-----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, I/5TY/7ffOlDg1OS3rP0huo7Fk1XFTj6eRG45hjPNkaw/WSyGxgH85lnT5wdty4d CRA6vTJENaD0vT8LNfKiGA== 0000950131-97-002264.txt : 19970401 0000950131-97-002264.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950131-97-002264 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 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: 97569655 BUSINESS ADDRESS: STREET 1: 200 S MICHIGAN AVE STREET 2: NULL 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, 1996 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 7, 1997 was approximately $163 million. As of March 7, 1997, the registrant had 22,266,956 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, 1996 The Company's proxy statement for the 1997 Part III annual meeting of stockholders
BORG-WARNER SECURITY CORPORATION FORM 10-K YEAR ENDED DECEMBER 31, 1996 INDEX PART I
Item Number Page - ----------- ---- 1. Business 3 2. Properties 10 3. Legal Proceedings 10 4. Submission of Matters to a Vote of Security Holders 12 PART II 5. Market for the Registrant's Common Stock and Related Stockholder Matters 12 6. Selected Financial Data 13 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 8. Financial Statements and Supplementary Data 13 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 14 PART III 10. Directors and Executive Officers of the Registrant 14 11. Executive Compensation 14 12. Security Ownership of Certain Beneficial Owners and Management 14 13. Certain Relationships and Related Transactions 15 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 15
2 PART I Item 1. Business The Company is the nation's largest supplier of contract guard services and is a leading provider of electronic security services. As a result of its significant market presence and breadth of product offerings, the Company is well positioned to service local, multi-location and national accounts and provide "Total Security Solutions" to its customers. The Company's protective services business is divided into two business units: physical security services and electronic security 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. In January 1997 the Company combined its armored transport business with Loomis Armored Inc. The Company received a 49% equity interest in the combined entity and approximately $105 million (net of transaction expenses, but subject to certain adjustments), and retained casualty and employee liabilities of its armored transport unit incurred prior to closing. The Company accounts for its investment in the combined entity under the equity method. In the third quarter of 1996, the Company elected to treat its courier business as a discontinued operation. The Company incurred a non-cash charge of $25 million to provide for anticipated future losses and liabilities. Physical Security Services The Company provides guard services, as well as background screening, contract employment and investigative services, to approximately 14,000 clients in the United States, Canada, the United Kingdom and South America. The Company services these clients with approximately 73,000 employees in approximately 280 offices under the Wells Fargo(R), Burns(R), Globe(R) and other service marks. The physical security 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, access control at health care and educational facilities, mailroom services, staffing services and investigative services, including background investigations of prospective employees. 3 The physical security services unit employs approximately 70,600 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. The physical security services unit markets guard services through approximately 153 sales representatives nationwide and in Canada, the United Kingdom and South America. Sales personnel operate out of local branch and sales offices. The physical security services unit also bids on contracts with governmental agencies. Physical security 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 services are negotiated with customers and are based upon payment of a specified amount per service 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. Electronic Security Services The Company provides integrated electronic security systems, including intrusion and fire detection, sprinkler and critical industrial process monitoring, closed circuit television and access control. The Company designs, installs, monitors and services electronic security systems located on the premises of approximately 83,000 commercial and 31,000 residential customers in the United States and Canada under the Wells Fargo(R) and Pony Express(R) service marks. The Company also provides, under the Bel-Air Patrol trade name, an integrated guard, patrol and alarm service to approximately 12,000 customers in Bel Air, Beverly Hills and other Los Angeles communities. The unit has approximately 2,200 employees. Commercial. The Company's electronic security 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 electronic security services unit services approximately 83,000 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. 4 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. The electronic security services unit conducts its sales, installation and service operations from 40 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 Company 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 electronic security 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 31,000 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 electronic security 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. Loomis, Fargo & Co. In January 1997 the Company's armored transport unit contributed substantially all of its assets and assigned certain of its liabilities to Loomis, Fargo & Co. ("Loomis Fargo"), a newly established corporation, in exchange for 49% of Loomis Fargo's outstanding common stock and a cash payment of approximately $105 million (net of transaction costs, but subject to certain adjustments). The 5 shareholders of Loomis Holding Corporation ("Loomis") contributed all of the Loomis common stock to Loomis Fargo in exchange for 51% of Loomis Fargo's outstanding common stock, a $6 million promissory note and a cash payment of approximately $15 million. In addition, Loomis Fargo repaid existing Loomis indebtedness and redeemed outstanding shares of Loomis preferred stock. Among the liabilities of the Company's armored transport unit that were retained are casualty and employee claims incurred prior to the closing. The Company agreed to indemnify Loomis Fargo for environmental liabilities associated with existing underground storage tanks and other known and identified environmental liabilities. Such indemnification obligation will continue until the earlier of December 31, 1998 or the first anniversary of an initial public offering of Loomis Fargo common stock. The Company has also agreed to indemnify Loomis Fargo against certain other claims, including claims relating to receivables and taxes. The Company and the former Loomis shareholders entered into a stockholders agreement providing that Loomis Fargo's board of directors initially will consist of seven directors: three directors nominated by the Company; three directors nominated by the former Loomis shareholders and Loomis Fargo's chief executive officer. The number of directors that may be designated pursuant to the stockholder agreement may adjust if either the Company or the former Loomis shareholders reduce their ownership stake in Loomis Fargo. The stockholder agreement provides that the vote of five of the seven directors is required for Loomis Fargo to engage in certain specified activities. The Company has nominated Messrs. Adorjan, O'Brien and Wood, its executive officers, to Loomis Fargo's board of directors. In addition, the stockholder agreement prohibits the transfer of Loomis Fargo common stock by either party for three years following the closing without the prior consent of the other party. After such period Loomis Fargo common stock may be transferred only in accordance with the provisions of the stockholder agreement, which include rights of first refusal and co-sale rights. The current stockholders also have certain preemptive and registration rights with respect to equity issuances by Loomis Fargo. Loomis Fargo operates over 150 branches, employs approximately 8,700 persons and uses a fleet of approximately 2,700 armored vehicles nationwide to provide armored ground transportation services, ATM services and cash vault and related services to financial institutions and commercial customers. 