Indian market. Huazhong Warner Transmission Company, Ltd. will manufacture
manual transmissions for light-truck applications for the central Chinese
market. The Company also formed joint ventures for the production of chains in
Taiwan and turbochargers in Italy.
   Other balance sheet changes included an increase in other noncurrent assets
of $11 million due to the recognition of $10 million of intangible pension
assets. Retirement-related long-term liabilities rose by only $12 million,
despite a decline in the discount rate for such liabilities. This was due to
earnings from pension plan assets offset by the annual expenses associated with
such liabilities exceeding the related cash disbursements.

16      Borg-Warner Automotive

<PAGE>   19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------

   Equity increased by $65 million primarily as a result of net earnings of $74
million offset by $14 million of dividends and $3 million less in currency
translation adjustments as rates were not as favorable for the U.S. dollar. The
equity component of the minimum pension liability declined by $3 million. This
was due to the earnings on pension assets exceeding the impact of the change in
discount rates.

OTHER FINANCIAL CONDITION MATTERS

North American manual transmission business 

In January 1996, the Company announced that its North American manual
transmission business would be offered for sale and that it had retained Lehman
Brothers to assist in the sale process.  This decision resulted from the
recognition that all major North American OEMs have allied suppliers for their
significant rear-wheel drive manual transmission applications, leaving only one
niche open to the Company in North America. The niche served by the
Company--sporty and performance cars--suffered declines of 20-30% in 1995, a
trend the Company feels is long-term in nature. This business had sales of $148
million in 1995, $177 million in 1994 and $102 million in 1993. Although
profitable in 1994, the business lost money on an operating basis in 1995 due
to declining volume. The business has a nominal investment of approximately $60
million, including $21 million in working capital. This amount does not reflect
any retirement-related liabilities. Any gain or loss on the sale is dependent
on not only the purchase price agreed upon by the parties but also an agreement
as to which assets/liabilities will be included in the transaction. The sale
process is still in its very early stages. Despite the announcement, the
Company plans to continue to implement its strategy to capitalize on manual
transmission opportunities in developing markets such as China and India.

Environment

The Company and certain of its current and former direct and indirect
corporate predecessors, subsidiaries and divisions have been identified by the
U.S. Environmental Protection Agency and certain state environmental agencies
and private parties as potentially responsible parties ("PRPs") at 28 hazardous
waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act ("Superfund") and equivalent state laws and, as
such, may be liable for the cost of cleanup and other remedial activities at
these sites. Responsibility for cleanup and other remedial activities at a
Superfund site is typically shared among PRPs based on an allocation formula.
The means of determining allocation among PRPs is generally set forth in a
written agreement entered into by the PRPs at a particular site. An allocated
share assigned to a PRP is often based on the PRP's volumetric contribution of
waste to the site and the characteristics of the waste material. 
        Based on information available to the Company, which, in most cases,
includes an estimate of allocation of liability among PRPs; the probability
that other PRPs, many of whom are large, solvent public companies, will fully
pay the cost apportioned to them; currently available information from PRPs
and/or federal or state environmental agencies concerning the scope of
contamination and estimated remediation costs; estimated legal fees, and other
factors, the Company has established a reserve in its financial statements for
indicated environmental liabilities in the aggregate amount of approximately
$11 million at December 31, 1995. The Company expects this amount to be
expended over the next three to five years. 
        The Company believes that none of these matters, individually or in the
aggregate, will have a material adverse effect on its financial position or
future operating results, generally either because estimates of the maximum
potential liability at a site are not large or because liability will be shared
with other PRPs, although no assurance can be given with respect to the
ultimate outcome of any of these matters. 

Other matters 

        Certain statements contained in this Management's Discussion and
Analysis of Financial Condition and Results of Operations ("MD&A") and
elsewhere in this Annual Report are "forward looking statements" as
contemplated by the Private Securities Litigation Reform Act of 1995. Such
forward looking statements are subject to risks and uncertainties which could
cause actual results to differ materially from those projected in the forward
looking statements. The Cautionary Statements at Exhibit 00.0 to the Company's
Form 10-K for the fiscal year ended December 31, 1995 as filed with the
Securities and Exchange Commission are incorporated into this MD&A and Annual
Report by reference. Investors are specifically referred to such Cautionary
Statements for a discussion of risk factors and uncertainties.

                                                Borg-Warner Automotive  17
<PAGE>   20
MANAGEMENT'S RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

The information in this report is the responsibility of management. Borg-Warner
Automotive, Inc. (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 generally accepted accounting principles.
   The accompanying financial statements have been audited by Deloitte & Touche
LLP, independent auditors. Management has made available all the Company's
financial records and related information deemed necessary by Deloitte & Touche
LLP. Furthermore, management believes that all representations made by it to
Deloitte & Touche LLP during its audit were valid and appropriate.
   Management is responsible for maintaining a comprehensive system of internal
control through its operations that provides reasonable assurance that assets
are protected from improper use, that material errors are prevented or detected
within a timely period and that records are sufficient to produce reliable
financial reports. The system of internal control is supported by written
policies and procedures that are updated by management as necessary. The system
is reviewed and evaluated regularly by the Company's internal auditors as well
as by the independent auditors in connection with their annual audit of the
financial statements. The independent auditors conduct their evaluation in
accordance with generally accepted auditing standards and perform such tests of
transactions and balances as they deem necessary. Management considers the
recommendations of its internal auditors and independent auditors concerning
the Company's system of internal control and takes the necessary actions that
are cost-effective in the circumstances.  Management believes that, as of
December 31, 1995, the Company's system of internal control was adequate to
accomplish the objectives set forth in the first sentence of this paragraph.
   The Company's Finance and Audit Committee, composed entirely of directors of
the Company who are not employees, meets periodically with the Company's
management and independent auditors to review financial results and procedures,
internal financial controls and internal and external audit plans and
recommendations. To guarantee independence, the Finance and Audit Committee and
the independent auditors have unrestricted access to each other with or without
the presence of management representatives.





John F. Fiedler                William C. Cline
Chairman and                   Vice President and Controller
Chief Executive Officer

January 31, 1996

INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders
of Borg-Warner Automotive, Inc.

We have audited the consolidated balance sheets of Borg-Warner Automotive, Inc.
and subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995. 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 generally accepted auditing
standards. 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 Borg-Warner Automotive, Inc.
and subsidiaries at December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
   As discussed in Note 6, the Company changed its method of accounting for
postretirement benefits other than pensions in 1993.



Deloitte & Touche LLP

Chicago, Illinois
January 31, 1996

18      Borg-Warner Automotive

        
<PAGE>   21
Consolidated Statements of Operations

Borg-Warner Automotive, Inc. and Consolidated Subsidiaries

<TABLE>
<CAPTION>
(millions of dollars except per share amounts)          For the Year Ended December 31,          1995             1994         1993
=================================================================================================================================== 
<S>                                                                                        <C>             <C>              <C>
Net sales                                                                                   $ 1,329.1        $1,223.4        $985.4 
- -----------------------------------------------------------------------------------------------------------------------------------
Cost of sales                                                                                1,044.99           948.4         769.3
- ----------------------------------------------------------------------------------------------------------------------------------
Depreciation                                                                                     68.0            60.9          57.9
- ------------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses                                                     97.8            92.1          83.5
- ------------------------------------------------------------------------------------------------------------------------------------
Minority interest                                                                                 2.0             1.4           0.1
- ----------------------------------------------------------------------------------------------------------------------------------
Goodwill amortization                                                                             9.6             9.6           9.7
- -----------------------------------------------------------------------------------------------------------------------------------
Equity in affiliate earnings and other income                                                   (18.6)          (10.6)        (10.6)
- ------------------------------------------------------------------------------------------------------------------------------------
    Earnings before interest expense and finance charges and income taxes                       125.4           121.6          75.5
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense and finance charges                                                             14.2            13.9          18.4
- ------------------------------------------------------------------------------------------------------------------------------------
    Earnings before income taxes                                                                 111.2           107.7         57.1
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes                                                                       37.0            43.3          24.3
- ------------------------------------------------------------------------------------------------------------------------------------
    Earnings before cumulative effect of accounting change                                       74.2            64.4          32.8
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative effect of initial application of new accounting standard
  for postretirement benefits, net of taxes  Note 6                                                --             --         (130.8)
- ------------------------------------------------------------------------------------------------------------------------------------
       Net earnings (loss)                                                                  $    74.2        $   64.4        $(98.0)
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per share (pro forma in 1993):                                                                    
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings before cumulative effect of accounting change                                      $    3.15        $   2.75        $ 1.41 
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative effect of initial application of new accounting
  standard for postretirement benefits, net of taxes                                               --              --         (5.62)
- ------------------------------------------------------------------------------------------------------------------------------------
       Net earnings (loss)                                                                  $    3.15        $   2.75        $(4.21)
- ------------------------------------------------------------------------------------------------------------------------------------
Average shares outstanding (pro forma in 1993) (thousands)                                     23,562          23,424        23,284
====================================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.


