BORG WARNER AUTOMOTIVE INC, S-3/A, 1997-02-20

BORG WARNER AUTOMOTIVE INC
S-3/A, 1997-02-20
MOTOR VEHICLE PARTS & ACCESSORIES

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 20, 1997

REGISTRATION NO. 333-20485

================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

------------------------------------

AMENDMENT NO. 1

FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

------------------------------------

BORG-WARNER AUTOMOTIVE, INC.
(Exact name of registrant as specified in its charter)

------------------------------------

<TABLE>
<S> <C>
DELAWARE 13-3404508
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification Number)
organization)
</TABLE>

200 SOUTH MICHIGAN AVENUE, CHICAGO, ILLINOIS 60604, (312) 322-8500
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)

------------------------------------

LAURENE H. HORISZNY, ESQ.
VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL
BORG-WARNER AUTOMOTIVE, INC.
200 SOUTH MICHIGAN AVENUE
CHICAGO, ILLINOIS 60604
(312) 322-8500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)

------------------------------------

COPIES TO:

<TABLE>
<S> <C>
David A. Katz, Esq. David J. Beveridge, Esq.
Wachtell, Lipton, Rosen & Katz Shearman & Sterling
51 West 52nd Street 599 Lexington Avenue
New York, New York 10019 New York, New York 10022
(212) 403-1000 (212) 848-4000
</TABLE>

------------------------------------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.

If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

------------------------------------

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
PROPOSED PROPOSED
TITLE OF EACH AMOUNT MAXIMUM MAXIMUM AMOUNT OF
CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) FEE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value... 5,134,534 shares $39.8125 $204,418,635 $61,946(3)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Includes 634,534 shares subject to the option of the Underwriters (as
defined herein) to purchase shares from the Selling Stockholders (as defined
herein) to cover over-allotments, if any.

(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) on the basis of the average high and low prices for
the Common Stock reported on the New York Stock Exchange Composite Tape on
January 20, 1997.

(3) Fee previously paid with filing of Registration Statement on January 27,
1997.

------------------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2

EXPLANATORY NOTE

All of the securities to be offered pursuant to this Registration Statement
are being sold by the Selling Stockholders and no proceeds will be received by
the Company.

This Registration Statement contains two forms of prospectus: one to be
used in connection with a United States and Canadian offering of the
registrant's Common Stock (the "U.S. Prospectus") and one to be used in
connection with a concurrent international offering of the Common Stock (the
"International Prospectus" and, together with the U.S. Prospectus, the
"Prospectuses"). The International Prospectus will be identical to the U.S.
Prospectus except that it will contain different front and back cover pages, a
different section entitled "Available Information" and a different section
entitled "Underwriting." The U.S. Prospectus is included herein and is followed
by those pages to be used in the International Prospectus which differ from
those in the U.S. Prospectus. Each of the pages for the International Prospectus
included herein has been labeled "Alternate Page for International Prospectus."

If required pursuant to Rule 424 of the General Rules and Regulations under
the Securities Act of 1933, as amended, copies of each of the Prospectuses in
the forms in which they are used will be filed with the Securities and Exchange
Commission.
<PAGE> 3

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT.
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME
THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO
BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN
WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED FEBRUARY 20, 1997

PROSPECTUS

4,000,000 SHARES

[BORG WARNER LOGO]

COMMON STOCK

------------------------

All of the shares of Common Stock offered hereby will be sold by certain
stockholders (the "Selling Stockholders") of Borg-Warner Automotive, Inc. (the
"Company"). See "Principal and Selling Stockholders." The Company will not
receive any proceeds from the sale of the shares offered hereby.

Of the 4,000,000 shares of Common Stock offered hereby, 3,200,000 shares are
being offered in the United States and Canada (the "U.S. Offering") by the U.S.
Underwriters (as defined herein) and 800,000 shares are being offered in a
concurrent offering outside the United States and Canada (the "International
Offering" and, together with the U.S. Offering, the "Offerings") by the
International Underwriters (as defined herein). The public offering price and
the underwriting discount per share are identical for the Offerings. See
"Underwriting."

The Common Stock is listed on the New York Stock Exchange, Inc. ("NYSE"),
under the symbol "BWA." On February 19, 1997, the last reported sale price of
the Common Stock on the NYSE was $40.375 per share. See "Price Range of Common
Stock."

FOR INFORMATION CONCERNING CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS, SEE "RISK FACTORS" COMMENCING ON PAGE 10.

------------------------

<TABLE>
<CAPTION>
=================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) SELLING
STOCKHOLDERS(2)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........................ $ $ $
- -------------------------------------------------------------------------------------------------
Total(3)......................... $ $ $
=================================================================================================
</TABLE>

(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities under the Securities Act of
1933, as amended. See "Underwriting."

(2) Before deducting expenses of the Offerings payable by the Company estimated
at $1,100,000.

(3) The Selling Stockholders have granted the U.S. Underwriters and the
International Underwriters options exercisable within 30 days after the date
hereof to purchase up to 408,498 and 102,125 additional shares of Common
Stock, respectively, solely to cover over-allotments, if any. If such
options are exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Selling Stockholders will be $ ,
$ , and $ , respectively. See "Underwriting."

------------------------

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about February , 1997.

------------------------

MERRILL LYNCH & CO.
LEHMAN BROTHERS
MORGAN STANLEY & CO.
INCORPORATED
------------------------

The date of this Prospectus is February , 1997.
<PAGE> 4

BORG-WARNER AUTOMOTIVE, INC.

<TABLE>
<CAPTION>
1995
CONSOLIDATED
SALES
PRODUCTS % OF TOTAL TOP VEHICLE PROGRAMS
--------------------------- ------------ ------------------------------------------
<S> <C> <C> <C>
Powertrain Systems................. - 4WD Transfer Cases $544.8* Ford Explorer
40% Ford Expedition
Ford F-Series and Ranger trucks
Range Rover
Mercedes AAV (1997)
Isuzu Big Horn (Japan)
SsangYong Musso (Korea)
Oldsmobile Bravada
Automatic Transmission Systems..... - Friction Plates $454.4 All GM mid/large-sized vehicles and
- One-Way Clutches 33% mini-vans
- Bands All Ford mid/large-sized vehicles and
- Precision Forged Sintered mini-vans
Products All Chrysler FWD 4-speed automatic
transmission vehicles
All Toyota automatic transmission
vehicles**
All Honda North American-manufactured
automatic transmission vehicles
All Ford, GM, BMW, Mercedes, Renault and
VW European-manufactured automatic
transmission vehicles
All Korean-manufactured automatic
transmission vehicles
Morse TEC.......................... - 4WD Chain $257.6 Ford modular engine family:
- Transmission Chain 19% Contour/Mystique, Taurus/Sable, Town
- Engine Timing Chain Car/Crown Victoria/Continental, and
- Engine Timing Chain F-Series truck
Systems All GM and Ford FWD automatic transmission
vehicles
Chrysler LH vehicles
Ford, GM and Chrysler 4WD sport utility
vehicles
Air/Fluid Systems.................. - Air Management Systems $107.6 All Chrysler vehicles and mini-vans
- Fuel Systems 8% Ford Explorer
- Transmission Systems Ford F-150 and Ranger trucks
Ford mid-sized vehicles (such as the
Taurus/Sable and Contour/Mystique)
Mercedes vehicles
</TABLE>

- ---------------

*Includes $148 million of sales from the Company's manual transmission business
sold in December 1996.
**Through the Company's 50%-owned unconsolidated Japanese joint venture
NSK-Warner K.K.

FORWARD-LOOKING STATEMENTS

CERTAIN STATEMENTS CONTAINED IN THIS PROSPECTUS UNDER THE CAPTIONS
"PROSPECTUS SUMMARY," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS -- BUSINESS STRATEGY," IN
ADDITION TO CERTAIN STATEMENTS CONTAINED ELSEWHERE IN THIS PROSPECTUS, ARE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 AND ARE THUS PROSPECTIVE. SUCH FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM FUTURE RESULTS EXPRESSED,
PROJECTED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FACTORS ARE
DISCUSSED UNDER THE HEADING "RISK FACTORS," BEGINNING ON PAGE 8 OF THIS
PROSPECTUS, AND PROSPECTIVE INVESTORS ARE URGED TO CAREFULLY CONSIDER SUCH
FACTORS.
------------------------

IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NYSE OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

2
<PAGE> 5

[Top half of gatefold page: Pictures of the Company's products from each of
its four operating groups: Powertrain Systems, Automatic Transmission Systems,
Morse TEC and Air/Fluid Systems along with textual descriptions.]

[Bottom half of gatefold page: Picture of the Borg-Warner Indianapolis 500
Trophy and a schematic of an automobile displaying locations of some of the
Company's products.]

<PAGE> 6

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere or incorporated by reference in this Prospectus. Unless indicated
otherwise, the information contained in this Prospectus assumes that the
Underwriters' over-allotment options are not exercised. Unless the context
otherwise requires, references in this Prospectus to the "Company" refer to
Borg-Warner Automotive, Inc., a Delaware corporation and its subsidiaries,
references to the "Common Stock" refer to shares of Common Stock, $.01 par
value, of the Company, and references to the "Shares" refer to the 4,000,000
shares of Common Stock being offered in the Offerings.

THE COMPANY

The Company is a leading, global Tier I supplier of highly engineered
systems and components, primarily for automotive powertrain applications. These
products are manufactured and sold worldwide, primarily to original equipment
manufacturers ("OEMs") of passenger cars, sport utility vehicles and light
trucks. The Company, which operates 36 manufacturing facilities in 12 countries
serving the North American, European and Asian automotive markets, is an
original equipment supplier to every major OEM in the world. The Company has
achieved its current leadership position and is well positioned to benefit from
emerging trends in the global automotive markets as a result of several key
competitive strengths, including: (i) the ability to supply its customers
globally; (ii) demonstrated technological expertise in developing highly
engineered systems and components; (iii) strong relationships with all major
OEMs; (iv) significant market shares in a number of its key products; and (v) a
strong presence in and focus on high-growth vehicle categories and platforms.

The Company's products fall into four operating groups: Powertrain Systems,
Automatic Transmission Systems, Morse TEC and Air/Fluid Systems (formerly known
as Control Systems). The Powertrain Systems group accounted for $544.8 million
(40%) of 1995 consolidated sales before inter-business eliminations. Its primary
products include four-wheel and all-wheel drive transfer cases. The Company
supplies substantially all of the four-wheel drive ("4WD") transfer cases for
Ford Motor Company ("Ford"), including those installed on the Ford Explorer, the
best selling sport utility vehicle in the United States, the Ford Expedition and
the Ford F-150 pickup truck. The Company has designed and developed an exclusive
4WD Torque-On-Demand(TM) ("TOD(TM)") transfer case, available on the Ford
Explorer and on the new Ford Expedition, which allows vehicles to automatically
shift from two-wheel drive to 4WD when electronic sensors indicate it is
necessary.

The Automatic Transmission Systems group accounted for $454.4 million (33%)
of 1995 consolidated sales before inter-business eliminations. Its products
include friction plates, transmission bands, one-way clutches and torque
converters for automatic transmissions. The Company is a supplier to virtually
every major automatic transmission manufacturer in the world. The Company's
50%-owned joint venture in Japan, NSK-Warner Kabushiki Kaisha ("NSK-Warner"),
with 1995 sales of $337 million, is a leading producer of friction plates and
one-way clutches in Japan.

The Morse TEC group accounted for $257.6 million (19%) of 1995 consolidated
sales before inter-business eliminations. Morse TEC manufactures chain and chain
systems including HY-VO(R) front-wheel drive ("FWD") and 4WD chain, MORSE
GEMINI(TM) Transmission Chain Systems, timing chain and timing chain systems,
crankshaft and camshaft sprockets, chain tensioners and snubbers. The Company is
a supplier to every major manufacturer that uses chain for such applications.

The Air/Fluid Systems group accounted for $107.6 million (8%) of 1995
consolidated sales before inter-business eliminations. The Company's air and
fluid management products include mechanical, electromechanical and electronic
components and systems used for engine and emission control, fuel and vapor
management, electronically controlled automatic transmissions and steering and
suspension systems. The Air/Fluid Systems group is the Company's fastest growing
group and has grown from $52.1 million of consolidated sales in 1991 to $107.6
million in 1995 (a compound annual growth rate of 20%). On June 17, 1996, the
Company acquired the operations and substantially all of the operating assets of
the Holley Automotive, Coltec Automotive and Performance Friction Products
divisions (collectively, the "Coltec Divisions") of Coltec Industries Inc. for
$283 million in cash (the "Coltec Acquisition"). The Coltec

3
<PAGE> 7

Divisions have a broad base of air and fluid management products, established
OEM relationships, and three technologically advanced manufacturing facilities.
These operations produced combined sales of $255 million in 1995. As a result of
the Coltec Acquisition, the Air/Fluid Systems group will comprise a
significantly greater portion of the Company's revenues. The Coltec Acquisition
was initially financed with borrowings under the Company's revolving credit
facility, which was refinanced in part by the Company's $150 million 7% Senior
Note offering (the "Senior Note Offering") completed in November 1996.

The Company believes that it is a leading supplier to major OEMs worldwide
in each of its four product groups. For Powertrain Systems, the Company believes
that it is the world's leading independent manufacturer of 4WD transfer cases,
manufacturing approximately 847,000 transfer cases in 1995, principally for
Ford. The Company also believes that, including its NSK-Warner joint venture,
the Automatic Transmission Systems group is a leading manufacturer and supplier
of friction elements and one-way clutches in North America, Europe and Asia.
Similarly, the Morse TEC group manufactures transmission chains for FWD
transmissions and 4WD transfer cases for every major OEM who uses chain for such
applications. Finally, the Coltec Acquisition positions the Air/Fluid Systems
group to become a leading supplier of air and fluid management systems with over
80% of its 1995 pro forma sales to the three largest North American OEMs --
Ford, General Motors Corporation ("GM") and Chrysler Corporation ("Chrysler").
As a result of the Coltec Acquisition, the Air/Fluid Systems group will almost
double the Company's sales to Chrysler.

The Company's business objective is to maintain its position as one of the
leading independent suppliers of highly engineered systems and components for
automotive powertrain applications. The Company pursues this objective in
several ways. First, the Company seeks to maintain its position and reputation
as a technological leader in its product groups. Second, the Company seeks to
maintain its price competitiveness by continuing to improve the efficiency of
its operations, including its production processes. Third, the Company believes
that it is well positioned to take advantage of certain trends within the global
automotive market. The Company believes that these trends include (i) a growing
demand for automatic transmissions with a greater number of speeds (the
Company's component content in an automatic transmission rises as the number of
speeds increases), (ii) a growing demand for 4WD vehicles, (iii) an increasing
demand for overhead cam engines, (iv) a growing demand for automatic
transmissions and air and fluid management systems in Europe and in Asia, (v)
the increasing tendency of OEMs to purchase integrated systems rather than
individual components, and (vi) demand in markets outside the United States for
air and fluid management products, particularly emission controls. Fourth, the
Company continues to pursue strategic joint ventures and selected acquisitions
within its existing or related lines of business. The Company continues to
maintain a strong presence in Europe and Asia, which has been further
strengthened by its recent acquisitions and joint ventures. The Company believes
its global presence will enable it to better withstand the effect of cyclical
downturns in the United States automotive market, while serving its OEM
customers as a global supplier.

Over the past several years, the Company has remained focused on and
committed to achieving its business objective. Sales have increased from $820
million in 1991 to $1.33 billion in 1995, reflecting a 12.8% compound annual
growth rate and outperforming the approximately 4% compound annual growth rate
of North American vehicle sales. The Company's sales outside the United States
are increasing and in 1995 represented 16% of consolidated sales. Including
unconsolidated joint ventures, 1995 sales outside the United States constituted
33% of total sales. The Company's sales have increased at a greater rate than
market growth as a result of higher content per vehicle and increased market
share achieved during a period of OEM supplier consolidation that has benefited
the Company. The Company's emphasis on providing systems and introduction of new
technologies has enabled it to substantially increase its content per vehicle.
For example, the timing system on the Ford modular engine consists of up to four
chains as well as sprockets, snubbers and tensioners as compared with a single
timing chain on the previous generation pushrod engine. Such sales increases
have been accompanied by increases in profitability. Over the same period,
earnings before interest and taxes ("EBIT") increased from $22 million in 1991
to $125 million in 1995, with EBIT margins rising from 2.6% in 1991 to 9.4% in
1995, and sales per employee rising from $128,000 in 1991 to $163,000 in 1995.

The Company's executive offices are located at 200 South Michigan Avenue,
Chicago, Illinois 60604, telephone (312) 322-8500.

4
<PAGE> 8

RECENT DEVELOPMENTS

On December 31, 1996, the Company completed the sale of its North American
manual transmission manufacturing business to Transmisiones y Equipos Mecanicos
S.A. de C.V. Under the terms of the agreement the Company received $20.3 million
in cash at closing for certain assets of the business and will receive
approximately $20 million during the transition period (which is expected to
last 18 months during which the business will be transferred to its new
location) for the value of inventory and certain services to be provided by the
Company to the purchaser. The Company took a one-time after-tax charge of $35
million or $1.49 per share, in the fourth quarter as a result of the sale.

On January 17, 1997, the Company announced that it had been selected to
design and produce a complete engine timing chain system for Chrysler's new
overhead cam 4.7 liter, V8 engine. The Company expects to begin producing the
timing systems in late 1998 with volumes expected to eventually reach 425,000
timing systems annually.

On February 6, 1997, the Company announced earnings for the fourth quarter
and full year 1996. The Company reported 1996 income of $41.8 million, or $1.77
per share, after giving effect to a $35 million after-tax charge, or $1.49 per
share, related to the sale of the Company's North American manual transmission
business. Excluding this one-time charge, the Company earned $76.8 million, or
$3.26 per share, in 1996 compared with $74.2 million, or $3.15 per share, in
1995. Full year results also included a loss from the operation of the North
American manual transmission business of $.46 per share, compared with a loss of
$.09 per share for 1995.

In 1996, the Company's net sales totaled $1.54 billion, a 16% increase over
1995. Excluding the North American manual transmission business, which was sold,
the Coltec Acquisition and an acquisition in Tulle, France at December 31, 1995
("Tulle"), sales increased by 10%. Each of the Company's four operating groups
reported increased sales for 1996. Powertrain Systems' sales increased by 3% to
$562.7 million. Excluding the manual transmission business, the increase was
17%. The group experienced continued growth with respect to its 4WD transfer
cases, particularly for Ford applications such as the F-150 pick-up truck and
the Expedition. In 1996, the Company's Automatic Transmission Systems' sales
increased 6% to $481.8 million. In 1996, the Company's Morse TEC's sales
improved by 7% due to gains in both engine timing systems, particularly for
Ford, and the Morse GEMINI(TM) transmission system for GM FWD vehicles. In 1996,
the Company's Air/Fluid Systems' sales increased by 141% as a result of the
Coltec Acquisition.

For the fourth quarter, the Company reported a loss of $11.1 million, or
$.47 per share, as a result of the loss on the manual transmission business
sale. Excluding this loss, the Company earned $23.9 million, or $1.02 per share,
an increase of 7% compared with 1995. Fourth quarter results also included a
loss from the operation of the manual transmission business of $.15 per share,
compared with a loss of $.05 per share for the fourth quarter of 1995.

The Company's net sales for the fourth quarter were $421.7 million, an
increase of 22% over the fourth quarter of 1995. Excluding the manual
transmission business, the Coltec Acquisition and the acquisition of Tulle,
sales increased by 5%. North American vehicle production declined approximately
4% from the fourth quarter of 1995. The Company's fourth quarter sales levels
were impacted by the GM strike in October and the decision by substantially all
North American producers to limit production over the last two weeks of
December.