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 6 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 5,800 employees. The collective bargaining agreements expire at various dates from 1997 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. Competition The physical security 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 electronic security 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. 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 physical security 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. 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 physical security services operations. The Company's electronic security 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 7 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. 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 generally obtains customer indemnification or liability limitations in its contracts to mitigate this risk exposure. The Company carries insurance of various types, including workers' compensation, automobile and general liability coverage. These policies include deductibles per occurrence for which the Company is self-insured. The Company obtains its 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 does not believe that limitations on, or the uncertainty of, insurance 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. Discontinued Operations The Company has treated its courier services unit as a discontinued operation since September 1996. As a result of this decision, a non-cash charge of $25 million was incurred to provide for anticipated future losses and liabilities. The unit transports time-sensitive packages for commercial businesses and non-negotiable financial documents for Federal Reserve banks and financial institutions in 32 states under the Pony Express(R) service mark. The unit employs approximately 3,800 persons and leases from its employees approximately 65% of its fleet of approximately 3,025 vehicles. 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 8 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. 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. For both the United States and foreign patents, their expiration, individually or in the aggregate, is not expected to have any material effect on the Company's financial condition or results of operations. 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, 1997.
Name Age Position with Company J. Joe Adorjan........ 58 Chairman of the Board, Chief Executive Officer and President; Director John D. O'Brien....... 54 Senior Vice President Timothy M. Wood....... 49 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, The Earthgrains Company, ESCO Electronics Corporation, Goss Graphic Systems, Inc. and Loomis, Fargo & Co. 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. O'Brien is also President of Borg-Warner Protective Services Corporation and a director of Loomis, Fargo & Co. 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 and is also a director of Loomis, Fargo & Co. 9 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 courier terminals, central alarm stations, plants and general offices in various cities in the United States, Canada, the United Kingdom and South America. At December 31, 1996, the physical security services unit occupied approximately 283 branch and satellite offices, all but one of which were leased. At December 31, 1996, the electronic security services unit operated 12 central stations, of which 4 were leased, 28 additional branch and headquarters offices, 12 of which were owned and 47 additional branch and satellite offices, all of which 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 10 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, 1995, Centaur's total liabilities were $137.1 million and its deficit in net worth was $56.1 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 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. 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. The complaint was amended again in 1995 to allege additional causes of action based on negligence and breach of the covenant of good faith and fair dealing. Plaintiff seeks judgment in excess of $100 million for current losses, future losses and other damages and also seeks punitive damages. 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. The liability phase of the trial was held in 1996 and the court has set a schedule for hearing the parties' closing arguments in such phase. 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. 11 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. In addition, the Company has or may have liability for environmental matters at properties it presently or previously owned or leased. Based on currently available information, 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, indemnification obligations in favor of the Company from the current owners of certain sold or discontinued operations, 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 $9 million (relating to environmental matters with respect to discontinued operations of the Company). While estimates of liability for environmental matters can vary over time due to, among other things, changes in laws, technology or available information, the Company believes that such provisions for indicated environmental liabilities have been established on a basis consistent with generally accepted accounting principles. 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 1996. PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters. As of March 7, 1997, there were approximately 183 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 is 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. 12 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 1995 and 1996 were:
Quarter ended High Low ------------- ------- -------- 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 1996 March 31 $12 3/4 $10 1/4 June 30 13 1/8 9 5/8 September 30 9 7/8 8 1/4 December 31 11 3/8 9 3/8