                                                                              
                                                Borg-Warner Automotive        19

<PAGE>   22
Consolidated Balance Sheets                    Borg-Warner Automotive, Inc. and
                                               Consolidated Subsidiaries


<TABLE>
<CAPTION>
(millions of dollars)                                                  December 31,                   1995                    1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                              <C>                      <C>
ASSETS                                                                                                                      
- ------------------------------------------------------------------------------------------------------------------------------------
Cash                                                                                             $     5.1                 $   4.4
- ------------------------------------------------------------------------------------------------------------------------------------
Short term securities                                                                                  7.0                    10.5
- ------------------------------------------------------------------------------------------------------------------------------------
Receivables                                                                                           91.4                    89.5
- ------------------------------------------------------------------------------------------------------------------------------------
Inventories                                                                                           94.0                    81.3
- ------------------------------------------------------------------------------------------------------------------------------------
Prepayments                                                                                           10.0                     9.6
- ------------------------------------------------------------------------------------------------------------------------------------
  Total current assets                                                                               207.5                   195.3
- -----------------------------------------------------------------------------------------------------------------------------------
Land                                                                                                  23.0                    22.3
- ------------------------------------------------------------------------------------------------------------------------------------
Buildings                                                                                            180.0                   157.4
- ------------------------------------------------------------------------------------------------------------------------------------
Machinery and equipment                                                                              671.9                   572.2
- ------------------------------------------------------------------------------------------------------------------------------------
Capital leases                                                                                         7.5                     7.5 
- ------------------------------------------------------------------------------------------------------------------------------------
Construction in progress                                                                              45.4                    67.4
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                                     927.8                   826.8
- ------------------------------------------------------------------------------------------------------------------------------------
Less accumulated depreciation                                                                        404.8                   364.5
- ------------------------------------------------------------------------------------------------------------------------------------
  Net property, plant and equipment                                                                  523.0                   462.3
- ------------------------------------------------------------------------------------------------------------------------------------
Investments and advances                                                                             140.0                   126.1
- ------------------------------------------------------------------------------------------------------------------------------------
Goodwill                                                                                             313.0                   312.6
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred income tax asset                                                                             40.8                    43.7
- ------------------------------------------------------------------------------------------------------------------------------------
Other noncurrent assets                                                                              110.9                   100.3
- ------------------------------------------------------------------------------------------------------------------------------------
  Total other assets                                                                                 604.7                   582.7
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  $1,335.2                $1,240.3
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY                                                               
- ------------------------------------------------------------------------------------------------------------------------------------
Notes payable                                                                                     $   31.6                $   20.5
- ------------------------------------------------------------------------------------------------------------------------------------
Accounts payable and accrued expenses                                                                194.3                   203.7
- ------------------------------------------------------------------------------------------------------------------------------------
Income taxes payable                                                                                  26.6                    23.6
- ------------------------------------------------------------------------------------------------------------------------------------
  Total current liabilities                                                                          252.5                   247.8
- -----------------------------------------------------------------------------------------------------------------------------------
Long-term debt                                                                                       103.1                    86.8
- ------------------------------------------------------------------------------------------------------------------------------------
Long-term liabilities:                                                                                     
- ------------------------------------------------------------------------------------------------------------------------------------
  Retirement-related liabilities                                                                     337.4                   325.9
- ------------------------------------------------------------------------------------------------------------------------------------
  Other                                                                                               39.0                    41.7
- ------------------------------------------------------------------------------------------------------------------------------------
  Total long-term liabilities                                                                        376.4                   367.6
- ------------------------------------------------------------------------------------------------------------------------------------
Minority stockholders' interest in consolidated subsidiaries                                           3.2                     3.2
- ------------------------------------------------------------------------------------------------------------------------------------
Capital stock:                                                                                             
- ------------------------------------------------------------------------------------------------------------------------------------
  Preferred stock, $.01 par value; authorized 5,000,000 shares; none issued                             --                      --
- ------------------------------------------------------------------------------------------------------------------------------------
  Common stock, $.01 par value; authorized 50,000,000 shares; issued 23,054,526 shares in 1995
     and 21,720,614 in 1994; outstanding shares of 23,054,526 in 1995 and 21,704,588 in 1994           0.2                     0.2
- ------------------------------------------------------------------------------------------------------------------------------------
  Non-voting common stock, $.01 par value; authorized 25,000,000 shares; issued 2,520,000 in
    1995 and 1994; outstanding shares of 412,530 in 1995 and 1,417,595 in 1994                          --                      --
- ------------------------------------------------------------------------------------------------------------------------------------
Capital in excess of par value                                                                       560.1                   562.5
- ------------------------------------------------------------------------------------------------------------------------------------
Retained earnings                                                                                     34.1                   (33.6)
- ------------------------------------------------------------------------------------------------------------------------------------
Currency translation adjustment                                                                       22.3                    25.2
- ------------------------------------------------------------------------------------------------------------------------------------
Minimum pension liability adjustment                                                                 (16.7)                  (19.4)
- ------------------------------------------------------------------------------------------------------------------------------------
  Total stockholders' equity                                                                         600.0                   534.9
- ----------------------------------------------------------------------------------------------------------------------------------- 
                                                                                                   $1,335.2               $1,240.3
</TABLE>
See accompanying notes to consolidated financial statements.

20      Borg-Warner Automotive

        
<PAGE>   23
Consolidated Statements of Cash Flows             Borg-Warner Automotive, Inc.
                                                  and Consolidated Subsidiaries
<TABLE>
<CAPTION>
    (millions of dollars)                         For the Year Ended December 31,          1995        1994         1993   
    ------------------------------------------------------------------------------------------------------------------------
    <S>                                                                                  <C>          <C>          <C>
    OPERATING
    ------------------------------------------------------------------------------------------------------------------------
    Earnings before cumulative effect of accounting change                               $  74.2     $ 64.4        $32.8 
    ------------------------------------------------------------------------------------------------------------------------
    Adjustments to reconcile earnings to net cash flows from operations:                                       
    ------------------------------------------------------------------------------------------------------------------------
    Non-cash charges (credits) to operations:                                                                  
    ------------------------------------------------------------------------------------------------------------------------
       Depreciation                                                                         68.0       60.9         57.9       
    ------------------------------------------------------------------------------------------------------------------------
       Goodwill amortization                                                                 9.6        9.6          9.7         
    ------------------------------------------------------------------------------------------------------------------------
       Other, principally equity in affiliate earnings                                     (19.2)     (13.1)       (11.1)   
    ------------------------------------------------------------------------------------------------------------------------
    Changes in assets and liabilities:                                                                         
    ------------------------------------------------------------------------------------------------------------------------
       (Increase) decrease in receivables                                                    6.9        2.1        (15.6)      
    ------------------------------------------------------------------------------------------------------------------------
       Increase in inventories                                                              (6.5)     (12.3)        (3.8)    
    ------------------------------------------------------------------------------------------------------------------------
       (Increase) decrease in prepayments                                                    1.0       (3.5)        (1.4)     
    ------------------------------------------------------------------------------------------------------------------------
       Increase (decrease) in accounts payable and accrued expenses                        (28.6)      57.6        (12.5)     
    ------------------------------------------------------------------------------------------------------------------------
       Increase in income taxes payable                                                      2.7        2.9         10.0        
    ------------------------------------------------------------------------------------------------------------------------
       Net change in other long-term assets and liabilities                                  4.1      (10.9)         8.1      
    ------------------------------------------------------------------------------------------------------------------------
       Net cash provided by operating activities                                           112.2      157.7         74.1
    ------------------------------------------------------------------------------------------------------------------------
    INVESTING                                                                                                  
    ------------------------------------------------------------------------------------------------------------------------
    Capital expenditures                                                                   (92.5)     (98.8)       (65.5)   
    ------------------------------------------------------------------------------------------------------------------------
    Investment in affiliates                                                                (0.9)      (0.6)        (5.6)     
    ------------------------------------------------------------------------------------------------------------------------
    Payments for businesses acquired                                                       (46.5)        --           --
    ------------------------------------------------------------------------------------------------------------------------
    Proceeds from other assets                                                              15.6       11.8          4.7
    ------------------------------------------------------------------------------------------------------------------------
    Net cash used in investing activities                                                 (124.3)     (87.6)        (66.4)
    ------------------------------------------------------------------------------------------------------------------------
    FINANCING                                                                                                  
    ------------------------------------------------------------------------------------------------------------------------
    Net increase (decrease) in notes payable                                                 4.0       (0.3)        19.0      
    ------------------------------------------------------------------------------------------------------------------------
    Additions to long-term debt                                                             20.0       63.5        330.1      
    ------------------------------------------------------------------------------------------------------------------------
    Reductions in long-term debt                                                              --     (118.6)      (185.9) 
    ------------------------------------------------------------------------------------------------------------------------
    Proceeds from options exercised                                                          5.0        3.9          1.7         
    ------------------------------------------------------------------------------------------------------------------------
    Dividends paid                                                                       $ (13.9)     (13.3)          --
    ------------------------------------------------------------------------------------------------------------------------
    Proceeds from initial sale of common stock                                                --         --         83.2          
    ------------------------------------------------------------------------------------------------------------------------
    Purchases of treasury common stock                                                        --         --         (0.6)         
    ------------------------------------------------------------------------------------------------------------------------
    Net change in intercorporate indebtedness                                                 --         --       (254.9)       
    ------------------------------------------------------------------------------------------------------------------------
      Net cash provided by (used for) financing activities                                  15.1      (64.8)        (7.4)
    ------------------------------------------------------------------------------------------------------------------------
    Effect of exchange rate changes on cash and cash equivalents                            (5.8)       0.2         (0.3)       
    ------------------------------------------------------------------------------------------------------------------------
    Net increase in cash and cash equivalents                                               (2.8)       5.5           --
    ------------------------------------------------------------------------------------------------------------------------
    Cash and cash equivalents at beginning of year                                          14.9        9.4          9.4         
    ------------------------------------------------------------------------------------------------------------------------
    Cash and cash equivalents at end of year                                             $  12.1     $ 14.9        $ 9.4
    ------------------------------------------------------------------------------------------------------------------------
    SUPPLEMENTAL CASH FLOW INFORMATION                                                                         
    ------------------------------------------------------------------------------------------------------------------------
    Net cash paid during the year for:                                                                         
    ------------------------------------------------------------------------------------------------------------------------
       Interest expense                                                                  $  15.2     $ 13.4        $14.3 
    ------------------------------------------------------------------------------------------------------------------------
       Income taxes                                                                         31.7       37.3         16.3       
    ------------------------------------------------------------------------------------------------------------------------
                                                                                                               
</TABLE>

See accompanying notes to consolidated financial statements.