5
<PAGE> 9

The following table shows the unaudited statement of operations:

<TABLE>
<CAPTION>
THREE MONTHS
ENDED TWELVE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------- ---------------------
1996 1995 1996 1995
------ ------ -------- --------
(MILLIONS OF DOLLARS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C>
Net sales............................................ $421.7 $346.8 $1,540.1 $1,329.1
Cost of sales........................................ 322.4 274.0 1,205.5 1,044.9
Depreciation......................................... 17.6 16.9 71.3 68.0
Selling, general and administrative expenses......... 32.9 23.0 122.7 97.8
Minority interest.................................... 0.7 0.5 2.6 2.0
Goodwill amortization................................ 4.1 2.4 13.5 9.6
Loss on sale of business(1).......................... 61.5 -- 61.5 --
Equity in affiliate earnings and other (income)
expense............................................ 0.1 (3.8) (13.1) (18.6)
------ ------ -------- --------
Earnings (loss) before interest expense and taxes.... (17.6) 33.8 76.1 125.4
Interest expense and finance charges................. 7.4 3.5 21.4 14.2
Provision (benefit) for income taxes................. (13.9) 8.0 12.9 37.0
------ ------ -------- --------
Net earnings (loss).................................. $(11.1) $ 22.3 $ 41.8 $ 74.2
====== ====== ======== ========
Net earnings (loss) per share........................ $(0.47) $ 0.95 $ 1.77 $ 3.15
Average shares outstanding (in millions)............. 23.6 23.7 23.6 23.6
</TABLE>

- ---------------

(1) The Company recorded a pre-tax loss on the sale of the North American manual
transmission business of $61.5 million, which net of tax benefit of $26.5
million, results in an after-tax charge of $35 million.

The following table shows sales by operating group:

<TABLE>
<CAPTION>
FOURTH FOURTH TWELVE TWELVE
QUARTER QUARTER % MONTHS MONTHS %
1996 1995 CHANGE 1996 1995 CHANGE
------- ------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Powertrain System(1).............. $ 151.7 $ 134.4 12.9 % $ 562.7 $ 544.8 3.3 %
Automatic Transmission Systems.... 116.7 128.2 (9.0) 481.8 454.4 6.0
Morse TEC......................... 71.7 63.8 12.4 276.5 257.6 7.3
Air/Fluid Systems................. 93.4 29.0 222.1 258.8 107.6 140.5
------ ------ ----- -------- -------- -----
Subtotal.......................... 433.5 355.4 22.0 1,579.8 1,364.4 15.8
Eliminations...................... (11.8) (8.6) 37.2 (39.7) (35.3) 12.5
------ ------ ----- -------- -------- -----
Total............................. $ 421.7 $ 346.8 21.6 % $1,540.1 $1,329.1 15.9 %
====== ====== ===== ======== ======== =====
</TABLE>

- ---------------

(1) Included are sales from the North American manual transmission business of
$19.8 million and $99.6 million for the fourth quarter and full year of
1996, and $27.2 million and $148.6 million for the respective periods of
1995.

6
<PAGE> 10

THE OFFERINGS

<TABLE>
<S> <C> <C>
Common Stock offered by the Selling Stockholders:
U.S. Offering............................................ 3,200,000 shares
International Offering................................... 800,000 shares
--------
Total.................................................... 4,000,000 shares

Total Outstanding Common Stock............................. 23,602,102 shares(1)

Dividend policy............................................ $0.15 per share, per quarter. See
Dividend Policy."
NYSE Symbol................................................ "BWA"
</TABLE>

- ---------------

(1) As of February 14, 1997. Includes 59,000 shares of the Company's Non-Voting
Common Stock, $.01 par value (the "Non-Voting Common Stock"), which are
convertible into Common Stock on a share-for-share basis; none of which are
expected to be converted into Common Stock in connection with the
Offerings. See "Description of Capital Stock." Excludes 464,609 shares of
Common Stock issuable upon exercise of options held by employees of the
Company and Borg-Warner Security Corporation ("BW-Security").

RISK FACTORS

For information concerning certain factors that should be considered by
prospective investors, see "Risk Factors" beginning on page 10.

7
<PAGE> 11

SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION

The following summary historical consolidated financial information for the
Company for the five years ended December 31, 1995 and for the nine-month
periods ended September 30, 1996 and 1995 has been derived from the consolidated
financial statements of the Company for such periods. The information as of
December 31, 1991, 1992, 1993, 1994 and 1995 is derived from the audited
financial statements of the Company. The information for the nine-month periods
ended September 30, 1996 and 1995 is not audited, but in the opinion of
management is a fair presentation of such information. This information is
qualified by reference to the historical consolidated financial statements of
the Company incorporated by reference herein. See "Incorporation of Certain
Information by Reference."

<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996(f)
------- ------- ------- ------- ------- ------- -------
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales............................. $ 820.3 $ 926.0 $ 985.4 $1,223.4 $1,329.1 $ 982.3 $1,118.4
Cost of sales......................... 660.4 755.2(a) 769.3 948.4 1,044.9 771.0 883.1
Depreciation.......................... 62.0(b) 64.3(a) 57.9 60.9 68.0 51.1 53.7
Selling, general and administrative
expense............................. 77.7 69.6 83.5 92.1 97.8 74.8 89.8
Minority interest..................... (1.3) (1.3) 0.1 1.4 2.0 1.5 1.9
Goodwill amortization................. 9.7 9.7 9.7 9.6 9.6 7.2 9.4
Equity in affiliate earnings and other
income.............................. (9.9) (6.9) (10.6) (10.6) (18.6) (14.8) (13.2)
Interest expense and finance
charges............................. 53.8(d) 44.8(d) 18.4 13.9 14.2 10.7 14.0
Provision for income taxes............ 3.7 2.7 24.3 43.3 37.0 29.0 26.8
-------- -------- -------- -------- -------- -------- --------
Earnings (loss) before cumulative
effect of accounting change......... (35.8) (12.1) 32.8 64.4 74.2 51.8 52.9
Cumulative effect of change in
accounting(b)....................... 4.8 -- (130.8) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net earnings (loss)................... $ (31.0) $ (12.1) $ (98.0) $ 64.4 $ 74.2 $ 51.8 $ 52.9
======== ======== ======== ======== ======== ======== ========
Earnings (loss) per share before
cumulative effect of accounting
change(b)........................... -- $ (0.53) $ 1.41 $ 2.75 $ 3.15 $ 2.20 $ 2.25
Net earnings (loss) per share(c)...... -- $ (0.53) $ (4.21) $ 2.75 $ 3.15 $ 2.20 $ 2.25
Average shares outstanding
(thousands)(c)...................... -- 23,005 23,284 23,424 23,562 23,522 23,543
Cash dividend declared per share...... -- -- 0.125 0.45 0.60 0.45 0.45
OTHER OPERATING DATA
Research and development.............. $ 26.9 $ 26.8 $ 25.2 $ 33.8 $ 36.7 $ 27.5 $ 37.7
Capital expenditures.................. 53.9 47.7 65.5 98.8 92.5 57.1 56.5
Number of full-time employees
(thousands)......................... 6.4 6.7 6.6 7.8 8.6 8.2 9.8
Sales per full-time employee
(thousands)......................... $ 128.0 $ 139.0 $ 149.0 $ 158.0 $ 163.0 $ 164.0 $ 167.0
BALANCE SHEET DATA (AT END OF PERIOD)
Net property, plant and equipment..... $ 463.5 $ 412.9 $ 418.3 $ 462.3 $ 523.0 $ 499.3 $ 547.9
Total assets.......................... 1,080.0 1,074.2 1,159.4 1,240.3 1,335.2 1,308.7 1,666.1
Total debt............................ --(d) --(d) 159.6 107.3 134.7 159.0 395.0
BW-Security investment(e)............. 743.5 728.2 -- -- -- -- --
Stockholders' equity(e)............... -- -- 459.1 534.9 600.0 582.9 636.3
</TABLE>

(footnotes on following page)

8
<PAGE> 12

- ---------------

(a) Cost of sales for 1992 included a $28.7 million charge for the write-off of
excess capacity and depreciation included $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 in the
Company's Annual Report (as defined herein) for additional information with
respect to per share calculations.

(d) Prior to the spin-off of the Company by BW-Security on January 27, 1993 (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.

(e) Prior to the date of the Spin-Off, the Company was wholly owned by
BW-Security and its stockholders' equity is reported as BW-Security
investment. After the Spin-Off, the Company's equity is reported as
stockholders' equity.

(f) Assuming the acquisition of the Coltec Divisions had occurred on January 1,
1996, pro forma net sales for the nine months ended September 30, 1996 would
have been $1,247.3 million, pro forma net earnings would have been $57.7
million and pro forma net earnings per share would have been $2.45. The pro
forma financial information is not necessarily indicative of the results of
operations which would have occurred had the transaction been consummated on
January 1, 1996, nor is it indicative of results of operations which may
occur in the future.

9
<PAGE> 13

RISK FACTORS

The following factors, as well as the information contained elsewhere or
incorporated by reference in this Prospectus, should be carefully considered by
prospective investors before any decision is made to invest in the Shares.

AUTOMOTIVE INDUSTRY CYCLICALITY AND CONDITIONS

The Company's principal operations are directly related to domestic and
foreign automotive production. Automotive sales and production are cyclical and
dependent upon general economic conditions and other factors. As compared to
1996, the Company expects automotive production in 1997 to be flat or to decline
slightly in North America and Europe, and to improve slightly in Asia. Any
significant reduction in automotive production would have an adverse effect on
the level of the Company's sales to OEMs and the Company's financial position
and operating results.

All three of the Company's primary North American customers, GM, Ford and
Chrysler, have major contracts with the United Automobile, Aerospace and
Agricultural Implement Workers of America (the "UAW") which were renewed in
1996. Because of the United States OEMs' dependence on a single union, labor
difficulties and work stoppages at OEMs' facilities have an impact on the
Company. For example, a 17-day March 1996 work stoppage in two Dayton, Ohio GM
plants resulted in the concomitant shutdown of the Company's production lines
dedicated to the manufacture of products for GM vehicles. Although the Company
took steps to minimize the consequences of the work stoppage, the Company lost
$8.5 million in revenue as a result of the 17-day strike.

Many of the Company's products are currently used exclusively in sport
utility vehicles and light trucks, the most rapidly growing segment in the
overall automotive market. Any significant reduction in production in this
market segment would have an adverse effect on the level of the Company's sales
to OEMs and the Company's financial position and operating results.

COMPETITION

The Company competes worldwide with a number of other manufacturers and
distributors that produce and sell similar products. Price, quality and
technological innovation are the primary elements of competition. The Company's
competitors include vertically integrated units of the Company's major OEM
customers, as well as a large number of independent domestic and international
suppliers. A number of these companies are larger and have greater resources
than the Company. There can be no assurance that the Company's business will not
be adversely affected by increased competition in the markets in which it
operates.

The competitive environment has also changed dramatically over the past few
years as the Company's traditional United States OEM customers, faced with
intense international competition, have expanded their worldwide sourcing of
components. As a result, the Company has experienced competition from suppliers
in other parts of the world that enjoy economic advantages such as lower labor
costs, lower health care costs, and, in some cases, export subsidies and/or raw
materials subsidies.

There is also substantial and continuing pressure on the OEMs to reduce
costs, including costs associated with outside suppliers such as the Company.
Although OEMs have indicated that they will continue to rely on outside
suppliers, a number of the Company's major OEM customers manufacture products
for their own use that compete with the Company's products and these OEMs could
elect to manufacture such products for their own use in place of the products
now supplied by the Company. The Company believes that its ability to develop
proprietary new products and to control its own costs will allow it to remain
competitive. However, there can be no assurance that the Company will be able to
improve or maintain its gross margins on product sales to OEMs or that the
recent trend by OEMs towards increased outsourcing will continue.

Annual price reductions to OEM customers appear to have become a permanent
feature of the Company's business environment. Price reductions net of economic
cost increase adjustments granted in 1995 totalled $8 million. To maintain its
profit margins, the Company, among other things, seeks price reductions from its
own suppliers, adopts improved production processes to increase manufacturing
efficiency, updates

10
<PAGE> 14

product designs to reduce costs and develops new products whose benefits support
increased pricing. The Company's ability to pass through increased raw material
costs to its OEM customers is also limited, with cost recovery less than 100%
and often on a delayed basis. There can be no assurance that the Company will be
able to reduce costs in an amount equal to the annual price reductions and the
increase in raw material costs.

RELIANCE ON MAJOR CUSTOMERS

The Company's worldwide sales in 1995 to Ford and GM constituted
approximately 41% and 25%, respectively, of its 1995 consolidated sales. The
corresponding percentages for 1994 were 39% and 27%. No other customer accounted
for more than 10% of the Company's consolidated sales in either 1995 or 1994.
After giving effect to the Coltec Acquisition, sales to Ford and GM would have
been approximately 40% and 26%, respectively, of 1995 consolidated sales. Sales
to Chrysler constituted approximately 9% of total consolidated sales in 1995,
and, pro forma for the Coltec Acquisition, sales to Chrysler would have
constituted approximately 13% of 1995 consolidated sales. The Company's 1995
consolidated sales do not include the approximately $394 million of sales made
by the Company's unconsolidated joint ventures. If sales from unconsolidated
joint ventures were included in 1995 consolidated sales, worldwide sales to
Toyota Motor Corporation and its affiliates ("Toyota") would be approximately
10% of such sales.

Although the Company has had long-standing relationships with each of Ford,
GM, Chrysler and Toyota and sells a wide variety of products to various
divisions of each company globally, if the Company lost any significant portion
of its sales to any of these customers, it would have a material adverse effect
on the financial condition and results of operations of the Company.

LABOR RELATIONS

Approximately 50% of the Company's domestic hourly employees are unionized.
The Company's two most significant domestic collective bargaining agreements
expire in March 1998 for its Muncie, Indiana plant, and in October 1998 for its
Ithaca, New York plant. While the Company believes that its relations with its
employees are good, a prolonged dispute could have a material adverse effect on
the Company.

UNFUNDED PENSION OBLIGATIONS

The Company has a substantial unfunded pension obligation. On December 31,
1995, the present values of the Company's projected benefit obligations and
accumulated benefit obligations with respect to underfunded plans were $221.5
million and $217.7 million, respectively. The fair value of the Company's
pension plan assets with respect to such plans as of December 31, 1995 was
$135.7 million. The resulting unfunded portion of $85.8 million at December 31,
1995 compared with an unfunded portion of $77.5 million at December 31, 1994
(based on the Company's projected benefit obligations on the respective dates).
This increase was due in part to a change in the discount rate from 8.5% in 1994
to 7.25% in 1995. Had the discount rate remained 8.5%, the unfunded portion as
of December 31, 1995 would have been $20.8 million lower, or $65.0 million. Of
the 1995 unfunded portion, approximately $29.4 million relates to pension
obligations for the Company's German subsidiary, which does not require funding.
The Company's long-term objective is to fund its entire pension obligation with
funds that are generated from operations, although there can be no assurance
that this will occur.

In connection with the Spin-Off, the Company and BW-Security entered into
an agreement with the Pension Benefit Guaranty Corporation (the "PBGC")
resolving certain issues with respect to the Company's pension obligations.
Pursuant to such agreement, the Company paid $17.5 million in 1993 to a
specified underfunded plan of the Company and agreed to pay to such plan, in
each year from 1993 through 2002, $1 million in excess of amounts that the
Company would otherwise be required to contribute under statutory or contractual
obligations. BW-Security also agreed to become the sponsor of two plans covering
certain employees of certain discontinued automotive operations, and the Company
will have no further liability for such plans. In addition, the Company agreed
to file certain reports and financial statements with the PBGC and to give the
PBGC advance notice of certain significant asset sales.

11
<PAGE> 15

ENVIRONMENTAL REGULATIONS AND PROCEEDINGS

The Company's operations are subject to federal, state, local and foreign
laws and regulations governing, among other things, emissions to air, discharge
to waters and the generation, handling, storage, transportation, treatment and
disposal of waste and other materials. The Company believes that its business,
operations and facilities have been and are being operated in compliance in all
material respects with applicable environmental and health and safety laws and
regulations, many of which provide for substantial fines and criminal sanctions
for violations. However, the operation of automotive parts manufacturing plants
entails risks in these areas and there can be no assurance that the Company will
not incur material costs or liabilities. In addition, potentially significant
expenditures could be required in order to comply with evolving environmental
and health and safety laws, regulations or requirements that may be adopted or
imposed in the future.

The Company believes that the overall impact of compliance with regulations
and legislation protecting the environment will not have a material effect on
its future financial position or results of operations, although no assurance
can be given. Capital expenditures and expenses in 1995 attributable to
compliance with such regulations and legislation were not material.

The Company and certain of its current and former direct and indirect
corporate predecessors, subsidiaries and divisions have been identified by the
United States Environmental Protection Agency and certain state environmental
agencies and private parties as potentially responsible parties ("PRPs") at 27
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 clean-up and other remedial activities at
these sites. Responsibility for clean-up and other remedial activities at a
Superfund site is typically shared among PRPs based on an allocation formula.

Based on information available to the Company which, in most cases,
includes: an estimate of allocation of liability among PRPs; the probability
that other PRPs, many of whom are large, solvent public companies, will fully
pay the 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 with a balance of approximately $9.5 million
at September 30, 1996. The Company expects this amount to be expended over the
next three to five years.

In connection with the Spin-Off, the Company and BW-Security entered into a
Distribution and Indemnity Agreement which provided for, among other matters,
certain cross-indemnities designed principally to place financial responsibility
for the liabilities of businesses conducted by BW-Security and its subsidiaries
with BW-Security and financial responsibility for liabilities of the Company or
related to its automotive businesses with the Company. The Company has been
advised that BW-Security believes that the Company is responsible for certain
liabilities relating to environmental matters retained by BW-Security at the
time of the Spin-Off. BW-Security has requested indemnification from the Company
for past costs of approximately $1.6 million and for future costs related to
these environmental matters. At the time of the Spin-Off, BW-Security maintained
a letter of credit for approximately $9 million with respect to the principal
portion of such environmental matters. Although there can be no assurance, based
upon information currently available to the Company, the Company does not
believe that it is required to indemnify BW-Security under the Distribution and
Indemnity Agreement with respect to such liabilities. The parties have agreed to
submit this matter to binding arbitration which is expected to be completed
during 1997. The Company does not currently have information sufficient to
determine what its liability would be if it is ultimately determined that it is
required to indemnify BW-Security with respect to such liabilities.

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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Other Financial Condition
Matters -- Environmental."

12
<PAGE> 16

USE OF PROCEEDS

The Selling Stockholders will receive all of the proceeds from the
Offerings and the Company will receive no proceeds. See "Principal and Selling
Stockholders."

PRICE RANGE OF COMMON STOCK

The Common Stock is traded on the NYSE under the symbol "BWA." The
following table sets forth on a per share basis, for the period indicated, the
high and low sales prices of the Common Stock as reported on the NYSE Composite
Tape and dividends paid.

<TABLE>
<CAPTION>
HIGH LOW DIVIDEND
------- ------- --------
<S> <C> <C> <C>
1994
First Quarter................................................. $34.000 $26.375 $0.125
Second Quarter................................................ $31.625 $22.625 $0.15
Third Quarter................................................. $29.125 $22.625 $0.15
Fourth Quarter................................................ $25.500 $21.625 $0.15
1995
First Quarter................................................. $26.125 $22.375 $0.15
Second Quarter................................................ $29.375 $23.500 $0.15
Third Quarter................................................. $33.875 $28.500 $0.15
Fourth Quarter................................................ $32.250 $27.625 $0.15
1996
First Quarter................................................. $33.625 $28.375 $0.15
Second Quarter................................................ $43.000 $33.625 $0.15
Third Quarter................................................. $40.375 $34.000 $0.15
Fourth Quarter................................................ $40.875 $33.250 $0.15
1997
First Quarter (through February 19)........................... $42.500 $38.375 $0.15
</TABLE>

On February 19, 1997, the closing price of the Common Stock on the NYSE
Composite Tape was $40.375 per share. Prospective investors should obtain a
current quote on the shares of Common Stock. As of February 14, 1997, there were
approximately 130 holders of record of Common Stock.

