-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N7QpIE7z3wXHnDqEXVseD9XXKqONoIZmK2SQvIFzippPzNNp050nlhF4f4khuJaS UvTMQQ2xfARqYT33MFrjiQ== 0000950131-96-001181.txt : 19960322 0000950131-96-001181.hdr.sgml : 19960322 ACCESSION NUMBER: 0000950131-96-001181 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960321 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BORG WARNER SECURITY CORP CENTRAL INDEX KEY: 0000817945 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-DETECTIVE, GUARD & ARMORED CAR SERVICES [7381] IRS NUMBER: 133408028 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-05529 FILM NUMBER: 96537116 BUSINESS ADDRESS: STREET 1: 200 S MICHIGAN AVE CITY: CHICAGO STATE: IL ZIP: 60604 BUSINESS PHONE: 3123228500 MAIL ADDRESS: STREET 1: 200 S. MICHIGAN AVENUE CITY: CHICAGO STATE: IL ZIP: 60604 FORMER COMPANY: FORMER CONFORMED NAME: BORG WARNER CORP /DE/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: BORG WARNER HOLDINGS CORP DATE OF NAME CHANGE: 19880328 10-K405 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 COMMISSION FILE NUMBER: 1-5529 ---------------------------- BORG-WARNER SECURITY CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 13-3408028 (State of incorporation) (I.R.S. Employer Identification No.) 200 South Michigan Avenue Chicago, Illinois 60604 (312) 322-8500 (Address and telephone number of principal executive offices) ---------------------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, par value $.01 per share New York Stock Exchange 9-1/8% Senior Subordinated Notes due 2003 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None ---------------------------- Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock of the registrant held by stockholders (not including voting stock held by directors and executive officers of the registrant and affiliates of Merrill Lynch & Co., Inc. (the exclusion of such stock shall not be deemed an admission by the registrant that such person is an affiliate of the registrant)) on March 5, 1996 was approximately $123.1 million. As of March 5, 1996, the registrant had 22,446,100 shares of Common Stock and 1,149,600 shares of Series I Non-Voting Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated herein by reference into the Part of the Form 10-K indicated. DOCUMENT PART OF FORM 10-K INTO WHICH INCORPORATED -------- ----------------------------------------- The Company's annual report to stockholders Parts I, II and IV for the year ended December 31, 1995 The Company's proxy statement for the 1996 Part III annual meeting of stockholders BORG-WARNER SECURITY CORPORATION FORM 10-K YEAR ENDED DECEMBER 31, 1995 INDEX
PART I Item Number Page - ----------- ---- 1. Business 3 2. Properties 11 3. Legal Proceedings 12 4. Submission of Matters to a Vote of Security Holders 14 PART II 5. Market for the Registrant's Common Stock and Related Stockholder Matters 15 6. Selected Financial Data 15 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 8. Financial Statements and Supplementary Data 16 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 16 PART III 10. Directors and Executive Officers of the Registrant 16 11. Executive Compensation 16 12. Security Ownership of Certain Beneficial Owners and Management 16 13. Certain Relationships and Related Transactions 17 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 17
2 PART I ITEM 1. BUSINESS The Company provides a broad line of protective services for its customers, including guard, alarm, armored and courier services. The Company believes that, based on revenues and the variety of services offered, it is the largest and broadest-based supplier in the protective services industry in the United States. COMPANY'S BUSINESS UNITS The Company's protective services business is divided into four business units: guard services, alarm services, armored services and courier services. Information concerning the revenues, operating profit or loss and identifiable assets attributable to each of the Company's business units is incorporated herein by reference to Note 9 of the Notes to Consolidated Financial Statements. GUARD SERVICES The guard services unit provides a variety of guard and related security services under the Wells Fargo(R), Burns(R), Globe(R) and other service marks to approximately 14,000 government and business customers from approximately 281 locations throughout the United States, and in Canada, Colombia and the United Kingdom. The Company believes that its guard services unit is the largest contract guard services operation in the world, measured by revenues. The Company's guard services unit supplies contract uniformed and plainclothes security officers, who may or may not be armed, to perform a wide variety of tasks. These security officers patrol and monitor commercial, financial, industrial, residential and governmental facilities providing deterrence against crime and breach of governmental security regulations and detection of fire, accidents and other casualties. The security officers also monitor electronic systems and control public and employee access to facilities. Specialized assignments include nuclear and conventional electric power plant security, pre-departure screening of passengers and luggage at airports, mailroom services and investigative services, including background investigations of prospective employees. The guard services unit employs approximately 70,000 security officers. Security officers undergo a standardized pre-employment screening program that features mandatory drug screening, criminal record checks at the county and municipal court level and verification of consumer credit reports, Social Security information and drivers' license records. Security officers receive classroom orientation and field training in safety, first aid and security techniques and in the handling of specific problems applicable to particular industries or situations. 3 The guard services unit markets guard services through approximately 150 sales representatives nationwide and in Canada, Colombia and the United Kingdom. Sales personnel operate out of local branch and sales offices. The guard services unit also bids on contracts with governmental agencies. Guard services contracts generally provide for such services on a continuing basis and generally are terminable by either party upon 30 to 60 days notice. Charges for guard services are negotiated with customers and are based upon payment of a specified amount per guard hour. Typically, such charges are adjusted for any change in any law, ruling or collective bargaining agreement causing a change in work hours, wage rates, working conditions or other costs. Investigative services are generally provided under specific arrangements, with charges varying according to the nature of the assignment. ALARM SERVICES The alarm services unit provides electronic security services in the United States and Canada under the Wells Fargo(R) service mark for its commercial customers and under the Pony Express(R) service mark for its residential customers. In addition, this unit provides an integrated guard, patrol and alarm service to Bel Air, Beverly Hills and other suburbs of Los Angeles under the trade name Bel-Air Patrol. The Company believes that its alarm services unit is one of the largest electronic security service operations in the United States, measured by revenues. The unit has approximately 2,440 employees. Commercial. The alarm services unit designs, installs, monitors and services electronic detection systems located at customers' premises. These systems are tailored to customers' needs and may include intrusion and fire detection, critical process and sprinkler monitoring, access control and closed-circuit television monitoring systems. The Company's alarm systems and devices may be monitored on the premises of the customer by the customer's own personnel or linked through telephone lines or long range radio to one of 12 central stations operated by the Company in the United States and Canada. The Company also services its installed systems. The alarm services unit services approximately 109,000 security systems in financial institutions, industrial and commercial businesses and complexes, warehouses, facilities of federal, state and local governments, defense installations, and health care and educational facilities. The majority of the Company's monitoring contracts are for an initial five- year period with automatic renewal for additional one-year terms, unless terminated by either party. Upon installation, a customer pays an installation fee and agrees to pay an annual service charge for ordinary maintenance and monitoring during the life of the contract. It has been the unit's experience that its customers generally continue the service after expiration of the initial term of the contract and enter into new five-year monitoring contracts. 4 The alarm services unit conducts its sales, installation and service operations from 37 branch offices in the United States and Canada, some of which are on the same premises as a monitoring station, and additional satellite offices. The alarm services unit has a nationwide sales force that is separated into broad-based commercial groups, as well as specialized sales teams that address the specific needs of the financial community, engineered systems market and other high growth segments of the industry. One group, for example, focuses on multi-location companies such as national retail chains and fast food outlets that require a single point of control for planning, servicing, monitoring and reporting for all locations. The alarm services unit also makes direct sales of security equipment to government and commercial users (including other companies in the alarm business) and designs, assembles and sells engineered systems for commercial fire suppression. Residential. The alarm services unit also installs fire and intrusion protection systems for residential customers under the Pony Express(R) service mark. Residential customer sales and service are generally performed from the same facilities as for commercial accounts. Residential systems are installed by the Company with monitoring agreements and often with maintenance agreements. The majority of the residential monitoring contracts are for an initial period of three to five years with automatic renewal for additional one-year terms, unless terminated by either party. The unit services approximately 25,600 residential security systems. Bel-Air Patrol. The Company also provides a complete protective package, including central station alarm service and surveillance systems, security guards and day and night patrols, to residents in Bel Air and Beverly Hills and other nearby communities of Los Angeles. The Company provides these services to approximately 12,000 customers under the trade name Bel-Air Patrol. The alarm services unit purchases electronic equipment and component parts for systems from a number of suppliers, and is not dependent upon any single source for such equipment or parts. ARMORED SERVICES The armored services unit is a security-related cash services business that provides traditional armored transport services, automatic teller machine ("ATM") services and cash management services in the United States under the Wells Fargo(R) service mark. The unit employs approximately 6,100 employees at approximately 136 facilities throughout the United States and Puerto Rico. The Company's armored and ATM businesses use a fleet of approximately 1,770 vehicles to transport approximately $5 billion of currency and securities each business day. The Company believes it is the second largest armored transportation operation in the United States, measured by revenues. Armored Transport. The Company provides vault storage and specialized, secure transportation services using armed guards in carrying currency, securities and other valuables for banks and national and local retail customers. 5 The Company provides armored transport services for over 14,000 customers. Most of the customer contracts are for a multi-year term with automatic renewal for additional one-year terms, unless terminated by either party. It has been the unit's experience that its customers generally continue the service after the initial term of the contract. The armored transport services operation has a sales force of approximately 40 people dedicated to the solicitation of transportation-related accounts and a separate sales force that focuses solely on transportation-related accounts for national retail customers. In recent years the Company has expanded its armored express service, which offers deposit pick-up services in small to medium sized markets for retailers who have not traditionally used armored transport services. Generally, the Company assumes responsibility for the safe arrival at the destination of transported commodities. The armored transport unit maintains a risk management department that is responsible for loss prevention, security investigation, employee safety and training and coordination with local and federal law enforcement personnel. ATM Servicing. The armored transport unit also provides special services to approximately 25,000 ATMs on a national basis. The Company believes it is the leading servicer of ATMs in the United States, measured by both revenues and the number of ATMs serviced. The Company controls its ATM services through an automated national dispatching center located in Columbia, Maryland. The dispatch center coordinates all customer requests and directs field technicians throughout the country. The automation system provides detailed service confirmation data both internally and to the customer. ATM servicing is a time-critical business and the Company guarantees a response time of 90 minutes or less to its major accounts. The Company offers financial institutions a complete range of management and maintenance services for ATM networks. The Company provides cash preparation and replenishment, deposit collection and verification, on-site balancing of ATM funds, preventive maintenance and first and second line maintenance services, including necessary hardware maintenance. The Company also sells refurbished ATM equipment. The Company's ATM servicing unit has a sales force of approximately five persons. Most of the customer contracts are for a multi-year term with automatic renewal for additional one-year terms, unless terminated by either party. 