Item 6. Selected Financial Data The selected financial data for the five years ended December 31, 1996, with respect to the following line items shown under the "Consolidated Statistical Review" (set forth on page 14) 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 Condition (set forth on pages 16 through 18) 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 19 through 40) 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, 1996 and 1995 is set forth in Note 14 of the Notes to Consolidated 13 Financial Statements. For a list of financial statements and schedules filed as part of this report, see Item 14. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Inapplicable. PART III 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 2 and 3 of the Company's proxy statement for the 1997 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) Beneficial Ownership Reporting Compliance" on page 6 of the Company's proxy statement for the 1997 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 7 through 9, and "Compensation of Directors" on pages 4 and 5, of the Company's proxy statement for the 1997 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 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 1997 annual meeting of stockholders. 14 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 12 and 13 of the Company's proxy statement for the 1997 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 19 through 40 of the Annual Report, are incorporated herein by reference: Consolidated Balance Sheet--December 31, 1996 and 1995 Consolidated Statement of Operations--three years ended December 31, 1996 Consolidated Statement of Cash Flows--three years ended December 31, 1996 Consolidated Statement of Stockholders' Equity--three years ended December 31, 1996 Notes to Consolidated Financial Statements (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, 1996. 15 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 (the "Company") as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, and have issued our report thereon dated February 4, 1997; such consolidated financial statements and report are included in your 1996 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 Company'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 4, 1997 SCHEDULE II Borg-Warner Security Corporation Valuation and Qualifying Accounts (millions of dollars)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - -------- -------- ------------------- -------- -------- Years ended December 31, ADDITIONS --------- (1) (2) Balance at Charged to Charged to Balance Beginning Costs and Other at Close of Period Expenses Accounts Deductions of Period ---------- -------- -------- ---------- --------- Description - ----------- 1994 Allowance for Doubtful Accounts $8.4 $5.5 $1.4 $7.9 $7.4 ==== ==== ==== ==== ==== 1995 Allowance for Doubtful Accounts $7.4 $4.4 $2.3 $7.3 $6.8 ==== ==== ==== ==== ==== 1996 Allowance for Doubtful Accounts $6.8 $2.7 $3.1 $6.3 $6.3 ==== ==== ==== ==== ====
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), 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), and as amended by the Fourth Amendment to Credit Agreement and Consent dated as of March 14, 1996 (incorporated by reference to Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). *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), 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), and as amended B-1 Exhibit Number Document Description ------ -------------------- by the Amendment No. 8 to Credit Agreement and Consent dated as of March 14, 1996 (incorporated by reference to Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). *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), as amended by the First Amendment to Credit Agreement and Consent dated as of March 14, 1996 (incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). *4.4 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). *4.5 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 (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 B-2 Exhibit Number Document Description ------ -------------------- 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 the Company'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 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). +*10.9 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). *10.10 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). * 10.11 Consulting Agreement dated as of January 1, 1996 between the Company and D.C. Trauscht (incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). *10.12 Contribution Agreement dated as of November 28, 1996 by and among the Company, Wells Fargo Armored Service Corporation, Loomis-Wells Corporation (now known as Loomis, Fargo & Co.), Loomis Holding Corporation and Loomis Stockholders Trust (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated February 7, 1997. B-3 Exhibit Number Document Description ------ -------------------- 11 Computation of earnings per share. 13 Portions of the 1996 Annual Report to Stockholders. 21 Subsidiaries of the Company. 23 Consent of Deloitte & Touche LLP. 27 Financial Data Schedule. 99 Cautionary Statement. - -------------------- * Incorporated by reference. + Indicates a management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c). B-4 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 28, 1997 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 28, 1997. 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 Officer) Timothy M. Wood /s/ James J. Burke, Jr. Director ----------------------- James J. Burke, Jr. /s/ Albert J. Fitzgibbons, III Director ------------------------------- Albert J. Fitzgibbons, III /s/ Arthur F. Golden Director -------------------- Arthur F. Golden Director ----------------- Dale W. Lang /s/ Robert A. McCabe Director -------------------- Robert A. McCabe /s/ Andrew McNally IV Director --------------------- Andrew McNally IV Director -------------------- Alexis P. Michas /s/ H. Norman Schwarzkopf Director -------------------------- H. Norman Schwarzkopf /s/ Donald C. Trauscht Director -------------------------- Donald C. Trauscht EX-11 2 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 Borg-Warner Security Corporation Computation of Per Share Earnings
Year Ended December 31, (in thousands) -------------------------- 1994 1995 1996 ------ ------ ------ Average common shares outstanding 22,893 23,097 23,266 Common stock equivalents 277 302 251 ------ ------ ------ Shares used in computation of per share earnings 23,170 23,399 23,517 ====== ====== ======
EX-13 3 PORTIONS OF THE 1996 ANNUAL REPORT TO STOCKHOLDERS Borg-Warner Security Corporation Consolidated Statistical Review The following table sets forth selected financial information for Borg-Warner Security Corporation (the "Company"). The information is derived from the audited financial statements of the Company and treats Borg-Warner Automotive, which was spun-off in January 1993, the Company's courier unit, which was discontinued in September 1996, as discontinued operations. Previously reported results have been restated to reflect both transactions. The selected financial data should be read in connection with the 1996 Consolidated Financial Statements and accompanying notes.
Year Ended December 31, Statement of Operation Data (millions of dollars, except per share) - ----------------------------------------------------------------------------------------------------------------------------- 1992 1993 1994 1995 1996 - ----------------------------------------------------------------------------------------------------------------------------- Net service revenues $1,457.9 $1,592.1 $1,626.8 $1,708.5 $1,711.2 Earnings before interest and taxes 75.7 (148.8) 59.4 71.2 80.0 Provision (benefit) for income taxes (1) (23.6) 19.5 (3.2) 6.9 9.5 Earnings (loss) from continuing operations (2) 52.9 (218.2) 13.8 8.4 13.9 Earnings (loss) from continuing operations per share $ 2.69 $ (9.54) $ 0.59 $ 0.36 $ 0.59 Average common shares and equivalents outstanding in thousands (3) 19,647 22,858 23,170 23,399 23,517 Balance Sheet Data (at end of period) - ----------------------------------------------------------------------------------------------------------------------------- Total assets $1,742.7 $ 773.5 $ 811.6 $ 838.5 $ 760.8 Total debt 740.9 450.3 459.9 484.5 442.6 Stockholders' equity 676.7 27.5 43.8 49.7 41.2 Net assets of discontinued operations $ 766.9 $ 35.1 $ 32.5 $ 36.8 $ 12.6