DIVIDEND POLICY

A dividend of $0.15 per share was paid on February 17, 1997 to stockholders
of record as of February 3, 1997. While the Company currently expects that
comparable cash dividends will continue to be paid in the future, the dividend
policy is subject to review and change at the discretion of the Board.

13
<PAGE> 17

CAPITALIZATION

The following table sets forth the actual capitalization of the Company at
September 30, 1996 and as adjusted for the Senior Note Offering in November
1996. The proceeds from the Senior Note Offering were used to refinance debt
incurred under the Company's revolving credit facility to finance the Coltec
Acquisition. As of February 14, 1997, the Company had total availability of $325
million under its $350 million credit facility. This table should be read in
conjunction with "Selected Historical Financial Data" and the historical
consolidated financial statements of the Company appearing in the Company's
Annual Report and the Company's Form 10-Q for the quarter ended September 30,
1996, which are incorporated by reference herein. See "Incorporation of Certain
Information by Reference." The Company will not receive any of the proceeds from
the Offerings.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------
ACTUAL AS ADJUSTED
------ -----------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Short-term debt:
Bank borrowings...................................................... $ 22.9 $ 22.9
Bank term loans...................................................... 20.0 20.0
Capital lease liability.............................................. 0.1 0.1
------ ------
Total short-term debt............................................. $ 43.0 $ 43.0
====== ======
Long-term debt:
Bank borrowings...................................................... $278.1 $ 128.1
Bank term loans...................................................... 68.2 68.2
Capital lease liability.............................................. 5.7 5.7
Senior notes......................................................... -- 150.0
------ ------
Total long-term debt.............................................. $352.0 $ 352.0
====== ======
Stockholders' equity:
Common stock......................................................... $ 0.2 $ 0.2
Other stockholders' equity........................................... 636.1 636.1
------ ------
Total stockholders' equity........................................ $636.3 $ 636.3
====== ======
</TABLE>

14
<PAGE> 18

SELECTED HISTORICAL FINANCIAL DATA

The following table sets forth selected historical financial information
for the Company for the year ended December 31, 1991 through September 30, 1996.
The information as of December 31, 1991, 1992, 1993, 1994 and 1995 is derived
from the audited financial statements of the Company. The information for the
nine-month periods ended September 30, 1996 and 1995 is not audited but, in the
opinion of the Company, is a fair presentation of such information. The
following table should be read in conjunction with the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" elsewhere herein
and in the Company's Annual Report. The information is qualified by reference to
the historical consolidated financial statements of the Company incorporated by
reference herein. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Incorporation of Certain Information
by Reference."

<TABLE>
<CAPTION>
YEAR
ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996(f)
------- ------- ------- ------- ------- ------- -------
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales............................. $ 820.3 $ 926.0 $ 985.4 $1,223.4 $1,329.1 $ 982.3 $1,118.4
Cost of sales......................... 660.4 755.2(a) 769.3 948.4 1,044.9 771.0 883.1
Depreciation.......................... 62.0(b) 64.3(a) 57.9 60.9 68.0 51.1 53.7
Selling, general and administrative
expenses............................ 77.7 69.6 83.5 92.1 97.8 74.8 89.8
Minority interest..................... (1.3) (1.3) 0.1 1.4 2.0 1.5 1.9
Goodwill amortization................. 9.7 9.7 9.7 9.6 9.6 7.2 9.4
Equity in affiliate earnings and other
income.............................. (9.9) (6.9) (10.6) (10.6) (18.6) (14.8) (13.2)
Interest expense and finance
charges............................. 53.8(d) 44.8(d) 18.4 13.9 14.2 10.7 14.0
Provision for income taxes............ 3.7 2.7 24.3 43.3 37.0 29.0 26.8
-------- -------- -------- -------- -------- -------- --------
Earnings (loss) before cumulative
effect of accounting change......... (35.8) (12.1) 32.8 64.4 74.2 51.8 52.9
Cumulative effect of change in
accounting(b)....................... 4.8.... -- (130.8) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net earnings (loss)................... $ (31.0) $ (12.1) $ (98.0) $ 64.4 $ 74.2 $ 51.8 $ 52.9
======== ======== ======== ======== ======== ======== ========
Earnings (loss) per share before
cumulative effect of accounting
change(c)........................... -- $ (0.53) $ 1.41 $ 2.75 $ 3.15 $ 2.20 $ 2.25
Net earnings (loss) per share(c)...... -- $ (0.53) $ (4.21) $ 2.75 $ 3.15 $ 2.20 $ 2.25
Average shares outstanding
(thousands)(c)...................... -- 23,005 23,284 23,424 23,562 23,522 23,543
Cash dividend declared per share...... -- -- 0.125 0.45 0.60 0.45 0.45
OTHER OPERATING DATA
Research and development.............. $ 26.9 $ 26.8 $ 25.2 $ 33.8 $ 36.7 $ 27.5 $ 37.7
Capital expenditures.................. 53.9... 47.7 65.5 98.8 92.5 57.1 56.5
Number of full-time employees
(thousands)......................... 6.4 6.7 6.6 7.8 8.6 8.2 9.8
Sales per full-time employee
(thousands)......................... $ 128.0 $ 139.0 $ 149.0 $ 158.0 $ 163.0 $ 164 $ 167.0
BALANCE SHEET DATA (AT END OF PERIOD)
Net property, plant and equipment..... $ 463.5 $ 412.9 $ 418.3 $ 462.3 $ 523.0 $ 499.3 $ 547.9
Total assets.......................... 1,080.0 1,074.2 1,159.4 1,240.3 1,335.2 1,308.7 1,666.1
Total debt............................ --(d) --(d) 159.6 107.3 134.7 159.0 395.0
BW-Security investment(e)............. 743.5 728.2 -- -- -- -- --
Stockholders' equity(e)............... -- -- 459.1 534.9 600.0 582.9 636.3
</TABLE>

(footnotes on following page)

15
<PAGE> 19

- ---------------

(a) Cost of sales for 1992 included a $28.7 million charge for the write-off of
excess capacity and depreciation included $7.3 million related to such
capacity.

(c) See Note 1 to the Company's Consolidated Financial Statements in the
Company's Annual Report 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.

16
<PAGE> 20

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

The Company became independent on January 27, 1993, when its Common Stock
was distributed to the stockholders of its then parent, BW-Security, as a
dividend in 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 ("IPO") of 3.66 million shares of Common
Stock, yielding net proceeds of $83.2 million.

The Company is a technology-driven supplier of highly engineered components
and systems, primarily for automotive powertrain applications. The Company,
which operates 36 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: Powertrain Systems, Automatic Transmission Systems, Morse TEC
and Air/Fluid Systems.

"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 in the Company's Annual Report and the
Company's Form 10-Q for the quarter ended September 30, 1996. See "Incorporation
of Certain Information by Reference." Also see "Selected Historical Financial
Data" for additional information.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales......................................... 100.0% 100.0% 100.0% 100% 100%
Cost of sales..................................... 78.1 77.5 78.6 78.5 79.0
Depreciation...................................... 5.8 5.0 5.1 5.2 4.8
Selling, general and administrative expenses...... 8.5 7.5 7.4 7.6 8.0
Goodwill amortization............................. 1.0 0.8 0.7 0.7 0.8
Minority interest, affiliate earnings and other
income, net..................................... (1.1) (0.8) (1.2) (1.4) (1.0)
</TABLE>

Historically, the Company's sales have been seasonal in nature, with the
fourth quarter of each year generally having higher sales. This trend has been
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.

The following table shows net sales by product grouping:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(MILLIONS OF DOLLARS) (MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Powertrain Systems.................... $ 418.4 $ 529.9 $ 544.8 $ 410.4 $ 411.0
Automatic Transmission Systems........ 307.6 378.5 454.4 326.2 365.1
Morse TEC............................. 202.3 239.9 257.6 193.8 204.8
Air/Fluid Systems..................... 83.7 97.3 107.6 78.6 165.4
-------- -------- -------- -------- --------
1,012.0 1,245.6 1,364.4 1,009.0 1,146.3
Interbusiness eliminations............ (26.6) (22.2) (35.3) (26.7) (27.9)
-------- -------- -------- -------- --------
Total................................. $ 985.4 $1,223.4 $1,329.1 $ 982.3 $1,118.4
======== ======== ======== ======== ========
</TABLE>

17
<PAGE> 21

Nine Months Ended September 30, 1996 Compared with Nine Months Ended September
30, 1995

Sales increased 14% in the first nine months of 1996 to $1,118.4 million
from $982.3 million in the first nine months of 1995. Adjusted for the effect of
the manual transmission business decline and the impact of acquisitions, sales
for the Company's core businesses increased 9%, compared with North American
automotive production which was flat, Japanese automotive production which
declined by approximately 2% and European automotive production which increased
by approximately 7%. The overall sales gain, primarily driven by increased
volume, resulted in a $24 million increase in gross profit for the nine months
ended September 30, 1996.

Powertrain Systems sales were flat compared to the prior year due to a
decrease of 34% or $41.6 million in the manual transmission business resulting
from the loss of the GM S-Truck manual transmission business in the summer of
1995 as well as a decline in sales of sports cars which feature the Company's
five and six-speed manual transmissions. The sale of the Company's manual
transmission business was completed in December 1996. See "Prospectus
Summary -- Recent Developments." This decline was offset by a 14% volume
increase in transfer case applications primarily as a result of continued market
penetration, particularly in the light truck area. Automatic Transmission
Systems sales increased 12% due to the acquisition of the Precision Forged
Products Division of Federal-Mogul Corporation ("PFPD") at the end of April
1995, which accounted for 7% of the increase, increased content in certain
automatic transmissions and volume increases by the Company's OEM customers.
Morse TEC sales increased 6% due to increased volume from new timing chain
system applications on overhead cam engines for passenger cars and light trucks
and the initial sales of MORSE GEMINI(TM) Transmission Chain Systems to GM. The
Morse TEC sales increase was offset by a sluggish Japanese market. Air/Fluid
Systems sales increased 110.6% or $86.9 million which includes a contribution of
$63.9 million and $12.3 million related to the Coltec Acquisition and the
acquisition of Tulle, respectively. Excluding these acquisitions, Air/Fluid
Systems sales increased 13.5% primarily due to volume increases of various
solenoids and valves, particularly in Chrysler applications.

The Company increased its spending on research and development ("R&D") by
$10.2 million for the nine months ended September 30, 1996, due to additional
spending related to the Coltec Divisions and to maintain and expand its
technological expertise in both product and process in all of the Company's core
businesses.

In the third quarter of 1996, the Company realized certain tax credits
related to its R&D programs. Additionally, in the first nine months of 1996, the
Company realized certain tax credits related to its foreign operations. These
realized credits resulted in a lower effective income tax rate for the first
nine months of 1996 than the standard federal and state tax rates. The Company's
effective tax rate was also lower than the standard federal and state tax rates
in 1995 as the Company benefited from R&D tax credits in 1995 as well.

For the nine months ended September 30, 1996 and 1995, the Company's
portion of NSK-Warner's earnings were $10 million and $14.7 million,
respectively. The decline was due to decreasing sales volume and weakening of
the yen by approximately 16% against the dollar between the comparable periods.

For the first nine months of 1996, the Company reported $52.9 million in
net earnings, an increase of $1.1 million over the same period of 1995. The
increase can be primarily attributed to increased sales volume in core
operations offset by larger operating losses from the manual transmission
business, lower earnings from the NSK-Warner joint venture and the start-up
problems in Europe with respect to new OEM engine and transmission programs.

1995 Compared with 1994

Overall, North American automotive production was down 3% in 1995 versus
1994, while Japanese automotive production was down about 3%, Korean automotive
production was up 12% and European automotive production 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

18
<PAGE> 22

marketing and engineering programs. The Company's acquisition of PFPD 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%.

Powertrain Systems' sales grew by 3% in 1995 (8% excluding a 1994
disposition). In the 4WD transfer case business, the TOD(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 discontinuance of the automatic locking hub business, due to changes in
technology. 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 or six-speed sporty cars such as the
Ford Mustang, Chevrolet Camaro, Pontiac Firebird and Dodge Viper. See
"Prospectus Summary -- Recent Developments" for a discussion of the Company's
sale of 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 were 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. 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 overall automotive sales 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(TM) system for all of GM's FWD
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.

Air/Fluid 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 FWD 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 TOD(TM) transfer
case. With the recent acquisitions of Tulle and the Coltec Divisions, the
Air/Fluid 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. GM accounted for 25% of 1995 sales and
27% of 1994 sales. Chrysler

19
<PAGE> 23

accounted for 9% of total consolidated sales in 1995. 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 $0.63
per pound at the beginning of 1994 to $0.97 at the beginning of 1995 to $0.77 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 acquired PFPD business has a relatively lower margin than
the Company as a whole.

Annual price reductions to customers appear to 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 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 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 include the TOD(TM) transfer case, the
MORSE GEMINI(TM) Chain System and the new Ford one-way clutch/drum system, which
the Company began 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,
pre-tax 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 R&D spending and foreign credits. The Company has available
approximately

20
<PAGE> 24

$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 nondeductible.

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 United
States sales in 1994, while European sales increased only marginally as the
region was emerging from a recession. The 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(TM) 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 4WD vehicles, most of which use the
Company's chain in their transfer cases.

Air/Fluid 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 rate at which 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 during 1994 and
1993.

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 $18.4
million in 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
IPO.

21
<PAGE> 25

Pre-tax income improved $50.6 million, or 88.6% from the prior year's
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
nondeductibility 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 SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions".

FINANCIAL CONDITION AND LIQUIDITY

The following discussion compares the Company's financial condition at
September 30, 1996 to its financial condition at December 31, 1994, the period
covered in this Prospectus. The Company was able to maintain its strong
financial position in 1995 and the first nine months of 1996 despite spending
over $334.3 million for acquisitions over the period. At September 30, 1996
total debt was $395 million, compared with $107.3 million at December 31, 1994.
Cash from operations provided $185.8 million to fund the acquisitions over the
period as well as $150 million of capital spending. At September 30, 1996, debt
represented 38% of the Company's capitalization as compared with 17% at December
31, 1994.

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 1995, the Company acquired Tulle, 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
in 1995 for Tulle, but its accounts were included in the December 31, 1995
balance sheet.

The Coltec Acquisition in June 1996 accounted for a cash outflow of $287.8
million. The Company paid $283 million in cash for the businesses and assumed
certain liabilities of the Coltec Divisions. The acquisition was initially
financed with $260 million of borrowings drawn under the Company's $300 million
revolving credit facility and $23 million of borrowings under various money
market facilities, which were refinanced in part by the Company's Senior Note
Offering completed in November 1996. In October 1996, the Company amended its
revolving credit facility, increasing the amount available thereunder from $300
million to $350 million. As of January 23, 1997, the Company had total
availability of $325 million under its $350 million credit facility.

Capital expenditures totaled $93 million in 1995, compared with $99 million
for 1994. Capital expenditures for the first nine months of 1996 were $56.5
million compared to $57.1 million for the first nine months of 1995. Major
spending programs included the Ford large transfer case, expansion of the MORSE
GEMINI(TM) Transmission Chain Systems 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 the first
nine months of 1996 was at a ratio of 1.1 times depreciation versus a ratio of
1.4 times depreciation in full year 1995 and 1.6 times depreciation in full year
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 1997.

At September 30, 1996, working capital, excluding notes payable, increased
by $56 million, reflecting the working capital of acquisitions. Receivables sold
under the receivables transfer agreement increased by $25 million to $100
million over this period. Net fixed assets increased by $86 million over the
21-month period reflecting the $150 million of capital spending and fixed assets
of acquisitions offset by $122 million of depreciation. Investments and advances
increased by $9.9 million reflecting NSK-Warner earnings net of dividends offset
by weakining of the yen in 1996.

22
<PAGE> 26

The Company entered into three foreign ventures during this period which
have not required a significant capital investment to date. These ventures are:

- Divgi-Warner Limited ("Divgi-Warner"), a 60%-owned venture that makes
transfer cases, manual transmissions and automatic locking hubs for the
Indian market.

- Warner Ishi Europe S.p.A., a 50%-owned venture that makes turbochargers
in Europe.

- Borg-Warner Automotive-Taiwan Co., Ltd., a 100%-owned subsidiary that
makes chains in Taiwan.

Total other assets increased by $264 million due principally to an increase
in goodwill of $242 million from the Coltec Acquisition. Retirement-related
liabilities increased by only $8 million despite a decline in the discount rate
related to such liabilities. This was due to the earnings on pension assets
offset by the excess of annual expense associated with such liabilities over the
related cash disbursement.

Equity increased by $101 million over the 21-month period. Earnings totaled
$127 million offset by $25 million in dividends. The currency translation
adjustment declined by $11 million due to a stronger U.S. dollar, while the
minimum pension liability adjustment improved by $3 million due to earnings on
pension assets.

OTHER FINANCIAL CONDITION MATTERS

Environmental

The Company and certain of its current and former direct and indirect
corporate predecessors, subsidiaries and divisions have been identified by the
United States Environmental Protection Agency and certain state environmental
agencies and private parties as PRPs at 27 hazardous waste disposal sites under
the Superfund and equivalent state laws and, as such, may be liable for the cost
of clean-up and other remedial activities at these sites. Responsibility for
clean-up 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 of approximately $9.5 million at September 30, 1996.
The Company expects this amount to be expended over the next three to five
years.

23
<PAGE> 27

BUSINESS

The Company is a leading, global Tier I supplier of highly engineered
components, primarily for automotive powertrain applications. These products are
manufactured and sold worldwide, primarily to OEMs of passenger cars, sport
utility vehicles and light trucks. The Company, which operates 36 manufacturing
facilities in 12 countries serving the North American, European and Asian
automotive markets, is an original equipment supplier to every major OEM in the
world. The Company has achieved its current leadership position and is well
positioned to benefit from emerging trends in the global automotive markets as a
result of several key competitive strengths, including: (i) the ability to
supply its customers globally; (ii) demonstrated technological expertise in
developing highly engineered systems and components; (iii) strong relationships
with all major OEMs; (iv) significant market shares in a number of its key
products; and (v) a strong presence in and focus on high-growth vehicle
categories and platforms.

The Company maintains a global network of contacts within the automotive
industry and works with its customers in all stages of production, including
design, development, component sourcing, quality assurance, manufacture and
delivery. The Company believes that its industry contacts and early involvement
in the design and engineering of new products as a Tier I supplier affords the
Company a competitive advantage in securing new business and provides customers
significant cost reduction opportunities through the coordination of design,
development and manufacturing processes. Suppliers to OEMs that design,
engineer, manufacture and conduct quality control testing are generally referred
to as "Tier I" suppliers. The Company maintains an excellent reputation with the
OEMs for timely delivery and customer service and for providing world-class
quality at a competitive price. The Company has received more than 40 awards for
outstanding quality from its customers worldwide.

PRIOR HISTORY OF THE COMPANY

The Company was incorporated in Delaware in 1987 in connection with the
acquisition of Borg-Warner Corporation ("Old Borg-Warner") by an indirect wholly
owned subsidiary of BW-Security.