6 Cash Management Services. The armored transport unit also provides cash management services to approximately 500 financial institutions and retail customers. These highly automated services include currency storage and preparation, micro-encoding of checks, deposit verification and consolidation, coin wrapping and storage and food stamp processing. Most of the customer contracts are for a multi-year term with automatic renewal for additional one- year terms, unless terminated by either party. COURIER SERVICES The courier services unit transports time-sensitive packages for commercial businesses and non-negotiable financial documents for Federal Reserve banks and financial institutions through 34 branch and 82 satellite offices in 32 states under the Pony Express(R) service mark. The unit provides ground courier services through a fleet of approximately 3,300 vehicles and commercial and charter air service for longer distance or extremely time-critical shipments. Although the Pony Express service mark traces its roots to the Pony Express of Old West fame, the present courier operation began as a financial commodity courier transporting cancelled checks and other non-negotiable financial documents among financial institutions as a part of the armored transportation unit. While shipments of non-negotiable financial documents are still a substantial part of the unit's business, the courier services unit also delivers small packages, particularly business-to-business shipments of parts, extremely urgent mail, film, medical and pharmaceutical supplies and other commodities. The primary focus of the courier service unit is same-day or next-day service by ground transportation in intrastate and regional interstate markets. The typical customer ships multiple, time-critical, small shipments on a daily or weekly basis from one or more locations to one or more other locations within a 500- mile radius. The Company may design a customized distribution system initially for one or two large customers and make available to smaller customers the excess capacity on such system. The courier services unit attempts to meet customer needs for secure transportation through flexible and customized services. Shipments are picked up and delivered by uniformed courier guards who are trained in security measures. The unit has developed sophisticated information systems that provide automated billing, computer-assisted routing and package tracking and other programs that enhance customer service. The unit is expanding its use of PonyTrak/TM/, an electronic tracking system that uses a hand-held scanner to record pickup and delivery times, dates and locations by reading package bar codes. The Company offers services outside of normal business hours that sometimes require couriers to unlock and enter customer premises and secure premises when leaving. The unit employs approximately 4,800 persons. The unit leases approximately 60 percent of its vehicles from its employees. The Company believes such lease arrangements provide a competitive advantage because such employees tend to provide 7 better customer service, drive more safely and have a more vested interest in the success of the business. The courier services unit operates both as a common and contract carrier and uses a combination of tariffs and shipping contracts to control the terms, conditions and rates applicable to the transportation of shipments. Rates are dependent upon many factors, including the weight and type of the shipped item, the distance and urgency of the shipment and the geographical location. COMPETITION The guard services unit competes with major national firms and numerous smaller regional and local companies providing similar services. Competition in the security guard industry is based on price in relation to the quality of service, the scope of services performed, the extent and quality of guard supervision, recruiting and training and name recognition. The alarm services unit competes with major national firms and numerous smaller regional and local companies. Competition in the alarm services industry is based on price in relation to the quality of service, the scope of alarm installation and service, and the level of technological and engineering sophistication. The armored services unit competes with major national firms and numerous smaller regional and local companies. Competition in the armored transport industry is based primarily on price in relation to quality of service, the scope of services performed, quality of cargo insurance and name recognition. The courier services unit competes with numerous regional and local courier companies. Competition in the courier industry is based primarily on price in relation to quality of service and size and configuration of distribution routes. Because of low barriers to entry in some areas, smaller local competitors with substantially lower overhead expenses are often able to compete effectively with the Company for local shipments. REGULATION Due to the nature of the Company's business, its operations are subject to a variety of federal, state, county and municipal laws, regulations and licensing requirements. The Company believes that its operations are in substantial compliance with those laws, regulations and requirements. The Company's guard services operations are subject to a variety of city, county and state firearm and occupational licensing laws. In addition, many states have laws requiring training and registration of security officers, regulating the use of badges, identification cards and uniforms and imposing minimum bond surety and insurance requirements. 8 Federal legislation has been introduced relating to security officer qualification and training. Similar legislation is pending in several states. The Company generally supports the creation of standards for the industry and does not expect that the establishment of such standards will have a material affect on its guard services operations. The Company's alarm services operations are subject to regulatory requirements of federal, state and local authorities. In addition, this unit relies upon the use of telephone lines to transmit signals, and the cost of such lines and the type of equipment which may be used are currently regulated by both federal and state governments. In some instances, the Company contracts with the local government to permit it to link a customer's business or home directly into the local police or fire department station for which it may pay a fee to such local government. As a result of a high incidence of false alarms in some communities, some local governments have imposed assessments, fines and penalties on customers based on the number of false alarms reported, or have restricted police response to systems producing excessive false alarms. Federal legislation became effective in 1995 that abolished all intrastate regulatory control over prices, routes and services to which the Company's armored and courier units had previously been subject. Such operations are subject to regulation by federal and state agencies with respect to safety of employees, operations and equipment, vehicle emissions and underground fuel storage tanks. From time to time, in the ordinary course of business, the Company is subjected to penalties or fines as the result of licensing irregularities or the misconduct of one or more of its agents or employees. In addition, under principles of common law, the Company can generally be held liable for acts or omissions of its agents or employees performed in the course and scope of their employment. In addition, some states have statutes that expressly impose on the Company legal responsibility for the conduct of its employees. RISK MANAGEMENT The nature of the services provided by the Company potentially exposes it to greater risks of liability for employee acts, injuries (including workers' compensation claims) or omissions than may be posed by other service businesses. The Company often obtains customer indemnification or liability limitations in its contracts to mitigate this risk exposure. In addition to self-insurance reserves, the Company carries insurance of various types, including general liability coverage. The Company obtains such insurance at rates and upon terms negotiated periodically with various underwriters. The loss experience of the Company and, to some extent, other protective services companies affects premium rates charged to the Company. The Company generally maintains insurance coverage for punitive damages, although the laws of many states limit or prohibit insurance coverage for liability for punitive damages. The Company does not believe that limitations on, or the uncertainty of, insurance 9 coverage for punitive damages in certain states in which it operates is likely to be material, based upon the Company's prior experience with punitive damages claims. The Company also attempts to manage its risk liability through analysis of customer facilities and transportation routes and employee screening, training, supervision and evaluation. EMPLOYEES The Company's business is labor intensive and, accordingly, is affected by the availability of qualified personnel and the cost of labor. Although the protective services industry is characterized generally by high turnover, the Company believes its experience compares favorably with that of the industry. The Company has not experienced any material difficulty in employing suitable numbers of qualified security guards and other employees. The Company considers its relations with its employees to be generally satisfactory. The Company is a party to collective bargaining agreements with various local unions covering approximately 8,100 employees. The collective bargaining agreements expire at various dates from 1996 to 1999 and relate, among other things, to wages, hours and conditions of employment. Under section 9(b)(3) of the National Labor Relations Act, if a union admits to membership, or is affiliated directly or indirectly with a union that admits to membership, employees other than guards, an employer of guards can refuse to bargain with such union and such union cannot be certified as the representative of a unit of guards. As a result, the Company has in many instances refused to recognize or withdrawn recognition of labor organizations that admit as members employees other than guards. The NLRB has certified various locals of the International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America as the exclusive collective bargaining representative of certain of its courier services employees. The unit is engaged in contract negotiations with such representative. TRADEMARKS AND PATENTS The Wells Fargo(R), Pony Express(R) and Burns(R) service marks are especially important to the Company's business. The Company believes that its rights in these marks are adequately protected and of unlimited duration. While the Company has patents it considers to be important to the overall conduct of its business, it does not consider any particular patent, or group of related patents, essential to its operations. The Company's 13 United States patents, which generally relate to the Company's alarm services unit, expire between 1997 and 2008, and the Company's 18 foreign patents, which generally relate to the Company's alarm services unit, expire between 1995 and 2009. For both the United States and the foreign patents, their expiration, individually, and in the aggregate, is not expected to have any material effect on the Company's financial condition or results of operations. 10 EXECUTIVE OFFICERS Set forth below are the names, ages, positions and certain other information concerning the executive officers of the Company as of March 1, 1996.
NAME AGE POSITION WITH COMPANY J. Joe Adorjan.... 57 Chairman of the Board, Chief Executive Officer and President; Director John D. O'Brien.. 53 Senior Vice President Timothy M. Wood.. 48 Vice President, Finance
Mr. Adorjan has been a director of the Company since 1993, Chairman of the Board (since January 1996), Chief Executive Officer (since October 1995) and President (since April 1995). Mr. Adorjan was President of Emerson Electric Co. from 1992 to 1995 and Chairman and Chief Executive Officer of ESCO Electronics Corporation from 1990 to 1992. Mr. Adorjan is also a director of California Microwave, Inc. and ESCO Electronics Corporation. Mr. O'Brien has been Senior Vice President of the Company since 1993 and was Vice President of the Company from 1987 to 1993. Mr. Wood has been Vice President, Finance of the Company since 1994 and was Vice President and Controller of the Company from 1987 to 1994. Each of the executive officers named above was elected by the Board of Directors to serve in the office indicated until his successor is elected and qualified. ITEM 2. PROPERTIES The Company and its subsidiaries maintain armored and courier terminals, central alarm stations, plants and general offices in various cities in the United States, Puerto Rico, Canada, the United Kingdom and Colombia. At December 31, 1995, the guard services unit occupied approximately 281 branch and satellite offices, all but one of which were leased. At December 31, 1995, the alarm services unit operated 12 central stations, of which 4 were leased and 37 additional branch and 15 separate satellite offices, all of which were leased. At December 31, 1995, the armored services unit occupied 136 facilities, of which 100 were leased, and 61 of which contained vaults. At December 31, 1995, the courier services unit occupied approximately 116 branches and satellites, of 11 which all but three were leased. The Company leases approximately 57,000 square feet of office space in Chicago, Illinois for its executive offices. The Company believes that its properties are in good condition and are adequate to meet its current and reasonably anticipated needs. ITEM 3. 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 of such actions, plaintiffs request punitive or other damages that may not be covered by insurance. In addition, the Company has been subject to claims and suits relating to certain discontinued operations. The most important of these legal proceedings are discussed below. The Company believes that the various asserted claims and litigation in which it 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. 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 (including the environmental matters discussed below). Centaur Litigation Centaur Insurance Company ("Centaur"), a discontinued property and casualty insurance subsidiary, 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 one pending lawsuit against the Company for recovery of alleged damages from the failure of Centaur to satisfy its reinsurance obligations. Certain former officers and directors of the Company's current and former subsidiaries have been named as defendants in such lawsuit and the Company has agreed to indemnify such individuals. Centaur is not a defendant in this lawsuit against the Company. Although the Illinois Director of Insurance has not made any claims against the Company for any of Centaur's liabilities, the Illinois Director of Insurance has requested, and the Company has agreed to, an extension of the statute of limitations for any such claims. As of December 31, 1993, Centaur's total liabilities were $135 million and its deficit in net worth was $54.7 million, according to financial statements submitted on behalf of the Illinois Director of Insurance. Such financial statements were presented on a liquidating basis with assets carried at their market value or estimated realizable value 12 and liabilities carried at their present value through the provision of a present value discount. Although Centaur is a subsidiary of the Company, the Company does not operate Centaur and has no responsibility for, nor does it participate in the preparation of, such financial statements. Centaur's financial results, assets and liabilities are not reflected in the Company's financial statements. In June 1988, the Insurance Commissioner of the State of California as trustee of Mission Insurance Trust and four other affiliated insurance companies filed a complaint in the Superior Court of the State of California, County of Los Angeles, against the Company and certain of its current and former subsidiaries alleging damages resulting from the failure of Centaur to satisfy its reinsurance obligations. This lawsuit alleges damages to plaintiff, as Trustee of Mission Insurance Company, Mission National Insurance Company, Enterprise Insurance Company, Holland-America Insurance Company and Mission Reinsurance Corporation, based on (i) conduct justifying piercing the corporate veil, (ii) fraud and (iii) negligent misrepresentation. Plaintiff seeks judgment in the amount of the insurance companies' current losses, which allegedly total approximately $14.2 million, plus a declaratory order that the Company pay future losses alleged to exceed $66 million. The complaint was amended in 1989 to add 11 former officers and directors of the Company's current and former subsidiaries as defendants and to allege additional causes of action based on (i) breach of fiduciary duty and imposition of personal liability, (ii) fraudulent conveyance, (iii) constructive trust and (iv) conspiracy and additional current losses totalling more than $9.8 million and to add a claim for punitive damages in the amount of $270 million. In 1989, the Company filed a motion to dismiss or stay the action, pending resolution of Centaur's rehabilitation in Illinois. The court declined to dismiss the action, but entered an order staying the action until the rehabilitation proceeding is resolved, except that the parties may pursue discovery to preserve evidence. In 1992, the Centaur rehabilitator filed a motion to intervene and dismiss the complaint on the grounds that the plaintiff lacked standing and that its claims were not ripe for adjudication. The motion is pending. In 1993, six of the 11 individual defendants were dismissed from the lawsuit. In September 1994, the court effectively lifted its stay. Active discovery is now being pursued. The Company intends to defend this lawsuit vigorously. The Company believes that any damages for failure to satisfy reinsurance obligations are solely the responsibility of Centaur and that the resolution of the lawsuit relating to Centaur, including the Company's indemnification obligations to former officers and directors, will not have a material adverse effect on its financial position or future operating results; however, no assurance can be given as to the ultimate outcome with respect to such lawsuit. 