Stock Prices - ----------------------------------------------------------------------------------------------------------------------------- 1996 Quarters First Second Third Fourth - ----------------------------------------------------------------------------------------------------------------------------- High $12 3/4 $13 1/8 $9 7/8 $11 3/8 Low $10 1/4 $ 9 5/8 $8 1/4 $ 9 3/8 1995 Quarters - ----------------------------------------------------------------------------------------------------------------------------- High $ 9 7/8 $ 9 1/2 $9 3/8 $ 13 Low $ 5 1/2 $ 6 7/8 $8 3/8 $ 7 1/8
(1) 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 1996 Consolidated Financial Statements. (2) $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. Borg-Warner Security Corporation Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Net Revenues Sales by business unit were:
1995 vs. 1996 (millions of dollars) 1994 1995 1996 Percent Change - ----------------------------------------------------------------------------- Physical Security Services $1,209.4 $1,222.8 $1,223.8 0.1% Electronic Security Services 206.2 254.7 241.1 (5.3%) Armored Security Services 211.2 231.0 246.3 6.6% - ----------------------------------------------------------------------------- Total Revenues $1,626.8 $1,708.5 $1,711.2 0.2% =============================================================================
The Company's physical security services unit is the nation's largest provider of contract security personnel with approximately 73,000 employees serving 14,000 customers in the United States, Canada, United Kingdom and South America. Physical security business revenue was flat versus 1995 primarily due to management's decision to prune low margin and higher risk business during the year. Revenue growth in 1995 was principally due to higher billing rates and new business growth. The Company's electronic security services unit is a leading full service provider of integrated electronic security systems, including intrusion and fire detection, closed circuit television, and access control. The unit has approximately 126,000 customers and 2,200 employees. In 1995 this unit began recognizing certain long-term alarm service contracts as sales-type leases rather than operating leases. Excluding the impact of sales-type lease accounting, 1996 alarm revenues were up modestly from 1995. Revenue in 1995, excluding the impact of sales-type leases, increased 5 percent primarily due to higher direct sales of commercial installations and higher service revenue on residential operations. The Company's armored security services unit is a leading provider of armored transportation, automated teller machine and cash handling services to financial institutions and commercial businesses nationwide. Revenue in 1996 increased principally due to higher volume in ATM services. 1995 revenue increased due to better pricing and higher volume in the Wells Fargo Armored Express and ATM service operations. In January, 1997, Wells Fargo Armored entered into a business combination with Loomis Armored. The combined company, known as Loomis, Fargo & Co., is owned 51 percent by the former Loomis shareholders and 49 percent by Borg-Warner Security. The combination created a leading armored transportation and ATM services company with broad geographic coverage. This transaction has allowed Borg-Warner Security to reduce its debt by $105 million from the 1996 year-end level. As of September 30, 1996, the Company's Pony Express Courier unit has been treated as a discontinued operation. In connection with this, a non-cash charge of $25 million, an earnings per share equivalent of $1.06, was incurred to recognize the future realizable value of this business. These two events enable Borg-Warner Security to focus its resources on the core electronic and physical security businesses. The Company believes the security industry will experience significant changes in the future. Increased outsourcing of security management needs, customer demand for single point responsibility, improved quality and reliability of services, and financial stability of security providers are factors driving the trend toward "total security solutions." Through its ability to offer both physical and electronic security services, and its 49 percent ownership in Loomis, Fargo & Co., the Company is uniquely positioned to effectively and profitably provide customers with the total security solution they require. Total Costs and Expenses Cost of services as a percent of revenue was 79.5 percent, 79.6 percent and 79.3 percent in 1996, 1995 and 1994, respectively. Gross profit margins remained consistent as a result of the Company's commitment to improved contract profitability and internal productivity improvement programs which offset increased labor costs. Depreciation expenses were $47.0 million in 1996, down from $52.1 million in 1995 and $52.8 million in 1994. Reduced electronic security equipment under operating leases was the principal factor. Selling, general and administrative (SG&A) expenses were $210.6 million, $212.5 million and $220.2 million in 1996, 1995 and 1994, respectively. As a percent of net sales, SG&A costs were 12.3 percent, 12.4 percent and 13.5 percent in 1996, 1995 and 1994, respectively. The decrease since 1994 is due primarily to continued cost reduction efforts, partially offset by increased investments in training and recruitment of employees and in information systems. Additionally, SG&A in 1994 included $14.0 million in non-recurring, non-cash accruals for self-insurance reserves and other corporate allowances. Operating profit increased to $93.1 million in 1996 from $85.9 million in 1995 and $76.1 million in 1994. Operating profit margin increased to 5.4 percent in 1996 from 5.0 percent in 1995 and 4.0 percent in 1994. Physical security services operating profit increased to $62.1 million in 1996 from $56.4 million in 1995 and $54.5 million in 1994. Electronic security services operating profit increased to $18.9 million in 1996 from $15.8 million in 1995 and $14.9 million in 1994. Armored security services operating profit was $12.1 million in 1996 compared with $13.7 million in 1995 and $6.7 million in 1994. Other income in 1994 included a gain of $9.9 million related to the sale of trademarks and other rights to Borg-Warner Automotive. Interest expense, including the amortization of financing costs, increased to $56.6 million in 1996 from $55.9 million in 1995 as a result of higher costs associated with the issuance and renegotiation of certain bank lines of credit and borrowing facilities. This was partially offset by the benefits of lower short-term market rates of interest and lower average debt levels outstanding. The increase in 1995 from $48.8 million in 1994 was due to higher market interest rates combined with increased rates under the 1995 credit agreement amendments and refinancing. Income taxes were $9.5 million and $6.9 million in 1996 and 1995, respectively. The