The Company was a wholly owned subsidiary of BW-Security until January 27,
1993, at which time it was distributed to the stockholders of BW-Security in the
tax-free Spin-Off. The capital structure of the Company was established with
$480 million of equity and debt of $251 million.

For additional information concerning the history of the Company and
BW-Security and a description of the benefits derived from the acquisition of
Old Borg-Warner by affiliates of Merrill Lynch Capital Partners, Inc. ("MLCP")
and other investors, including the Company's management, as well as certain
obligations of the Company and BW-Security to each other under agreements
entered into in connection with the Spin-Off, see "Certain Relationships and
Related Transactions" in the Company's proxy statement for the 1996 Annual
Meeting of Stockholders, which is incorporated by reference herein. See
"Incorporation of Certain Information by Reference."

BUSINESS STRATEGY

24
<PAGE> 28

with a greater number of speeds (the Company's component content in an automatic
transmission rises as the number of speeds increases), (ii) a growing demand for
4WD vehicles, (iii) an increasing demand for overhead cam engines, (iv) a
growing demand for automatic transmissions and air and fluid management systems
in Europe and in Asia, (v) the increasing tendency of OEMs to purchase
integrated systems rather than individual components and (vi) demand in markets
outside the United States for air and fluid management products, particularly
emission controls. Fourth, the Company continues to pursue strategic joint
ventures and selected acquisitions within its existing or related lines of
business. The Company continues to maintain a strong presence in Europe and
Asia, which has been further strengthened by its recent acquisitions and joint
ventures. The Company believes its global presence will enable it to better
withstand the effect of cyclical downturns in the United States automotive
market, while serving its OEM customers as a global supplier. See "--Coltec
Acquisition."

Over the past several years, the Company has remained focused on and
committed to achieving its business objective. Sales have increased from $820
million in 1991 to $1.33 billion in 1995, reflecting a 12.8% compound annual
growth rate and outperforming the approximately 4% compound annual growth rate
of North American vehicle sales. The Company's sales outside the United States
are increasing and in 1995 represented 16% of consolidated sales. Including
unconsolidated joint ventures, 1995 sales outside the United States constituted
33% of total sales. The Company's sales have increased at a greater rate than
market growth as a result of higher content per vehicle and increased market
share achieved during a period of OEM supplier consolidation that has benefited
the Company. The Company's emphasis on providing systems and introduction of new
technologies has enabled it to substantially increase its content per vehicle.
For example, the timing system on the Ford modular engine consists of up to four
chains as well as sprockets, snubbers and tensioners as compared with a single
timing chain on the previous generation pushrod engine. Such sales increases
have been accompanied by increases in profitability. Over the same period, EBIT
increased from $22 million in 1991 to $125 million in 1995, with EBIT margins
rising from 2.6% in 1991 to 9.4% in 1995, and sales per employee rising from
$128,000 in 1991 to $163,000 in 1995.

Demonstrated Technological Expertise and Leadership. The Company believes
that it is recognized throughout the global automotive industry as a leader in
technological innovation, expertise and excellence. A significant component of
the Company's business strategy is to maintain and enhance this reputation. In
order to achieve this, the Company is committed to being the technological
leader in its markets by developing and producing state-of-the-art products
using state-of-the-art processes. The Company is also able to parlay its
technological expertise into designing and developing complete systems for its
customers.

The Company has over 300 engineers dedicated to R&D and a significant
long-term commitment to R&D. The Company has obtained over 3,000 patents in its
history and currently has approximately 1,900 active domestic and foreign
patents and patent applications, pending or under preparation.

Throughout its history, the Company has been an innovative technology
partner to the global automotive industry. The Company's engineering
achievements include the single-plate manual clutch, a "silent" chain engine
timing system, and high-volume HY-VO(R) chain for FWD and 4WD applications. In
transmissions alone, the Company's engineering achievements include the first
automatic transmission model sold worldwide and the world's first fully
electronic continuously variable transmission.

Products developed and produced by the Company include the TOD(TM) transfer
case which allows vehicles to automatically shift from two-wheel drive to 4WD
when electronic sensors indicate it is necessary. Other products include the
MORSE GEMINI(TM) Transmission Chain System. Products expected to be introduced
in future model years include a complete air and fluid system. In addition, the
Company continues to develop integrated systems incorporating individual
components, such as the one-way clutch and drum assembly developed for Ford.

Continuous Process Improvements and Production Efficiencies. In recent
years, automotive OEMs have reduced the number of their suppliers and
transferred additional responsibility for design, engineering and quality
control to their remaining suppliers. In addition, there has been substantial
and continuing pressure from the major automotive OEMs to reduce costs,
including costs associated with outside suppliers such as the Company. As a
result, the OEMs have demanded annual selling price reductions from such
suppliers.

25
<PAGE> 29

Annual price reductions granted in 1995 totaled approximately $8.0 million.
Although the Company believes that it produces a technologically sophisticated
product at a competitive cost, the Company must continually seek to control and
reduce costs in order to maintain its gross margins in light of such price
pressure. Continuing improvement in the efficiency of operations, including
production processes, is therefore another significant component of the
Company's strategy. Accordingly, the Company has adopted a "lean" manufacturing
philosophy that seeks to eliminate waste and inefficiency in its operations. The
Company's R&D staff works together throughout its worldwide operations sharing
ideas and accumulated knowledge regarding powertrain applications and customer
requirements. The Company also fosters an environment of continuous improvement
by critically comparing its products and processes against those of its
competitors and customers in terms of quality, cost, safety, efficiency and
delivery.

Global Industry Trends. In the near term, the Company believes that it is
well positioned to take advantage of certain trends in the global automotive
industry that could permit the Company to increase sales and profits without
long-term growth in the global automotive industry. These trends include:

- The air and fluid management systems market is one in which the Company
believes there are significant growth opportunities driven by
increasingly stringent air emissions regulations both in the United
States and overseas.

- Light trucks and sport utility vehicles with four-wheel drive options are
increasingly popular with vehicle purchasers. Since the Company is a
major manufacturer of transfer cases and transmission chain for 4WD
vehicles, the Company believes that it is well positioned to take
advantage of this trend.

- Fuel efficiency and customer demands are causing a shift from three-speed
to four-speed and five-speed automatic transmissions as well as
increasing demand for double overhead cam engines. Transmissions with a
greater number of speeds include a higher content per transmission of the
Company's automatic transmission components. Double overhead cam engines
also require higher content per vehicle because they utilize complex
timing systems as compared to pushrod engines.

- The Company will seek to capitalize on the increasing tendency of the
OEMs to purchase integrated systems rather than individual components.

- Installations of automatic transmissions are projected to increase for
automobiles sold in Europe and Asia. For example, in Europe, automatic
transmissions are installed on only approximately 12% of the cars and
light trucks sold as compared to approximately 80% installation on cars
sold in North America. Because of the Company's experience in developing
technologically advanced automatic transmission components, the Company
believes it is well positioned to benefit from any such increase.

Growth Through Joint Ventures and Acquisitions. In addition to internal
growth, the Company expects to continue to grow through strategic joint ventures
and selected acquisitions. In the last 24 months, the Company has acquired its
partner's shares in its Regina-Warner joint venture to improve its engine timing
business in Europe, has acquired PFPD to enhance its systems capability in
one-way clutches, and it has acquired Tulle in France to provide a local
manufacturing and engineering base for its air/fluid systems products in Europe.
In addition the Company has acquired the Coltec Divisions, which significantly
expands its global air and fluid systems management business. The Company has
also established a majority-owned joint venture for transfer case and manual
transmission manufacturing in India with Divgi Metalwares Private, Ltd.
("Divgi").

COLTEC ACQUISITION

On June 17, 1996, the Company acquired the operations and substantially all
of the operating assets of the Coltec Divisions for $283 million in cash. The
Coltec Divisions have a broad base of air and fluid management products,
established OEM relationships, and three technologically advanced manufacturing
facilities. These operations produced combined sales of $255 million in 1995.
The Coltec Acquisition was initially financed with borrowings under the
Company's revolving credit facility, which was refinanced in part by the
Company's Senior Note Offering completed in November 1996. See "--Air/Fluid
Systems."

26
<PAGE> 30

The Coltec Acquisition provided the Company with a number of strategic
benefits. The air and fluid management systems market is one in which the
Company believes there are significant growth opportunities driven principally
by increasingly stringent air emissions regulations both in the U.S. and in
Europe. The Company also believes that since few suppliers control a large share
of the growing air and fluid management market, the Company had additional
opportunities to increase its market share because of its technological
expertise and broad range of products. By combining the Coltec Divisions'
component products with the Air/Fluid System's complementary system-based
products, the Coltec Acquisition positions the Company to capitalize on the
high-growth air and fluid management systems market and to become a global
supplier of complete, integrated air and fluid management systems. The Coltec
Acquisition better balances the Company's business mix by significantly
expanding the Company's operations in the air and fluid management systems
business as Air/Fluid Systems pro forma sales will represent approximately 22%
of total consolidated sales, more than double the Air/Fluid Systems sales in
1995 of 8%. Moreover, the Coltec Acquisition permits the Company to further
strengthen its relationships with existing OEM customers, especially Chrysler.
Additionally, with the Company's 1995 acquisition of Tulle, it is well
positioned to begin manufacturing air and fluid management systems in Europe.

One of the Company's strategic objectives is to pursue strategic joint
ventures and selected acquisitions in its existing or related lines of business.
The Coltec Acquisition is evidence of management's commitment to the realization
of this strategy. Management continues to monitor additional growth
opportunities.

The Coltec Divisions added design and manufacturing capability in engine
air intake management products and systems, emission air pumps, and oil pumps to
the Company's Air/Fluid Systems existing product line. Complementary product
lines in transmission, steering and suspension solenoids and proprietary wet
friction materials and synchronizers have also been added to existing Company
capabilities. Facilities acquired in the Coltec Acquisition are located in
Warren, Michigan; Water Valley, Mississippi; Sallisaw, Oklahoma; and Longview,
Texas. The Company plans to expand Coltec's historical focus on components for
the North American market to systems throughout the world, especially in Europe.

PRODUCTS

The Company's products fall into four categories: Powertrain Systems,
Automatic Transmission Systems, Morse TEC and Air/Fluid Systems. Net revenues by
product grouping for the three years ended December 31, 1995 and the nine month
periods ended September 30, 1996 and 1995 are as follows (in millions of
dollars):

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Powertrain Systems........................ $ 418.4 $ 529.9 $ 544.8 $ 410.4 $ 411.0
Automatic Transmission Systems............ 307.6 378.5 454.4 326.2 365.1
Morse TEC................................. 202.3 239.9 257.6 193.8 204.8
Air/Fluid Systems......................... 83.7 97.3 107.6 78.6 165.4
-------- -------- -------- -------- --------
1,012.0 1,245.6 1,364.4 1,009.0 1,146.3
Interbusiness eliminations................ (26.6) (22.2) (35.3) (26.7) (27.9)
-------- -------- -------- -------- --------
Net sales................................. $ 985.4 $1,223.4 $1,329.1 $ 982.3 $1,118.4
======== ======== ======== ======== ========
</TABLE>

The sales information presented above excludes the sales by the Company's
unconsolidated joint ventures. See "-- Joint Ventures." Such sales totalled
approximately $394 million in 1995, approximately $316 million in 1994,
approximately $312 million in 1993, approximately $285 million for the nine
months ended September 30, 1996 and approximately $253 million for the nine
months ended September 30, 1995.

27
<PAGE> 31

POWERTRAIN SYSTEMS

The Company manufactures fully assembled transmission systems and
components for automotive applications. Major products include 4WD and all-wheel
drive transfer cases.

Transfer cases are installed on light trucks and sport utility vehicles. A
transfer case attaches to the transmission and distributes torque to the front
and rear axles for 4WD, improving vehicle control during off-road use and in a
variety of road conditions. Shifting from two-wheel drive to 4WD can be
accomplished mechanically through a lever or electronically through a
push-button activated motor.

The Company has designed and developed an exclusive 4WD TOD(TM) transfer
case system, which allows vehicles to automatically shift from two-wheel drive
to 4WD when electronic sensors indicate it is necessary. The TOD(TM) transfer
case is a feature on the Ford Explorer, the best selling sport utility vehicle
in the United States and is available on the Ford Expedition, a new sport
utility vehicle.

Sales of 4WD transfer cases represented 30%, 26% and 28% of the Company's
total revenues for 1995, 1994 and 1993, respectively. The Company believes that
it is the world's leading independent manufacturer of 4WD transfer cases,
producing approximately 847,000 transfer cases in 1995. The Company's largest
customer of 4WD transfer cases is Ford. The Company supplies substantially all
of the 4WD transfer cases for Ford, including those installed in the Ford
Explorer, the Ford Expedition and the Ford F-150 pickup truck.

The Company has entered into an agreement with Mercedes-Benz Project, Inc.,
a subsidiary of MercedesBenz AG, for the Company to supply transfer cases for a
new 4WD vehicle, which will be produced beginning in 1997 at Mercedes-Benz's new
United States passenger-vehicle manufacturing facility. Under the five-year
agreement, which has a three-year extension provision, the Company will develop
the technology and supply Mercedes-Benz with new two-speed, electronically
controlled, all-wheel drive transfer cases that are compatible with its
anti-skid braking system. In 1995, the Company purchased a 211,000 square foot
facility in Seneca, South Carolina, to serve as the production facility for
manufacture of the Mercedes-Benz transfer case.

The Company signed an agreement to establish a joint venture in India in
1995 for the manufacture of 4WD transfer cases and manual transmissions. See "--
Joint Ventures."

AUTOMATIC TRANSMISSION SYSTEMS

The Company engineers and manufactures components for automatic
transmissions, as well as the systems which combine such components around the
world. Principal product lines include friction plates, one-way clutches,
transmission bands and torque converters for automatic transmissions.

The Company manufactures over 100 different varieties of friction plates
incorporating asbestos-free, organic friction paper linings. The Company offers
over 20 proprietary friction material formulas, each developed to satisfy
specific customer requirements. The quality of the friction surface results in
high durability, smooth shifting quality, low noise and vibration and minimal
drag. The Company also manufactures over 16 varieties of transmission bands used
in automatic transmissions and over 100 types of one-way clutches for automotive
and aircraft applications. The Company believes that, with the inclusion of its
NSK-Warner joint venture, the Automatic Transmission Systems group is a leading
manufacturer and supplier of friction elements and one-way clutches in North
America, Europe and Asia. The Company is a supplier to virtually every major
automatic transmission manufacturer in the world.

In 1995, the Company completed the purchase of PFPD. PFPD is a manufacturer
of precision forged sintered metallurgy products, including races for one-way
clutches and engine connecting rods which utilize powdered metal technology.
This acquisition allows the Company to incorporate products of PFPD with
existing products to become a supplier of one-way clutch systems.

28
<PAGE> 32

MORSE TEC

Morse TEC manufactures chain and chain systems, including HY-VO(R) FWD and
4WD chain, MORSE GEMINI(TM) Transmission Chain Systems, timing chain and timing
chain systems, crankshaft and camshaft sprockets, chain tensioners and snubbers.

HY-VO(R) chain is used in FWD transmissions and for 4WD transfer case
applications. The transmission chain is used to transfer power from the engine
to the transmission. The Company's MORSE GEMINI(TM) Transmission Chain System,
which is used on Chrysler's LH models, emits significantly less chain pitch
frequency noise than conventional transmission chain systems. In 1997, GM will
be incorporating this system in its FWD vehicles. The chain in a transfer case
distributes power between the front and rear output shafts which, in turn, drive
the front and rear wheels. The Company believes it is the world's leading
manufacturer of chain for FWD transmissions and 4WD transfer cases. The Company
is an original equipment supplier to every major manufacturer who uses chain for
such applications.

The Company manufactures complete engine timing chain systems and accessory
drives, including chain, sprockets, tensioners, snubbers, balance shaft gears
and precision gearing. Timing chain is installed around the crankshaft and
camshaft sprockets. The crankshaft turns and transfers power via the timing
chain to the camshaft. The camshaft, in turn, operates the intake and exhaust
valves in the engine cylinder head. The Company's timing chain system is used on
Ford's new modular family of overhead cam engines, including the Duratech
engine. The Company recently announced that it will be designing and producing a
similar timing chain system for Chrysler's new overhead cam engines beginning in
late 1997. The Company believes that it is the world's leading manufacturer of
timing chain.

AIR/FLUID SYSTEMS

The Air/Fluid Systems business designs and manufactures sophisticated
mechanical, electro-mechanical and electronic components and systems for engine
air intake and exhaust management and fuel and vapor management, as well as for
electronically-controlled automatic transmissions and steering and suspension
systems. Key products for engine air intake management produced by the Company
include throttle bodies, intake manifolds, throttle position sensors and
complete engine induction systems. The Company's products for emissions control
and improved mileage include mechanical and electrical air pumps, air control
valves and pressure feedback exhaust gas re-circulation valves. The fuel
management and vapor recovery products include roll valves, canister purge
solenoids, and complete vapor recovery systems. The Company also produces oil
pumps and proprietary wet friction materials for synchronizers, transfer cases
and manual transmissions.

In 1995, the Company completed the purchase of Tulle, a designer and
manufacturer of electro-mechanical and electronic automotive components located
in Tulle, Cedex, France. This acquisition provides a manufacturing and
engineering base for the expansion of the Company's air and fluid management
products in Europe.

The Coltec Divisions add design and manufacturing capability in engine air
intake management products and systems, emission air pumps, and oil pumps to the
Company's Air/Fluid Systems product line. Complementary product lines in
transmission, steering and suspension solenoids and proprietary wet friction
materials and synchronizers have also been added to existing Company
capabilities. Facilities acquired in the Coltec Acquisition are located in
Warren, Michigan; Water Valley, Mississippi; Sallisaw, Oklahoma; and Longview,
Texas. The Company plans to expand the Coltec Divisions' historical focus on
components for the North American market to systems throughout the world,
especially in Europe.

JOINT VENTURES

The Company has seven ventures in which it has a less-than-100% ownership
interest. Results from three of these ventures, in which the Company is the
majority owner, are consolidated as part of the Company's results. The Company's
ownership interest in the remaining four joint ventures ranges from 39% to 50%.
The

29
<PAGE> 33

results of NSK-Warner, Warner-Ishi Corporation, Beijing Warner Gear Co., Ltd.
and Warner-Ishi Europe S.p.A. are reported using the equity method.

In 1995, the Company entered into a joint venture with Divgi to produce
transfer cases, manual transmissions and automatic locking hubs in India. The
venture, named Divgi-Warner Limited, began operations in the second half of 1996
and is 60%-owned by the Company and 40%-owned by Divgi.

Management of the unconsolidated joint ventures is shared with the
Company's respective joint venture partners. Certain information concerning the
Company's joint ventures is set forth below:

<TABLE>
<CAPTION>
PERCENTAGE
YEAR OWNED BY LOCATION OF JOINT VENTURE FISCAL
JOINT VENTURE PRODUCTS ORGANIZED THE COMPANY OPERATION PARTNER 1995 SALES
- ---------------------------------- ----------------- --------- ----------- ------------ ----------------- ----------
($ IN
MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
UNCONSOLIDATED
NSK-Warner K.K.................. Friction products 1964 50% Japan Nippon Seiko K.K. $337

Warner-Ishi Corporation......... Turbochargers 1980 50% U.S. Ishikawajima- $ 15
Harima Heavy
Industries Co.,
Ltd.

Beijing Warner Gear Co., Ltd.... Manual 1992 39% China Beijing Gear $ 34
transmissions Works

Warner-Ishi Europe, S.p.A....... Turbochargers 1995 50% Italy Ishikawajima- N/A
Harima Heavy
Industries Co.,
Ltd.

CONSOLIDATED
Borg-Warner Automotive Korea,
Inc........................... Friction products 1987 60% Korea Hyundai Motor $ 25
Company,
NSK-Warner K.K.