13 Environmental Proceedings The Company and certain of its current and former subsidiaries have been identified by the U.S. Environmental Protection Agency and certain state environmental agencies as potentially responsible parties ("PRPs") at a number of hazardous waste disposal sites under the Comprehensive Environmental Response, Compensation and Liability Act ("Superfund") and equivalent state laws and, as such, may be liable for the cost of cleanup and other remedial activities at these sites. Responsibility for cleanup and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula. The Company believes that none of these matters individually or in the aggregate will have a material adverse affect on its financial position or future operating results, generally either because the maximum potential liability at a site is 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 liability. Based on its estimate of allocations of liability among PRPs, the probability that other PRPs, many of whom are large, solvent public companies, will fully pay the costs allocated to them, currently available information concerning the scope of contamination at such sites, estimated remediation costs at such sites, estimated legal fees and other factors, the Company has made provisions for indicated environmental liabilities in its financial statements in the aggregate amount of approximately $10 million (relating to environmental matters with respect to discontinued operations of the Company). The Company believes that such provisions for indicated environmental liabilities have been established on a basis consistent with generally accepted accounting principles. If any environmental liability claim relating to the Company's former chemical and plastics business is made, the Company is indemnified by the purchaser of such business, General Electric Company. Since the disposition, the Company has notified General Electric Company of various claims made with respect to the Company's former chemical and plastics business and General Electric Company has assumed all of such claims and has not contested its indemnification obligations. There is no dollar limitation on the General Electric Company's indemnification obligations and there are no other material limitations or exclusions with respect thereto. If any environmental liability claim relating to the operations of Borg-Warner Automotive, Inc. is made, the Company will be indemnified by Borg-Warner Automotive. There is no dollar limitation on such indemnification obligations and there are no other material limitations or exclusions with respect thereto. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to the security holders of the Company during the fourth quarter of 1995. 14 ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. On January 20, 1993, the Company's Common Stock was listed for trading on the New York Stock Exchange. Prior to that date, there was no established public trading market for shares of Common Stock. As of March 5, 1996, there were approximately 217 holders of record of Common Stock. The Company has neither paid nor declared any cash dividends on its Common Stock during the last two years. The payment of dividends by the Company prohibited under the terms of the Company's indebtedness. The Company currently intends to retain earnings for acquisitions, working capital, capital expenditures, general corporate purposes and reduction of outstanding indebtedness. Accordingly, the Company does not expect to be able to nor does it expect to pay cash dividends in the foreseeable future. High and low sales prices (as reported on the New York Stock Exchange composite tape) for the Common Stock for each quarter during 1994 and 1995 were:
Quarter ended High Low ------------- ------- ------- 1994 March 31 $22 $16-3/8 June 30 16-7/8 10-3/4 September 30 12-3/4 10-5/8 December 31 11-1/8 8-1/4 1995 March 31 $ 9-7/8 $ 5-1/2 June 30 9-1/2 6-7/8 September 30 9-3/8 8-3/8 December 31 13 7-1/8
ITEM 6. SELECTED FINANCIAL DATA The selected financial data for the five years ended December 31, 1995, with respect to the following line items shown under the "Consolidated Statistical Review" (set forth on page 12) in the Annual Report is incorporated herein by reference and made a part of this report: Net service revenues; earnings (loss) from continuing operations; earnings (loss) from continuing operations per share; total assets and total debt. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Management's Discussion and Analysis of Results of Operations and Financial 15 Condition (set forth on pages 14 through 19) in the Annual Report are incorporated herein by reference and made a part of this report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements (including the notes thereto) of the Company (set forth on pages 20 through 38) in the Annual Report are incorporated herein by reference and made a part of this report. Supplementary financial information regarding quarterly results of operations (unaudited) for the years ended December 31, 1995 and 1994 is set forth in Note 14 of the Notes to Consolidated Financial Statements. For a list of financial statements and schedules filed as part of this report, see the "Index to Financial Statements and Financial Statement Schedules." ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Inapplicable. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to directors and nominees for election as directors of the Company is incorporated herein by reference to the information under the caption "Election of Directors" on pages 1 through 3 of the Company's proxy statement for the 1996 annual meeting of stockholders. Information with respect to executive officers of the Company is set forth in part I of this report. Information concerning compliance with Section 16(a) of the Exchange Act is incorporated by reference to the information under the caption "Section 16(a) Compliance" on page 6 of the Company's proxy statement for the 1996 annual meeting of stockholders. ITEM 11. EXECUTIVE COMPENSATION Information with respect to compensation of executive officers and directors of the Company is incorporated herein by reference to the information under the captions "Executive Compensation" on pages 6 through 9, and "Compensation of Directors" on page 4, of the Company's proxy statement for the 1996 annual meeting of stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to security ownership by persons known to the Company to 16 beneficially own more than five percent of the Company's common stock, by directors and nominees for director of the Company and by all directors and executive officers of the Company as a group is incorporated herein by reference to the information under the caption "Stock Ownership" on pages 5 and 6 of the Company's proxy statement for the 1996 annual meeting of stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to certain relationships and related transactions is incorporated herein by reference to the information under the caption "Certain Relationships and Related Transactions" on pages 13 and 14 of the Company's proxy statement for the 1996 annual meeting of stockholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) The following consolidated financial statements of the registrant and its consolidated subsidiaries, set forth on pages 20 through 38 of the Annual Report, and the report of Deloitte & Touche set forth on page 39 of the Annual Report, are incorporated herein by reference: Consolidated Balance Sheet--December 31, 1995 and 1994 Consolidated Statement of Operations--three years ended December 31, 1995 Consolidated Statement of Cash Flows--three years ended December 31, 1995 Consolidated Statement of Stockholders' Equity--three years ended December 31, 1995 Notes to Consolidated Financial Statements 17 (a)(2) The following report of independent auditors and financial statement schedule of the registrant and its consolidated subsidiaries are included herein: Report of Deloitte & Touche LLP, independent auditors II Valuation and Qualifying Accounts Certain schedules for which provisions are made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (a)(3) The exhibits listed in the "Exhibit Index." (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company during the three-month period ended December 31, 1995. 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BORG-WARNER SECURITY CORPORATION By /s/ J. Joe Adorjan -------------------- J. Joe Adorjan Chairman of the Board, Chief Executive Officer and President Date: March 18, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on this day of March 18, 1996. Signature Title - --------- ------ /s/ J. Joe Adorjan Chairman of the Board, Chief - ------------------------------- Executive Officer and President and J. Joe Adorjan Director (Principal Executive Officer) /s/ Timothy M. Wood Vice President, Finance - ------------------------------- (Principal Financial and Accounting Timothy M. Wood Officer) /s/ James J. Burke, Jr. Director - ------------------------------- James J. Burke, Jr. /s/ Albert J. Fitzgibbons, III Director - ------------------------------- Albert J. Fitzgibbons, III Director - ------------------------------- Arthur F. Golden /s/ Dale W. Lang Director - ------------------------------- Dale W. Lang Director - ------------------------------- Robert A. McCabe - ------------------------------- Andrew McNally IV Director /s/ Alexis P. Michas Director - ------------------------------- Alexis P. Michas /s/ H. Norman Schwarzkopf Director - ------------------------------- H. Norman Schwarzkopf /s/ Donald C. Trauscht Director - ------------------------------- Donald C. Trauscht INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders Borg-Warner Security Corporation We have audited the consolidated financial statements of Borg-Warner Security Corporation as of December 31, 1995 and 1994, and for each of the three years in the period ended December 31, 1995, and have issued our report thereon dated February 5, 1996; such consolidated financial statements and report are included in your 1995 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the financial statement schedule of Borg- Warner Security Corporation listed in Item 14 of this Annual Report on Form 10- K. This financial statement schedule is the responsibility of the Corporation's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Chicago, Illinois February 5, 1996 SCHEDULE II BORG-WARNER SECURITY CORPORATION VALUATION AND QUALIFYING ACCOUNTS (dollars in millions)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- ----------- ---------------------------- ----------- ----------- Additions --------- Years Ended December 31, (1) (2) Balance At Charged to Charged to Balance Beginning Costs and Other at Close Description of Period Expenses Accounts Deductions of Period ----------- ----------- ----------- ----------- ----------- ----------- 1993 Allowance for Doubtful Accounts $ 8.2 $ 4.2 $ 0.5 $ 4.1 $ 8.8 =========== =========== =========== =========== =========== 1994 Allowance for Doubtful Accounts $ 8.8 $ 5.5 $ 1.5 $ 8.1 $ 7.7 =========== =========== =========== =========== =========== 1995 Allowance for Doubtful Accounts $ 7.7 $ 4.4 $ 2.4 $ 7.2 $ 7.3 =========== =========== =========== =========== ===========
EXHIBIT INDEX EXHIBIT NUMBER DOCUMENT DESCRIPTION ------ -------------------- *3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992). *3.2 Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992). *4.1 Credit Agreement dated as of January 27, 1993 ("Credit Agreement") among the Company, the lenders party thereto and the administrative agent named therein (incorporated by reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992), as amended by the First Amendment thereto (incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ending June 30, 1994), as amended by the Second Amendment and Consent to Credit Agreement dated as of March 15, 1995 (incorporated by reference to Exhibit 4.8 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994), and as amended by the Third Amendment to Credit Agreement and Consent dated as of October 16, 1995 (incorporated by reference to Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). *4.2 Credit Agreement dated as of January 27, 1993 ("L/C Agreement") among the Company, the banks party thereto and the agent named therein (incorporated by reference to Exhibit 4.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992), as amended by the First Amendment thereto (incorporated by reference to Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ending June 30, 1994), as amended by the Fifth Amendment to L/C Agreement dated as of March 15, 1995 (incorporated by reference to Exhibit 4.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994), and as amended by Amendment No. 6 dated as of October 16, 1995 (incorporated by reference to Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). B-1 EXHIBIT NUMBER DOCUMENT DESCRIPTION ------ -------------------- *4.3 Credit Agreement dated as of October 16, 1995 ("Term Loan Agreement") among the Company, various lenders and Bankers Trust Company, as agent (incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). *4.4 Indenture dated as of January 15, 1983 by and between Borg-Warner and Harris Trust & Savings Bank, Trustee, entered into in connection with the registration of up to $150 million of debt securities and under which Borg-Warner issued 8% Notes due April 1, 1996 (incorporated by reference to Exhibit 9(d) to Registration Statement No. 2-81437). *4.5 Supplemental Indenture dated as of December 31, 1987 to the Indenture dated as of January 15, 1983 by and between the Company and Harris Trust and Savings Bank (incorporated by reference to Exhibit 4.7 to the Company's Annual Report on Form 10-K for the Ten Months ended October 31, 1987). *4.6 Form of Security for 8% Notes due April 1, 1996 (incorporated by reference to Exhibit 4.8 to Registration Statement No. 33-53480). *4.7 Indenture dated as of April 1, 1986 by and between Borg-Warner and Harris Trust and Savings Bank, entered into in connection with the registration of up to $150,000,000 of Debt Securities and Warrants to Purchase Debt Securities for issuance under a shelf registration on Form S-3 (incorporated by reference to Registration Statement No. 33-4670). *4.8 Indenture dated as of May 3, 1993 by and between the Company and The First National Bank of Chicago (incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1993). +*10.1 Borg-Warner Security Corporation Directors Stock Appreciation Rights Plan (incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1988). +*10.2 Borg-Warner Corporation Management Stock Option Plan, as amended through January 19, 1993 (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992). +*10.3 Borg-Warner Security Corporation 1993 Stock Incentive Plan B-2 EXHIBIT NUMBER DOCUMENT DESCRIPTION ------ -------------------- (incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992). +*10.4 Employment Agreement dated as of March 28, 1995 for J.J. Adorjan (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995). +*10.5 Form of Employment Agreement for Messrs. O'Brien and Wood (incorporated by reference to Exhibit 10.26 to Registration Statement No. 33-15419), as amended by Form of Amendment of Employment Agreement dated January 19, 1989 (incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 1988). *10.6 Form of Indemnification Agreement dated September 23, 1986 between the Company and Messrs. O'Brien and Wood (incorporated by reference to Exhibit 10.17 to Borg-Warner's Annual Report on Form 10-K for the year ended December 31, 1986). +*10.7 Agreement dated as of March 28, 1995 with D.C. Trauscht (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995). +*10.8 Borg-Warner Retirement Savings Plan, as amended through January 1, 1995 (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994). +*10.9 Borg-Warner Security Corporation Retirement Savings Excess Benefit Plan, as amended and restated through January 1, 1995 (incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994). +*10.10 Borg-Warner Security Corporation Supplemental Benefits Compensation Program (incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994). *10.11 Consulting Agreement dated as of September 1, 1993 between the Company and H. Norman Schwarzkopf (incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). B-3 EXHIBIT NUMBER DOCUMENT DESCRIPTION ------ -------------------- 10.12 Consulting Agreement dated as of January 1, 1996 between the Company and D.C. Trauscht. 