                                            Borg-Warner Automotive          21
<PAGE>   24
Consolidated Statements of Stockholders' Equity   Borg-Warner Automotive, Inc.
                                                  and Consolidated Subsidiaries



<TABLE>
<CAPTION>
                                         Number of Shares    (million of dollars)                      Stockholders' Equity
                                   ----------------------    --------------------------------------------------------------
                                                                                            Currency     Minimum
                                                                                              trans-     pension        BW-
                                        Issued     Common    Issued   Capital in              lation   liability   Security
For the Three Years Ended               common   stock in    common    excess of   Retained  adjust-     adjust-    invest-
December 31, 1995                        stock   treasury     stock    par value   earnings     ment        ment       ment
- ---------------------------------------------------------------------------------------------------------------------------
<S>                                <C>            <C>           <C>       <C>         <C>       <C>       <C>       <C>

Balance, January 1, 1993                   --          --      $ --       $   --     $   --    $   --      $   --    $728.2
   Repayment of debt to BW-Security        --          --        --           --          --       --          --    (156.1)
   1993 pre-Spin-Off adjustment to
     BW-Security investment                --          --        --           --          --       --          --     (92.4)
       Balance at Spin-Off                 --          --        --           --          --       --          --     479.7
   Allocation of BW-Security
     investment                    18,813,384          --       0.2         487.6         --      7.7       (15.8)   (479.7)
   Net loss                                --          --        --            --      (98.0)      --          --        --
   Dividends declared                      --          --        --          (2.9)        --       --          --        --
   Issuance of stock                3,660,300          --        --          83.2         --       --          --        -- 
   Purchase of treasury shares             --      24,200        --          (0.6)        --       --          --        -- 
   Shares issued under stock
     option plans                     270,586          --        --           1.7         --       --          --        --
   Adjustment for minimum
     pension liability                     --          --        --            --         --       --       (12.5)       --
   Currency translation adjustment         --          --        --            --         --      9.0          --        --
Balance, December 31, 1993         22,744,270      24,200       0.2         569.0      (98.0)    16.2       (28.3)       --
   Net income                              --          --        --            --       64.4       --          --        --
   Dividends declared                      --          --        --         (10.4)       (--)      --          --        --
   Shares issued under stock
     option plans                     393.939      (8,174)       --           3.9         --       --          --        --
   Adjustment for minimum
     pension liability                     --          --        --            --         --       --         8.9        -- 
   Currency translation adjustment         --          --        --            --         --      9.0          --        --
Balance, December 31, 1994         23,138,209      16,026       0.2         562.5      (33.6)    25.2       (19.4)       --
      Net income                           --          --        --            --       74.2       --          --        --
   Dividends declared                      --          --        --          (7.4)      (6.5)      --          --        --
   Shares issued under stock
     option plans                     328,847     (16,026)       --           5.0         --       --          --        --
   Adjustment for minimum
     pension liability                     --          --        --            --         --       --         2.7        --
   Currency translation adjustment         --          --        --            --         --     (2.9)         --        --
Balance, December 31, 1995         23,467,056          --      $0.2       $ 560.1      $34.1    $22.3     $ (16.7)   $   --
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
        
See accompanying notes to consolidated financial statements.



22     Borg-Warner Automotive
<PAGE>   25
Notes to Consolidated Financial Statements     Borg-Warner Automotive, Inc. and
                                               Consolidated Subsidiaries

INTRODUCTION                                  

Borg-Warner Automotive, Inc. (the "Company") was a wholly owned subsidiary of
Borg-Warner Security Corporation ("BW-Security") until January 27, 1993, at
which time it was distributed to the stockholders of BW-Security in a tax-free
distribution (the "Spin-Off").

   The Company is a technology-driven supplier of highly engineered components
and systems, primarily for automotive drivetrain applications. The Company,
which operates 33 manufacturing facilities in 12 countries serving the North
American, European and Asian automotive markets, is an original equipment
supplier to every major automaker in the world. Its products fall into four
operating groups: Automatic Transmission Systems, Control Systems, Morse TEC
and Powertrain Systems.

NOTE 1   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following paragraphs briefly describe significant accounting policies.

Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Principles of consolidation

The consolidated financial statements include all significant majority-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain prior year amounts have been reclassified
to conform to the current year presentation.

Short-term securities

Short-term securities are valued at cost, which approximates market. It is the
Company's policy to classify investments with original maturities of three
months or less as cash equivalents for purposes of preparing the Consolidated
Statement of Cash Flows. All short-term securities meet this criterion.

Accounts receivable

In 1995, an agreement with a financial institution to sell, without recourse,
eligible receivables was amended from $75 million to $85 million and extended
to January 1999. Accounts receivable were recorded net of this agreement, which
was fully utilized at December 31, 1995 and 1994 and a smaller foreign
agreement together totaling $85.6 million at December 31, 1995 and $75.4
million at December 31, 1994.

Inventories

Inventories are valued at the lower of cost or market. Cost of U.S. inventories
is determined by the last-in, first-out (LIFO) method, while the foreign
operations use the first-in, first-out (FIFO) method.

Property, plant and equipment and depreciation

Property, plant and equipment is 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 related assets ranging
from 3 to 30 years. For income tax purposes, accelerated methods of
depreciation are generally used.

Goodwill

Goodwill is being amortized on a straight-line basis over periods not exceeding
forty years. The Company periodically reviews its operations to determine
whether there has been a diminution in value of its goodwill. If the review
indicates a decline in the carrying value, the Company would adjust the
amortization accordingly.

Intercorporate allocations

In 1993, the Company entered into a service agreement with BW-Security which
provided for a monthly payment of $750,000 to BW-Security for a twelve-month
period to cover office space and services provided by BW-Security. The monthly
payment was reduced for services that the Company provided for itself. The
agreement expired on December 31, 1993. Following the expiration, the Company
subleased space at BW-Security's headquarters in Chicago for a cost equal to
50% of rent and common overhead expenses related to the BW-Security lease which
expires in 1999. This expense was approximately $125,000 per month.

   The Company entered into a service agreement with BW-Security for the year
ending 1994, under which it purchased certain administrative services from
BW-Security. The Company paid BW-Security $1.9 million for the administrative
services in 1994. In 1995, only minor administrative services of BW-Security
were contracted for by the Company.

   The Company paid BW-Security $10 million for a trademark license agreement
in 1994.

   In 1996, the Company replaced the above-mentioned sublease of BW-Security's
headquarters in Chicago. The Company will continue to occupy the same space in
Chicago but will lease its space from the building's owners and sublease from
BW-Security a portion of the previously subleased space which is jointly used
by the two companies.

BW-Security investment

On the Consolidated Statement of Stockholders' Equity, the $92.4 million on the
1993 pre-Spin-Off adjustment to BW-Security investment line represents the
normal operating activity that took place between December 31, 1992 and the
date of the Spin-Off, and other various adjustments and allocations to the
investment account.






                                               Borg-Warner Automotive         23
<PAGE>   26
Notes to Consolidated Financial Statements      Borg-Warner Automotive, Inc.
                                                and Consolidated Subsidiaries


Earnings per common share (pro forma in 1993)

Earnings per share have been calculated assuming that the offering of shares of
the Company's common stock in August 1993 had been outstanding for the entire
year.

Revenue recognition

The Company recognizes revenue upon shipment of product. Although the
Company may enter into long-term supply agreements with its major shipment of
goods is treated as a separate sale. Although the Company has entered into
long-term supply agreements, the price is not fixed over the life of the
agreements.

Financial instruments

Financial instruments consist primarily of investments in cash, short-term
securities, and receivables and obligations under accounts payable and accrued
expenses and debt instruments, primarily variable rate debt. The Company
believes that the fair value of the financial instruments approximates the
carrying value.

NOTE 2   BALANCE SHEET INFORMATION

Detailed balance sheet data are as follows:
<TABLE>
<CAPTION>
    December 31,                                1995      1994                                                 
    -----------------------------------------------------------
    <S>                                         <C>       <C>       
   (millions of dollars)                                                                                      
    -----------------------------------------------------------
    Receivables:                                                                                               
    -----------------------------------------------------------
       Customers                              $ 63.0    $ 68.2                                                 
    -----------------------------------------------------------
       Other                                    29.4      22.6                                                 
    -----------------------------------------------------------
                                              $ 92.4    $ 90.8
    -----------------------------------------------------------
        Less allowance for losses                1.0       1.3                                                 
    ----------------------------------------------------------- 
          Net receivables                    $  91.4    $ 89.5     
    -----------------------------------------------------------        
      Inventories:                                                                                               
    -----------------------------------------------------------
       Raw material                           $ 48.6    $ 35.7                                                 
    -----------------------------------------------------------
       Work in progress                         31.6      31.1                                                 
    -----------------------------------------------------------
       Finished goods                           13.8      14.5                                                 
    -----------------------------------------------------------
          Total inventories                   $ 94.0    $ 81.3                           
    -----------------------------------------------------------
    Investments and advances:             
    -----------------------------------------------------------                                                                 
       NSK-Warner                             $128.9    $117.9                                                 
    -----------------------------------------------------------
       Other                                    11.1       8.2                                                 
    -----------------------------------------------------------
          Total investments and advances      $140.0    $126.1
    -----------------------------------------------------------
        Other noncurrent assets:                                                                                   
    -----------------------------------------------------------
       Deferred pension assets                $ 50.9    $ 40.5                                                 
    -----------------------------------------------------------
       Deferred tooling                         43.5      38.6                                                 
    -----------------------------------------------------------
       Other                                    16.5      21.2                                                 
    -----------------------------------------------------------
          Total other noncurrent assets      $ 110.9   $ 100.3                                                       
    -----------------------------------------------------------        
    Accounts payable and accrued expenses:                                                                     
    -----------------------------------------------------------
       Trade payables                         $114.9    $120.2                                                 
    -----------------------------------------------------------
       Payroll and related                      15.4      16.9                                                 
    -----------------------------------------------------------
       Insurance                                13.3      15.1                                                 
    -----------------------------------------------------------
       Retirement benefits                      11.1       8.0                                                 
    -----------------------------------------------------------
       Other                                    39.6      43.5                                                 
    -----------------------------------------------------------
          Total accounts payable and accrued 
          expenses                            $194.3    $203.7
    -----------------------------------------------------------
    Other long-term liabilities:                                                                               
    -----------------------------------------------------------
       Environmental reserve                  $ 10.9    $ 14.0                                                 
    -----------------------------------------------------------
       Other                                    28.1      27.7                                                 
    -----------------------------------------------------------
          Total other Long-term liabilities   $ 39.0    $ 41.7  
</TABLE>

   Inventory held by U.S. operations was $72.6 million in 1995 and $65.9
million in 1994. Inventories, if valued at current cost instead of LIFO, would
have been greater by $11.1 million in 1995 and $10.9 million in 1994.