Company's effective tax rate in 1996 was 40.6 percent, down from 45.1 percent in 1995. The effective tax rate generally exceeds the statutory rate 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. Earnings from continuing operations for 1996 were $13.9 million, up 65.5 percent from $8.4 million in 1995. Earnings from continuing operations were $13.8 million in 1994. Including the impact of the discontinued Pony Express Courier business, the Company incurred a net loss of $14.6 million in 1996, compared with net earnings of $1.2 million in 1995, and $13.1 million in 1994. Net earnings in 1995 included 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. International Operations Revenues for 1996 were $116.7 million compared with $109.4 million in 1995 and $101.7 million in 1994. Operations are primarily in Canada, Columbia and the United Kingdom and principally involve the employment of contract guard personnel. Financial Position, Capital Resources and Liquidity The Company continues its strategy to become less capital intensive and to produce steady cash flow from operations. In addition to internally generated cash flow, the Company maintains financing resources that are sufficient to meet working capital and other needs. Cash Flow The Company generated cash flow from operating activities of $86.9 million in 1996, compared to $52.4 million and $68.0 million in 1995 and 1994, respectively. The improved cash flow in 1996 was due primarily to better working capital management. Capital expenditures of $40.7 million in 1996 were down from 1995 and 1994 levels of $47.8 million and $59.4 million, respectively. This reduction reflects a more selective investment process, primarily within the electronic security services segment. The Company also implemented a program in 1995 to securitize certain lease contracts within the electronic security services segment. This program reduced the internal capital requirements necessary to maintain and grow this line of business. Leverage/Capitalization Debt was $442.6 million at year-end 1996, a reduction of $41.9 million from the 1995 year-end level of $484.5 million. This reduction primarily resulted from cash flow from operations exceeding investing activities. In 1996, the Company repaid $100 million of 8% senior notes with $100 million in proceeds from a bank term loan due December 31, 1998. The Company uses selective financial derivative instruments to limit exposure to fluctuations in short term interest rates. At year-end 1996, the Company maintained bank lines of credit and borrowing facilities totalling $332.2 million of which $283.6 million was utilized and outstanding. Of the total, $41.6 million is available through June 1999 and $248 million matures at various dates through 1998, with the remainder maturing at various dates in 1997. The bank credit lines and facilities provide for funds at market rates of interest throughout the availability periods. The Company's term loan facility requires partial prepayment if, at 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 has commitments, subject to certain customary conditions, from banks to provide debt financing that would replace the existing term loan facility. The Company also maintained a $155 million letter of credit facility that is available through 1998. The Company utilizes letters of credit to secure certain of its obligations under various casualty insurance programs. At year-end 1996, letters of credit totalling $136.3 million were issued and outstanding. 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.
BORG-WARNER SECURITY CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS Year Ended December 31, - -------------------------------------------------------------------------------------------------------------- (millions of dollars, except per share) 1994 1995 1996 - -------------------------------------------------------------------------------------------------------------- Net service revenues $1,626.8 $1,708.5 $1,711.2 Cost of services 1,289.4 1,359.3 1,360.2 Selling, general and administrative expenses 220.2 212.5 210.6 Depreciation 52.8 52.1 47.0 Amortization of excess purchase price over net assets acquired 14.8 13.4 13.4 Other income, net-Note 10 (9.8) -- -- Interest expense and finance charges 48.8 55.9 56.6 - -------------------------------------------------------------------------------------------------------------- Earnings before income taxes 10.6 15.3 23.4 Provision (benefit) for income taxes-Note 11 (3.2) 6.9 9.5 - -------------------------------------------------------------------------------------------------------------- Earnings from continuing operations 13.8 8.4 13.9 Loss from discontinued operations, net of income taxes-Note 3 (0.7) (2.5) (28.5) - -------------------------------------------------------------------------------------------------------------- Earnings (loss) before extraordinary item 13.1 5.9 (14.6) Extraordinary item: Loss from early extinguishment of debt, net of $3.2 tax benefit-Note 5 -- (4.7) -- - -------------------------------------------------------------------------------------------------------------- Net earnings (loss) $ 13.1 $ 1.2 $ (14.6) ============================================================================================================== Earnings (loss) per common share: Continuing operations $ 0.59 $ 0.36 $ 0.59 Discontinued operations (0.03) (0.11) (1.21) Extraordinary item -- (0.20) -- - -------------------------------------------------------------------------------------------------------------- Net earnings (loss) per share $ 0.56 $ 0.05 $ (0.62) ==============================================================================================================
(See accompanying notes to consolidated financial statements) Borg-Warner Security Corporation Consolidated Balance Sheet
December 31, - ------------------------------------------------------------------------------------------------------------- (millions of dollars) 1995 1996 - ------------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 19.4 $ 17.8 Receivables, net 90.7 100.4 Inventories 12.5 12.1 Other current assets 59.7 36.8 - ------------------------------------------------------------------------------------------------------------- Total current assets 182.3 167.1 Property, plant and equipment Land and buildings 47.6 46.9 Machinery and equipment 72.8 5.8 Subscribers' installations 336.5 374.6 Capital leases 18.8 14.3 Construction in progress 2.7 1.0 - ------------------------------------------------------------------------------------------------------------- 478.4 442.6 Less accumulated depreciation 240.5 239.5 - ------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 237.9 203.1 Net excess purchase price over net assets acquired 250.2 237.2 Deferred tax asset, net 52.8 46.8 Net assets of discontinued operations 36.8 12.6 Other assets 78.5 94.0 - ------------------------------------------------------------------------------------------------------------- Total other assets 418.3 390.6 - ------------------------------------------------------------------------------------------------------------- $ 838.5 $ 760.8 ============================================================================================================= Liabilities and Stockholders' Equity Notes payable $ 3.6 $ 4.4 Accounts payable and accrued expenses 185.6 173.7 - ------------------------------------------------------------------------------------------------------------- Total current liabilities 189.2 178.1 Long-term debt 480.9 438.2 Other long-term liabilities 118.7 103.3 Capital stock: Common stock, issued 22,446,100 shares in 1995 and 1996 0.2 0.2 Series I non-voting common stock, issued 2,720,000 shares in 1995 and 1996 - - Capital in excess of par value 28.1 29.0 Retained earnings 31.2 20.6 Notes receivable-management stock purchase (0.3) (0.3) Cumulative translation adjustment (0.4) 0.5 - ------------------------------------------------------------------------------------------------------------- 58.8 50.0 Treasury common stock, at cost, 1,928,861 shares in 1995 and 1,862,311 shares in 1996 (9.1) (8.8) - ------------------------------------------------------------------------------------------------------------- Total stockholders' equity 49.7 41.2 - ------------------------------------------------------------------------------------------------------------- $ 838.5 $ 760.8 =============================================================================================================