11 Computation of earnings per share. 13 1995 Annual Report to Stockholders. 21 Subsidiaries of the Company. 23 Consent of Deloitte & Touche LLP. 27 Financial Data Schedule. - -------------------- * Incorporated by reference. + Indicates a management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c). B-4 EX-10.12 2 CONSULTING AGREEMENT CONSULTING AGREEMENT This Consulting Agreement ("Agreement") is made as of this first day of January, 1996 between Donald C. Trauscht having an address at 4 Arden Court, Oak Brook, Illinois 60521 ("Consultant") and Borg-Warner Security Corporation, a Delaware Corporation having its principal place of business at 200 South Michigan Avenue, Chicago, Illinois 60604 (the "Company"). WHEREAS, Consultant has the ability to offer to the Company expertise, knowledge and assistance regarding matters relating to the Company and its business and the Company desires to retain Consultant to provide such services. NOW THERETOFORE, Consultant and Company agree as follows: 1. Nature of Work - Upon the request of the Chief Executive Officer of the Company ("CEO"), Consultant will provide consulting, advisory and other services ("Services") to the CEO with respect to the Company and its subsidiaries and their business. 2. Payment - The Company will pay Consultant a fee of One Hundred Thousand ($100,000.00) for the term of this Agreement, with one-half payable on January 15, 1996 and the remainder payable on July 15, 1996. If both parties agree that the Services required by the CEO under this Agreement exceed what was reasonably expected by the Consultant, then the Consultant and CEO shall meet and discuss an appropriate increase in the consulting fee. 3. Term - The term of this Agreement shall begin on January 1, 1996 and shall end at the close of business on December 31, 1996. 4. Status of Consultant - Consultant shall perform the Services hereunder as an independent contractor and consultant. Except as otherwise provided in the March Agreement (as defined in Section 6 below), Consultant shall at no time and under no circumstances be deemed an employee, agent, or representative of the Company for any purposes whatsoever including, but not limited to, worker's compensation, social security, state or federal unemployment insurance, withholding or other taxes of a similar or general nature or eligibility for any benefits available to employees of the Company. Consultant does not have the authority to and shall not bind or commit the Company to any other party. 5. Assignment - This Agreement requires the Consultant's personal services and is not assignable by Consultant. 6. March Agreement - Nothing herein shall be deemed to waive, release, or amend any term or condition of that certain Agreement between Consultant and Company dated as of March 28, 1995, as amended ("March Agreement"). In witness whereof the parties have executed this Agreement as of the day and year first above writen. /s/ DONALD C. TRAUSCHT -------------------------------- Donald C. Trauscht BORG-WARNER SECURITY CORPORATION By: /s/ J. JOE ADORJAN ----------------------------- EX-11 3 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 BORG WARNER SECURITY CORPORATION STATEMENT RE COMPUTATION OF PER SHARE EARNINGS Years Ended December 31, 1993, 1994, and 1995 Shares used in computation of per share earnings (Thousands)
1993 1994 1995 ------ ------ ------ Average common shares outstanding 22,272 22,893 23,097 Common stock equivalents 586 277 302 ------ ------ ------ Shares used for computation of per share earnings 22,858 23,170 23,399 ====== ====== ======
EX-13 4 ANNUAL REPORT CONSOLIDATED STATISTICAL REVIEW The following table sets forth selected financial information for Borg-Warner Security Corporation. The information is derived from the audited financial statements of the Company and treats Borg-Warner Automotive, Inc., which was spun off in January 1993, as a discontinued operation. The selected financial data should be read in connection with the 1995 consolidated financial statements and accompanying notes. STATEMENT OF OPERATIONS DATA
- ------------------------------------------------------------------------------------------------ Year Ended December 31, (millions of dollars, except share data) 1991 1992 1993 1994 1995 - ------------------------------------------------------------------------------------------------ Net service revenues $1,555.4 $1,620.6 $1,764.6 $1,792.9 $1,862.5 Provision (benefit) for income taxes/(1)/ 9.4 (19.7) 22.2 (3.0) 5.9 Earnings (loss) from continuing operations/(2)/ 25.2 57.7 (215.1) 13.1 5.9 Earnings (loss) from continuing operations per share $1.28 $2.94 ($9.41) $0.56 $0.25 Average common shares and equivalents outstanding in thousands/(3)/ 19,698 19,647 22,858 23,170 23,399 BALANCE SHEET DATA - ------------------------------------------------------------------------------------------------ (at end of period) - ------------------------------------------------------------------------------------------------ Total assets $1,866.3 $1,758.1 $ 790.5 $ 830.3 $ 851.4 Total debt 872.9 746.6 457.5 468.5 489.1 Stockholders' equity 668.3 676.7 27.5 43.8 49.7 Net assets of discontinued Borg-Warner Automotive operations 743.5 728.2 -- -- --
STOCK PRICES - ------------------------------------------------------------------------------------------------ 1995 Quarters First Second Third Fourth - ------------------------------------------------------------------------------------------------ High $9-7/8 $9-1/2 $9-3/8 $13 Low $5-1/2 $6-7/8 $8-3/8 $7-1/8 1994 Quarters - ------------------------------------------------------------------------------------------------ High $22 $16-7/8 $12-3/4 $11-1/8 Low $16-3/8 $10-3/4 $10-5/8 $8-1/4
(1) Effective January 1, 1991, the Company changed its method of accounting for income taxes to conform to Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Income taxes for the years ended December 31, 1992 and 1994 reflect certain adjustments related to changes in tax bases. See Note 11 to the Consolidated Financial Statements. (2) Following the spin-off of Borg-Warner Automotive, $250 million of excess purchase price over net assets acquired not directly attributed to the protective services business was written off as a charge to earnings in the first quarter of 1993. (3) The average common shares outstanding include 3,795,000 shares sold through an initial public offering on January 27, 1993. 12 Management's Discussion and Analysis of Financial Condition and Results of Operations Overview The Company's protective services business is divided into four business units: guard services, alarm services, armored services and courier services. The Company's consolidated net service revenue increased 4% in 1995 and 2% in 1994. All business units except courier reported higher revenues in 1995, with the largest gains due to higher volume at armored services and recognition of alarm revenue under sales-type leases. The 1994 increase resulted primarily from higher volume and acquisitions by armored services. Operating profit, which is pretax earnings before interest expense and unallocated corporate expenses, increased 9% in 1995 following a 30% decrease in 1994. The increase in 1995 operating profit reflects operating margin improvements in the guard and alarm units throughout the year, and continued strong armored performance. The higher operating margins primarily resulted from improved pricing and cost control programs. Margins declined at all units in 1994 as selling price pressures continued despite rising direct costs. Results of Operations The following table sets forth the net service revenues and operating profit by unit for the three years ended December 31, 1995:
Year ended December 31, ................................................................................. (millions of dollars) 1993 1994 1995 ................................................................................. Net service revenues: Guard services $1,198.0 $1,209.4 $1,222.8 Alarm services 213.2 206.2 254.7 Armored services 180.9 211.2 231.0 Courier services 172.5 166.1 154.0 ................................................................................. Total net service revenues $1,764.6 $1,792.9 $1,862.5 ================================================================================= Operating profit: Guard services $58.5 $54.5 $56.4 Alarm services 31.1 14.9 15.8 Armored services 13.3 6.7 13.7 Courier services 7.4 1.1 (1.6) ................................................................................. Total operating profit $110.3 $77.2 $84.3 =================================================================================
Consolidated revenue for 1995 includes $38.5 million related to recognition of certain alarm services contracts as sales-type leases. There was no comparable activity in 1994 or 1993. Excluding the impact of the sales-type leases, consolidated revenue for 1995 increased 2% over 1994. Guard Services Guard service revenue increased slightly in 1995 and 1994. Revenue growth was achieved despite competitive pressures. The Company also experienced moderately higher billing rates to offset higher labor costs. The 1994 revenue increase was due to internal growth and improved customer retention. 14 Management's Discussion and Analysis of Financial Condition and Results of Operations, continued Guard's operating profit increased 3% in 1995 after declining 7% in 1994. Profit trailed 1994 in the first half of the year. However, it exceeded 1994 during the second half of 1995 due to stabilizing gross margins and operations streamlining. During 1994 and continuing into 1995, competitive market conditions had constrained the Company's ability to increase prices in response to cost increases. The guard unit was reorganized in February 1994 by combining the corporate administrative functions and establishing regional offices. Operating margins also improved due to continued consolidation of certain support staff and field operations in 1995. Alarm Services Alarm service revenue increased 24% in 1995 following a 3% decrease in 1994. Excluding the impact of leasing commercial and residential alarm installations under sales-type leases, revenue increased 5% in 1995, primarily as a result of higher direct sales of commercial alarm installations and higher service revenue on residential operations. The increase in revenue related to sales-type leases will be offset in future periods by reduced rental revenue from equipment under operating leases. In 1994 revenues from key commercial, banking and defense industry customers declined due to consolidation in those industries. This also adversely impacted overall customer retention rates in 1995 and 1994. Alarm's 1995 operating profit increased 6%, due in part to improved pricing and investment control performance. Annual contract service-in-force at December 31, 1995 was comparable to the prior year-end despite the increase in cancellations. The operating margin improved steadily in 1995 despite increased commitments to selling and service capabilities. Operating profit declined 52% in 1994 due to reduced revenues over a largely fixed cost base. In addition, the Company invested in resources to improve service quality and other costs increased. Price competition also applied downward pressure on operating margins in 1994. Armored Services Armored service revenue increased 9% and 17% in 1995 and 1994, respectively. The 1995 increase resulted primarily from improved pricing together with higher volume in the Wells Fargo Armored Express and ATM service operations. The 1994 increase resulted primarily from acquisitions, including the acquisition of the assets of Shields Business Machines, Inc., an ATM servicer, and from increased volume in the ATM service operations. The traditional armored transport business has been adversely affected by consolidation in the banking industry. To counter this, the unit has expanded into additional areas of service, including Wells Fargo Armored Express and ATM service operations in the retail sector. Wells Fargo Armored Express specializes in deposit pick-up services in small- to medium-sized markets for retailers who have not traditionally utilized armored transport services. 15 Management's Discussion and Analysis of Financial Condition and Results of Operations, continued Despite higher labor, vehicle and insurance costs, operating profit increased by $7.0 million in 1995. Operating margins improved primarily due to improved pricing, profitability, and loss control programs. The unit continues to invest in programs for improvements in both safety and service quality. Operating profit declined 50% in 1994 as the rate of cargo losses attributable to external theft increased substantially from historical levels. In addition, increases in direct labor costs and administrative expenses reduced operating margins. Courier Services Courier service revenue declined 7% and 4% in 1995 and 1994, respectively. The lower revenue resulted primarily from a reduced volume of traditional non- negotiable financial document shipments and from customer cost-reduction efforts. The lower volume results, in part, from consolidations occurring within the banking industry and from increased competition in local markets due to deregulation within the industry. This lost volume has been partially offset by increased activity in package express business, which specializes in next-day delivery of small packages and other time- sensitive commodities. Courier operations incurred a $1.6 million operating loss in 1995, compared with operating profit of $1.1 million and $7.4 million in 1994 and 1993, respectively. Operating profit declined due to the reduced revenues against a fixed cost base in established route structures. Additionally, 1994 and 1995 earnings also reflect adverse effects associated with labor unrest in certain geographic regions. Foreign The percentage of the Company's revenues derived from non-U.S. operations, primarily guard services, was 6% in 1995, 1994 and 1993. The Company operates in Canada, the United Kingdom and Colombia. Other Earnings Factors General corporate expenses were $14.7 million in 1995 compared to $26.5 million in 1994 and $4.8 million in 1993. The decline in 1995 was due to cost reduction efforts and to the absence of non-recurring charges. Corporate expenses in 1994 included $14 million in non- recurring non-cash accruals for self-insurance reserves and other corporate allowances. Expenses in 1993 benefitted from a $6 million higher headquarters expense reimbursement from Borg-Warner Automotive. Other income in 1994 included a gain of $9.9 million related to the sale of trademarks and other rights to Borg-Warner Automotive. Gains on the sale of various assets in 1993 were $1.9 million. Interest expense and finance charges increased 15% in 1995 to $57.8 million from $50.4 million in 1994, and were $51.5 million in 1993. The increase in 1995 was due to higher market interest rates combined with increased rates under the 1995 credit agreement amendments and refinancing. 