   Dividends received from affiliates accounted for under the equity method
totaled $6.5 million in 1995, $4.3 million in 1994 and $2.6 million in 1993.

   Accumulated amortization related to capital leases amounted to $5.4 million
in 1995 and $6.3 million in 1994.  Accumulated amortization of goodwill
amounted to $83.1 million in 1995 and $73.5 million in 1994.

   The Company has a 50% interest in NSK-Warner, a joint venture based in Japan
that manufactures friction products. 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 twelve months ended November 30
so as to reflect earnings on as current a basis as is reasonably feasible.

   Following are summarized financial data for NSK-Warner, translated using the
ending or periodic rates as of and for the years ended March 31, 1995, 1994 and
1993:

<TABLE>
<CAPTION>
                                         1995      1994        1993               
    -----------------------------------------------------------------
    (millions of dollars)                                                                                      
    <S>                                 <C>       <C>        <C>
    -----------------------------------------------------------------
    Balance sheet:                                                                                             
    -----------------------------------------------------------------
        Current assets                  $168.4    $ 98.3     $ 82.7               
    -----------------------------------------------------------------
        Noncurrent assets                187.6     166.3      155.9               
    -----------------------------------------------------------------
        Current liabilities               99.4      70.1       94.5               
    -----------------------------------------------------------------
        Noncurrent liabilities            17.2      13.3       28.4               
    -----------------------------------------------------------------
    Statement of operations:                                                            
    -----------------------------------------------------------------
        Net sales                       $336.8    $280.9     $269.7               
    -----------------------------------------------------------------
        Gross profit                      98.5      70.9       61.4               
    -----------------------------------------------------------------
        Net income                        35.9      23.3       15.9               
    -----------------------------------------------------------------
                                                                                                               
</TABLE>




24     Borg-Warner Automotive
<PAGE>   27
NOTE 3   COMMITMENTS

The Company is committed to pay rents on non-cancellable leases with terms
exceeding one year. Rental amounts committed for future years are summarized at
December 31, 1995 as follows:

<TABLE>
<CAPTION>
                                Operating    Capital
    Year                           Leases     Leases     Total                                                 
    ------------------------------------------------------------
    (millions of dollars)                                                                                      
    ------------------------------------------------------------
    <S>                             <C>        <C>      <C>       
    1996                            $ 6.3       $0.7     $ 7.0                                                 
    ------------------------------------------------------------
    1997                              7.6        0.7       8.3                                                 
    ------------------------------------------------------------   
    1998                              5.9        1.8       7.7                                                 
    ------------------------------------------------------------   
    1999                              3.1        0.6       3.7                                                 
    ------------------------------------------------------------   
    2000                              2.2        0.8       3.0                                                 
    ------------------------------------------------------------   
    2001 and after                    8.0        4.2      12.2                                                 
    ------------------------------------------------------------   
      Total                        $ 33.1       $8.8     $41.9
    ------------------------------------------------------------
</TABLE>

   Total rental expense amounted to $7.5 million in 1995, $5.1 million in 1994
and $4.6 million in 1993. Future capital lease rental payments include interest
expense of $2.7 million and principal payments of $6.1 million.

NOTE 4   CONTINGENT LIABILITIES

The Company and certain of its current and former direct and indirect corporate
predecessors, subsidiaries and divisions have been identified by the U.S.
Environmental Protection Agency and certain state environmental agencies and
private parties as potentially responsible parties ("PRPs") at 28 hazardous
waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act ("Superfund") and equivalent state laws and, as
such, may be liable for the cost of cleanup and other remedial activities at
these sites.  Responsibility for cleanup and other remedial activities at a
Superfund site is typically shared among PRPs based on an allocation formula.
The means of determining allocation among PRPs is generally set forth in a
written agreement entered into by the PRPs at a particular site.  An allocated
share assigned to a PRP is often based on the PRPs' volumetric contribution of
waste to the site and the characteristics of the waste material.

   Based on information available to the Company, which, in most cases,
includes an estimate of allocation of liability among PRPs; the probability
that other PRPs, many of whom are large, solvent public companies, will fully
pay the costs apportioned to them; currently available information from PRPs
and/or federal or state environmental agencies concerning the scope of
contamination and estimated remediation costs; estimated legal fees and other
factors, the Company has established a reserve in its financial statements for
indicated environmental liabilities in the aggregate amount of approximately
$11 million at December 31, 1995. The Company expects this amount to be
expended over the next three to five years.

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

   The Company has guaranteed borrowings of $3.5 million of affiliate
operations as of December 31, 1995 and 1994.

NOTE 5   NOTES PAYABLE AND LONG-TERM DEBT

Following is a summary of notes payable and long-term debt which reflects all
borrowings of the Company.

<TABLE>
<CAPTION>
                                           December 31, 1995    December 31, 1994                                                 
    -------------------------------------------------------------------------------
                                          Current  Long-term    Current  Long-term               
    -------------------------------------------------------------------------------
    (millions of dollars)                                                                                      
    <S>                                   <C>      <C>         <C>       <C>
    Bank borrowings                       $24.5    $ 19.5     $  14.0    $  0.7                                                 
    -------------------------------------------------------------------------------
                                                                                                               
    Bank term loans due through
       1998 (at an average rate
       of 6.0% in 1995 and
       5.2% in 1994; and 5.6%
       at December 1995)                    6.9      77.7         --       81.8                                                 
    -------------------------------------------------------------------------------
    14% Korean debentures
       due 1995                              --        --         6.3        --
    -------------------------------------------------------------------------------
    Capital lease liabilities (at an
       average rate of 6.5% in
       1995 and 1994; and 7.1%
       at December 1995)                    0.2       5.9         0.2       4.3                                                 
    -------------------------------------------------------------------------------
      Total notes payable and 
         long-term debt                   $31.6    $103.1       $20.5    $ 86.8    
    -------------------------------------------------------------------------------

</TABLE>

    Annual principal payments required as of December 31, 1995 are as follows 
(in millions of dollars):


<TABLE>
<S>                                                    <C>
- ---------------------------------------------------------------
1996                                                   $31.6                                        
- ---------------------------------------------------------------                                     
1997                                                    34.2                                        
- ---------------------------------------------------------------                                     
1998                                                    45.2                                        
- ---------------------------------------------------------------                                       
1999                                                    19.2                                        
- ---------------------------------------------------------------                                       
2000                                                     0.5                                        
- ---------------------------------------------------------------                                       
after 2000                                               4.0                                        
- ---------------------------------------------------------------                                       


</TABLE>


   On January 27, 1993, BW-Security distributed the stock of the Company in the
Spin-Off. The capital structure of the Company was established with $480
million of equity and debt of $251 million.

   For periods prior to the Spin-Off, all of the Company's debt and equity were
classified as BW-Security's investment and reported as equity. At January 1,
1993, BW-Security's investment was $728.2 million.

   In December 1994, the Company amended and restated its credit agreement to a
$300 million revolving credit facility.  The facility was unused at December
31, 1995 and 1994 and remains fully available through December 1999.




                                              Borg-Warner Automotive     25
<PAGE>   28
Notes to Consoldiated Financial Statements         Borg-Warner Automotive, Inc.
                                                   Consolidated Subsidiaries

   Borrowings under the credit agreement are guaranteed by certain of the
Company's subsidiaries. The credit agreement contains numerous financial and
operating covenants including, among others, covenants requiring the Company to
maintain certain financial ratios and restricting its ability to incur
additional foreign indebtedness.

   Bank term loans of $84.6 million outstanding at December 31, 1995 are
subject to annual reductions of $6.9 million in 1996, $33.9 million in 1997 and
$43.8 million in 1998.

NOTE 6   RETIREMENT BENEFIT PLANS
A number of eligible salaried and hourly employees participate in contributory
or noncontributory defined benefit or defined contribution plans. The funding
policy for defined benefit plans is based upon independent actuarial valuations
and is within the limits required by ERISA for U.S. defined benefit plans and
similar legal requirements for non-U.S.  plans.

   The benefits provided to certain salaried employees covered under various
defined benefit plans are based on years of service and final average pay and
utilize the projected unit credit method for cost allocation. The benefits
provided to certain hourly employees under various defined benefit plans are
based on years of service and utilize the unit credit method for cost
allocation.

   A number of employees in the U.S. participate in defined contribution plans,
where contributions by the Company or the subsidiary sponsoring the plans are
based on the employees' salary, age and years of service. These contributions
are charged to earnings as they are made to the various plans.

   Retirement benefit expense amounted to $46.0 million, $39.9 million and
$44.8 million in 1995, 1994 and 1993, respectively. This expense includes
postretirement life insurance and medical benefits of $22.0 million, $21.3
million and $24.6 million in 1995, 1994 and 1993, respectively. Also included
are defined contribution plan expenses of $13.3 million, $10.3 million and $9.4
million in 1995, 1994 and 1993, respectively.