(See accompanying notes to consolidated financial statements) Borg-Warner Security Corporation Consolidated Statement of Cash Flows
Year ended December 31, - ------------------------------------------------------------------------------------------------------------------ (millions of dollars) 1994 1995 1996 - ------------------------------------------------------------------------------------------------------------------ Operating: Continuing operations: Earnings from continuing operations $ 13.8 $ 8.4 $ 13.9 Adjustments to reconcile net earnings to net cash provided by continuing operations: Non-cash charges to earnings: Depreciation and amortization 67.6 65.5 60.4 Provision for losses on receivables 5.5 4.4 2.7 Deferred income taxes (9.4) (5.5) (3.8) Amortization of debt discount 2.1 2.1 0.6 Changes in assets and liabilities: (Increase) in receivables (17.7) (6.1) (12.4) (Increase) decrease in other current assets (2.8) (6.9) 32.6 Increase (decrease) in accounts payable and accrued expenses 19.2 19.3 (8.1) Net change in other long-term assets and liabilities (3.7) (22.0) 5.3 Gain on sales of other assets (8.5) -- -- - ------------------------------------------------------------------------------------------------------------------ Net cash provided by continuing operations 66.1 59.2 91.2 Discontinued operations: Net loss (0.7) (2.5) (28.5) Other cash related to discontinued operations 2.6 (4.3) 24.2 - ------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) discontinued operations 1.9 (6.8) (4.3) - ------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 68.0 52.4 86.9 Investing: Capital expenditures and investments in sales-type leases (59.4) (47.8) (40.7) Payments related to businesses acquired (9.0) -- -- Proceeds from sales of fixed and other assets 4.2 (1.1) 1.9 - ------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (64.2) (48.9) (38.8) Financing: Net increase (decrease) in notes payable 2.9 (6.1) 0.8 Increase (decrease) in debt outstanding under revolving credit facility 40.2 19.4 (37.8) Increases in long-term debt 17.5 100.0 100.0 Reductions in long-term debt (53.1) (90.8) (105.5) Net decrease in receivables sold (12.0) (20.9) (9.3) Sales of treasury common stock 0.8 1.0 0.3 Other 1.7 (2.0) 1.8 - ------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities (2.0) 0.6 (49.7) - ------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 1.8 4.1 (1.6) Cash and cash equivalents at beginning of year 13.5 15.3 19.4 - ------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 15.3 $ 19.4 $ 17.8 - ------------------------------------------------------------------------------------------------------------------ Supplemental cash flow information: Interest paid $ 46.0 $ 54.2 $ 57.7 Income taxes paid (refunded) (3.2) 0.7 2.8
(See accompanying notes to consolidated financial statements) Borg-Warner Security Corporation Consolidated Statement of Stockholders' Equity
Year Ended December 31, 1994 1995 1996 - ----------------------------------------------------------------------------------------------------------------------------------- (millions of dollars, except share data) Shares Amount Shares Amount Shares Amount - ----------------------------------------------------------------------------------------------------------------------------------- Common Stock Issued Beginning balance 24,955,700 $ 0.2 25,155,700 $ 0.2 25,166,100 $ 0.2 Conversion of Series I non-voting shares to common shares 200,000 -- 10,400 -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31 25,155,700 0.2 25,166,100 0.2 25,166,100 0.2 - ----------------------------------------------------------------------------------------------------------------------------------- Capital in Excess of Par Value Beginning balance 28.2 30.9 28.1 Shares issued under stock option and related plans 0.2 (5.4) 0.4 Tax benefit from trust distribution and exercise of stock options 2.5 2.6 0.5 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31 30.9 28.1 29.0 - ----------------------------------------------------------------------------------------------------------------------------------- Retained Earnings Beginning balance 15.9 29.7 31.2 Net earnings (loss) 13.1 1.2 (14.6) Adjustment for deferred pension experience loss 0.7 0.3 4.0 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31 29.7 31.2 20.6 - ----------------------------------------------------------------------------------------------------------------------------------- Notes Receivable-Management Stock Purchase Beginning balance (1.8) (1.0) (0.3) Net activity 0.8 0.7 -- - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31 (1.0) (0.3) (0.3) - ----------------------------------------------------------------------------------------------------------------------------------- Cumulative Translation Adjustment Beginning balance 1.3 (0.5) (0.4) Current year adjustment (1.8) 0.1 0.9 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31 (0.5) (0.4) 0.5 - ----------------------------------------------------------------------------------------------------------------------------------- Treasury Stock Beginning balance 2,151,108 (16.3) 2,237,344 (15.5) 1,928,861 (9.1) Shares issued under stock option and related plans (113,764) 0.8 (318,883) 6.4 (66,550) 0.3 Conversion of Series I non-voting shares to common shares 200,000 -- 10,400 -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31 2,237,344 (15.5) 1,928,861 (9.1) 1,862,311 (8.8) - ----------------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity $ 43.8 $ 49.7 $ 41.2 - -----------------------------------------------------------------------------------------------------------------------------------