Divgi-Warner Limited............ Transfer cases, 1995 60% India Divgi Metalworks N/A
manual Private, Ltd.
transmissions,
and automatic
locking hubs

Huazhong Automotive Transmission
Company Ltd................... Manual 1995 60% China Shiyan Automotive N/A
transmissions Transmission
Factory
</TABLE>

See Note 9 of the Notes to Consolidated Financial Statements on page 28 of
the Company's Annual Report (incorporated herein by reference) for geographic
information. See "Incorporation of Certain Information by Reference."

CUSTOMERS

Approximately 86% of the Company's total sales in 1995 were to automotive
OEMs, with the remaining 14% of the Company's sales to a diversified group of
industrial, construction and agricultural vehicle manufacturers, auto part
manufacturers and to distributors of automotive aftermarket and replacement
parts.

The Company's worldwide sales in 1995 to Ford and GM constituted
approximately 41% and 25%, respectively, of its 1995 consolidated sales. Sales
to Chrysler constituted 9% of total consolidated sales in 1995. The Coltec
Acquisition would have increased Chrysler sales to approximately 13% of sales.
Approximately 26% of consolidated sales for 1995 were outside the United States,
including exports. However, a substantial portion of such sales were to foreign
OEMs of vehicles that are, in turn, exported to the United States. See Note 9 of
the Notes to Consolidated Financial Statements in the Company's Annual Report.
If sales from unconsolidated joint ventures were included in 1995 consolidated
sales, worldwide sales to Toyota would be approximately 10% of such sales.

30
<PAGE> 34

The Company's automotive products are sold directly to OEMs pursuant to the
terms and conditions of the OEM's purchase orders, and deliveries are subject to
periodic authorizations based upon the production schedules of the OEMs. The
Company ships its products directly from its plants to the OEMs.

SALES AND MARKETING

Each of the Company's four business groups has its own sales function
headed by a Vice-President of Sales. Account executives for each group are
assigned to service specific OEM customers for one or more of a business group's
products. Such account executives spend the majority of their time in direct
contact with OEM purchasing employees and engineers and are responsible for
servicing existing business and for identifying and obtaining new business.
Because of their close relationship with the OEMs, account executives are able
to identify and meet customers' needs based upon their knowledge of the
Company's products and design and manufacturing capabilities. Upon securing a
new order, account executives are responsible for negotiating the terms of the
purchase contract.

RESEARCH AND DEVELOPMENT

Each of the Company's business groups has its own R&D organization. Over
300 employees, including engineers, mechanics and technicians, are engaged in
R&D activities at Company facilities worldwide. The Company also operates
testing facilities such as prototype, measurement and calibration, life testing
and dynamometer laboratories.

By working closely with the OEMs and anticipating their future product
needs, the Company's R&D personnel conceive, design, develop and manufacture new
proprietary automotive components and systems. R&D personnel also work to
improve current products and production processes. The Company believes its
commitment to R&D will allow it to obtain new orders from its OEM customers.

Consistent with its strategy of developing technologically innovative
products, the Company spent approximately $36.7 million, $33.8 million and $25.2
million 1995, 1994 and 1993, respectively, on R&D activities. Not included in
the reported R&D activities were customer-sponsored R&D activities that were
approximately $11.3 million, $11.2 million and $16.1 million in 1995, 1994 and
1993, respectively.

The Company makes a significant annual investment in R&D activities to
develop new and improved products and manufacturing processes. There can be no
assurance that R&D activities will yield new or improved products or products
which will be purchased by the OEMs, or new and improved manufacturing
processes.

PATENTS AND LICENSES

The Company has approximately 1,900 active domestic and foreign patents and
patent applications, pending or under preparation, and receives royalties from
licensing patent rights to others. While it considers its patents on the whole
to be important, the Company does not consider any single patent, group of
related patents or any single license essential to its operations in the
aggregate. The expiration of the patents individually and in the aggregate is
not expected to have a material effect on the Company's financial position or
future operating results. The Company owns numerous trademarks, some of which
are valuable but none of which are essential to its business in the aggregate.

The "Borg-Warner Automotive" trade name and the housemark adopted in 1984
are material to the Company's business. During 1994, the Company and BW-Security
entered into an Assignment of Trademarks and License Agreement (the "Trademark
Agreement") whereby BW-Security assigned certain trademarks and trade names
(including the "Borg-Warner Automotive" trade name) to the Company (which
trademarks and trade names had been previously licensed to the Company) for use
in the automotive field. Pursuant to the Trademark Agreement, the Company agreed
to pay an additional $7.5 million to BW-Security upon the occurrence of certain
events, including a change of control of the Company.

31
<PAGE> 35

COMPETITION

The Company competes worldwide with a number of other manufacturers and
distributors which produce and sell similar products. Price, quality and
technological innovation are the primary elements of competition. The Company's
competitors include vertically integrated units of the Company's major OEM
customers, as well as a large number of independent domestic and international
suppliers. Many of these companies are larger and have greater resources than
the Company.

A number of the Company's major OEM customers manufacture for their own use
products which compete with the Company's products. Although these OEM customers
have indicated that they will continue to rely on outside suppliers, the OEMs
could elect to manufacture products to meet their own requirements or to compete
with the Company. There can be no assurance that the Company's business will not
be adversely affected by increased competition in the markets in which it
operates.

The competitive environment has changed dramatically over the past few
years as the Company's traditional United States OEM customers, faced with
intense international competition, have expanded their worldwide sourcing of
components with the stated objective of better competing with lower-cost
imports. As a result, the Company has experienced competition from suppliers in
other parts of the world enjoying economic advantages such as lower labor costs,
lower health care costs, and, in some cases, export subsidies and/or raw
materials subsidies.

EMPLOYEES

As of September 30, 1996, the Company and its consolidated subsidiaries had
approximately 9,800 salaried and hourly employees (as compared with 8,600
employees at December 31, 1995), of which approximately 8,155 were United States
employees. Approximately 50% of the Company's current domestic hourly workers
are unionized. The Company's Muncie, Indiana plant has approximately 1,665
employees represented by the UAW. Approximately 794 hourly employees at the
Company's Ithaca, New York plant are represented by the International
Association of Machinists. The collective bargaining agreement covering the
Muncie, Indiana plant expires in March 1998 and the collective bargaining
agreement covering the Ithaca, New York plant expires in October 1998. Pursuant
to the requirements of the National Labor Relations Act, a union representation
election involving approximately 630 hourly workers at the Company's Bellwood,
Illinois facility was held on June 14, 1996. A majority of the hourly workers
voting in the election voted against union representation. The labor
organization appearing on the ballot was the UAW. The hourly workers at the
Company's European facilities are also unionized. The Company believes its
present relations with employees to be satisfactory. See "Risk Factors -- Labor
Relations."

RAW MATERIALS

The Company believes that its supplies of raw materials for manufacturing
requirements in 1997 are adequate and are available from multiple sources. It is
common, however, for customers to require their prior approval before certain
raw materials or components can be used, thereby reducing sources of supply that
would otherwise be available. Manufacturing operations are dependent upon
natural gas, fuel oil, propane and electricity.

ENVIRONMENTAL REGULATIONS AND PROCEEDINGS

32
<PAGE> 36

The Company believes that the overall impact of compliance with regulations
and legislation protecting the environment will not have a material effect on
its financial position or future operating results, although no assurance can be
given in this regard. Capital expenditures and expenses in 1995 attributable to
compliance with such legislation were not material.

The Company and certain of its current and former direct and indirect
corporate predecessors, subsidiaries and divisions have been identified by the
United States Environmental Protection Agency and certain state environmental
agencies and private parties as PRPs at 27 hazardous waste disposal sites under
the Superfund and equivalent state laws and, as such, may be liable for the cost
of clean-up and other remedial activities at these sites. Responsibility for
clean-up 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 a 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 for indicated environmental
liabilities with a balance of approximately $9.5 million at September 30, 1996.
The Company expects this amount to be expended over the next three to five
years.

PROPERTIES

The Company's 36 manufacturing facilities are strategically located in the
United States, two facilities in Germany, Japan, India, China and Italy and one
facility in each of Canada, France, Mexico, Korea, Taiwan and Wales. The Company
also has numerous sales offices, warehouses and technical centers. The Company's
executive offices, which are leased, are located in Chicago, Illinois. In
general, the Company believes that its properties are in good condition and are
adequate to meet its current and reasonably anticipated needs. In 1995, the
Company purchased a 211,000 square foot facility in Seneca, South Carolina, to
establish the production facility for manufacture of the Mercedes-Benz transfer
case.

The Coltec Acquisition increased by three the number of manufacturing
facilities the Company operates by adding new facilities in Mississippi,
Oklahoma and Texas. See "-- Air/Fluid Systems."

33
<PAGE> 37

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

<TABLE>
<CAPTION>
1995
PERCENT OF CAPACITY
LOCATIONS UTILIZATION(1)(2)(3)
---------------------------------------------------------------- --------------------
<S> <C> <C>
U.S.: Blytheville, Arkansas (leased); Bellwood, Dixon and Frankfort,
Illinois; Muncie, Indiana; Sterling Heights, Coldwater, Livonia
and Romulus, Michigan; Ithaca, New York (2 plants); Gallipolis,
Ohio; and Cary, North Carolina.................................. 114%
Non-U.S.: Canada, France, Germany (2 plants), Italy (leased), Japan,
Korea, and Wales................................................ 83%
</TABLE>

- ---------------

(1) The figure shown in each case is a weighted average of the percentage
utilization of each major plant within the category, with an individual
plant weighted in proportion to the number of employees employed when such
plant runs at 100% capacity. Capacity utilization at the 100% level is
defined as operating five days per week, with two eight-hour shifts per day
and normal vacation schedules.

(2) During 1995, the Company acquired facilities in South Carolina, France,
India, China and Taiwan and, in connection with the Coltec Acquisition,
acquired facilities in Mississippi, Oklahoma and Texas from the Coltec
Divisions, none of which are included in the capacity utilization.

(3) Table excludes 50% or less owned joint ventures in China, Japan, Italy,
Korea and Illinois.

LEGAL PROCEEDINGS

The Company is presently, and is from time to time, subject to claims and
suits arising in the ordinary course of its business. In certain such actions,
plaintiffs request punitive or other damages that may not be covered by
insurance. The Company believes that it has established adequate provisions for
litigation liabilities in its financial statements in accordance with generally
accepted accounting principles. These provisions include both legal fees and
possible outcomes of legal proceedings.

Centaur Insurance Company ("Centaur"), Old Borg-Warner's discontinued
property and casualty insurance subsidiary and currently a wholly owned
subsidiary of BW-Security, ceased writing insurance in 1984 and has been
operating under rehabilitation since September 1987. Rehabilitation is a process
supervised by the Illinois Director of Insurance to attempt to compromise
liabilities at an aggregate level that is not in excess of Centaur's assets. In
rehabilitation, Centaur's assets are currently being used to satisfy claim
liabilities under direct insurance policies written by Centaur. Any remaining
assets will be applied to Centaur's obligations to other insurance companies
under reinsurance contracts. The foregoing has resulted in several lawsuits
seeking substantial dollar amounts being filed against BW-Security, and in some
cases the Company, for recovery of alleged damages from the failure of Centaur
to satisfy its reinsurance obligations. All of these lawsuits, except one to
which the Company is not currently a party, have been settled. The defense of
this litigation is being managed by BW-Security and the Company is indemnified
by BW-Security for any losses or expenses arising out of the litigation.

It is the opinion of the Company that the various asserted claims and
litigation in which the Company is currently involved will not materially affect
its financial position or future operating results, although no assurance can be
given with respect to the ultimate outcome for any such claim or litigation.

34
<PAGE> 38

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

Set forth below are the names, ages, positions and certain other
information concerning the executive officers of the Company as of February 14,
1997. Following consummation of the Offerings, the ML Entities (as defined
herein) intend to reduce their representation on the Board. See "Principal and
Selling Stockholders."

<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
- --------------------------------------------- ----
<S> <C> <C>
John F. Fiedler.............................. 58 Chairman and Chief Executive Officer
Robin J. Adams............................... 43 Vice President and Treasurer
William C. Cline............................. 47 Vice President and Controller
Gary P. Fukayama............................. 49 Executive Vice President
Christopher A. Gebelein...................... 50 Vice President--Business Development
Vice President, Secretary and General
Laurene H. Horiszny.......................... 41 Counsel
Geraldine Kinsella........................... 49 Vice President--Human Resources
Fred M. Kovalik.............................. 59 Executive Vice President
Ronald M. Ruzic.............................. 58 Executive Vice President
Robert D. Welding............................ 48 Vice President
Matthias B. Bowman........................... 48 Director
Albert J. Fitzgibbons, III................... 51 Director
Paul E. Glaske............................... 63 Director
James J. Kerley.............................. 74 Director
Alexis P. Michas............................. 39 Director
Donald C. Trauscht........................... 63 Director
Ivan W. Gorr................................. 67 Director
Jere A. Drummond............................. 57 Director
</TABLE>

Mr. Fiedler has been Chairman of the Board since March 1996 and has been
Chief Executive Officer of the Company since January 1995. He was President of
the Company from June 1994 to March 1996 and was Chief Operating Officer of the
Company from June 1994 to December 1994. Mr. Fiedler was Executive Vice
President of Goodyear Tire & Rubber Company in charge of the North American Tire
division, from 1991 to 1994. He is a director of Navistar, Inc.

Mr. Adams has been Vice President and Treasurer of the Company since May
1993. He was Assistant Treasurer of the Company from 1991 to 1993 and Assistant
Treasurer of BW-Security from 1991 to 1993.

Mr. Cline has been Vice President and Controller of the Company since May
1993. He was Assistant Controller of BW-Security from 1987 to 1993.

Mr. Fukayama has been Executive Vice President of the Company since
November 1992. He has been Group President of Borg-Warner Automotive Air/Fluid
Systems Corporation since May 1996. He was President and General Manager of
Borg-Warner Automotive Automatic Transmission Systems Corporation from January
1995 to May 1996. He was President and General Manager of Borg-Warner Automotive
Transmission & Engine Components Corporation, Automatic Transmission Systems
from November 1992 to December 1994. He was President and General Manager of the
Friction Products Business Group of Borg-Warner Automotive Transmission & Engine
Components Corporation from February 1991 to October 1992.

Mr. Gebelein has been Vice President -- Business Development of the Company
since January 1995. He was General Manager of Corporate Development of Inland
Steel Industries from 1987 to 1994.

Ms. Horiszny has been Vice President, Secretary and General Counsel of the
Company since May 1993. She was Assistant General Counsel of the Company from
December 1991 to 1993, and Senior Attorney from 1988 to December 1991.

35
<PAGE> 39

Ms. Kinsella has been Vice President -- Human Resources of the Company
since May 1993. She was Vice President -- Human Resources of Borg-Warner
Automotive Transmission & Engine Components Corporation, Automatic Transmission
Systems from November 1990 to May 1993.

Mr. Kovalik has been Executive Vice President of the Company and President
and General Manager of Borg-Warner Automotive Powertrain Systems Corporation
since March 1994. He was General Manager of Heavy and Medium Duty Transmissions
for Eaton Corporation from April 1992 to February 1994; Marketing
Manager-Transmissions of Eaton Corporation from February 1991 to April 1992 and
Manager-Manufacturing and Quality of Eaton Corporation from February 1989 to
1991.

Mr. Ruzic has been Executive Vice President of the Company and President
and General Manager of Borg-Warner Automotive Morse TEC Corporation since
October 1992. He was President and General Manager of Borg-Warner Automotive
Transmission & Engine Components Corporation, Morse Chain Systems from December
1989 to 1992.

Mr. Welding has been Vice President of the Company and President of
Borg-Warner Automotive Automatic Transmission Systems Corporation since May
1996. He was Vice President -- Operations of Borg-Warner Automotive Automatic
Transmissions System Corporation, Bellwood Plant, from November 1993 to May
1996. He was Vice President -- Operations of Borg-Warner Automotive Automatic
Transmission Systems Corporation, Frankfort Plant, from November 1990 to October
1993.

Mr. Bowman has been Vice Chairman of Investment Banking for Merrill Lynch
Pierce, Fenner and Smith Incorporated ("MLPF&S") since 1993, and has been
President and a Director of MLCP since 1994. He has been a Managing Director of
the Investment Banking Division of MLPF&S since 1978. He is also a Director of
Rykoff-Sexton, Inc., Pathmark Stores, Inc. and Supermarkets General Holdings
Corporation.

Mr. Fitzgibbons has been a Partner and a Director of Stonington Partners,
Inc., an investment management firm, since 1993, and has been a Director of MLCP
since 1988. He was a Partner of MLCP from 1993 to 1994 and Executive Vice
President of MLCP from 1988 to 1993. He was also a Managing Director of the
Investment Banking Division of MLPF&S from 1978 to July 1994. He is a Director
of Rykoff-Sexton, Inc., BW-Security, Dictaphone Corporation and United Artists
Theatre Circuit, Inc.

Mr. Glaske has been Chairman and Chief Executive Officer since April 1992
and President since July 1986 of Blue Bird Corporation, a leading manufacturer
of school buses, motor homes and a variety of other vehicles. Mr. Glaske is also
a Director of Trust Company Bank of Middle Georgia.

Mr. Kerley was Chairman of the Board of Rohr, Inc., a manufacturer of
aircraft engine components from January 1993 until his retirement in December
1994. Mr. Kerley was interim President and Chief Executive Officer of Rohr, Inc.
from January 1993 until May 1993. From September 1981 until his retirement in
December 1985, he was Vice Chairman and Chief Financial Officer of Emerson
Electric Company, a manufacturer of electronic, electrical and other products.
Mr. Kerley is also a Director of DT Industries, Inc. and Goss Graphic Systems,
Inc.

Mr. Michas has been a Partner and a Director of Stonington Partners, Inc.,
an investment management firm, since 1993, and has been a Director of MLCP since
1989. He was a Partner of MLCP from 1993 to 1994 and Senior Vice President of
MLCP from 1989 to 1993. He was also a Managing Director of the Investment
Banking Division of MLPF&S from 1991 to 1994 and a Director in the Investment
Banking Division of MLPF&S from 1990 to 1991. He is also a Director of Blue Bird
Corporation, BW-Security, Dictaphone Corporation and Goss Graphic Systems, Inc.

Mr. Trauscht was Chairman of the Board from December 1992 until December
1995; Chief Executive Officer from January 1992 to October 1995; and President
from January 1992 to April 1995 of BW-Security. Mr. Trauscht was Chief Operating
Officer and President from September 1991 to January 1992; Chief Operating
Officer and Vice President from 1990 to 1991; and Vice President -- Finance and
Strategy of BW-Security from 1987 to 1990. Mr. Trauscht was President of the
Company from December 1990 and Chief Operating Officer from September 1991 to
September 1992. Mr. Trauscht is also a Director of BW-Security,

36
<PAGE> 40

Baker Hughes Incorporated, ESCO Electronics Corporation, Thiokol Corporation,
Blue Bird Corporation, and IMO Industries, Inc.

Mr. Gorr was Chairman and Chief Executive Officer of Cooper Tire & Rubber
Company from 1989 until his retirement in 1994 and President of the Company from
1982 until 1989. Mr. Gorr is a director of Amcast Industrial Corporation, Arvin
Industries, Inc., Fifth Third Bancorp and OHM Corporation.

Mr. Drummond has been President and Chief Executive Officer of BellSouth
Telecommunications, Inc. since January 1, 1995 and was elected a director of
that company in July, 1993. He was Group President-Customer Operations from
March 1991 until December 1994, and from April 1989 until February 1991, Mr.
Drummond was the Executive Vice President-Marketing, Network and Planning for
BellSouth Services Incorporated.