   In 1993, the U.K. operations incurred a $1.2 million charge to reflect the
curtailment and augmentation of lump-sum retirement benefits for early
retirees.

   Reconciliation of the funded status of the U.S. and foreign defined benefit
pension plans with related amounts included in the balance sheets follows:

<TABLE>
<CAPTION>
                                   DECEMBER 31, 1995    December 31, 1994                                                 
    ----------------------------------------------------------------------
                                    OVER-     UNDER-      Over-    Under-
                                   FUNDED     FUNDED     funded    funded
                                    PLANS      PLANS      Plans     Plans               
    ----------------------------------------------------------------------
    (millions of dollars)                                                              
    ----------------------------------------------------------------------
    <S>                             <C>       <C>        <C>       <C>
    Actuarial present value of                                    
       benefit obligations:                                                            
    ----------------------------------------------------------------------
       Vested benefits              $ 77.9     $192.6     $ 69.0    $166.4                         
    ----------------------------------------------------------------------
       Non-vested benefits             0.4       25.1        0.6      16.7                         
    ----------------------------------------------------------------------
    Accumulated benefit obligations   78.3      217.7       69.6     183.1
    ----------------------------------------------------------------------

       Effect of projected future                                 
          compensation levels          6.3         3.8        5.0      3.5               
    ----------------------------------------------------------------------
    Projected benefit obligation      84.6      221.5       74.6     186.6
    ----------------------------------------------------------------------
    Plan assets at fair value        109.1      135.7       94.9     109.1                         
    ----------------------------------------------------------------------
    Assets in excess of (less than)
       projected benefit obligation   24.5      (85.8)      20.3     (77.5)
    ----------------------------------------------------------------------
    Unamortized net (asset)                                       
       liability from transition      (2.6)       1.5       (2.9)      1.5               
    ----------------------------------------------------------------------
    Unrecognized net loss             11.9       27.1       16.2      31.7                         
    ----------------------------------------------------------------------
    Unrecognized prior                                            
       service cost                    1.6       14.9        1.8       4.6                         
    ----------------------------------------------------------------------
    Adjustment required to                                        
       recognize minimum                                          
          liability                     --      (41.9)       --      (35.8)               
    ----------------------------------------------------------------------
    Net asset (liability) on
       balance sheets               $ 35.4    $ (84.2)    $ 35.4    $(75.5)
    ----------------------------------------------------------------------

</TABLE>

   Funding is based on requirements set forth by ERISA as well as requirements
imposed by collective bargaining agreements.

   As part of the Spin-Off in 1993, the Company agreed with the PBGC to make an
additional $17.5 million contribution to an underfunded pension plan in 1993
and make a supplemental contribution of $1 million per year for the next ten
years.

   Assets held in trust for the defined benefit plans are comprised of
marketable equity and fixed income securities and real estate.

   Net periodic pension expense was comprised as follows:

<TABLE>
<CAPTION>
                  Year Ended December 31,                       1995     1994      1993               
                  -------------------------------------------------------------------------
                  (millions of dollars)                                                                      
                  -------------------------------------------------------------------------
                  <S>                                         <C>       <C>        <C>
                  Service cost                                $  3.2    $  3.6     $  3.3               
                  -------------------------------------------------------------------------
                  Interest cost                                 21.1      20.2       21.8               
                  -------------------------------------------------------------------------
                  Actual (return) loss on assets               (55.8)      3.7      (24.3)               
                  -------------------------------------------------------------------------
                  Net amortization and deferrals                40.3     (20.3)       7.7               
                  -------------------------------------------------------------------------
                  Net periodic pension cost                   $  8.8     $ 7.2     $  8.5       
                  -------------------------------------------------------------------------
</TABLE>




26 Borg-Warner Automotive
<PAGE>   29
Notes to Consolidated Financial Statements          Borg-Warner Automotive,
                                                    Inc. and Consolidated
                                                    Subsidiaries


   The Company's assumptions used as of December 31, 1995, 1994 and 1993 in
determining the pension cost and pension liability shown above were as follows:
<TABLE>
<CAPTION>
                                                   1995       1994      1993               
    ------------------------------------------------------------------------
    (percent)                                                                                                  
    ------------------------------------------------------------------------
    <S>                                         <C>        <C>      <C>
    U.S. plans:                                                                                                
    ------------------------------------------------------------------------
    Discount rate                                  7.25        8.5      7.25                                       
    ------------------------------------------------------------------------
    Rate of salary progression                      4.5        4.5       4.5                                       
    ------------------------------------------------------------------------
    Long-term rate of return on assets              9.5        9.5       9.5                                       
    ------------------------------------------------------------------------
    Foreign plans:                                                                                             
    ------------------------------------------------------------------------
    Discount rate                               7.0-7.5    7.5-8.0  7.0-7.25                                       
    ------------------------------------------------------------------------
    Rate of salary progression                  3.5-6.0    4.0-6.0   4.0-6.0                                       
    ------------------------------------------------------------------------
    Long-term rate of return on assets             7.75       8.25      7.25                                       
    ------------------------------------------------------------------------
 </TABLE>

   Effective January 1, 1993, the Company adopted the provisions of SFAS 106
using the immediate recognition method and recorded a cumulative effect charge
of $130.8 million (net of $76.8 million of deferred tax benefit) or $5.62 per
share.  In the U.S., the Company has in place comprehensive medical plans
covering certain retirees and their eligible dependents. The plans require
certain cost-sharing payments by retirees. The plans are not funded. The
assumptions used as of January 1, 1993 in adopting SFAS 106 were a 9.0%
discount rate and medical inflation of 12.0% in 1993, descending to a 7.0%
annual rate by 1998. The liability related to foreign plans, where applicable,
is not significant.

   Net periodic postretirement benefit cost was comprised as follows:

<TABLE>
<CAPTION>
    Year Ended December 31,          1995       1994      1993                                                 
    -----------------------------------------------------------
    (millions of dollars)                                                                                      
    -----------------------------------------------------------
    <S>                             <C>        <C>       <C>
    Service cost                    $ 2.7      $ 3.2     $ 3.2                                                 
    -----------------------------------------------------------
    Interest cost                    19.3       18.1      21.4                                                 
    -----------------------------------------------------------
                                    $22.0      $21.3     $24.6
</TABLE>

   Reconciliation of the actuarial present value of postretirement benefit
obligations of the U.S. plans with the related liability included in the
balance sheets follows:

<TABLE>
<CAPTION>
    December 31,                                1995      1994                                                 
    ------------------------------------------------------------
    (millions of dollars)                                                                                      
    ------------------------------------------------------------
    <S>                                       <C>       <C>
    Actuarial present value of postretirement
       benefit obligations:                                                                                    
    ------------------------------------------------------------
       Retirees                               $194.1    $176.7                                                 
    ------------------------------------------------------------
       Other fully eligible participants        28.8      23.5                                                 
    ------------------------------------------------------------
       Other active participants                52.7      31.6
    ------------------------------------------------------------
    Accumulated Postretirement benefit         275.6     231.8 
       obligation                                               
    ------------------------------------------------------------
    Unrecognized gain (loss)                  (19.4)      19.7                                                 
    ------------------------------------------------------------
    Unrecognized prior service cost              0.3       0.3 
    ------------------------------------------------------------                                            
    Net liability on balance sheets           $256.5    $251.8                                                        
    ------------------------------------------------------------
    Assumed discount rate (percent)             7.25       8.5      
    ------------------------------------------------------------                                       
                                                                                                               
</TABLE>

   As of December 31, 1995, the actuarial present value of postretirement
medical and life insurance benefits was calculated using assumptions of medical
inflation of 8.25% in 1996, descending to a 5.25% annual rate by 1999. As of
December 31, 1994, the actuarial present value of postretirement medical and
life insurance benefits was calculated using assumptions of medical inflation
of 9.25% in 1995, descending to a 5.25% annual rate by 1999. A one percentage
point increase in the assumed medical inflation rate at December 31, 1995 would
have increased the accumulated benefit obligation, service cost and interest
cost by approximately $34.3 million, $0.7 million and $2.2 million,
respectively.

NOTE 7   OPERATIONS OUTSIDE THE UNITED STATES

The Company's equity in net earnings of consolidated subsidiaries located
outside the United States was $18.7 million in 1995, $13.9 million in 1994 and
$6.6 million in 1993.  The Company's equity in the net assets of these
companies is summarized as follows:

<TABLE>
<CAPTION>
    December 31,                                1995      1994                                                 
    -----------------------------------------------------------
    (millions of dollars)                                                                                      

    <S>                                       <C>       <C>
    Current assets                            $ 79.1    $ 63.8                                                 
    -----------------------------------------------------------
    Noncurrent assets                          152.1     125.9                                                 
    -----------------------------------------------------------
      Total assets                             231.2     189.7
    -----------------------------------------------------------
    Current liabilities                         80.8      56.2                                                 
    -----------------------------------------------------------
    Noncurrent liabilities                      87.3      77.3                                                 
    ----------------------------------------------------------- 
      Net assets before minority interest       63.1      56.2                                          
    -----------------------------------------------------------
    Minority interest                            3.2       3.2                                                 
    -----------------------------------------------------------
      Equity in net assets                    $ 59.9    $ 53.0
    -----------------------------------------------------------
                                    
                                                                       
</TABLE>

At December 31, 1995 and 1994, current liabilities included debt of $27.2
million and $16.3 million and noncurrent liabilities included debt of $28.4
million and $32.5 million, respectively.