(See accompanying notes to consolidated financial statements) Borg-Warner Security Corporation Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 1-Summary of Significant Accounting Policies The following paragraphs briefly describe significant accounting policies. Certain 1994 and 1995 amounts have been reclassified to conform with the 1996 presentation. Principles of Consolidation The consolidated financial statements include all significant subsidiaries. As of September 30, 1996, the Company's courier unit has been treated as a discontinued operation. The assets, liabilities, results of operations and adjustments to carrying values of net assets, and cash flows of the courier unit have been segregated and reported as discontinued operations for all periods presented, and previously reported results have been restated (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 reported amounts and related disclosures. Actual results may differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents consists primarily of cash 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 method. Property, Plant and Equipment and Depreciation Property, plant and equipment is carried at cost less accumulated depreciation. Expenditures for maintenance, repairs and renewals of relatively minor items are generally charged to expense as incurred. Renewals of significant items are capitalized. Depreciation is computed generally on 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 Benefit Plans A number of eligible salaried and hourly employees 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. 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. Casualty Insurance Liabilities The Company has accrued a discounted liability for the retained portion of insurance costs related to its various Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued deductible policies. This insurance liability is determined by the Company based on claims filed and an estimate of claims incurred but not yet reported. The discount rate used to value the future obligation at December 31, 1995 and 1996 was 5.5%. Amortization of Excess of Purchase Price Over Net Assets Acquired Excess of purchase price over net assets acquired is being amortized on a straight-line basis over 5 to 40 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. Transactions with Borg-Warner Automotive Under a tax-sharing agreement with the Company, for periods prior to January 1993, Borg-Warner Automotive is required to pay the Company for any operating loss carry-forward apportioned to it 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. Derivative Financial Instruments The Company uses interest rate swap agreements to manage exposure to interest rate fluctuations. The Company does not use 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 incurred or earned. 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 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to Be Disposed Of." The adoption of this standard did not have a material effect on the financial statements. In 1996, the Company also adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). This statement defines a new "fair value" method of accounting for stock-based compensation expense, and requires certain additional disclosures. 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" (APB 25). The Company has retained the intrinsic value method and, therefore, the new standard had no effect on the Company's net income or financial position (see Note 8). In October 1996, the American Institute of Certified Public Accountants issued Statement of Position No. 96-1, "Environmental Remediation Liabilities," which is effective for calendar year 1997. The Company does not expect adoption of this statement to have a material effect on the financial statements. In June 1996, the Financial Accounting Standards Board issued Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which the Company must adopt for transactions occurring after December 31, 1996. The Company does not expect adoption of this statement to have a material effect on the financial statements. Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued - --------------------------------------------------------------------------------
Note 2--Balance Sheet Information Detailed balance sheet data are as follows: December 31, - -------------------------------------------------------------------------------- (millions of dollars) 1995 1996 - -------------------------------------------------------------------------------- Receivables Customers $ 94.1 $102.8 Other 3.4 3.9 - -------------------------------------------------------------------------------- 97.5 106.7 Less allowance for losses 6.8 6.3 - -------------------------------------------------------------------------------- Net receivables $ 90.7 $100.4 ================================================================================ Other assets Net investment in sales-type leases $ 35.3 $ 54.4 Debt issuance costs 14.5 10.4 Deferred pension asset 7.5 9.1 Deferred subscribers' installation costs 7.2 5.4 Other 14.0 14.7 - -------------------------------------------------------------------------------- Total other assets $ 78.5 $ 94.0 ================================================================================ Accounts payable and accrued expenses Trade payables $ 24.4 $ 42.5 Payroll and related 58.2 41.6 Casualty insurance 45.2 44.4 Interest 8.5 5.2 Liabilities to former shareholders 10.9 8.7 Deferred income 10.8 10.3 Other 27.6 21.0 - -------------------------------------------------------------------------------- Total accounts payable and accrued expenses $185.6 $173.7 ================================================================================
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, net" in the accompanying Consolidated Balance Sheet at December 31, 1995 and 1996. The Company retains, on a subordinated basis, an undivided interest in the pool of receivables. The Company's retained interest of $15.3 million and $34.9 million at December 31, 1995 and 1996, respectively, is included with "Receivables, net" on the balance sheet. While the courier unit continues to participate in the receivables facility, its share of the receivables pool has been segregated on the balance sheet with "Net assets of discontinued operations." "Other current assets" at December 31, 1995 and 1996 included interest-bearing cash deposits of $28.9 million and $9.3 million, respectively, 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. Selling, general and administrative expenses include provisions for losses on receivables of $5.5 million, $4.4 million and $2.7 million in 1994, 1995 and 1996, respectively. Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued Accumulated depreciation related to capital leases amounted to $11.0 million and $8.8 million at December 31, 1995 and 1996, respectively. Accumulated amortization related to excess purchase price over net assets acquired amounted to $77.8 million and $74.2 million at December 31, 1995 and 1996, 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 $16.1 million and $32.7 million at December 31, 1995 and 1996, respectively. The non-current portion of the casualty insurance liability, included in other long-term liabilities, was $44.2 million at December 31, 1995 and 1996. The total discounted insurance accrual, including the portion reflected in accounts payable and accrued liabilities, was $89.4 million and $88.6 million at December 31, 1995 and 1996, respectively. The estimated aggregate undiscounted insurance liability was $101.6 million and $101.9 million at December 31, 1995 and 1996, respectively. - -------------------------------------------------------------------------------- Note 3-Discontinued Operations As of September 30, 1996, the Company's courier unit has been treated as a discontinued operation. The assets, liabilities, results of operations and adjustments to carrying values of net assets, and cash flows of the courier unit have been segregated and reported as discontinued operations for all periods presented, and previously reported results have been restated. As of December 31, 1996, the net assets of the discontinued operation consists mainly of customer receivables, property, plant and equipment and accounts payable.