37
<PAGE> 41

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of February 14, 1997 by (i) directors of the
Company, (ii) each of the named executive officers of the Company, (iii) each
person known by the Company to be the beneficial owner of 5% or more of the
outstanding Common Stock (based on publicly available information), (iv) all of
the Company's directors and executive officers as a group, and (v) each Selling
Stockholder. Unless otherwise indicated, the Company believes that the
beneficial owner has sole voting and investment power over such shares. The
table does not reflect the potential sale of additional shares if the
Underwriters' over-allotment options are exercised. The percentage ownership has
been calculated based on shares of Common Stock outstanding as of February 14,
1997. The Selling Stockholders will participate proportionately in any sales
pursuant to the over-allotment options based on their participation in the
Offerings.

<TABLE>
<CAPTION>
OWNERSHIP PRIOR TO OWNERSHIP AFTER
THE OFFERINGS THE OFFERINGS
--------------------------- ---------------------------
SHARES OF SHARES TO SHARES OF
NAME COMMON STOCK PERCENTAGE BE SOLD COMMON STOCK PERCENTAGE
-------------- --------- ---------- -------------- ---------
<S> <C> <C> <C> <C> <C>
ML Entities(1)................................ 5,134,534 21.8% 4,000,000 1,134,534(2)(3) 4.8%(3)
John F. Fiedler............................... 25,000 * -- 25,000 *
Fred M. Kovalik(4)............................ 25,000 * -- 25,000 *
Matthias B. Bowman(5)......................... 0 * -- 0 *
Donald C. Trauscht(6)......................... 6,500 * -- 6,500 *
James J. Kerley(7)............................ 2,500 * -- 2,500 *
Gary P. Fukayama(8)........................... 56,000 * -- 56,000 *
Ronald M. Ruzic(9)............................ 56,168 * -- 56,168 *
Albert J. Fitzgibbons, III(10)................ 0 * -- 0 *
Alexis P. Michas(11).......................... 12,188 * -- 12,188 *
Paul E. Glaske(12)............................ 1,500 * -- 1,500 *
Ivan W. Gorr.................................. 0 * -- 0 *
Jere A. Drummond.............................. 0 * -- 0 *
All directors and executive officers of the
Company as a group (18 persons) (13)........ 282,635 * -- 282,635 *
All Management Investors as a group (10
persons)(14)................................ 204,845 * -- 204,845 *
</TABLE>

- ---------------

* Less than 1%.

(1) Shares of Common Stock beneficially owned by the following entities (the
"ML Entities") are owned of record as follows: 20,135 shares by Merrill
Lynch KECALP L.P. 1986; 100,678 shares by Merrill Lynch KECALP L.P. 1987;
251,694 shares by Merchant Banking L.P. No. I; 251,694 shares by ML Venture
Partners II, L.P.; 3,336,743 shares by Merrill Lynch Capital Appreciation
Partnership No. VIII, L.P.; 84,831 shares by ML Offshore LBO Partnership
No. VIII; 82,948 shares by ML Employees LBO Partnership No. I, L.P.; and
1,005,811 shares by ML IBK Positions, Inc. MLCP is the general partner of
Merrill Lynch LBO Partners No. II, L.P., which is the general partner of
Merrill Lynch Capital Appreciation Partnership No. VIII, L.P., and the
investment general partner of ML Offshore LBO Partnership No. VIII. Merrill
Lynch Capital Appreciation Partnership No. VIII, L.P. and ML Offshore LBO
Partnership No. VIII are record holders of shares of Common Stock.

(2) Certain of the ML Entities that are limited partnerships are expected to
distribute an aggregate of between approximately 388,000 and 393,000 shares
of Common Stock owned by them to their partners that have elected not to
receive their pro rata share of the proceeds of the sale of Common Stock by
such partnerships (the "Merrill Lynch Distribution"). The number of shares
actually distributed will depend upon the Price to Public in the Offerings
and may be higher or lower than the number of shares shown above. As a
condition to receiving shares of Common Stock in the Merrill Lynch
Distribution, such partners have agreed to be bound by the same lock-up
provision as each holder of at least 1% of the outstanding shares of the
Common Stock who is a party to the Registration Rights Agreement (as
defined herein) for a period of 90 days after the effective date of the
Registration Statement. The Merrill Lynch Distribution is expected to occur
as soon as practicable after 90 days from the effective date of the
Registration Statement, or on such earlier date consented to by the
Representatives (as defined herein).

38
<PAGE> 42

(3) Giving effect to the Merrill Lynch Distribution and the exercise in full of
the Underwriters' option to cover over-allotments, the ML Entities will
beneficially own 232,948 shares of Common Stock, which would represent less
than 1% of the shares of Common Stock outstanding after the Offerings.

(4) Total includes 25,000 shares issuable upon the exercise of options within
the next 60 days.

(5) Mr. Bowman is a limited partner of the following ML Entities which, in the
aggregate, are the holders of record of 3,792,198 shares: Merrill Lynch
Capital Appreciation Partnership No. VIII, L.P., ML Employees LBO
Partnership No. I, L.P., Merrill Lynch KECALP L.P. 1986, Merrill Lynch
KECALP L.P. 1987 and Merchant Banking L.P. No. 1. In addition, Mr. Bowman
is an advisor to or a director and/or an officer of the ultimate general
partner of such ML Entities. Mr. Bowman expressly disclaims beneficial
ownership of all shares held by such ML Entities.

(6) Total includes 3,500 shares issuable upon the exercise of options within
the next 60 days.

(7) Total includes 1,500 shares issuable upon the exercise of options within
the next 60 days.

(8) Total includes 47,000 shares issuable upon the exercise of options within
the next 60 days.

(9) Total includes 40,500 shares issuable upon the exercise of options within
the next 60 days.

(10) Mr. Fitzgibbons is a director of the Company as well as MLCP, which manages
Merrill Lynch Capital Appreciation Partnership No. VIII, L.P. and ML
Offshore LBO Partnership No. VIII. Mr. Fitzgibbons disclaims beneficial
ownership of shares beneficially owned by the partnerships identified in
footnote 1, above.

(11) Mr. Michas is a director of the Company as well as MLCP, which manages
Merrill Lynch Capital Appreciation Partnership No. VIII, L.P. and ML
Offshore LBO Partnership No. VIII. Mr. Michas disclaims beneficial
ownership of shares beneficially owned by the partnerships identified in
footnote 1, above.

(12) Total includes 1,500 shares issuable upon the exercise of options within
the next 60 days.

(13) Total includes 214,200 shares issuable upon the exercise of options within
the next 60 days.

(14) Total includes 142,750 shares issuable upon exercise of options within the
next 60 days.

39
<PAGE> 43

DESCRIPTION OF CAPITAL STOCK

GENERAL

The Company has three authorized classes of capital stock: Preferred Stock,
par value $.01 per share (the "Preferred Stock"); Common Stock; and Non-Voting
Common Stock. The shares of such stock which are authorized and outstanding as
of February 14, 1997 are as follows:

<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SHARES SHARES
AUTHORIZED OUTSTANDING*
---------- -----------
<S> <C> <C>
Common Stock...................................................... 50,000,000 23,602,102
Non-Voting Common Stock........................................... 25,000,000 59,000
Preferred Stock................................................... 5,000,000 0
</TABLE>

- ---------------

* Shares subject to exercisable but unexercised options are not treated as
outstanding.

COMMON STOCK

The Common Stock and the Non-Voting Common Stock have the same terms except
as to voting rights and certain conversion features.

Each share of Common Stock entitles the holder thereof to one vote in the
election of directors and all other matters submitted to a vote of the Company's
stockholders. Holders of Common Stock do not have cumulative voting rights. The
Non-Voting Common Stock has no voting rights, other than those required by law.

As to conversion rights, certain institutional investors who are subject to
regulatory requirements that forbid or limit their right to own general voting
stock may convert their Common Stock into Non-Voting Common Stock on a
share-for-share basis as needed to satisfy the applicable regulatory
requirements, or directly purchase Non-Voting Common Stock because of such
regulatory requirements. Thereafter, the Non-Voting Common Stock may be
converted into Common Stock on a share-for-share basis in certain circumstances
as permitted by the applicable regulatory requirements.

Subject to any preferential rights of any outstanding shares of Preferred
Stock, holders of shares of Common Stock and Non-Voting Common Stock, treated as
a single class, are entitled to receive, pro rata based on the number of shares
held, cash dividends when, as and if declared by the Board from funds legally
available for such purpose. See "Dividend Policy."

In the event of a liquidation of the Company, holders of shares of Common
Stock and Non-Voting Common Stock, treated as a single class, are entitled to
receive, pro rata based on the number of shares held, all of the assets
available for distribution to stockholders after payment of all prior claims,
including any preferential liquidation rights of any Preferred Stock then
outstanding.

Holders of shares of Common Stock and Non-Voting Common Stock have no
preemptive rights to subscribe to additional shares of any such class or other
securities of the Company. All outstanding shares of Common Stock and Non-Voting
Common Stock are fully paid and non-assessable.

The Shares being offered in the Offerings are fully paid and non-assessable
and are not subject to any future call or assessment.

The transfer agent and registrar for the Common Stock is Chase Mellon
Shareholder Services.

REGISTRATION RIGHTS AGREEMENT

The Company is a party to a registration rights agreement (the
"Registration Rights Agreement") with stockholders who currently own
approximately 1.6 million shares of Common Stock (in addition to stockholders
who are selling Shares in the Offerings) and substantially all of the currently
outstanding Non-Voting Common Stock. Stockholders who are parties to the
Registration Rights Agreement and who also hold at least 15% of the "registrable
securities," but in no event less than 1,000,000 shares of Common Stock, will

40
<PAGE> 44

have the right to demand, on up to four occasions, that the Company effect the
registration of such securities under the Securities Act of 1933, as amended
(the "Securities Act"). Two such demands have previously been exercised and this
Offering will constitute the third of these four demands. The Registration
Rights Agreement also provides for incidental registration rights in
circumstances in which the Company is registering securities under the
Securities Act and the concurrent registration of registrable securities can be
accomplished, in the good faith judgment of the Company, without an adverse
effect on the Company. For purposes of the Registration Rights Agreement,
"registrable securities" means Common Stock received in the Spin-Off, or
obtained upon conversion of securities received in the Spin-Off, that has not
been previously transferred pursuant to a registration under the Securities Act
or pursuant to Rule 144. The Registration Rights Agreement contains customary
provisions with respect to the timing of registrations required thereunder, the
allocation of registration expenses and indemnification. The Registration Rights
Agreement terminates pursuant to its terms on July 27, 2002.

PREFERRED STOCK

The Certificate of Incorporation of the Company (the "Certificate of
Incorporation") authorizes the Board to establish one or more series of
Preferred Stock and to determine, with respect to any series of Preferred Stock,
the terms and rights of such series, including (i) the designation of the
series, (ii) the number of shares of the series, which number the Board may
thereafter (except where otherwise provided in the Preferred Stock designation)
increase or decrease (but not below the number of shares thereof then
outstanding), (iii) whether dividends, if any, will be cumulative or
non-cumulative and the dividend rate of the series, (iv) the dates at which
dividends, if any, will be payable, (v) the redemption rights and price or
prices, if any, for shares of the series, (vi) the terms and amounts of any
sinking fund provided for the purchase or redemption of shares of the series,
(vii) the amounts payable on shares of the series in the event of any voluntary
or involuntary liquidation, dissolution or winding-up of the affairs of the
Company, (viii) whether the shares of the series will be convertible into shares
of any other class or series, or any other security, of the Company or any other
corporation, and, if so, the specification of such other class or series or such
other security, the conversion price or prices or rate or rates, any adjustments
thereof, the date or dates as of which such shares shall be convertible and all
other terms and conditions upon which such conversion may be made, (ix)
restrictions on the issuance of shares of the same series or of any other class
or series, and (x) the voting rights, if any, of the holders of such series. The
authorized shares of Preferred Stock, as well as shares of Common Stock, will be
available for issuance without further action by the Company's stockholders,
unless such action is required by applicable law or the rules of any stock
exchange or automated quotation system on which the Company's securities may be
listed or traded.

41
<PAGE> 45

Although the Board has no intention at the present time of doing so, it
could issue a series of Preferred Stock that could, depending on the terms of
such series, impede the completion of a merger, tender offer or other takeover
attempt. The Board will make any determination to issue such shares based on its
judgment as to the best interests of the Company and its stockholders. The
Board, in so acting, could issue Preferred Stock having terms that could
discourage an acquisition attempt or other transaction that some, or a majority,
of the Company's stockholders might believe to be in their best interests or in
which stockholders might receive a premium for their stock over the then current
market price of such stock.

THE DELAWARE GENERAL CORPORATION LAW

The Company is a Delaware corporation subject to Section 203 of the
Delaware General Corporation Law (the "DGCL"). Section 203 provides that,
subject to certain exceptions specified therein, a corporation shall not engage
in any business combination with any "interested stockholder" for a three-year
period following the time that such stockholder became an interested stockholder
unless (i) prior to such time, the board of directors of the corporation
approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder, (ii) upon consummation of
the transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced (excluding
certain shares), or (iii) at or subsequent to such time, the business
combination is approved by the board of directors of the corporation and by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which is
not owned by the interested stockholder. Except as specified in Section 203 of
the DGCL, an interested stockholder is defined to include (x) any person that is
the owner of 15% or more of the outstanding voting stock of the corporation, or
is an affiliate or associate of the corporation and was the owner of 15% or more
of the outstanding voting stock of the corporation, at any time within three
years immediately prior to the relevant date and (y) the affiliates and
associates of any such person. Under certain circumstances, Section 203 of the
DGCL makes it more difficult for an "interested stockholder" to effect various
business combinations with a corporation for a three-year period, although the
stockholders may elect to exclude a corporation from the restrictions imposed
thereunder. The Certificate of Incorporation does not exclude the Company from
the restrictions imposed under Section 203 of the DGCL.

CERTIFICATE OF INCORPORATION; BYLAWS

The Certificate of Incorporation and the Bylaws contain certain provisions
that could make more difficult the acquisition of the Company by means of a
tender offer, a proxy contest or otherwise.

Classified Board. The Certificate of Incorporation and Bylaws of the
Company (the "Bylaws") provide that the Company's Board will be divided into
three classes of directors, with the classes to be as nearly equal in number as
possible. As a result, approximately one-third of the Board will be elected each
year. The classification of directors will have the effect of making it more
difficult for stockholders to change the composition of the Company's Board. The
Certificate of Incorporation provides that, subject to any rights of holders of
Preferred Stock to elect additional directors under specified circumstances, the
number of directors will be fixed in the manner provided in the Bylaws. The
Bylaws provide that, subject to any rights of holders of Preferred Stock to
elect directors under specified circumstances, the number of directors will be
fixed from time to time exclusively pursuant to a resolution adopted by
directors constituting a majority of the total number of directors that the
Company would have if there were no vacancies on the Board, but must consist of
not more than seventeen nor less than three directors. In addition, the
Certificate of Incorporation provides that, subject to any rights of holders of
Preferred Stock, and unless the Board otherwise determines, any vacancies will
be filled only by the affirmative vote of a majority of the remaining directors,
though less than a quorum.

Removal of Directors. Under the DGCL, unless otherwise provided in the
Certificate of Incorporation, directors serving on a classified board may be
removed by the stockholders only for cause. In addition, the Certificate of
Incorporation and the Bylaws provide that directors may be removed only for
cause and only upon the affirmative vote of holders of at least 80% of the
voting power of all the then outstanding shares of stock entitled to vote
generally in the election of directors ("Voting Stock"), voting together as a
single class.

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<PAGE> 46

Stockholders Action. The Certificate of Incorporation and the Bylaws
provide that, subject to the rights of any holders of Preferred Stock to elect
additional directors under specified circumstances, stockholder action can be
taken only at an annual or special meeting of stockholders and may not be taken
by written consent in lieu of a meeting. The Bylaws provide that, subject to the
rights of holders of any series of Preferred Stock to elect additional directors
under specified circumstances, special meetings of stockholders can be called
only by the Board pursuant to a resolution adopted by a majority of the total
number of directors. Stockholders are not permitted to call a special meeting or
to require that the Board call a special meeting of stockholders. Moreover, the
business permitted to be conducted at any special meeting of stockholders is
limited to the business brought before the meeting pursuant to the notice of
meeting given by the Company.

Advance Notice Procedures. The Bylaws establish an advance notice
procedure for stockholders to make nominations of candidates for election as
directors, or bring other business before an annual meeting of stockholders of
the Company (the "Stockholders Notice Procedure"). The Stockholders Notice
Procedure provides that only persons who are nominated by, or at the direction
of, the Board, or by a stockholder who has given timely written notice to the
Secretary of the Company prior to the meeting at which directors are to be
elected, will be eligible for election as directors of the Company. The
Stockholders Notice Procedure also provides that at an annual meeting only such
business may be conducted as has been brought before the meeting by, or at the
direction of, the Chairman of the Board or by a stockholder who has given timely
written notice to the Secretary of the Company of such stockholder's intention
to bring such business before such meeting. Under the Stockholders Notice
Procedure, for notice of stockholder nominations to be made at an annual meeting
to be timely, such notice must be received by the Company not less than 60 days
nor more than 90 days prior to the first anniversary of the previous year's
annual meeting (or, if the date of the annual meeting is advanced by more than
30 days or delayed by more than 60 days from such anniversary date, not earlier
than the 90th day prior to such meeting and not later than the later of (x) the
60th day prior to such meeting and (y) the 10th day after public announcement of
the date of such meeting is first made). Notwithstanding the foregoing, in the
event that the number of directors to be elected is increased and there is no
public announcement naming all of the nominees for director or specifying the
size of the increased Board of Directors made by the Company at least 70 days
prior to the first anniversary of the preceding year's annual meeting, a
stockholder's notice will be timely, but only with respect to nominees for any
new positions created by such increase, if it is received by the Company not
later than the 10th day after such public announcement is first made by the
Company.

Under the Stockholders Notice Procedure, for notice of a stockholder
nomination to be made at a special meeting at which directors are to be elected
to be timely, such notice must be received by the Company not earlier than the
90th day before such meeting and not later than the later of (x) the 60th day
prior to such meeting and (y) the 10th day after the public announcement of the
date of such meeting is first made. In addition, under the Stockholders Notice
Procedure, a stockholder's notice to the Company proposing to nominate a person
for election as a director or relating to the conduct of business other than the
nomination of directors must contain certain specified information. If the
Chairman of the Board or other officer presiding at a meeting determines that a
person was not nominated, or other business was not brought before the meeting,
in accordance with the Stockholders Notice Procedure, such person will not be
eligible for election as a director, or such business will not be conducted at
such meeting, as the case may be.

Liability of Directors; Indemnification. The Certificate of Incorporation
provides that a director will not be personally liable for monetary damages to
the Company or its stockholders for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
paying a dividend or approving a stock repurchase or redemption in violation of
Section 174 of the DGCL, or (iv) for any transaction from which the director
derived an improper personal benefit. The Certificate of Incorporation also
provides that each current or former director, officer, employee or agent of the
Company, or each such person who is or was serving or who had agreed to serve at
the request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise (including
the heirs, executors, administrators or estate of such person), will be
indemnified by the Company to the full extent permitted by the DGCL, as the same
exists or may in the

43
<PAGE> 47

future be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Company to provide broader indemnification
rights than said law permitted the Company to provide prior to such amendment).
The Certificate of Incorporation also specifically authorizes the Company to
enter into agreements with any person providing for indemnification greater or
different than that provided by the Certificate of Incorporation.