NOTE 8   EQUITY IN AFFILIATE EARNINGS AND OTHER INCOME

Items included in equity in affiliate earnings and other income consist of:

<TABLE>
<CAPTION>
    Year Ended December 31,          1995       1994      1993                                                 
    -----------------------------------------------------------
    (millions of dollars)                                                                                      
    -----------------------------------------------------------
    <S>                             <C>        <C>       <C>
    Interest income                 $ 0.4      $ 0.5     $ 0.5                                                 
    -----------------------------------------------------------
    Loss on asset disposals, net     (1.0)      (4.2)     (1.0)                                                 
    -----------------------------------------------------------
    Equity in affiliate earnings     19.2       14.3      11.1                                                 
    -----------------------------------------------------------
    Total                           $18.6      $10.6     $10.6
    -----------------------------------------------------------
                                                                                                                                
</TABLE>







                                                  Borg-Warner Automotive     27
<PAGE>   30
Notes to Consolidated Financial Statements         Borg-Warner Automotive, Inc.
                                                   and Consolidated Subsidiaries

NOTE 9   GEOGRAPHIC INFORMATION

The Company's consolidated operations are engaged entirely in the manufacture
and sale of automotive components and systems. General corporate assets
primarily include cash, marketable securities, a deferred tax asset and
investments and advances.
   Sales, transfers between geographic areas, operating profit and identifiable
assets by major geographic area, in millions of dollars, are summarized as
follows:

<TABLE>
<CAPTION>
Year Ended December 31,          1995       1994      1993                                                 
- --------------------------------------------------------------  
 <S>                             <C>        <C>       <C>                                
Sales:                                                                                                     
- --------------------------------------------------------------  
United States                $1,114.8   $1,048.1    $829.5                                                 
- --------------------------------------------------------------  
Europe                          125.8      105.3      96.9                                                 
- --------------------------------------------------------------  
Other foreign                    88.5       70.0      59.0                                                 
- --------------------------------------------------------------
        Total                $1,329.1   $1.223.4    $985.4
</TABLE>
 
  Included in U.S. sales are export sales of $140 million in 1995, $136
million in 1994 and $101 million in 1993.

<TABLE>
<CAPTION>
Year Ended December 31,                           1995       1994      1993                                                 
- ----------------------------------------------------------------------------  
Transfers between geographic areas:                                                                        
- ----------------------------------------------------------------------------  
United States                                 $13.4      $12.5      $9.0                                                 
- ----------------------------------------------------------------------------  
Europe                                          7.1        6.8       6.1                                                 
- ----------------------------------------------------------------------------  
Other foreign                                    3.8        1.1       1.2                                                 
- ----------------------------------------------------------------------------  
        Total                                  $24.3      $20.4     $16.3

Year Ended December 31,                         1995       1994      1993                                                 
- ----------------------------------------------------------------------------  
<S>                                           <C>        <C>        <C>

Operating profit:                                                                                          
- ----------------------------------------------------------------------------  
United States                                 $ 83.4     $102.1     $60.4                                                 
- ----------------------------------------------------------------------------  
Europe                                          11.4        7.8       5.4                                                 
- ----------------------------------------------------------------------------  
Other foreign                                   26.3       21.3      15.8                                                 
- ----------------------------------------------------------------------------  
        Total                                   121.1      131.2      81.6

Other expenses, net (including corporate
  headquarters expense of $12.4 million,
  $12.3 million and $10.7 million for
  1995, 1994 and 1993, respectively)            (15.3)    (24.4)     (17.7)               
- -------------------------------------------------------------------------------
Interest income and equity in
     affiliate earnings                          19.6      14.8       11.6               
- -------------------------------------------------------------------------------
Interest expense and finance charges            (14.2)     (13.9)    (18.4)                                                 
- -------------------------------------------------------------------------------
Income before taxes                             111.2      107.7      57.1
- -------------------------------------------------------------------------------
Income taxes                                    (37.0)     (43.3)    (24.3)                                                 
- -------------------------------------------------------------------------------
Net earnings                                   $ 74.2     $ 64.4     $32.8
- -------------------------------------------------------------------------------

December 31,                                      1995      1994                                                 
- -------------------------------------------------------------------------------
Identifiable assets:                                                                                       
- -------------------------------------------------------------------------------
United States                                  $924.3     $864.6                                                 
- -------------------------------------------------------------------------------
Europe                                          149.3     110.2                                                 
- -------------------------------------------------------------------------------
Other foreign                                    81.9      83.8                                                 
- -------------------------------------------------------------------------------
        Total assets of operations            1,155.5   1,058.6
- -------------------------------------------------------------------------------
Affiliates at equity                            132.7     123.2                                                 
- ------------------------------------------------------------------------------- 
General corporate assets                         57.4      67.1                                                 
- -------------------------------------------------------------------------------                                                   
Consolidation--elimination                      (10.4)     (8.6)                                                 
- -------------------------------------------------------------------------------
        Total                                $1,335.2  $1,240.3
</TABLE>


Sales to major customers

Consolidated sales included sales to Ford Motor Company of approximately 41%,
39% and 40% and to General Motors Corporation of approximately 25%, 27% and 24%
for the years ended December 31, 1995, 1994 and 1993, respectively. No other
single customer accounted for 10% or more of consolidated sales in the period
1993 through 1995.

Note 10   STOCK OPTIONS AND MANAGEMENT STOCK PURCHASES

Stock option plans

In connection with the Spin-Off, in January 1993 each outstanding option under
the BW-Security stock option plan was exchanged for (i) an adjusted option to
purchase the same number of post-Spin-Off shares of BW-Security common stock at
a price equal to 50% of the pre-Spin-Off exercise price and (ii) an option to
purchase the same number of shares of common stock of the Company at a price
equal to 50% of the pre-Spin-Off exercise price. Options granted to date to
purchase common stock of the Company under this plan carry exercise prices
ranging from $5.00 to $20.20 per share. The 300,603 outstanding options at
December 31, 1995 will be fully vested in 1996.
   In 1993, the Company adopted a stock option plan which authorizes the grant
of options to purchase 500,000 shares of the Company's common stock. Options
granted to date under this plan carry exercise prices ranging from $22.50 to
$30.63 per share. The 331,500 outstanding options at December 31, 1995 will
vest over periods up to three years based upon employment.
The fair value of the options granted in the current year are immaterial in
nature.  
   A summary of the two plans' shares under option at December 31, 1995,
1994 and 1993 follows:


28 Borg-Warner Automotive
<PAGE>   31
Notes to Consolidated Financial Statements         Borg-Warner Automotive, Inc.
                                                   Consolidated Subsidiaries

NOTE 12   INCOME TAXES

The Company has not provided deferred taxes on the excess of its financial book
investment in foreign joint ventures and subsidiaries over its tax basis in
these investments as they are essentially permanent in nature. It is not
practicable to estimate the amount of unrecognized deferred tax liability.
   Income before taxes from continuing operations and provision for taxes, in
millions of dollars, consists of:  

Components of income tax expense

<TABLE>
<CAPTION>
                                                             1995                       1994                     1993               
- ------------------------------------------------------------------------------------------------------------------------
                                       U.S.     NON-U.S.     TOTAL     U.S.   Non-U.S.  Total    U.S.   Non-U.S.  Total             
- ------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>          <C>      <C>        <C>     <C>      <C>      <C>     <C>       <C> 
Income before income taxes            $78.8       $32.4     $111.2     $83.3   $24.4    $107.7   $42.2   $14.9     $57.1
- ------------------------------------------------------------------------------------------------------------------------
Income taxes:
- ------------------------------------------------------------------------------------------------------------------------
   Current:
- ------------------------------------------------------------------------------------------------------------------------
        Federal/foreign               $19.0       $12.5     $ 31.5     $29.4   $ 9.7   $ 39.1    $16.5   $11.6    $28.1
- ------------------------------------------------------------------------------------------------------------------------
        State                           6.4           -        6.4       7.5       -      7.5      4.9       -      4.9
- ------------------------------------------------------------------------------------------------------------------------
                                       25.4         12.5      37.9      36.9     9.7     46.6      21.4   11.6     33.0
- ------------------------------------------------------------------------------------------------------------------------
        Deferred                       (2.1)        1.2       (0.9)     (4.1)    0.8     (3.3)    (5.4)   (3.3)    (8.7)
- ------------------------------------------------------------------------------------------------------------------------
Total income taxes                    $23.3       $13.7     $ 37.0    $ 32.8   $10.5    $43.3     $16.0    $8.3   $24.3
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>


        The analysis of the variance of income taxes as reported from income
taxes computed at the U.S. statutory rate for consolidated operations for 1995,
1994 and 1993, in millions of dollars, is as follows: 

<TABLE>
<CAPTION>
                                                      1995               1994                  1993               
- --------------------------------------------------------------------------------------------------- 
<S>                                                  <C>                <C>                  <C>
Income taxes at U.S. statutory
       rate of 35%                                   $38.9              $37.7                $20.0
- ---------------------------------------------------------------------------------------------------
Increases (decreases) resulting from:                                                                      
- ---------------------------------------------------------------------------------------------------
       Income (net) from non-U.S. sources              4.7                4.6                   4.4               
- --------------------------------------------------------------------------------------------------- 
       State taxes                                     4.1                4.3                   2.7
- ---------------------------------------------------------------------------------------------------
       Business tax credits, net                      (5.7)              (1.7)                (5.1)
- ---------------------------------------------------------------------------------------------------
       Affiliate earnings                             (6.7)              (5.0)                (3.8)
- ---------------------------------------------------------------------------------------------------
       Nontemporary differences                        1.6                3.1                  6.7 
- ---------------------------------------------------------------------------------------------------
       Other, net                                      0.1                0.3                 (0.6)
- ---------------------------------------------------------------------------------------------------
       Income taxes as reported                      $37.0              $43.3                $24.3 
- ---------------------------------------------------------------------------------------------------
</TABLE>
   
     Following are the gross components of the deferred tax liability (asset) as
of December 31, 1995 and 1994 in millions of dollars:

<TABLE>
<CAPTION>
                                                    1995                                    1994               
- --------------------------------------------------------------------------------------------------
<S>                                     <C>       <C>                           <C>       <C>
Deferred tax liabilities                          $110.7                                  $103.5  
- --------------------------------------------------------------------------------------------------
Deferred tax assets                     $151.5                                  $147.2
- --------------------------------------------------------------------------------------------------
Foreign tax credits                       22.3                                    17.3
- --------------------------------------------------------------------------------------------------
Valuation allowance                      (22.3)   (151.5)                        (17.3)   (147.2)
- --------------------------------------------------------------------------------------------------
Net deferred tax asset                            $(40.8)                                 $(43.7)
- --------------------------------------------------------------------------------------------------
</TABLE>
   
        The foreign tax credit has been fully considered in the valuation
allowance.
   