16 Management's Discussion and Analysis of Financial Condition and Results of Operations, continued The Company's effective tax rates have varied significantly from the federal tax rate. The effective tax rate of 50% in 1995 exceeded the statutory rate primarily because of non-deductible excess purchase price amortization. The Company recorded a net income tax benefit in 1994 primarily because of adjustments to deferred income taxes of $7.0 million related to changes in the tax basis of certain liabilities as a result of sales and settlements. In 1993 the Company had a $22.2 million provision for income taxes despite a pre-tax loss of $192.9 million primarily due to a $250 million non-deductible charge to eliminate excess purchase price. Excluding the impact of the foregoing items, the Company's effective tax rate would have been 39% and 40% in 1993 and 1994, respectively. Discontinued Operations The loss from discontinued operations in 1993 reflects the results of Borg-Warner Automotive operations up to the time of the spin-off in January. These results include an allocation of corporate headquarters and interest expenses. Extraordinary Items Earnings for 1995 include a charge of $4.7 million, net of tax, from the early extinguishment of debt in connection with the amendment of the Company's credit facilities. Earnings for 1993 reflect a loss of $9.1 million, net of tax, from the early extinguishment of debt. Cumulative Effect of The Company adopted SFAS No. 106, "Employers' Initial Application of Accounting for Postretirement Benefits Other Than New Accounting Pensions," effective January 1, 1993, and elected Standards immediate recognition of the $15 million obligation. The cumulative effect was a charge of $8.3 million, net of tax. In the fourth quarter of 1993, the Company changed the method of selecting the rate used to discount the retained portion of insurance costs related to its various deductible policies. The Company previously used a rate based on its overall cost of capital. Consistent with the Securities and Exchange Commission Staff Accounting Bulletin No. 92, the rate was changed to a rate based on risk-free monetary asset yields for securities with similar maturities. This change resulted in a reduction in the discount rate from 10% to 4%. The cumulative effect of this change was a charge of $9.4 million, net of tax. Neither of the above changes in accounting had a material impact on earnings from continuing operations in the respective years of implementation. 17 Management's Discussion and Analysis of Financial Condition and Results of Operations, continued Financial Condition and Current liabilities exceeded current assets at Liquidity December 31, 1995 and 1994 due to the sale of receivables with the proceeds used to reduce long-term debt. The outstanding balance of sold receivables was $120.0 million and $112.0 million at December 31, 1995 and 1994, respectively. Other current assets at December 31, 1995 included interest-bearing cash deposits of $31.1 million held in trust under the terms of the Company's accounts receivable facility. These deposits represent proceeds of collections held back based on the amount of eligible receivables in the revolving receivables pool. The levels of receivables, inventory and current liabilities are partly seasonal in nature and are influenced by the timing of billings, collections and payrolls. The Company's policy is to keep working capital at as low a level as is operationally feasible to minimize related carrying costs. Other assets at December 31, 1995 included $35.3 million for the Company's 1995 investment in sales-type leases related to alarm installations. Prior years' investments in alarm service contracts were reflected as operating leases and included in property, plant and equipment. Cash provided by operating activities was $58.1 million, $66.0 million and $34.3 million in 1995, 1994 and 1993, respectively. Cash used for investing activities in 1995 was reduced by $9.9 million due to improved alarm investment control, lower capital expenditures and the absence of acquisitions. Capital expenditures were $50.4 million, $67.0 million and $68.8 million in 1995, 1994 and 1993, respectively. Pursuant to the terms of the Company's credit facilities, capital expenditures are limited to $64.6 million in 1996. The Company does not have any material commitments for capital expenditures and believes that it will be able to continue to invest in its business as required, within the limits set forth under its amended credit facilities. The Company expects that continuing operations, together with existing credit facilities and replacements thereof, will generate sufficient cash to fund its operating requirements and capital expenditures. The Company amended its revolving and letter of credit facilities in March 1995 with respect to covenants related to earnings, leverage, fixed charge coverage, net worth, capital expenditures and acquisitions. On October 17, 1995, the Company entered into a credit agreement with a group of banks, providing for a $200 million term loan due December 31, 1998. The Company also amended its existing revolving credit and letter of credit facilities, principally to permit the term loan, change pricing, amend covenants relating to interest coverage, leverage, net worth and earnings, extend the maturity of the letter of credit facility to December 31, 1998, and reduce the level of commitments under the letter of credit facility to $155 million. On November 14, 1995, the Company entered into a new $120 million accounts receivable facility to replace the previous facility which would have expired on November 30, 1995. The new facility is available through December 31, 1998. Under the terms of this facility, BPS Financial Services, Inc., a wholly owned special purpose subsidiary of the Company, purchases customer receivables on a daily basis from participating operating units and sells an undivided interest in the revolving pool of receivables through asset-backed certificates issued to investors. 18 Management's Discussion and Analysis of Financial Condition and Results of Operations, continued The Company used the initial $100 million of proceeds from the term loan to prepay an existing $50 million term loan and for general corporate purposes. Subject to customary borrowing conditions, the remaining $100 million of the term loan will be used to repay the $100 million principal amount of 8% notes due April 1, 1996. The Company is required to prepay the term loan with the proceeds from certain asset sales, certain reversions of surplus pension plan assets, issuance of debt or equity securities and excess cash flow. In the event that, as of the end of each quarter beginning with the quarter ended March 31, 1997, the Company has not achieved required covenants for the four consecutive quarters ending on such date, the Company is required to prepay $150 million of the term loan not later than 120 days after the end of such quarter. If the Company is required to make such payment, it expects to fund such amount through some combination of transactions that may include the issuance of debt or equity securities, the sale of assets or other financing alternatives. As discussed more fully in Note 6 of the Notes to Consolidated Financial Statements, various complaints seeking substantial dollar amounts have been filed against the Company. The Company believes that it has established adequate provisions for litigation liabilities in its financial statements in accordance with generally accepted accounting principles. 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, although no assurance can be given with respect to the ultimate outcome of any such proceeding. 19
Borg-Warner Security Corporation Consolidated Statement of Operations Year Ended December 31, ........................................................................................................................ (millions of dollars, except per share) 1993 1994 1995 ........................................................................................................................ Net service revenues $1,764.6 $1,792.9 $1,862.5 Cost of services 1,390.3 1,437.3 1,500.7 Selling, general and administrative expenses 197.0 231.2 220.6 Depreciation 55.3 57.6 57.1 Amortization of excess purchase price over net assets acquired 16.5 16.1 14.5 Other income, net -- Note 10 (3.1) (9.8) - Non-recurring elimination of excess purchase price over net assets acquired 250.0 - - Interest expense and finance charges 51.5 50.4 57.8 ........................................................................................................................ Earnings (loss) before taxes (192.9) 10.1 11.8 Provision (benefit) for income taxes - Note 11 22.2 (3.0) 5.9 ........................................................................................................................ Earnings (loss) from continuing operations (215.1) 13.1 5.9 Loss from discontinued operations (1.5) - - ........................................................................................................................ Earnings (loss) before extraordinary items and cumulative effect of accounting change (216.6) 13.1 5.9 Extraordinary items: Loss from early extinguishment of debt, net of tax effects ($5.3 million benefit in 1993 and $3.2 million benefit in 1995) - Note 5 (9.1) - (4.7) Cumulative effect of initial application of new accounting standards - Note 1 (17.7) - - ........................................................................................................................ Net earnings (loss) ($243.4) $13.1 $1.2 ======================================================================================================================== Earnings (loss) per common share: Continuing operations ($9.41) $0.56 $0.25 Discontinued operations (0.07) - - Extraordinary items (0.40) - (0.20) Cumulative effect of initial application of new accounting standards (0.77) - - ........................................................................................................................ Net earnings (loss) per share ($10.65) $0.56 $0.05 ========================================================================================================================
(See accompanying notes to consolidated financial statements) 20 Borg-Warner Security Corporation Consolidated Balance Sheet
December 31, - ------------------------------------------------------------------------------------------------------------------------ (millions of dollars) 1994 1995 - ------------------------------------------------------------------------------------------------------------------------ Assets Cash and cash equivalents $ 15.8 $ 21.1 Receivables, net 106.7 102.7 Inventories 12.2 12.5 Other current assets 24.8 59.5 - ------------------------------------------------------------------------------------------------------------------------ Total current assets 159.5 195.8 Property, plant and equipment Land and buildings 50.7 51.0 Machinery and equipment 79.3 77.0 Subscribers' installations 365.2 336.5 Capital leases 37.0 32.4 Construction in progress 5.5 3.8 - ------------------------------------------------------------------------------------------------------------------------ 537.7 500.7 Less accumulated depreciation 242.6 249.8 - ------------------------------------------------------------------------------------------------------------------------ Net property, plant and equipment 295.1 250.9 Net excess purchase price over net assets acquired 286.5 273.0 Deferred tax asset, net 50.8 52.8 Other assets 38.4 78.9 - ------------------------------------------------------------------------------------------------------------------------ Total other assets 375.7 404.7 - ------------------------------------------------------------------------------------------------------------------------ $ 830.3 $ 851.4 ======================================================================================================================== Liabilities and Stockholders' Equity Notes payable $ 14.5 $ 7.0 Accounts payable and accrued expenses 181.8 193.9 - ------------------------------------------------------------------------------------------------------------------------ Total current liabilities 196.3 200.9 Long-term debt 454.0 482.1 Other long-term liabilities 136.2 118.7 Capital stock: Common stock, issued 22,435,700 shares in 1994 and 22,446,100 shares in 1995 0.2 0.2 Series I non-voting common stock, issued 2,720,000 shares - - Capital in excess of par value 30.9 28.1 Retained earnings 29.7 31.2 Notes receivable - management stock purchase (1.0) (0.3) Cumulative translation adjustment (0.5) (0.4) - ------------------------------------------------------------------------------------------------------------------------ 59.3 58.8 Treasury common stock, at cost, 2,237,344 shares in 1994 and 1,928,861 shares in 1995 (15.5) (9.1) - ------------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 43.8 49.7 - ------------------------------------------------------------------------------------------------------------------------ $ 830.3 $ 851.4 ========================================================================================================================
(See accompanying notes to consolidated financial statements) 21 Borg-Warner Security Corporation Consolidated Statement of Cash Flows
Year Ended December 31, - ------------------------------------------------------------------------------------------ (millions of dollars) 1993 1994 1995 - ------------------------------------------------------------------------------------------ Operating: Continuing operations: Earnings (loss) from continuing operations ($215.1) $ 13.1 $ 5.9 Adjustments to reconcile net earnings (loss) to net cash flows provided by continuing operations: Non-cash charges to earnings: Depreciation and amortization 71.8 73.7 71.6 Provision for losses on receivables 3.7 5.5 4.4 Deferred income taxes 13.5 (9.4) (5.5) Amortization of debt discount 2.0 2.1 2.1 Non-recurring elimination of excess purchase price over net assets acquired 250.0 - - Changes in assets and liabilities: (Increase) in receivables (23.3) (10.9) (3.6) (Increase) decrease in other current assets 1.8 (2.7) (3.9) Increase (decrease) in accounts payable and accrued expenses (5.4) 10.0 12.1 Net change in other long-term assets and liabilities (50.2) (4.7) (19.8) Gain on sales of businesses and other assets (1.8) (8.5) - - ------------------------------------------------------------------------------------------ Net cash provided by continuing operations 47.0 68.2 63.3 Discontinued operations: Net loss (1.5) - - Other cash related to discontinued operations (11.2) (2.2) (5.2) - ------------------------------------------------------------------------------------------ Net cash used in discontinued operations (12.7) (2.2) (5.2) - ------------------------------------------------------------------------------------------ Net cash provided by operating activities 34.3 66.0 58.1 Investing: Capital expenditures and investments in sales-type leases (68.8) (67.0) (50.4) Payments related to businesses acquired (4.8) (9.0) - Proceeds from sales of fixed and other assets 5.7 16.9 1.2 - ------------------------------------------------------------------------------------------ Net cash used in investing activities (67.9) (59.1) (49.2) Financing: Net (decrease) increase in notes payable (19.3) 3.8 (7.5) Increase (decrease) in debt outstanding under revolving credit facility (95.0) 40.2 19.4 Increases in long-term debt 149.5 37.5 100.0 Reductions in long-term debt (94.3) (72.6) (93.4) Net increase (decrease) in receivables sold 18.0 (12.0) (23.1) Net proceeds from the issuance of common stock 63.5 - - Cash outflows related to early extinguishment of debt (246.4) - - Borg-Warner Automotive repayment/assumption of Company indebtedness 249.9 - - Sales of treasury common stock 3.2 0.8 1.0 Purchases of treasury common stock (0.1) - - - ------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities 29.0 (2.3) (3.6) - ------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents (4.6) 4.6 5.3 Cash and cash equivalents at beginning of year 15.8 11.2 15.8 - ------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 11.2 $ 15.8 $ 21.1 ========================================================================================== Supplemental cash flow information: Interest paid $ 61.1 $ 46.0 $ 54.2 Income taxes paid (refunded) 21.3 (3.2) 0.7
(See accompanying notes to consolidated financial statements) 22 Borg-Warner Security Corporation Consolidated Statement of Stockholders' Equity