Amendment. The Certificate of Incorporation provides that the affirmative
vote of the holders of at least 80% of the voting power of the outstanding
shares of Voting Stock, voting together as a single class, is required to amend
provisions of the Certificate of Incorporation relating to the prohibition of
stockholder action without a meeting; the number, election and term of the
Company's directors; and the removal of directors. The Certificate of
Incorporation further provides that the Bylaws may be amended by the Board or by
the affirmative vote of the holders of at least 80% of the outstanding shares of
Voting Stock, voting together as a single class.

The description set forth above is intended as a summary only and is
qualified in its entirety by reference to the forms of the Certificate of
Incorporation and the Bylaws, copies of which have been filed as exhibits to the
Registration Statement of which this Prospectus is a part. See "Available
Information."

44
<PAGE> 48

CERTAIN UNITED STATES TAX CONSEQUENCES
FOR NON-U.S. SHAREHOLDERS

The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of shares of
Common Stock by a person that is a "Non-U.S. Shareholder." For purposes of this
discussion, a "Non-U.S. Shareholder" means any person other than (i) an
individual who is a citizen or resident of the United States, (ii) a
corporation, partnership or other entity created or organized in or under the
laws of the United States or of any political subdivision thereof, or (iii) an
estate or trust the income of which is subject to United States federal income
taxation regardless of its source.

This discussion is for general information only and does not consider all
aspects of United States federal tax consequences that may be relevant to a
particular Non-U.S. Shareholder in light of such shareholder's particular tax
position, and does not deal with state, local or foreign tax consequences. This
discussion is based on the Internal Revenue Code of 1986, as amended, existing
(and, where noted, proposed) Treasury regulations, and judicial and
administrative interpretations as of the date hereof, all of which are subject
to change. Prospective investors are urged to consult their own tax advisors
with respect to the United States federal, state and local tax consequences of
owning and disposing of the Common Stock, as well as any tax consequences
arising under the laws of any other taxing jurisdiction. Proposed Treasury
regulations (the "Proposed Regulations") that are proposed to be effective with
respect to dividends paid after December 31, 1997 would change in certain
respects some of the certification and reporting requirements discussed below.
It is not certain whether, or in what form, such proposed regulations will be
finalized.

DIVIDENDS

In the event that dividends are paid on the Common Stock, any such
dividends paid to a Non-U.S. Shareholder will be subject to withholding of
United States federal income tax at a rate of 30% of the amount of the dividend
(or a lower rate prescribed by an applicable income tax treaty). However, if the
dividend is effectively connected with the conduct of a United States trade or
business by the Non-U.S. Shareholder and the Non-U.S. Shareholder properly files
Internal Revenue Service Form 4224 (or such other applicable form required by
the Internal Revenue Service) with the Company or its dividend-paying agent,
then the dividend (i) will not be subject to income tax withholding, and (ii)
except to the extent that an applicable income tax treaty provides otherwise,
will be subject to United States federal income tax at progressive rates of tax.
In the case of a Non-U.S. Shareholder that is a corporation, such effectively
connected dividend income may also be subject to the branch profits tax (which
is generally imposed on a foreign corporation on the repatriation from the
United States of effectively connected earnings and profits) at a 30% rate (or a
lower rate prescribed by an applicable income tax treaty).

A Non-U.S. Shareholder that is eligible for a reduced rate of United States
withholding tax pursuant to an income tax treaty may obtain a refund of any
excess amounts currently withheld by filing an appropriate claim for refund with
the Internal Revenue Service.

The Company is required to report annually to the Internal Revenue Service
and to each Non-U.S. Shareholder the amount of dividends paid to, and the income
tax withheld with respect to, such shareholder. Such information may also be
made available by the Internal Revenue Service to the tax authorities of the
country in which the Non-U.S. Shareholder resides.

DISPOSITION OF COMMON STOCK

Generally, a Non-U.S. Shareholder will not be subject to United States
federal income tax on the gain realized upon the disposition of such
shareholder's shares of Common Stock unless (i) the Company is or has been a
"U.S. real property holding corporation" for federal income tax purposes (which
the Company does not believe that it has been, or is likely to become) and the
Non-U.S. Shareholder held, directly or indirectly, at any time during the
five-year period ending on the date of disposition, more than 5% of any class of
stock of the Company that is regularly traded on an established securities
market within the meaning of the applicable Treasury regulations, (ii) the gain
is effectively connected with a United States trade or business carried on by
the Non-U.S. Shareholder and, if an income tax treaty applies, attributable to a
United States permanent

45
<PAGE> 49

establishment maintained by the Non-U.S. Shareholder, (iii) the Non-U.S.
Shareholder is an individual who holds the Common Stock as a capital asset, such
shareholder is present in the United States for 183 days or more in the taxable
year of the disposition and either the Non-U.S. Shareholder has a "tax home" in
the United States for United States federal income tax purposes or the sale is
attributable to an office or other fixed place of business maintained by the
Non-U.S. Shareholder in the United States, or (iv) the Non-U.S. Shareholder is
subject to tax pursuant to the provisions of United States tax law applicable to
certain United States expatriates.

ESTATE TAX

Shares of Common Stock owned or treated as owned by an individual who is
not a citizen or resident (as specifically defined for United States federal
estate tax purposes) of the United States at the time of his or her death will
be includable in the individual's gross estate for United States federal estate
tax purposes and thus subject to United States federal estate tax, unless an
applicable estate tax treaty provides otherwise.

UNITED STATES INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX

United States information reporting requirements (other than the reporting
of dividend payments for purposes of the 30% income tax withholding discussed
under "-- Dividends") and backup withholding tax generally will not apply to a
dividend payment made outside the United States to a Non-U.S. Shareholder, if
the dividend either is subject to the 30% withholding discussed above or is
subject to a reduced rate of such withholding tax under an applicable income tax
treaty. Otherwise, information reporting and backup withholding tax at a 31%
rate may apply to dividends paid on the Common Stock to a Non-U.S. Shareholder
who fails to certify its non-U.S. status under penalties of perjury in the
manner required by United States law or otherwise fails to establish an
exemption.

In addition, the payment of the proceeds of the sale of shares of Common
Stock to or through the United States office of a broker will be subject to
information reporting and possible 31% backup withholding unless the shareholder
certifies its non-U.S. status under penalties of perjury or otherwise
establishes an exemption. The payment of the proceeds of the sale of shares of
Common Stock to or through the foreign office of a broker generally will not be
subject to this backup withholding tax. In the case of the payment of proceeds
from the disposition of shares of Common Stock to or through a foreign office of
a broker that is a United States person or a "U.S. related person," existing
regulations require information reporting but not backup withholding on the
payment unless the broker has documentary evidence in its files that the owner
is a Non-U.S. Shareholder and the broker has no actual knowledge to the
contrary. For this purpose, a "U.S. related person" is (i) a "controlled foreign
corporation" for United States federal income tax purposes, or (ii) a foreign
person, 50% or more of whose gross income from all sources for the three-year
period ending with the close of its taxable year preceding the payment (or for
such part of the period that the broker has been in existence) is derived from
activities that are effectively connected with the conduct of a United States
trade or business. The Proposed Regulations would, if adopted, alter the
foregoing rules in certain respects. Among other things, the Proposed
Regulations would provide certain presumptions under which a Non-U.S.
Shareholder would be subject to backup withholding in the absence of required
certifications. Backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules from a payment to a Non-U.S.
Shareholder will be allowed as a refund or a credit against such Non-U.S.
Shareholder's United States federal income tax, provided that the required
information is furnished to the Internal Revenue Service.

These information reporting and backup withholding rules are under review
by the Internal Revenue Service, and their application to the Common Stock could
be changed by future regulations.

46
<PAGE> 50

UNDERWRITING

Subject to the terms and conditions set forth in a purchase agreement (the
"U.S. Purchase Agreement") among the Company, the Selling Stockholders, and each
of the underwriters named below (the "U.S. Underwriters") and concurrently with
the sale of 800,000 Shares to the International Underwriters, the Selling
Stockholders have agreed to sell to each of the U.S. Underwriters, and each of
the U.S. Underwriters has severally agreed to purchase, the aggregate number of
Shares set forth opposite its name below.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
-------------------------------------------------------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith Incorporated............
Lehman Brothers Inc...........................................
Morgan Stanley & Co. Incorporated.............................

----------
Total......................................................... 3,200,000
==========
</TABLE>

MLPF&S, Lehman Brothers Inc. and Morgan Stanley & Co. Incorporated are
acting as representatives (the "U.S. Representatives") of the several U.S.
Underwriters.

The Company and the Selling Stockholders have also entered into a purchase
agreement (the "International Purchase Agreement") with certain underwriters
outside the United States and Canada (the "International Underwriters" and,
together with the U.S. Underwriters, the "Underwriters") for whom Merrill Lynch
International, Lehman Brothers International (Europe) and Morgan Stanley & Co.
International Limited are acting as representatives (the "International
Representatives" and, together with the U.S. Representatives, the
"Representatives"). Subject to the terms and conditions set forth in the
International Purchase Agreement, and concurrently with the sale of 3,200,000
Shares to the U.S. Underwriters, the Selling Stockholders have agreed to sell to
the International Underwriters, and the International Underwriters severally
have agreed to purchase, an aggregate of 800,000 Shares. The public offering
price per Share and the underwriting discount per Share are identical under the
U.S. Purchase Agreement and the International Purchase Agreement.

In the U.S. Purchase Agreement, the several U.S. Underwriters have agreed,
subject to the terms and conditions set forth therein, to purchase all of the
Shares being sold pursuant to such Agreement if any of the Shares being sold
pursuant to such Agreement are purchased and in the International Purchase
Agreement the several International Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all the Shares being sold
pursuant to such Agreement if any of the Shares being sold pursuant to such
Agreement are purchased. Each Agreement provides that in the event of a default
by an Underwriter, the purchase commitments of non-defaulting Underwriters may
in certain circumstances be increased. The closings with respect to the sale of
the Shares to be purchased by the U.S. Underwriters and the International
Underwriters are conditioned upon one another.

The U.S. Underwriters propose initially to offer the Shares to the public
at the public offering price set forth on the cover page of this Prospectus and
to certain dealers (who may include U.S. Underwriters) at such price less a
concession not in excess of $ per Share. The U.S. Underwriters may
allow, and such dealers may re-allow, a discount not in excess of $ per
Share to certain other dealers. After the initial public offering, the public
offering price, concession and discount may be changed.

The Selling Stockholders have granted to the U.S. Underwriters options to
purchase up to an aggregate of 408,498 additional Shares, and the International
Underwriters options to purchase up to an aggregate of 102,125 Shares, in each
case exercisable for 30 days after the date hereof, to cover over-allotments, if
any, at

47
<PAGE> 51

the public offering price set forth on the cover page of this Prospectus, less
the underwriting discount. To the extent that the U.S. Underwriters exercise
this option, each of the U.S. Underwriters will have a firm commitment, subject
to certain conditions, to purchase approximately the same percentage of such
Shares that the number of Shares to be purchased by it shown in the foregoing
table bears to the total number of Shares initially offered to the U.S.
Underwriters hereby.

The U.S. Underwriters and the International Underwriters have entered into
an Intersyndicate Agreement (the "Intersyndicate Agreement") that provides for
the coordination of their activities. Pursuant to the Intersyndicate Agreement,
sales may be made between the U.S. Underwriters and the International
Underwriters of such number of Shares as may be mutually agreed. The price of
any Shares so sold shall be the public offering price, less an amount not
greater than the selling concession.

Under the terms of the Intersyndicate Agreement, the U.S. Underwriters and
any dealer to whom they sell Shares will agree to offer to sell or sell Shares
to persons who are United States or Canadian persons (as defined in the
Intersyndicate Agreement) or to persons they believe intend to resell to persons
who are United States or Canadian persons, and the International Underwriters
and any dealer to whom they sell Shares will not offer to sell or sell Shares to
United States or Canadian persons or to persons they believe intend to resell to
United States or Canadian persons, except, in each case, for transactions
pursuant to the Intersyndicate Agreement which, among other things, permits the
Underwriters to purchase from each other and to offer for resale such number of
Shares as the selling Underwriter or Underwriters and the purchasing Underwriter
or Underwriters may agree.

The Common Stock is listed on the NYSE under the symbol "BWA." Because the
Company is an affiliate of MLPF&S, one of the underwriters, the U.S. Offering is
being conducted in accordance with Conduct Rule 2720 of the National Association
of Securities Dealers, Inc. (the "NASD"). In accordance with Conduct Rule 2720,
no NASD member participating in the distribution is permitted to confirm sales
to accounts over which it exercises discretionary authority without prior
specific written consent of the customer.

Pursuant to the Registration Rights Agreement, each holder of at least 1%
of the outstanding shares of Common Stock who is a party thereto is required to
agree, for a period beginning seven days before, and ending 180 days after, the
effective date of the Registration Statement of which this Prospectus is a part,
not to effect any public sale or distribution, including any sale pursuant to
Rule 144 under the Securities Act, of Common Stock or any securities convertible
into or exchangeable for Common Stock, or any rights or warrants to acquire
Common Stock. The U.S. Representatives have agreed to shorten the 180-day period
after the effective date of the Registration Statement to 90 days. In addition,
certain of the ML Entities that are limited partnerships are expected to
distribute an aggregate of between approximately 388,000 and 393,000 shares of
Common Stock pursuant to the Merrill Lynch Distribution. The number of shares
actually distributed will depend upon the Price to Public in the Offerings and
may be higher or lower than the number of shares shown above. As a condition to
receiving shares of Common Stock in the Merrill Lynch Distribution, such
partners have agreed to be bound by the same lock-up provision as each holder of
at least 1% of the outstanding shares of the Common Stock who is a party to the
Registration Rights Agreement for a period of 90 days after the effective date
of the Registration Statement. The Merrill Lynch Distribution is expected to
occur as soon as practicable after 90 days from the effective date of the
Registration Statement, or on such other date consented to by the
Representatives. Furthermore, each of the Company and the executive officers and
directors of the Company, as well as certain other stockholders, will agree, for
a period beginning seven days before, and ending 90 days after the effective
date of the Registration Statement of which this Prospectus is a part, not to,
directly or indirectly, (i) sell, grant any option, right or warrant for the
sale of, or otherwise dispose of or transfer any shares of the Common Stock or
any securities convertible into or exchangeable or exercisable for the Common
Stock or (ii) enter into any swap or any other agreement or any transaction that
transfers, in whole or in part, directly or indirectly, the economic consequence
of ownership of the Common Stock sell or otherwise dispose of any Common Stock
or securities convertible into or exchangeable or exercisable for Common Stock,
or any rights or warrants to acquire Common Stock without the prior written
consent of MLPF&S (other than options or shares of Common Stock issuable upon
exercise of options which expire during such 98 day period). Upon consummation
of the Offering, it is expected that the lock-up agreements will cover an
aggregate of approximately 2 million shares of Common Stock.

48
<PAGE> 52

The Company and the Selling Stockholders have agreed to indemnify the U.S.
Underwriters and the International Underwriters against certain civil
liabilities, including liabilities under the Securities Act.

Each of the U.S. Representatives or their affiliates from time-to-time
performs investment banking and other financial services for the Company. Lehman
Brothers, Inc. acted as financial advisor to the Company in connection with the
disposition of the North American manual transmission business and received a
fee of approximately $500,000. If the Underwriters exercise in full their option
to cover over-allotments, the ML Entities' ownership of Common Stock after the
Offerings and the Merrill Lynch Distribution will be less than 1%. Following
consummation of the Offerings, the ML Entities intend to reduce their
representation on the Board. For information regarding the ownership by the ML
Entities of Common Stock, the Merrill Lynch Distribution and the representation
of affiliates of Merrill Lynch & Co., Inc. ("ML&Co.") on the Board, see
"Management" and "Principal and Selling Stockholders."

LEGAL MATTERS

The validity of the Shares offered hereby and certain other legal matters
relating to the Offerings will be passed upon for the Company by Wachtell,
Lipton, Rosen & Katz, New York, New York. Certain legal matters will be passed
upon for the Underwriters by Shearman & Sterling, New York, New York. Wachtell,
Lipton, Rosen & Katz and Shearman & Sterling occasionally act as counsel to MLCP
and other affiliates of ML&Co.

EXPERTS

The consolidated financial statements of the Company and its subsidiaries
for each of the three years in the period ended December 31, 1995 have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report which is incorporated herein by reference, and have been so incorporated
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.

The financial statements of NSK-Warner as of March 31, 1996 and 1995, and
for each of the years in the three-year period ended March 31, 1996, have been
incorporated by reference herein in reliance upon the report of KPMG Peat
Marwick, independent certified public accountants, incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing.

The combined financial statements of the Coltec Automotive OEM Business
Group as of December 31, 1995 and 1994 and for each of the two years in the
period ended December 31, 1995, incorporated by reference in this Prospectus
from the Company's Form 8-K dated June 17, 1996, have been audited by Arthur
Andersen LLP, as indicated by their report, which is incorporated herein by
reference. The audited financial statements incorporated by reference have been
so incorporated in reliance upon the report of Arthur Andersen LLP, independent
public accountants, given upon the authority of said firm as experts in
accounting and auditing.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The Registration
Statement, such reports, proxy statements and other information, may be
inspected and copied at the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549; and at the regional offices of the
Commission at 7 World Trade Center (13th Floor), New York, New York 10048; and
Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661.
Copies of such material can be obtained at prescribed rates from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549. The Commission also maintains an internet web site at http://www.sec.gov
that contains reports, proxy statements and other information. Additionally,
reports, proxy statements and other information concerning the Company filed
pursuant to the Exchange Act are available for inspection at the NYSE, on which
the Common Stock is listed, located at 20 Broad Street, New York, New York
10005.

49
<PAGE> 53

contain all of the information set forth in the Registration Statement and the
exhibits thereto. For further information with respect to the Company and the
Common Stock, reference is hereby made to such Registration Statement and the
exhibits thereto.

INCORPORATION OF CERTAIN INFORMATION BY REFERENCE

Incorporated herein by reference are (i) the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995 (including the portions of
the Company's annual report to stockholders incorporated by reference therein),
as amended by the Form 10-K/A (Amendment No. 1) filed on June 28, 1996, as
further amended by the Form 10-K/A (Amendment No. 2) filed on July 1, 1996 (the
"Company's Annual Report"); (ii) the Company's proxy statement dated March 22,
1996 for its Annual Meeting of Stockholders held on April 23, 1996 (other than
the sections entitled "Compensation Committee Report on Executive Compensation"
and "Performance Graph" which shall not be so incorporated); (iii) the Company's
Quarterly Reports on Form 10-Q for the periods ended March 31, 1996, June 30,
1996 and September 30, 1996; and (iv) the Company's Current Reports on Form 8-K
dated January 19, 1996, June 17, 1996 and February 6, 1997.

All reports and other documents filed by the Company pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the Offerings shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing such documents. Any statement contained herein or in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein, or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein, modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.

The Company will furnish, without charge, to each person to whom a
Prospectus is delivered, upon written or oral request, a copy of any or all of
the foregoing documents incorporated herein by reference other than exhibits to
such documents (unless such exhibits are specifically incorporated by reference
therein). Requests for such documents should be submitted in writing to
Borg-Warner Automotive, Inc., 200 South Michigan Avenue, Chicago, Illinois
60604, Attention: Investor Relations Department, or by telephone at (312)
322-8500.

50
<PAGE> 54

[Top half of page: Chart listing the Company's headquarters and advanced
engineering centers in North America, Europe and Asia for each of the Company's
four operating groups (Powertrain Systems, Automatic Transmission Systems, Morse
TEC and Air/Fluid Systems).]

[Bottom half of page: Pictures of the vehicles comprising the Company's
Top Vehicle Programs including the Ford Explorer, Mercedes S-Class, Ford Taurus,
Ford F-150, SsangYong Musso, Chrysler FWD Cars and Mini-Vans, Chrysler FWD LH
Vehicles and Range Rover.]