     The most significant element of the gross deferred tax liability at
December 31, 1995 and 1994, in millions of dollars, was as follows:

<TABLE>
<CAPTION>
                                                          1995                              1994               
- -------------------------------------------------------------------------------------------------
<S>                                                     <C>                               <C>
    Excess of financial accounting basis in
          fixed assets over tax basis                   $69.7                             $70.3               
- -------------------------------------------------------------------------------------------------
</TABLE>
   
     Significant elements of the gross deferred tax asset at December 31, 1995
and 1994, in millions of dollars, were as follows:

<TABLE>
<CAPTION>
                                                          1995                              1994               
- -------------------------------------------------------------------------------------------------
<S>                                                     <C>                               <C>
   
Pension liabilities                                     $20.1                             $19.1
- -------------------------------------------------------------------------------------------------
Postretirement benefits                                  97.4                              95.7
- -------------------------------------------------------------------------------------------------
</TABLE>

NOTE 13  RESEARCH AND DEVELOPMENT COSTS

Total research and development costs amounted to $36.7 million in 1995, $33.8
million in 1994 and $25.2 million in 1993.



30        Borg-Warner Automotive

                                       

<PAGE>   32
Notes to Consolidated Financial Statements      Borg-Warner Automotive, Inc. and
                                                 Consolidated Subsidiaries

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------- 
                                                                       1995                             1994                     
- --------------------------------------------------------------------------         ----------------------------------   
                                                                                     
                                                                                                                                    
                                                                 Weighted-                           Weighted-      
                                                  Shares          average            Shares          average          
                                                (thousands)    exercise plan       (thousands)   exercise price     
<S>                                                  <C>            <C>                <C>           <C>
- ----------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year                       987           $17.66            1,343         $14.75              
- ----------------------------------------------------------------------------------------------------------------------
        Granted                                         16           $25.43               79         $26.12               
- ---------------------------------------------------------------------------------------------------------------------- 
        Exercised                                     (345)          $14.69             (402)        $ 9.47          
- ----------------------------------------------------------------------------------------------------------------------
        Forfeitures                                    (26)          $19.65              (33)        $19.44          
- ----------------------------------------------------------------------------------------------------------------------
Outstanding at end of year                             632           $19.39              987         $17.66         
- ----------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end                        384                               537                         
- ----------------------------------------------------------------------------------------------------------------------
Shares available for future grants                     144                               184                       
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>

- ----------------------------------------------------------------------------------------
                                                                    1993
- ----------------------------------------------------------------------------------------                                        
                                                                 Weighted-                       
                                                    Shares         average            
                                                  (thousands)    exercise plan 
<S>                                               <C>            <C>
- ----------------------------------------------------------------------------------------
Outstanding at beginning of year                     1,339           $10.44            
- ----------------------------------------------------------------------------------------
        Granted                                        341           $24.95            
- ----------------------------------------------------------------------------------------
        Exercised                                     (274)          $ 6.39                 
- ----------------------------------------------------------------------------------------
        Forfeitures                                    (63)          $14.56              
- ----------------------------------------------------------------------------------------
Outstanding at end of year                           1,343           $14.75              
- ----------------------------------------------------------------------------------------
Options exercisable at year-end                        833
- ----------------------------------------------------------------------------------------
Shares available for future grants                     230
- ----------------------------------------------------------------------------------------
</TABLE>

The following table summarizes information
about the options outstanding at December 31, 1995:      


<TABLE>
<CAPTION>

                                                          Options Outstanding                        Options Exercisable
- ---------------------------------------------------------------------------------  --------------------------------------
                                                
                                                  Weighted-
                              Number               average         Weighted-           Number            Weighted-
Range of                      outstanding         remaining        average             exercisable       average
exercisable prices            at 12/31/95         contractual life  exercise prices    at 12/31/95       exercise prices
<S>                                <C>                 <C>             <C>              <C>             <C>
- -------------------------------------------------------------------------------------------------------------------------
$5.00                               114                 1.6            $ 5.00             89            $ 5.00
- -------------------------------------------------------------------------------------------------------------------------
13.91-20.20                         187                 5.2             17.82             183             17.87
- -------------------------------------------------------------------------------------------------------------------------
22.50-25.00                         288                 7.7             24.73             112             24.92
- -------------------------------------------------------------------------------------------------------------------------
25.31-30.63                          43                 8.5             28.58               -                 -
- -------------------------------------------------------------------------------------------------------------------------
$5.00-30.63                         632                 5.9             19.39             384             16.93
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>

NOTE 11 INTERIM FINANCIAL INFORMATION (UNAUDITED)

The following information includes all adjustments, as well as
normal recurring items, which the Company considers necessary
for a fair presentation of 1995 and 1994 interim results of
operations.

<TABLE>
<CAPTION>
                                                             1995                                         1994
(millions of dollars)                               Quarter Ended                                Quarter Ended
- ---------------------------------------------------------------------------------------------------------------------------
                           March     June        Sept.     Dec.        Year    March     June    Sept.     Dec.        Year
                              31       30          30       31         1995       31       30      30        31        1994
- ----------------------------------------------------------------------------------------------------------------------------
<S>                       <C>       <C>        <C>       <C>       <C>         <C>      <C>      <C>      <C>      <C>
Net sales                 $327.8    $356.0     $298.5    $346.8    $1,329.1    $287.2   $312.1   $285.0   $339.1   $1,2334.1
- ----------------------------------------------------------------------------------------------------------------------------
Cost of sales              253.0     276.9      241.0     274.0     1,044.9     221.2    240.5    221.6    265.1       948.1
- ----------------------------------------------------------------------------------------------------------------------------
Depreciation                17.2      18.1       15.8      16.9        68.0     15.2     15.6      15.8     14.3        60.9
- ----------------------------------------------------------------------------------------------------------------------------
Selling, general and
   administrative expenses  26.4      26.3       22.1      23.0        97.8      23.0     22.0     24.6     22.5        92.1
- ----------------------------------------------------------------------------------------------------------------------------
Minority interest            0.4       0.6        0.5       0.5         0.5       2.0      0.2      0.3      0.4         1.4
- ----------------------------------------------------------------------------------------------------------------------------
Goodwill amortization        2.4       2.3        2.5       2.4         9.6       2.4      2.4      2.4      2.4         9.6 
- ----------------------------------------------------------------------------------------------------------------------------
Equity in affiliate earnings
  and other income          (4.2)     (5.9)      (4.7)     (3.8)      (18.6)     (2.9)    (3.9)    (3.5)    (0.3)      (10.6)
- ----------------------------------------------------------------------------------------------------------------------------
Earnings before interest
   expense and finance
  charges and income taxes  32.6      37.7       21.3      33.8       125.4      28.1     35.0     23.8     34.7       121.6
- ----------------------------------------------------------------------------------------------------------------------------
Interest expense and
  finance charges            3.5       3.6        3.6       3.5        14.2       3.5      3.4      3.4      3.6        13.9
- ----------------------------------------------------------------------------------------------------------------------------
Earnings before taxes       29.1      34.1       17.7      30.3(a)    111.2      24.6     31.6     20.4     31.1       107.7
- ----------------------------------------------------------------------------------------------------------------------------
Provision for income taxes  11.5      13.0        4.5       8.0(b)     37.0      10.9     12.8      8.4     11.2        43.3
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings              $ 17.6    $ 21.1     $ 13.2   $  22.3    $   74.2   $  13.7   $ 18.8   $ 12.0   $ 19.9   $    64.4
- ----------------------------------------------------------------------------------------------------------------------------
Earnings per share:
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings               $0.75    $ 0.90     $ 0.56   $  0.95    $   3.15   $  0.58   $ 0.81   $ 0.51     0.85   $    2.75
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>

(a) Includes favorable year-end adjustments of approximately $3.0 million 
    relating prmarily to inventories and accruals.
(b) Includes a favorable year-end adjustment of approximately $3.0 million 
    relating primarily to research and experimentation credits and foreign 
    credits.  









<PAGE>   33
Notes to Consolidated Financial Statements     
Borg-Warner Automotive, Inc. and Consolidated Subsidiaries

                          
NOTE 14     PENDING SALE OF NORTH AMERICAN MANUAL TRANSMISSION BUSINESS

In January 1996, the Company announced that its North American manual
transmission business was being offered for sale.  This decision was the result
of the Company only having one niche available in the declining North American
rear-wheel drive manual transmission market--sporty and performance cars. Other
applications are served by suppliers allied with OEMs. The sporty and
performance car niche suffered 20-30% declines in 1995, a trend viewed as
long-term by the Company. In 1995, the Company incurred an operating loss on
this business on net sales of $148 million. The Company's investment in the net
assets of the business approximates $60 million, including net working capital
of $21 million and excluding any retirement-related liabilities. Disposal of
the business is expected to be completed in 1996. Because the sale process is
in an early stage, no estimate can be made as to the range of gain or loss
reasonably likely to be incurred upon disposal of the business.