Years Ended December 31, 1993 1994 1995 - ---------------------------------------------------------------------------------------------------------------------------------- (millions of dollars, except share data) Shares Amount Shares Amount Shares Amount - ---------------------------------------------------------------------------------------------------------------------------------- Common Stock Issued Beginning balance 20,000,700 $ 0.2 24,955,700 $ 0.2 25,155,700 $ 0.2 Shares issued in initial public offering 3,795,000 - - - - - Conversion of Series I non-voting shares to common shares 1,160,000 - 200,000 - 10,400 - - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31 24,955,700 0.2 25,155,700 0.2 25,166,100 0.2 - ---------------------------------------------------------------------------------------------------------------------------------- Capital In Excess of Par Value Beginning balance 187.3 28.2 30.9 Shares issued in initial public offering 63.5 - - Shares issued under stock option and related plans (2.1) 0.2 (5.4) Spin-off of Borg-Warner Automotive (230.0) - - Tax benefit from trust distribution and exercise of stock options 9.5 2.5 2.6 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31 28.2 30.9 28.1 - ---------------------------------------------------------------------------------------------------------------------------------- Retained Earnings Beginning balance 520.6 15.9 29.7 Net earnings (loss) (243.4) 13.1 1.2 Spin-off of Borg-Warner Automotive (259.9) - - Adjustment for deferred pension experience loss (1.4) 0.7 0.3 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31 15.9 29.7 31.2 - ---------------------------------------------------------------------------------------------------------------------------------- Notes Receivable - Management Stock Purchase Beginning balance (2.1) (1.8) (1.0) Net activity 0.3 0.8 0.7 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31 (1.8) (1.0) (0.3) - ---------------------------------------------------------------------------------------------------------------------------------- Cumulative Translation Adjustment Beginning balance 9.3 1.3 (0.5) Spin-off of Borg-Warner Automotive (7.7) - - Current year adjustment (0.3) (1.8) 0.1 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31 1.3 (0.5) (0.4) - ---------------------------------------------------------------------------------------------------------------------------------- Treasury Stock Beginning balance 1,188,316 (38.6) 2,151,108 (16.3) 2,237,344 (15.5) Acquired shares 6,083 (0.1) - - - - Shares issued under stock option and related plans (203,291) 3.2 (113,764) 0.8 (318,883) 6.4 Conversion of Series I non-voting shares to common shares 1,160,000 - 200,000 - 10,400 - Spin-off of Borg-Warner Automotive - 19.2 - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31 2,151,108 (16.3) 2,237,344 (15.5) 1,928,861 (9.1) - ---------------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity $ 27.5 $ 43.8 $ 49.7 ==================================================================================================================================
(See accompanying notes to consolidated financial statements) 23 Borg-Warner Security Corporation Notes to Consolidated Financial Statements Note 1--Summary The following paragraphs briefly describe significant of Significant accounting policies. Certain 1993 and 1994 amounts have Accounting Policies been reclassified to conform with the 1995 presentation. Prior to an initial public offering in January 1993, the name of the Company was changed from Borg-Warner Corporation to Borg-Warner Security Corporation. Principles of The consolidated financial statements include all Consolidation significant subsidiaries. In January 1993 the Company distributed to its shareholders all of the stock of Borg-Warner Automotive, Inc. Therefore, Borg-Warner Automotive is treated as a discontinued operation for all periods presented. (See Note 3.) Use of Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the measurement of assets and liabilities and of revenues and expenses, and the disclosure of contingent assets and liabilities during the reported period. Cash and Cash Cash and cash equivalents consists primarily of cash Equivalents and certificates of deposit with original maturities of three months or less. Inventories Inventories are valued at the lower of cost or market. Cost of substantially all inventories is determined by the first-in, first-out (FIFO) method. Property, Plant and Property, plant and equipment is carried at cost less Equipment and accumulated depreciation. Expenditures for maintenance, Depreciation repairs and renewals of relatively minor items are generally charged to expense as incurred. Renewals of significant items are capitalized. Depreciation is computed generally on the straight-line method over the following estimated useful lives: * Buildings and improvements 15 to 50 years * Machinery and equipment 3 to 12 years * Subscribers' installations 8 to 15 years * Property under capital leases 3 to 7 years Income Taxes Income taxes are determined using the liability method, under which deferred tax assets and liabilities are determined based on the differences between the financial accounting and tax bases of assets and liabilities. Deferred tax assets or liabilities at the end of each period are determined using the currently enacted tax rate expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be settled or realized. (See Note 11.) Retirement A number of eligible salaried and hourly employees Benefit Plans participate in contributory or noncontributory defined benefit or defined contribution plans. Funding policy is based upon independent actuarial valuations and is within the limits required by ERISA for U.S. defined benefit plans. The benefits provided to certain salaried employees covered under various defined benefit plans are based on years of service and final average pay and utilize the projected unit credit method for cost allocation. The benefits provided to certain hourly employees under various defined benefit plans are based on years of service and utilize the unit credit method for cost allocation. 24 Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued Under the defined contribution plans, contributions by the Company or its subsidiaries sponsoring the plans are based on the employees' salary, age, years of service, and/or a fixed schedule. These contributions are charged to earnings as they are made to the various plans. Postretirement Benefits Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"), and elected immediate recognition of the $15.0 million obligation and recorded a charge of $8.3 million (net of the related income tax benefit of $5.1 million) or $0.37 per share to reflect the cumulative effect of the change in accounting for periods prior to 1993. This standard requires that the expected cost of retiree health benefits be charged to expense during the years that the employees render service rather than recognizing these costs on a cash basis. Casualty Insurance The Company has accrued a discounted liability for the Liabilities retained portion of insurance costs related to its various deductible policies. This insurance liability is determined by the Company based on claims filed and an estimate of claims incurred but not yet reported. Consistent with Securities and Exchange Commission Staff Accounting Bulletin Number 92, in 1993 the Company changed the method of selecting the discount rate from an overall cost of capital-based rate to a rate based on risk-free monetary asset yields for securities with similar maturities. This change resulted in a reduction in the discount rate from 10% to 4% and a change in method of estimating the future cash flows related to this obligation. The cumulative effect was a charge to earnings of $9.4 million (net of applicable taxes of $6.0 million) or $0.40 per share. This amount, included in "Cumulative effect of initial application of new accounting standards" in the Statement of Operations, was recorded in the fourth quarter of 1993. The discount rate used to value the future obligation at December 31, 1994 and 1995 was 7% and 5.5%, respectively. The change in discount rate in 1993, 1994 and 1995 did not have a material impact on earnings from continuing operations in the respective years of change. Amortization of Excess Excess of purchase price over net assets acquired is of Purchase Price Over being amortized on a straight-line basis over 5 to 40 Net Assets Acquired years, with the majority being amortized over 40 years. The Company periodically reviews its operations to determine whether there has been a diminution in value of its excess purchase price over net assets acquired. If the review indicates a decline in the carrying value, the Company adjusts the amortization accordingly. Intercompany Income taxes for periods prior to the spin--off have Allocations and been allocated to the Borg-Warner Automotive operations Transactions with based on Borg-Warner Automotive's relative share of the Borg-Warner Automotive combined operations' income taxes after consideration of intercompany charges. The Company and Borg-Warner Automotive have entered into a tax-sharing agreement after the spin-off, which calls for Borg-Warner Automotive to pay the Company for any operating loss carry-forward apportioned to it as part of the spin-off at such time as the benefits related to such carry- forward are realized by Borg-Warner Automotive. Also, certain costs incurred at corporate headquarters are charged to Borg-Warner Automotive based on a service agreement with the Company. 25 Borg-Warner Security Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DERIVATIVE FINANCIAL INSTRUMENTS The Company uses interest rate swap agreements to manage exposure to interest rate derivative instruments for speculative purposes. The differential paid or received on interest rate swap agreements is recognized as an adjustment to interest expense in the period. REVENUE RECOGNITION Revenue is recognized at the time services are provided. In certain circumstances this can result in revenue recognition prior to customer billing and revenue deferral from advance billings. EARNINGS PER COMMON SHARE Earnings per common share are based on average outstanding common shares and common share equivalents. Common share equivalents recognize the dilutive effects of common shares which may be issued in the future upon exercise of certain stock options. NEW ACCOUNTING PRONOUNCEMENTS In October 1995 the Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based Compensation," which the Company must adopt in fiscal year 1996. This statement defines a new "fair value" method of accounting for stock-based compensation expense, and requires certain additional disclosures for these plans. The statement also allows the retention of the previous "intrinsic value" method of accounting for expense recognition under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The Company intends to retain the intrinsic value method and, therefore, the new standard will have no effect on the Company's net income or financial position. Note 2--Balance Sheet Information Detailed balance sheet data are as follows:
December 31, ------------------------------------------------------------------------------------------------ (millions of dollars) 1994 1995 ------------------------------------------------------------------------------------------------ Receivables Customers $ 111.6 $ 105.8 Other 2.8 4.2 ------------------------------------------------------------------------------------------------ 114.4 110.0 Less allowance for losses 7.7 7.3 ------------------------------------------------------------------------------------------------ Net receivables $ 106.7 $ 102.7 ================================================================================================ Other assets Net investment in sales-type leases $ -- $ 35.3 Debt issuance costs 10.8 14.5 Deferred pension asset 8.0 7.5 Deferred subscribers' installation costs 8.9 7.2 Other 10.7 14.4 ------------------------------------------------------------------------------------------------ Total other assets $ 38.4 $ 78.9 ================================================================================================ Accounts payable and accrued expenses Trade payables $ 29.8 $ 30.3 Payroll and related 57.7 60.4 Casualty insurance 43.9 45.2 Interest 7.6 8.5 Liabilities to former shareholders 10.5 9.6 Deferred income 11.2 10.8 Other 21.1 29.1 ------------------------------------------------------------------------------------------------ Total accounts payable and accrued expenses $ 181.8 $ 193.9 ================================================================================================
26 Borg-Warner Security Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED In November 1995 the Company replaced its previous $100 million accounts receivable facility with an agreement to sell a $120 million undivided interest in a revolving pool of customer receivables. This sold interest is reflected as a reduction of "Receivables" in the accompanying Consolidated Balance Sheet at December 31, 1995. The Company retains, on a subordinated basis, an undivided interest in the pool of receivables. The Company's retained interest of $17.0 million at December 31, 1995 is included with "Receivables" on the balance sheet. "Other current assets" at December 31, 1995 included interest-bearing cash deposits of $31.1 million held in trust under the terms of the accounts receivable facility. These deposits represent proceeds of collections held back based on the amount of eligible receivables in the revolving receivables pool. The Company's retained interest in the receivables and cash deposits is generally restricted. The full amount of the allowance for losses has been retained because the Company has retained substantially the same risk of credit loss as if the receivables had not been sold. The discount related to the sale of receivables is included with "Interest expense and finance charges" in the Consolidated Statement of Operations. At December 31, 1994, $112 million of receivables was sold under the prior receivables facility. Selling, general and administrative expenses include provisions for losses on receivables of $3.7 million, $5.5 million and $4.4 million in 1993, 1994, and 1995, respectively. Accumulated depreciation related to capital leases amounted to $15.6 million and $18.0 million at December 31, 1994 and 1995, respectively. Accumulated amortization related to excess purchase price over net assets acquired amounted to $78.5 million and $93.0 million at December 31, 1994 and 1995, respectively. Trade payables include checks outstanding in excess of bank deposits in the Company's central disbursement accounts, since arrangements with the banks do not call for reimbursement until checks are presented for payment. Such amounts were $18.3 million and $19.3 million at December 31, 1994 and 1995, respectively. The non-current portion of the casualty insurance liability, included in other long-term liabilities, was $44.2 million at December 31, 1994 and 1995. The total discounted insurance accrual, including the portion reflected in accounts payable and accrued liabilities, was $88.1 million and $89.4 million at December 31, 1994 and 1995, respectively. The estimated aggregate undiscounted insurance liability was $99.6 million and $101.6 million at December 31, 1994 and 1995, respectively. Note 3--Discontinued On January 27, 1993 all of the outstanding common Operations stock of Borg-Warner Automotive was distributed to the Company's stockholders. Following the distribution, the Company does not have any operations apart from the protective services business. Therefore, the remaining $250 million of excess purchase price over net assets acquired not directly attributed to the protective services business was written off as a charge to earnings in the first quarter of 1993. Borg-Warner Automotive has been treated as discontinued in the consolidated financial statements for all periods presented, and previously reported results have been restated. Net revenues and net losses for previously consolidated Borg-Warner Automotive operations were $66.5 million and $1.5 million, respectively, for the period from January 1 to January 27, 1993. Borg-Warner Automotive earnings reflect allocated interest of $3.1 million in 1993. 27 Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued The Company and Borg-Warner Automotive have entered into agreements to provide for the allocation of certain corporate overhead expenses subsequent to the spin-off. Borg-Warner Automotive paid the Company $8.6 million, $2.8 million and $1.1 million in 1993, 1994 and 1995, respectively, for office space and services rendered under the agreements. Borg-Warner Automotive also paid the Company $1 million in 1993 under a Trademark and Trade Name License Agreement. In 1994 Borg-Warner Automotive paid $9.9 million to the Company for the purchase of certain trademarks and other rights. In 1993 the Company paid Borg-Warner Automotive $1.2 million under a tax-sharing agreement related to settlement of 1992 federal income tax liabilities. Note 4--Commitments The Company is committed to pay rents on non- cancelable operating leases with terms exceeding one year. Rental amounts committed in future years are summarized at December 31, 1995 as follows:
(millions of dollars) -------------------------------------------------------------------------------------------- Fiscal year -------------------------------------------------------------------------------------------- 1996 $22.6 1997 19.2 1998 13.5 1999 7.0 2000 4.9 2001 and after 15.1 -------------------------------------------------------------------------------------------- Total $82.3 ============================================================================================
Total rental expense amounted to $25.3 million, $25.6 million and $31.7 million in 1993, 1994 and 1995, respectively. Note 5--Notes Payable The following is a summary of notes payable and long- and Long-Term Debt term debt which reflects all borrowings of the Company and its consolidated subsidiaries:
December 31, 1994 December 31, 1995 -------------------------------------------------------------------------------------------- (millions of dollars) Current Long-Term Current Long-Term -------------------------------------------------------------------------------------------- Bank borrowings (at an average of 5.4% in 1994 and 8.3% in 1995) $ -- $ 88.0 $ -- $100.0 Bank revolving commitment loan due through 1999 (at an average rate of 7.6% in 1994 and 7.3% in 1995) -- 105.2 -- 124.6 8% notes (face amount $100 million due 1996) -- 97.5 -- 99.5 Unsecured notes (at an average rate of 5.9% in 1994 and 7.0% in 1995) 5.3 1.3 0.4 0.6 Capital lease liability (at an average rate of 9.2% in 1994 and 8.4% in 1995) 9.2 13.0 6.6 8.3 9 1/8% senior subordinated notes (face amount $150 million due 2003) -- 149.0 -- 149.1 -------------------------------------------------------------------------------------------- Total notes payable and long-term debt $14.5 $454.0 $7.0 $482.1 ============================================================================================
28 Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued Maturities of long-term debt, including unamortized discount of $1.4 million, are as follows: 1996, $100.0 million; 1997, $33.8 million; 1998, $152.9 million; 1999, $43.2 million; and after 1999, $153.6 million. Future capital lease rental payments include executory costs of $0.8 million, interest expense of $3.5 million and principal payments of $14.9 million. The 1996 principal payments of $6.6 million are included in notes payable. Included in long-term debt at December 31, 1994 and 1995 were obligations of $259.5 million and $256.9 million, respectively, with fixed interest rates and $194.5 million and $225.2 million, respectively, with variable interest rates (generally based on LIBOR or prime rate). Interest rate swap agreements with a notional amount of $100 million at December 31, 1995 were utilized to manage exposure to interest rate fluctuations. Under these agreements, the Company has exchanged variable rate payments based on LIBOR for fixed-rate payments. In 1995 the Company completed a financing which updated more than $600 million of existing bank facilities. The financing included a $200 million intermediate term loan, a $120 million accounts receivable facility, an extension of the maturity of an existing letter of credit facility of $155 million, and amendments to an existing $166 million revolving credit facility. The term loan and the receivables facility are available through December 31, 1998 while the revolving credit facility is available through June 30, 1999. The committed amount under the revolving credit facility reduces semi-annually during the remaining commitment period. Available future commitments at December 31 are as follows: 1996, $137.7 million; 1997, $95.0 million; and 1998, $42.7 million. Unused commitments at December 31, 1995 under the term loan and revolving credit facility were $100 million and $42 million, respectively. The Company intends to use the remaining $100 million of the term loan to repay the $100 million principal amount of the 8% notes due April 1, 1996. Included in long-term debt at December 31, 1995 was $99.5 million, representing the $100 million principal amount, net of related discount, of the 8% notes due April 1, 1996. The credit facilities contain numerous financial and operating covenants including, among others, covenants requiring the Company to maintain certain financial ratios and restricting its ability to incur additional indebtedness, to create or permit to exist certain liens or to pay dividends. In addition, the Company pledged the stock of certain of its subsidiaries under this agreement. In 1995, an extraordinary loss of $4.7 million, net of tax, was realized related to the extinguishment of debt in connection with the amendment of the Company's credit facilities. In 1993, a net of tax loss of $9.1 million was realized as an extraordinary item based on the early redemption of debt. Note 6--Contingent The Company's discontinued property and casualty Liabilities insurance subsidiary ("Centaur") 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 claim 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. If all of Centaur's obligations are not satisfied through rehabilitation, it is possible that satisfaction could be sought from the Company for Centaur's liabilities. 29 Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued The foregoing has resulted in one pending lawsuit against the Company, certain of its current and former subsidiaries, and directors and officers of certain current and former subsidiaries for recovery of alleged damages incurred because of Centaur's failure to satisfy its reinsurance obligations. The lawsuit seeks in excess of $100 million for current losses, future losses and other damages and also seeks punitive damages. The Company believes that any damages for failure to satisfy reinsurance obligations are solely the responsibility of Centaur and that the resolution of the lawsuit relating to Centaur, including the Company's indemnification obligations to certain former officers and directors, will not have a material adverse effect on its financial position or future operating results; however, no assurance can be given as to the ultimate outcome with respect to such lawsuit. The Company and certain of its current and former subsidiaries have been identified by the U.S. Environmental Protection Agency and certain state environmental agencies as potentially responsible parties ("PRPs") at several hazardous waste disposal sites under the Comprehensive Environmental Response, Compensation and Liability Act ("Superfund") and equivalent state laws and, as such, may be liable for the cost of cleanup and other remedial activities at these sites. Responsibility for cleanup and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula. The 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 the maximum potential liability at a site is 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 liability. Based on its estimate of allocations of liability among PRPs, the probability that other PRPs, many of whom are large, solvent public companies, will fully pay the costs allocated to them, currently available information concerning the scope of contamination at such sites, estimated remediation costs at such sites, estimated legal fees and other factors, the Company has made provisions for indicated environmental liabilities in the aggregate amount of approximately $10 million (relating to environmental matters with respect to discontinued operations of the Company). If any environmental liability claim relating to the Company's former chemical and plastics business is made, the Company is indemnified by the purchaser of such business, General Electric Company. Since the disposition, the Company has notified General Electric Company of various claims made with respect to the Company's former chemical and plastics business, and General Electric Company has assumed all of such claims and has not contested its indemnification obligations. There is no dollar limitation on the General Electric Company's indemnification obligations and there are no other material limitations or exclusions with respect thereto. If any environmental liability claim relating to the operations of the Company's discontinued automotive subsidiary is made, the Company will be indemnified by such former subsidiary. The Company believes that the various asserted claims and litigation in which it is involved will not materially affect its financial position or future operating results, although no assurance can be given with respect to the ultimate outcome of any such claim or litigation. 30 Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued
Note 7--Retirement Benefits The Company has various defined benefit and defined contribution plans which cover eligible employees. Retirement benefit expense amounted to $4.8 million, $5.8 million, and $4.7 million in 1993, 1994, and 1995, respectively. This expense includes postretirement life insurance and medical benefits of $0.4 million, $0.2 million and $0.3 million for 1993, 1994, and 1995, respectively. Also included are defined contribution plan expenses of $1.4 million, $1.6 million, and $1.7 million in 1993, 1994, and 1995, respectively. The following table sets forth the funded status of the defined benefit plans: Funded Status December 31, 1994 December 31, 1995 ---------------------------------------------------------------------------------------------------------- (millions of dollars) Over Under Over Under ---------------------------------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefits $37.8 $ 39.5 $ 45.6 $ 44.1 Non-vested benefits 1.1 1.9 1.4 2.0 ---------------------------------------------------------------------------------------------------------- Accumulated benefit obligations 38.9 41.4 47.0 46.1 Effect of projected future compensation levels 5.1 -- 5.3 -- ---------------------------------------------------------------------------------------------------------- Projected benefit obligation 44.0 41.4 52.3 46.1 Plan assets at fair value 44.4 27.9 55.9 34.4 ---------------------------------------------------------------------------------------------------------- Assets in excess of (less than) projected benefit obligation 0.4 (13.5) 3.6 (11.7) Unrecognized net loss 6.4 10.2 2.9 9.7 Unrecognized prior service cost (1.9) 3.0 (1.7) 2.7 ---------------------------------------------------------------------------------------------------------- Net asset (liability) before minimum liability 4.9 (0.3) 4.8 0.7 Adjustment required to recognize minimum liability -- (13.2) -- (12.4) ---------------------------------------------------------------------------------------------------------- Net asset (liability) on balance sheet $ 4.9 ($13.5) $ 4.8 ($11.7) ---------------------------------------------------------------------------------------------------------- Assets held in trust for the defined benefit plans are comprised of marketable equity and fixed income securities. Net periodic pension expense for the defined benefit plans was comprised as follows: Year ended December 31, ---------------------------------------------------------------------------------------------------------- (millions of dollars) 1993 1994 1995 ---------------------------------------------------------------------------------------------------------- Service cost $ 2.2 $ 3.0 $ 2.4 Interest cost 6.7 6.7 6.9 Actual return on assets (8.5) 1.1 (20.4) Net amortization and deferrals 2.6 (6.9) 13.8 ---------------------------------------------------------------------------------------------------------- Net periodic pension cost $ 3.0 $ 3.9 $ 2.7 ----------------------------------------------------------------------------------------------------------
31 Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued The Company's assumptions used as of December 31, 1993, 1994 and 1995 in determining the pension cost and pension liability shown above were as follows:
(percent) 1993 1994 1995 ------------------------------------------------------- Discount rate 7.5 8.5 7.5 Rate of salary progression 4.0 4.0 4.0 Long-term rate of return on assets 9.5-10 9.5 9.5
The Company also has postretirement benefits covering certain existing and former employees, including employees of certain businesses which have been divested by the Company. The liabilities for these benefits as of December 31, 1994 and 1995 were $12.9 million and $12.4 million, respectively, and are included in "Other long-term liabilities." The discount rate used in determining this liability was 7.5% and medical expense increases are projected to be 8.25% in 1996 grading to 5.25% in 1999. Note 8--Stock Options The Company has two plans which authorize the grant of and Management options to purchase 3,000,000 shares of the Company's Stock Purchases common stock. All options granted to date carry STOCK OPTION PLAN exercise prices ranging from $5.00 to $21.19 per share. These prices correspond to the fair market value (as defined in the plans) of the Company's common stock at the time of grant. In 1993, 1994 and 1995 there were no options canceled or converted. Common shares under option for the years ended December 31, 1993, 1994 and 1995 are summarized as follows:
Aggregate Number of Shares Option Price ------------------------------------------------------------------------------ (shares in thousands, dollars in millions) 1993 1994 1995 1993 1994 1995 ------------------------------------------------------------------------------ Shares under option at January 1 1,339 1,472 1,843 $13.9 $19.9 $26.7 Granted 385 593 390 8.0 9.7 3.3 Exercised (203) (114) (141) (1.3) (1.1) (0.7) Forfeited (49) (108) (282) (0.7) (1.8) (5.1) ------------------------------------------------------------------------------ Shares under option at end of period 1,472 1,843 1,810 $19.9 $26.7 $24.2 ------------------------------------------------------------------------------ Options exercisable 907 881 800 ----------------------------------------------------------- Shares available for future grants 172 186 78 -----------------------------------------------------------
The 1,010,341 options outstanding at December 31, 1995 that are not presently exercisable will vest over the next three-year period based upon periods of employment. 32 Borg-Warner Security Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED NOTES RECEIVABLE-- Included among the Company's equity holders are members MANAGEMENT STOCK of management. Purchases of shares by management have PURCHASE been funded in part by loans from the Company. These loans, which totaled approximately $1.0 million and $0.3 million at December 31, 1994, and 1995, respectively, bear interest of approximately 6% and are offset against stockholders' equity in the Consolidated Balance Sheet. Note 9--Business The Company's operations have been classified into four Segment Information business segments: guard, alarm, armored and courier services. The guard segment provides contract security officers to patrol client facilities, monitor electronic systems, and control public and employee access. The alarm segment primarily designs, installs, monitors and services sophisticated electronic security systems and fire and intrusion detection systems. The armored segment transports currency, securities and other valuables. Additionally, this segment provides full-service automated teller machine operations and cash management services such as deposit verification and currency processing. The courier segment provides transportation of time-sensitive, non-negotiable financial documents and small packages. Intersegment sales are not significant. Operating profit by business segment represents total revenues less operating expenses, depreciation and amortization, and excludes interest income, interest expense, income taxes and net unallocated corporate expenses. Identifiable assets are those assets employed in each segment's operations, including an allocated value to each segment of cost in excess of net assets acquired. Corporate assets consist principally of cash and cash equivalents, certain corporate receivables and other assets. Summarized financial information by business segment for 1993, 1994, and 1995 is as follows:
Year ended December 31, ------------------------------------------------------------------------------ (millions of dollars) 1993 1994 1995 ------------------------------------------------------------------------------ NET SERVICE REVENUES: Guard services $1,198.0 $1,209.4 $1,222.8 Alarm services 213.2 206.2 254.7 Armored services 180.9 211.2 231.0 Courier services 172.5 166.1 154.0 ------------------------------------------------------------------------------ Total net service revenues $1,764.6 $1,792.9 $1,862.5 ------------------------------------------------------------------------------ OPERATING PROFIT: Guard services $ 58.5 $ 54.5 $ 56.4 Alarm services 31.1 14.9 15.8 Armored services 13.3 6.7 13.7 Courier services 7.4 1.1 (1.6) ------------------------------------------------------------------------------ Total operating profit 110.3 77.2 84.3 ------------------------------------------------------------------------------ Corporate expenses 4.8 26.5 14.7 Other income (3.1) (9.8) - Interest expense 51.5 50.4 57.8 Non-recurring elimination of excess purchase price over net assets acquired 250.0 - - ------------------------------------------------------------------------------ Earnings (loss) before taxes (192.9) 10.1 11.8 Provision (benefit) for income taxes 22.2 (3.0) 5.9 ------------------------------------------------------------------------------ Earnings (loss) from continuing operations ($215.1) $ 13.1 $ 5.9
33 Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued
Year ended December 31, ................................................................... (millions of dollars) 1993 1994 1995 ................................................................... Depreciation: Guard services $7.0 $7.4 $7.3 Alarm services 36.5 38.0 37.4 Armored services 6.7 7.0 7.1 Courier services 4.7 4.8 5.0 Corporate 0.4 0.4 0.3 ................................................................... Total depreciation $55.3 $57.6 $57.1 =================================================================== Amortization of excess purchase price over net assets acquired: Guard services $11.5 $11.1 $8.9 Alarm services 2.2 2.3 2.8 Armored services 1.3 1.3 1.5 Courier services 1.3 1.3 1.1 Corporate 0.2 0.1 0.2 ................................................................... Total amortization $16.5 $16.1 $14.5 =================================================================== Capital expenditures: Guard services $6.8 $8.6 $3.6 Alarm services 49.8 44.6 40.5 Armored services 5.7 6.2 3.7 Courier services 6.5 7.6 2.6 ................................................................... Total capital expenditures $68.8 $67.0 $50.4 =================================================================== Identifiable assets: Guard services $235.0 $259.2 Alarm services 361.2 364.6 Armored services 90.4 89.1 Courier services 46.3 43.6 Corporate 97.4 94.9 ................................................................... Total identifiable assets $830.3 $851.4 ===================================================================
Note 10--Other Income, Other income in 1994 included a $9.9 million gain Net on the sale of certain trademarks and other rights to Borg-Warner Automotive. 34 Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued
Note 11--Income Taxes Earnings (loss) before income taxes from continuing operations and provision (benefit) for income taxes consist of: 1993 1994 1995 (millions of dollars) U.S. Non-U.S. Total U.S. Non-U.S. Total U.S. Non-U.S. Total --------------------------------------------------------------------------------------------------------- Earnings (loss) before income taxes $(197.4) $4.5 $(192.9) $ 7.4 $ 2.7 $10.1 $ 8.4 $ 3.4 $11.8 --------------------------------------------------------------------------------------------------------- Income taxes: Current Federal/Foreign $ 4.1 $1.6 $ 5.7 $ 3.8 $ 1.7 $ 5.5 $ 8.9 $ 1.5 $10.4 State 3.0 -- 3.0 0.9 -- 0.9 1.0 -- 1.0 --------------------------------------------------------------------------------------------------------- 7.1 1.6 8.7 4.7 1.7 6.4 9.9 1.5 11.4 Deferred 13.5 -- 13.5 (9.4) -- (9.4) (5.5) -- (5.5) --------------------------------------------------------------------------------------------------------- Provision (benefit) for income taxes $ 20.6 $1.6 $ 22.2 $(4.7) $ 1.7 $(3.0) $ 4.4 $ 1.5 $ 5.9 ---------------------------------------------------------------------------------------------------------
The analysis of the variance of income taxes as reported from income taxes computed at the U.S. statutory federal income tax rate for continuing operations is as follows: (millions of dollars) 1993 1994 1995 ----------------------------------------------------------------------- Income taxes at U.S. statutory rate of 35% $(67.5) $ 3.5 $ 4.1 Increases (decreases) resulting from: Non-recurring elimination of excess purchase price over net assets acquired 87.5 -- -- Change in tax basis -- (7.0) -- State income taxes 2.0 0.6 0.6 Non-temporary differences 0.2 1.0 1.1 Other, net -- (1.1) 0.1 ----------------------------------------------------------------------- Income taxes reported $ 22.2 $(3.0) $ 5.9 -----------------------------------------------------------------------
The components of the deferred tax asset at December 31, 1994 and 1995 were as follows: December 31, ----------------------------------------------------------------- (millions of dollars) 1994 1995 ----------------------------------------------------------------- Deferred tax assets: Liabilities for casualty insurance $ 34.9 $ 35.8 Liabilities related to discontinued operations 13.2 9.8 Liabilities for pension benefits 5.4 4.4 Liabilities for other postretirement benefits 5.1 5.1 Other, net 4.1 8.0 Net operating loss carry-forward 20.9 16.7 General business credit 26.5 25.5 Minimum tax credit 27.0 27.0 Foreign tax credit 2.3 2.3 ------------------------------------------------------------------ Total deferred tax assets 139.4 134.6 Valuation allowance (11.8) (10.6) ------------------------------------------------------------------ 127.6 124.0
35 Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued
December 31, ---------------------------------------------------------------------- (millions of dollars) 1994 1995 ---------------------------------------------------------------------- Deferred tax liabilities: Fixed assets (54.6) (49.5) Investments (13.1) (13.1) Net excess purchase price over net assets acquired (9.1) (8.6) ---------------------------------------------------------------------- Total deferred tax liabilities (76.8) (71.2) ---------------------------------------------------------------------- Net deferred tax asset $ 50.8 $ 52.8 ---------------------------------------------------------------------- The foreign tax credit carry-forward has been fully considered in the valuation allowance at both December 31, 1994 and 1995, while an additional allowance of $9.5 million and $8.3 million at December 31, 1994 and 1995, respectively, has been established against the other credits. The general business credit carry-forward will expire in years 2004-2009, the net operating loss carry-forward will expire in 2009, while the minimum tax credit can be carried forward indefinitely. Note 12--Capital Stock The following table summarizes the Company's capital stock at December 31, 1994 and 1995: December 31, ---------------------------------------------------------------------- (thousands of shares) 1994 1995 ----------------------------------------------------------------------- Common stock, $.01 par value: Authorized 50,000.0 50,000.0 Issued 22,435.7 22,446.1 Outstanding 21,758.4 22,087.6 Series I non-voting common stock, $.01 par value: Authorized 25,000.0 25,000.0 Issued 2,720.0 2,720.0 Outstanding 1,160.0 1,149.6 Preferred stock, $.01 par value: Authorized 5,000.0 5,000.0 Issued and Outstanding - - Note 13--Fair Value of The methods and assumptions used to estimate the fair value of each Financial Instruments class of financial instrument are as follows: Cash and Cash The carrying amounts approximate fair value because of the short Equivalents, maturity of these instruments. Receivables, Notes Payable and Accounts Payable
36 Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued Long-Term Debt The carrying amounts of the Company's bank borrowings under its short-term bank lines and revolving credit agreement approximate fair value because the interest rates are based on floating rates identified by reference to market rates. The fair values of the Company's other long-term debt either approximate carrying value or are estimated based on quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The carrying amounts and fair values of long-term debt at December 31, 1994 and 1995 were as follows:
December 31, ------------------------------------------------------- (millions of dollars) 1994 1995 ------------------------------------------------------- Carrying amount $441.0 $473.8 Fair value 419.3 463.6
Interest Rate Swaps The Company uses interest rate swap agreements to manage exposure to fluctuations in interest rates. Interest rate swap agreements involve the exchange of interest obligations on fixed and floating interest rate debt without the exchange of the underlying principal amounts. The differential paid or received on interest rate swap agreements is recognized as an adjustment to interest expense over the term of the underlying debt agreement. The book value of the interest rate swap agreements represents the differential receivable or payable with a swap counterparty since the last settlement date. The fair value of interest rate swaps is the estimated amount the Company would receive or pay to terminate the agreement. The fair value is calculated using current market rates and the remaining terms of the agreements. The fair value of interest rate swaps at December 31, 1995 is not significant. In the unlikely event that a counterparty fails to meet the terms of an interest rate swap, the Company's exposure is limited to the interest rate differential. The underlying notional amounts on which the Company has interest rate swap agreements outstanding was $100 million at December 31, 1995. There were no interest rate swap agreements at December 31, 1994. Letters of Credit The Company utilizes third-party letters of credit to guarantee certain self-insurance activities. The letters of credit reflect fair value as a condition of their underlying purpose and are subject to fees competitively determined in the marketplace. The contract value/fair value of the letters of credit at December 31, 1994 and 1995 were $130.7 million and $150.3 million, respectively. To monitor the counterparties' ability to perform, these letters of credit are only executed with major financial institutions, and full performance is anticipated. 37 Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued Note 14--Interim The following information includes all adjustments, Financial Information consisting only of normal recurring items, which the (Unaudited) Company considers necessary for a fair presentation of 1994 and 1995 interim results of operations.
1994 Quarter Ended 1995 Quarter Ended .................................................................................................................................. (millions of dollars, except per share) Mar. 31 June 30 Sept. 30 Dec. 31 Year 1994 Mar. 31 June 30 Sept. 30 Dec. 31 Year 1995 .................................................................................................................................. Net service revenues $439.1 $444.1 $450.7 $459.0 $1,792.9 $462.4 $467.3 $466.5 $ 466.3 $1,862.5 Cost of services 349.6 354.6 361.0 372.1 1,437.3 372.4 377.0 375.8 375.5 1,500.7 Selling, general and administrative expense 52.7 51.4 52.8 74.3 231.2 57.7 57.0 54.2 51.7 220.6 Depreciation 14.3 14.3 14.4 14.6 57.6 14.9 14.3 14.2 13.7 57.1 Amortization of excess purchase price over net assets acquired 4.1 4.2 4.0 3.8 16.1 3.8 3.6 3.5 3.6 14.5 Other income (0.5) (0.4) (0.2) (8.7) (9.8) - - - - - Interest expense and finance charges 11.9 12.3 13.0 13.2 50.4 13.8 14.4 14.1 15.5 57.8 Earnings (loss) before income taxes 7.0 7.7 5.7 (10.3) 10.1 (0.2) 1.0 4.7 6.3 11.8 Provision (benefit) for income taxes 2.8 3.1 2.3 (11.2) (3.0) (0.3) 0.4 2.3 3.5 5.9 Earnings before extraordinary item 4.2 4.6 3.4 0.9 13.1 0.1 0.6 2.4 2.8 5.9 Extraordinary item: Loss from early extinguishment of debt - - - - - - - - (4.7) (4.7) .................................................................................................................................. Net earnings (loss) $4.2 $4.6 $3.4 $0.9 $13.1 $0.1 $0.6 $2.4 ($1.9) $1.2 ================================================================================================================================== Earnings (loss) per common share: Earnings before extraordinary item $0.18 $0.20 $0.15 $0.03 $0.56 - $0.03 $0.10 $0.12 $0.25 Extraordinary item - - - - - - - - (0.20) (0.20) .................................................................................................................................. Net earnings (loss) per share $0.18 $0.20 $0.15 $0.03 $0.56 - $0.03 $0.10 ($0.08) $0.05 ==================================================================================================================================
38 Independent Auditors' Report The Board of Directors We have audited the consolidated balance sheets of and Stockholders Borg-Warner Security Corporation and subsidiaries as of Borg-Warner December 31, 1995 and 1994, and the related Security Corporation consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Borg-Warner Security Corporation and subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 1, the Company changed its methods of accounting for postretirement benefits other than pensions and the method of selecting the discount rate to discount its casualty insurance liabilities in 1993. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Chicago, Illinois . February 5, 1996 39 EX-21 5 LIST OF SUBSIDIARIES EXHIBIT 21 Subsidiary - ---------- Baker Insurance Company (Illinois) Borg-Warner Equities Corporation (Delaware) Borg-Warner Equities Corporation of California (California) Borg-Warner Equities of Monterey, Inc. (California) Borg-Warner Insurance Holding Corporation (Delaware) Centaur Insurance Company NAL II, Ltd. (Delaware) Borg-Warner Government Services, Inc. (Delaware) Borg-Warner International Corporation (Delaware) Borg-Warner Protective Services Corporation (Delaware) Borg-Warner Information Services, Inc. (Delaware) Burns International Security Services, Inc. (American Samoa) Burns Special Services, Inc. (Delaware) Wells Fargo Guard Service Inc. of Florida (Florida) Wells Fargo Guard Services, Inc. (Delaware) Wells Fargo Special Services, Inc. (Delaware) BPS Financial Services, Inc. (Delaware) BW - Canada Alarm (Wells Fargo) Corporation (Delaware) Wells Fargo Alarm Services of Canada Limited (Ontario) Pony Express Residential Security Ltd. (Ontario) BW - Canadian Guard Corporation (Delaware) Burns International Security Services Limited (Ont.) (Ontario) Les Services de Protection Burns International Ltee. (Quebec) BW - Colombia Guard Corporation (Delaware) Newerco, Inc. (Delaware) Bll, Inc. (Delaware) Seguridad Burns de Colombia, S.A. (Colombia) The William J. Burns International Detective Agency, Inc. (Delaware) BW - U.K. Guard Corporation (Delaware) Burns International Security Services, Ltd. (U.K.) (United Kingdom) Globe Aviation Services Corporation (Delaware) Globe Airport Security Services, Inc. (Delaware) Globe Aviation Services Corporation of Puerto Rico (Delaware) Globe Aviation Services of Canada, Limited (Ontario) Pony Express Courier Corp. (Delaware) Pony Express Courier Corporation of Texas Pyro Chem, Inc. (New Jersey) Wells Fargo Alarm Services, Inc. (Delaware) BW-Chemicals Corporation Wells Fargo Armored Service Corporation (Delaware) Wells Fargo Armcar, Inc. (Ontario) Wells Fargo Armored Service Corporation of Puerto Rico (Tennessee) Wells Fargo Armored Service Corporation of Texas (Texas) EX-23 6 INDEPENDENT AUDITORS CONSENT INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-23046) and the Registration Statement on Form S-3 (No. 33-60294) of our reports dated February 5, 1996 appearing in and incorporated by reference in the Annual Report on Form 10-K for the year ended December 31, 1995 filed by Borg-Warner Security Corporation. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Chicago, Illinois March 18, 1996 EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 21 0 110 7 13 196 501 250 851 201 482 0 0 0 50 851 0 1,863 0 1,501 72 4 58 12 6 6 0 5 0 1 .05 .05
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