<PAGE> 55

======================================================

NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFERING MADE HEREBY, AND INFORMATION OR
REPRESENTATIONS NOT HEREIN CONTAINED, IF GIVEN OR MADE, MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THE SHARES OR AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, SHARES IN ANY JURISDICTION WHERE,
OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN
THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 10
Use of Proceeds....................... 13
Price Range of Common Stock........... 13
Dividend Policy....................... 13
Capitalization........................ 14
Selected Historical Financial Data.... 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 24
Management............................ 35
Principal and Selling Stockholders.... 38
Description of Capital Stock.......... 40
Certain United States Tax Consequences
for Non-U.S. Shareholders........... 45
Underwriting.......................... 47
Legal Matters......................... 49
Experts............................... 49
Available Information................. 49
Incorporation of Certain Information
by Reference........................ 50
</TABLE>

======================================================
======================================================

4,000,000 SHARES

[BORG WARNER LOGO]

COMMON STOCK

---------------------
PROSPECTUS
---------------------

MERRILL LYNCH & CO.

LEHMAN BROTHERS

MORGAN STANLEY & CO.
INCORPORATED

FEBRUARY , 1997

======================================================
<PAGE> 56

[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED FEBRUARY 20, 1997

PROSPECTUS

4,000,000 SHARES

[BORG WARNER LOGO]

COMMON STOCK

------------------------

Of the 4,000,000 shares of Common Stock offered hereby, 800,000 shares are
being offered outside the United States and Canada (the "International
Offering") by the International Underwriters (as defined herein) and 3,200,000
shares are being offered in a concurrent offering in the United States and
Canada (the "U.S. Offering" and, together with the International Offering, the
"Offerings") by the U.S. Underwriters (as defined herein). The public offering
price and the underwriting discount per share are identical for the Offerings.
See "Underwriting."

The Common Stock is listed on the New York Stock Exchange, Inc. under the
symbol "BWA." On February 19, 1997, the last reported sale price of the Common
Stock on the New York Stock Exchange was $40.375 per share. See "Price Range of
Common Stock."

FOR INFORMATION CONCERNING CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS, SEE "RISK FACTORS" COMMENCING ON PAGE 10.

------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) SELLING
STOCKHOLDERS(2)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........................ $ $ $
- -------------------------------------------------------------------------------------------------
Total(3)......................... $ $ $
=================================================================================================
</TABLE>

(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities under the Securities Act of
1933, as amended. See "Underwriting."

(2) Before deducting expenses of the Offerings payable by the Company estimated
at $1,100,000.

(3) The Selling Stockholders have granted the International Underwriters and the
U.S. Underwriters options exercisable within 30 days after the date hereof
to purchase up to 102,125 and 408,498 additional shares of Common Stock,
respectively, solely to cover over-allotments, if any. If such options are
exercised in full, the total Price to Public, Underwriting Discount and
Proceeds to Selling Stockholders will be $ , $ , and
$ , respectively. See "Underwriting."

------------------------

MERRILL LYNCH INTERNATIONAL
LEHMAN BROTHERS
MORGAN STANLEY & CO.
INTERNATIONAL
------------------------

The date of this Prospectus is February , 1997.
<PAGE> 57

[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]

UNDERWRITING

Subject to the terms and conditions set forth in a purchase agreement (the
"International Purchase Agreement") among the Company, the Selling Stockholders,
and each of the underwriters named below (the "International Underwriters") and
concurrently with the sale of 3,200,000 Shares to the U.S. Underwriters, the
Selling Stockholders have agreed to sell to each of the International
Underwriters and each of the International Underwriters has severally agreed to
purchase, the aggregate number of Shares set forth opposite its name below.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------------------------------------------------------------------ ---------
<S> <C>
Merrill Lynch International........................................
Lehman Brothers International (Europe).............................
Morgan Stanley & Co. International Limited.........................

-------
Total.............................................................. 800,000
=======
</TABLE>

Merrill Lynch International, Lehman Brothers International (Europe) and
Morgan Stanley & Co. International Limited are acting as representatives (the
"International Representatives") of the several International Underwriters.

The Company and the Selling Stockholders have also entered into a purchase
agreement (the "U.S. Purchase Agreement") with certain underwriters inside the
United States and Canada (the "U.S. Underwriters" and, together with the
International Underwriters, the "Underwriters") for whom MLPF&S, Lehman Brothers
Inc. and Morgan Stanley & Co. Incorporated are acting as representatives (the
"U.S. Representatives" and, together with the International Representatives, the
"Representatives"). Subject to the terms and conditions set forth in the U.S.
Purchase Agreement, and concurrently with the sale of 800,000 Shares to the
International Underwriters, the Selling Stockholders have agreed to sell to the
U.S. Underwriters and the U.S. Underwriters severally have agreed to purchase,
an aggregate of 3,200,000 Shares. The public offering price per Share and the
underwriting discount per Share are identical under the U.S. Purchase Agreement
and the International Purchase Agreement.

In the International Purchase Agreement, the several International
Underwriters have agreed, subject to the terms and conditions set forth therein,
to purchase all of the Shares being sold pursuant to such Agreement if any of
the Shares being sold pursuant to such Agreement are purchased and in the U.S.
Purchase Agreement the several U.S. Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all the Shares being sold
pursuant to such Agreement if any of the Shares being sold pursuant to such
Agreement are purchased. Each Agreement provides that in the event of a default
by an Underwriter, the purchase commitments of non-defaulting Underwriters may
in certain circumstances be increased. The closings with respect to the sale of
the Shares to be purchased by the U.S. Underwriters and the International
Underwriters are conditioned upon one another.

The International Underwriters propose initially to offer the Shares to the
public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers (who may include U.S. Underwriters) at such
price less a concession not in excess of $ per Share. The International
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $ per Share to certain other dealers. After the initial public
offering, the public offering price, concession and discount may be changed.

47
<PAGE> 58

[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]

The Selling Stockholders have granted to the International Underwriters
options to purchase up to an aggregate of 102,125 additional Shares, and the
U.S. Underwriters options to purchase up to an aggregate of 408,498 Shares, in
each case exercisable for 30 days after the date hereof, to cover
over-allotments, if any, at the public offering price set forth on the cover
page of this Prospectus, less the underwriting discount. To the extent that the
International Underwriters exercise this option, each of the International
Underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage of such Shares that the number of
Shares to be purchased by it shown in the foregoing table bears to the total
number of Shares initially offered to the International Underwriters hereby.

Under the terms of the Intersyndicate Agreement the U.S. Underwriters and
any dealer to whom they sell Shares will agree to offer to sell or sell Shares
to persons who are United States or Canadian persons (as defined in the
Intersyndicate Agreement) or to persons they believe intend to resell to persons
who are United States or Canadian persons, and the International Underwriters
and any dealer to whom they sell Shares will not offer to sell or sell Shares to
United States or Canadian persons or to persons they believe intend to resell to
United States or Canadian persons, except, in each case, for transactions
pursuant to the Intersyndicate Agreement which, among other things, permits the
Underwriters to purchase from each other and to offer for resale such number of
Shares as the selling Underwriter or Underwriters and the purchasing Underwriter
or Underwriters may agree.

Each International Underwriter has agreed that (i) it has not offered or
sold and will not offer or sell any Shares to persons in the United Kingdom
prior to the expiration of the period six months after the date of issue of the
Shares except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which have not
resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995 (the
"Regulations"), (ii) it has complied and will comply with all applicable
provisions of the Financial Services Act 1986 and the Regulations with respect
to anything done by it in relation to the Shares, in, from or otherwise
involving the United Kingdom, and (iii) it has only issued or passed on and will
only issue or pass on to any person in the United Kingdom any document received
by it in connection with the issue of the Shares to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom such document may
otherwise lawfully be issued or passed on.

48
<PAGE> 59

[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]

above. As a condition to receiving shares of Common Stock in the Merrill Lynch
Distribution, such partners have agreed to be bound by the same lock-up
provision as each holder of at least 1% of the outstanding shares of the Common
Stock who is a party to the Registration Rights Agreement for a period of 90
days after the effective date of the Registration Statement. The Merrill Lynch
Distribution is expected to occur as soon as practicable after 90 days from the
effective date of the Registration Statement, or on such other date consented to
by the Representatives. Furthermore, each of the Company and the executive
officers and directors of the Company, as well as certain other stockholders,
will agree, for a period beginning seven days before, and ending 90 days after
the effective date of the Registration Statement of which this Prospectus is a
part not to, directly or indirectly, (i) sell, grant any option, right or
warrant for the sale of, or otherwise dispose of or transfer any shares of the
Common Stock or any securities convertible into or exchangeable or exercisable
for the Common Stock or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly, the
economic consequence of ownership of the Common Stock without the prior written
consent of MLPF&S (other than options or shares of Common Stock issuable upon
exercise of options which expire during such 98 day period). Upon consummation
of the Offering, it is expected that the lock-up agreements will cover an
aggregate of approximately 2 million shares of Common Stock.

Purchasers of Shares offered hereby may be required to pay stamp taxes and
other charges in accordance with the laws and practices of their country of
purchase, in addition to the public offering price set forth on the cover page
hereof.

Each of the U.S. Representatives and certain of the other U.S. Underwriters
or their affiliates from time-to-time provide commercial and investment banking
and other financial services for the Company. Lehman Brothers Inc. acted as
financial advisor to the Company in connection with the disposition of the North
American manual transmission business and received a fee of approximately
$500,000. If the Underwriters exercise in full their option to cover
over-allotments, the ML Entities' ownership of Common Stock after the Offerings
and the Merrill Lynch Distribution will be less than 1%. Following consummation
of the Offerings, the ML Entities intend to reduce their representation on the
Board. For information regarding the ownership by the ML Entities of Common
Stock, the Merrill Lynch Distribution and the representation of affiliates of
Merrill Lynch & Co., Inc. ("ML&Co.") on the Board, see "Management" and
"Principal and Selling Stockholders."

LEGAL MATTERS

EXPERTS

49
<PAGE> 60

[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]

report of KPMG Peat Marwick, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The Registration
Statement, such reports, proxy statements and other information, may be
inspected and copied at the Public Reference Section of the Commission 450 Fifth
Street, N.W., Washington, D.C. 20549; and at the regional offices of the
Commission at 7 World Trade Center (13th Floor), New York, New York 10048; and
Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661.
Copies of such material can be obtained at prescribed rates from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549. The Commission also maintains an internet web site at http://www.sec.gov
that contains reports, proxy statements and other information. Additionally,
reports, proxy statements and other information concerning the Company filed
pursuant to the Exchange Act are available for inspection at the NYSE, on which
the Common Stock is listed, located at 20 Broad Street, New York, New York
10005.

The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act with respect to the shares of Common Stock being
offered in the Offerings. The Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits thereto. For further
information with respect to the Company and the Common Stock, reference is
hereby made to such Registration Statement and the exhibits thereto.

No action has been taken or will be taken in any jurisdiction by the
Company or any Underwriter that would permit a public offering of the Shares or
possession or distribution of this Prospectus in any jurisdiction where action
for that purpose is required, other than the United States. Persons into whose
possession this Prospectus comes are required by the Company and the
Underwriters to inform themselves about and to observe any restrictions as to
the offering of the Shares and the distribution of this Prospectus.

50
<PAGE> 61

[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]

INCORPORATION OF CERTAIN INFORMATION BY REFERENCE

51
<PAGE> 62

[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]

======================================================

IN THIS PROSPECTUS, REFERENCE TO "DOLLARS" AND "$" ARE TO UNITED STATES
DOLLARS UNLESS STATED OTHERWISE.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 10
Use of Proceeds....................... 13
Price Range of Common Stock........... 13
Dividend Policy....................... 13
Capitalization........................ 14
Selected Historical Financial Data.... 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 24
Management............................ 35
Principal and Selling Stockholders.... 38
Description of Capital Stock.......... 40
Certain United States Tax Consequences
for Non-U.S. Shareholders........... 45
Underwriting.......................... 47
Legal Matters......................... 49
Experts............................... 49
Available Information................. 50
Incorporation of Certain Information
by Reference........................ 51
</TABLE>

======================================================
======================================================

4,000,000 SHARES

[BORG WARNER LOGO]

COMMON STOCK

---------------------
PROSPECTUS
---------------------

MERRILL LYNCH INTERNATIONAL

LEHMAN BROTHERS

MORGAN STANLEY & CO.
INTERNATIONAL

FEBRUARY , 1997

======================================================
<PAGE> 63

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following are the estimated expenses of the issuance and distribution
of the securities being registered, all of which will be paid by the Registrant.

<TABLE>
<S> <C>
Registration fee............................................. $ 61,946
NASD filing fee.............................................. 20,942
Blue Sky fees and expenses................................... 10,000
Printing and related expenses................................ 350,000
Legal fees and expenses...................................... 450,000
Accounting fees and expenses................................. 100,000
Miscellaneous................................................ 107,112
----------
Total.............................................. $1,100,000
==========
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 145 of the General Corporation Law of the State of Delaware
("DGCL") provides that a corporation has the power to indemnify its officers and
directors against the expenses, including attorney's fees, judgments, fines or
settlement amounts actually and reasonably incurred by them in connection with
the defense of any action by reason of being or having been directors or
officers, if such person shall have acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
corporation, except that if such action shall be in the right of the
corporation, no such indemnification shall be provided as to any claim, issue or
matter as to which such person shall have been judged to have been liable to the
corporation unless and to the extent that the Court of Chancery of the State of
Delaware, or another court in which the suit was brought, shall determine upon
application that, in view of all of the circumstances of the case, such person
is fairly and reasonably entitled to indemnity.

As permitted by Section 102 of the DGCL, the Registrant's Amended and
Restated Certificate of Incorporation (the "Certificate of Incorporation") of
the Company provides that no director shall be liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director
other than (i) for breaches of the director's duty of loyalty to the Registrant
and its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) for the
unlawful payment of dividends or unlawful stock purchases or redemptions under
Section 174 of the DGCL, and (iv) for any transaction from which the director
derived an improper personal benefit.

The Certificate of Incorporation provides for indemnification of its
directors and officers to the fullest extent permitted by the DGCL, and allows
the Registrant to advance or reimburse litigation expenses upon submission by
the director, officer or employee of an undertaking to repay such advances or
reimbursements if it is ultimately determined that indemnification is not
available to such director or officer.

ITEM 16. EXHIBITS.

The following documents are filed as a part of this Registration Statement.
Those exhibits previously filed and incorporated herein by reference are
identified below. For each such exhibit there is shown below the registration
statement number or periodic report and exhibit number of the document in the
previous filing.

II-1
<PAGE> 64

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- -------------
<C> <S>
1.1 -- Form of U.S. Purchase Agreement among the Company, the Selling Stockholders,
MLCP and the U.S. Underwriters.*
1.2 -- Form of International Purchase Agreement among the Company, the Selling
Stockholders, MLCP and the International Underwriters.*
3.1 -- Restated Certificate of Incorporation of the Company (incorporated by reference
to Exhibit No. 3.1 of the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1993).
3.2 -- By-laws of the Company (incorporated by reference to Exhibit No. 3.2 of the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1993).
5 -- Opinion of Wachtell, Lipton, Rosen & Katz.*
23.1 -- Consent of Deloitte & Touche LLP.
23.2 -- Consent of Wachtell, Lipton, Rosen & Katz (contained in Exhibit 5).*
23.3 -- Consent of KPMG Peat Marwick.
23.4 -- Consent of Arthur Andersen LLP.
24 -- Powers of Attorney.*
</TABLE>

- ---------------

* Previously filed.

ITEM 17. UNDERTAKINGS.

(a), (c)-(g), (j) Not applicable

(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

(h) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

(i) The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of
registration statement as of the time it was declared effective.

(2) For the purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-2
<PAGE> 65

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment to the
Registration Statement to be signed on its behalf by the undersigned thereunto
duly authorized in the City of Chicago, State of Illinois, on February 20, 1997.

BORG-WARNER AUTOMOTIVE, INC.

By: /s/ JOHN F. FIEDLER

------------------------------------
John F. Fiedler
Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities indicated on February 20, 1997.

<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------ -----------------------------------------------
<C> <S>
/s/ JOHN F. FIEDLER
- ------------------------------------------ Chairman, Chief Executive Officer, and Director
John F. Fiedler (Principal Executive Officer)

*
- ------------------------------------------ Vice President and Treasurer (Principal
Robin J. Adams Financial Officer)

*
- ------------------------------------------ Vice President and Controller (Principal
William C. Cline Accounting Officer)

*
- ------------------------------------------
Donald C. Trauscht Director

*
- ------------------------------------------
Alexis P. Michas Director

*
- ------------------------------------------
Jere A. Drummond Director

*
- ------------------------------------------
Albert J. Fitzgibbons III Director

*
- ------------------------------------------
Matthias B. Bowman Director

*
- ------------------------------------------
Paul E. Glaske Director

*
- ------------------------------------------

James J. Kerley Director

*
- ------------------------------------------
Ivan W. Gorr Director

/s/ JOHN F. FIEDLER
- ------------------------------------------ As attorney-in-fact for the officers and/or
John F. Fiedler directors marked by an asterisk.
</TABLE>

II-3
<PAGE> 66

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION OF DOCUMENT PAGE NO.
------- ------------------------------------------------------------------- ----------
<C> <S> <C> <C> <C>

23.1 -- Consent of Deloitte & Touche LLP...................................

23.3 -- Consent of KPMG Peat Marwick.......................................

23.4 -- Consent of Arthur Andersen LLP.....................................
</TABLE>

<PAGE> 1

EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in this Amendment No. 1 to
Registration Statement No. 333-20485 of Borg-Warner Automotive, Inc. on Form S-3
of our report dated January 31, 1996 incorporated by reference in the Annual
Report on Form 10-K of Borg-Warner Automotive, Inc. for the year ended December
31, 1995 and to the reference to us under the heading "Experts" in the
Prospectus, which is part of such Registration Statement.

/s/ DELOITTE & TOUCHE LLP

DELOITTE & TOUCHE LLP

Chicago, Illinois

February 19, 1997

<PAGE> 1

EXHIBIT 23.3

[LETTERHEAD OF KPMG PEAT MARWICK]

INDEPENDENT AUDITORS' CONSENT

We consent to incorporation by reference in this Amendment No. 1 to
Registration Statement No. 333-20485 on Form S-3 of Borg-Warner Automotive, Inc.
of our report dated April 26, 1996 relating to the balance sheets of NSK-Warner
Kabushiki Kaisha as of March 31, 1996 and 1995, and the related statements of
earnings, stockholders' equity, and cash flows for each of the years in the
three-year period ended March 31, 1996 incorporated by reference in the Annual
Report on Form 10-K for the year ended December 31, 1995, and to the reference
to us under the heading "Experts" in the Prospectus, which is part of such
Registration Statement.

/s/ KPMG PEAT MARWICK

Tokyo, Japan

February 19, 1997

<PAGE> 1

EXHIBIT 23.4

[LETTERHEAD OF ARTHUR ANDERSEN]

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation
by reference in this Amendment No. 1 to Registration Statement No. 333-20485 of
Borg-Warner Automotive, Inc. on Form S-3 of our report dated June 14, 1996 on
the combined financial statements of the Coltec Automotive OEM Business Group as
of December 31, 1995 and 1994 and for the two years in the period ended December
31, 1995 included in Borg-Warner Automotive, Inc.'s current report on Form 8-K
dated June 17, 1996 and to the reference to us under the heading "Experts" in
the Prospectus, which is part of this Registration Statement.

/s/ ARTHUR ANDERSEN LLP

Detroit, Michigan

February 19, 1997