Selected Financial Data
Borg-Warner Automotive, Inc. and Consolidated Subsidiaries

<TABLE>
<CAPTION>
    Year Ended December 31,                                 1995            1994          1993          1992         1991       
- ------------------------------------------------------------------------------------------------------------------------------------
    <S>                                                  <C>             <C>              <C>            <C>          <C>  
    (millions of dollars, except per share data)                                                               
- ------------------------------------------------------------------------------------------------------------------------------------
    STATEMENT OF OPERATIONS DATA
- ------------------------------------------------------------------------------------------------------------------------------------
    Net sales                                            $1,329.1        $1,223.4        $  985.4     $    926.0      $   820.3
- ------------------------------------------------------------------------------------------------------------------------------------
    Cost of sales                                         1,044.9           948.4           769.3          755.2(a)       660.4    
- ------------------------------------------------------------------------------------------------------------------------------------
    Depreciation                                             68.0            60.9            57.9           64.3(a)        62.0(b)
- ------------------------------------------------------------------------------------------------------------------------------------
    Selling, general and administrative expenses             97.8            92.1            83.5           69.6           77.7
- ------------------------------------------------------------------------------------------------------------------------------------
    Minority interest                                         2.0             1.4             0.1           (1.3)          (1.3)
- ------------------------------------------------------------------------------------------------------------------------------------
    Goodwill amortization                                     9.6             9.6             9.7            9.7            9.7
- ------------------------------------------------------------------------------------------------------------------------------------
    Equity in affiliate earnings and other income           (18.6)          (10.6)          (10.6)          (6.9)          (9.9)
- ------------------------------------------------------------------------------------------------------------------------------------
    Interest expense and finance charges                     14.2            13.9            18.4           44.8(d)        53.8(d)
- -----------------------------------------------------------------------------------------------------------------------------------
    Provision for income taxes                               37.0            43.3            24.3            2.7            3.7
- ------------------------------------------------------------------------------------------------------------------------------------
    Earnings (loss) before cumulative effect
       of accounting change                                  74.2            64.4            32.8          (12.1)         (35.8)
- ------------------------------------------------------------------------------------------------------------------------------------
    Cumulative effect of accounting change(b)                   -                -         (130.8)             -            4.8
- ------------------------------------------------------------------------------------------------------------------------------------
    Net earnings (loss)                                  $   74.2        $   64.4        $  (98.0)    $   (12.1)      $   (31.0)
- ------------------------------------------------------------------------------------------------------------------------------------
    Earnings (loss) per share before cumulative
       effect of accounting changec                      $   3.15        $   2.75            $1.41    $    (0.53)     $       -
- ------------------------------------------------------------------------------------------------------------------------------------
    Cumulative effect of initial application of
       new accounting standard for postretire-                                                                    
       ment benefits, net of taxes per sharec                   -               -            (5.62)           -               -
- ------------------------------------------------------------------------------------------------------------------------------------
    Net earnings (loss) per sharec                       $   3.15         $  2.75        $   (4.21)   $   (0.53)      $       -
- ------------------------------------------------------------------------------------------------------------------------------------
    Average shares outstanding (thousands)(c)              23,562          23,424           23,284       23,005               -
- ------------------------------------------------------------------------------------------------------------------------------------
    Cash dividend declared per share                     $   0.60         $  0.45        $   0.125    $       -       $       -
- ------------------------------------------------------------------------------------------------------------------------------------
    BALANCE SHEET DATA (at end of period)
- ------------------------------------------------------------------------------------------------------------------------------------
    Total assets                                         $1,335.2        $1,240.3         $1,159.4    $ 1,074.2       $ 1,080.0
- ------------------------------------------------------------------------------------------------------------------------------------
    Total debt                                              134.7           107.3            159.6            -(d)            - (d)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(a) Cost of sales for 1992 included a $28.7 million charge for the write-off of
excess capacity and depreciation includes $7.3 million related to such capacity.
(b) Amounts reflect the adoption of SFAS No. 109 in 1991 and SFAS No. 106 in
1993. In 1991, depreciation increased by $11.2 million because of an adjustment
to fixed assets related to the adoption of SFAS No. 109. 
(c) See Note 1 to the Company's Consolidated Financial Statements for 
additional information with respect to per share calculations.
(d) Prior to the Spin-Off, interest was allocated to the Company on the
basis of the Company's relative operating investment compared to BW-Security's
overall capital investment (debt plus equity). Prior to the Spin-Off, all debt
was considered to be part of the BW-Security investment.

                                         Borg-Warner Automotive             31

<PAGE>   34
DIRECTORS

Matthias B. Bowman
Vice Chairman, Investment Banking
Merrill Lynch & Co.

John F. Fiedler
Chairman and Chief Executive Officer

Albert J. Fitzgibbons, III
Partner and Director
Stonington Partners, Inc.

Paul E. Glaske
Chairman, President and Chief Executive Officer
Blue Bird Corporation

Ivan W. Gorr
Chairman and Chief Executive Officer, Retired
Cooper Tire and Rubber Company

James J. Kerley
Chairman, Retired
Rohr, Inc.

Alexis P. Michas
Partner and Director
Stonington Partners, Inc.

Donald C. Trauscht
Chairman, Retired
Borg-Warner Security Corporation


COMMITTEES OF THE BOARD

EXECUTIVE COMMITTEE

John F. Fiedler
Albert J. Fitzgibbons, III
Alexis P. Michas
Donald C. Trauscht

FINANCE AND AUDIT COMMITTEE

James J. Kerley, Chairman
Ivan W. Gorr
Alexis P. Michas
Donald C. Trauscht

COMPENSATIAON COMMITTEE

Albert J. Fitzgibbons, III, Chairman
Paul E. Glaske
Alexis P. Michas
Donald C. Trauscht

EXECUTIVE OFFICERS

John F. Fiedler
Chairman and Chief Executive Officer

Gary P. Fukayama
Executive Vice President
President and General Manager,
Automatic Transmission Systems Corporation

Fred M. Kovalik
Executive Vice President
President and General Manager,
Powertrain Systems Corporation

Ronald M. Ruzic
Executive Vice President
President and General Manager,
Morse TEC Corporation

Terry A. Schroeder
Vice President
President and General Manager,
Control Systems Corporation

Robin J. Adams
Vice President and Treasurer

William C. Cline
Vice President and Controller

Christopher A. Gebelein
Vice President, Business Development

Laurene H. Horiszny
Vice President, Secretary and General Counsel

Geraldine Kinsella
Vice President, Human Resources


EXECUTIVE OPERATING COMMITTEE

Robin J. Adams
Leslie Cleveland Hague, Director,
Communications/Investor Relations
William C. Cline
Greg Dziegielewski, Director, Patents
John F. Fiedler
Gary P. Fukayama
Christopher A. Gebelein
Laurene H. Horiszny
Geraldine Kinsella
Fred M. Kovalik
Dennis W. Krol, Director, Taxes
Ronald M. Ruzic
Terry A. Schroeder


32                 Borg-Warner Automotive


<PAGE>   35
Corporate Information

COMPANY HEADQUARTERS
Borg-Warner Automotive, Inc.
200 South Michigan Avenue
Chicago, IL 60604
312-322-8500

STOCK LISTING
Borg-Warner Automotive shares are
listed and traded on the New York Stock Exchange. Ticker symbol: BWA. The stock
tables in most daily newspapers list the company shares as "BorgWAut."

<TABLE>
<CAPTION>

                         High        Low
<S>                     <C>          <C>
- --------------------------------------------
Fourth Quarter 1995     $32 1/4      $27 5/8
- --------------------------------------------
Third Quarter 1995       33 7/8       28 1/2
- --------------------------------------------
Second Quarter 1995      29 3/8       23 1/2
- --------------------------------------------
First Quarter 1995       26 1/8       22 3/8
- --------------------------------------------

                        High         Low
- --------------------------------------------
Fourth Quarter 1994     $25 1/2      $21 3/8
- --------------------------------------------
Third Quarter 1994       29 1/8       22 5/8
- --------------------------------------------
Second Quarter 1994      31 5/8       22 5/8
- --------------------------------------------
First Quarter 1994       34           26 3/8
- --------------------------------------------
</TABLE>

DIVIDENDS
The current dividend practice established by the directors is to declare
regular quarterly dividends. The last such dividend of 15 cents per share of
common stock was declared on January 16, 1996, payable February 15, 1996, to
stockholders of record on February 1, 1996. The current practice is subject to
review and change at the discretion of the Board of Directors.

STOCKHOLDERS
As of December 31, 1995, there were 163 holders of record.

ANNUAL MEETING OF STOCKHOLDERS
The 1996 annual meeting of stockholders will be held on Tuesday, April 23,
1996, beginning at 11:00 a.m. on the 19th floor of the company's headquarters
at 200 South Michigan Avenue in Chicago.

SECURITIES INFORMATION
Chemical Bank is the transfer agent,
registrar and dividend dispersing agent for Borg-Warner Automotive common
stock. Communications concerning stock transfer, change of address, lost stock
certificates or proxy statement for annual meeting should be directed to:

Chemical Mellon
Shareholder Services
450 West 33rd Street, 15th Floor
New York, NY 10001
800-851-9677

INVESTOR INQUIRIES
Financial investors and securities analysts requiring financial reports,
interviews or other information should contact the Communications/Investor
Relations Department at company headquarters, 312-322-8683.

FORM 10-K REPORT
A copy of the company's annual report
on Form 10-K, filed with the Securities and Exchange Commission, is available
to stockholders without charge by writing the Communications/Investor Relations
Department at the company headquarters or calling 312-322-8547 or 8607.

 
                     Designed and produced by Boller Coates & Neu, Chicago, Ill.
                     Photography by Anthony Arciero, Howard Ash and Andy Goodwin
                     Printed by Lake County Press, Waukegan, Ill.
         
                                                          Borg-Warner Automotive




<PAGE>   36
BORG-WARNER AUTOMOTIVE, INC.
200 South Michigan Avenue
Chicago, Illinois 60604