Year Ended December 31, - ----------------------------------------------------------------------------------------------------- (millions of dollars, except per share) 1994 1995 1996 - ----------------------------------------------------------------------------------------------------- Net service revenues $166.1 $154.0 $140.0 ===================================================================================================== Loss from operations before income taxes $ (0.5) $ (3.5) $ (5.4) Income tax benefit (paid) (0.2) 1.0 1.9 - ------------------------------------------------------------------------------------------------------ Loss from operations (0.7) (2.5) (3.5) Adjustment of assets to estimated realizable value and other provisions -- -- (27.0) Income tax benefit -- -- 2.0 - ----------------------------------------------------------------------------------------------------- Net adjustment and provisions -- -- (25.0) - ----------------------------------------------------------------------------------------------------- Net loss from discontinued operations $ (0.7) $ (2.5) $(28.5) ===================================================================================================== Loss per common share: Loss from operations $(0.03) $(0.11) $(0.15) Net adjustment and provisions -- -- (1.06) - ----------------------------------------------------------------------------------------------------- Loss per common share $(0.03) $(0.11) $(1.21) =====================================================================================================
Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued - -------------------------------------------------------------------------------- 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, 1996 as follows:
Fiscal year (millions of dollars) - ------------------------------------------------- 1997 $19.4 1998 16.3 1999 9.9 2000 6.4 2001 4.3 2002 and after 8.9 - ------------------------------------------------- Total $65.2 - -------------------------------------------------
Total rental expense amounted to $21.5 million, $26.1 million and $26.7 million in 1994, 1995 and 1996, respectively. Note 5--Notes Payable and Long-Term Debt The following is a summary of notes payable and long-term debt which reflects all borrowings of the Company and its consolidated subsidiaries:
December 31, 1995 December 31, 1996 - ----------------------------------------------------------------------------------------------------------------------- (millions of dollars) Current Long-Term Current Long-Term - ----------------------------------------------------------------------------------------------------------------------- Bank term loan due 1998 (at an average of 8.3% in 1995 and 8.9% in 1996) $ -- $100.0 $ -- $196.8 Bank revolving credit loan due through 1999 (at an average rate of 7.3% in 1995 and 8.5% in 1996) -- 124.6 -- 86.8 8% notes (face amount $100 million due 1996) -- 99.5 -- -- Unsecured notes (at an average rate of 7.0% in 1995 and 7.3% in 1996) 0.4 0.6 2.0 0.1 Capital lease liability (at an average rate of 8.4% in 1995 and 10.2% in 1996) 3.2 7.1 2.4 5.3 9 1/8% senior subordinated notes (face amount $150 million due 2003) -- 149.1 -- 149.2 - ----------------------------------------------------------------------------------------------------------------------- Total notes payable and long-term debt $3.6 $480.9 $4.4 $438.2 - -----------------------------------------------------------------------------------------------------------------------
Maturities of long-term debt, including unamortized discount of $0.8 million, are as follows: 1998, $243.4 million; 1999, $42.2 million; 2000, $1.0 million; 2001, $1.0 million; and after 2001, $151.4 million. Included in long-term debt at December 31, 1995 and 1996 were obligations of $255.7 million and $154.5 million, respectively, with fixed interest rates and $225.2 million and $283.7 million, respectively, with variable interest rates (generally based on LIBOR or prime rate). Interest rate swap agreements with a notional amount of $125 million at December 31, 1996 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 Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued reduces semi-annually during the remaining commitment period. Available future commitments at December 31 are as follows: 1997, $92.4 million; and 1998, $41.6 million. Unused commitments at December 31, 1996 under the revolving credit facility were $48.6 million. 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. To secure its obligations under these facilities, the Company pledged the stock of certain of its subsidiaries. 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. - -------------------------------------------------------------------------------- Note 6--Contingent Liabilities The Company's discontinued property and casualty 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 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. 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 Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued the scope of contamination at such sites, estimated remediation costs at such sites, indemnification obligations in favor of the Company from the current owners of certain sold or discontinued operations, estimated legal fees and other factors, the Company has made provisions for indicated environmental liabilities in the aggregate amount of approximately $9 million (relating to environmental matters with respect to discontinued operations of the Company). The Company has requested that its discontinued automotive subsidiary, Borg- Warner Automotive, indemnify it against certain past and future costs relating to environmental and financing liabilities associated with certain former automotive operations. At December 31, 1996 such past costs were approximately $2.3 million. Borg-Warner Automotive has contested its indemnification obligation with respect to such liabilities. The Company believes that the various asserted claims and litigation in which it is involved will not materially affect its financial position, future operating results or cash flows, although no assurance can be given with respect to the ultimate outcome of any such claim or litigation. Note 7--Retirement Benefits The Company has various defined benefit and contribution plans which cover eligible employees. Retirement benefit expense amounted to $5.8 million, $4.7 million and $4.5 million in 1994, 1995 and 1996, respectively. This expense includes post- retirement life insurance and medical benefits of $0.2 million, $0.3 million and $0.3 million for 1994, 1995 and 1996, respectively, as well as defined contribution plan expenses of $1.6 million, $1.7 million and $1.5 million in 1994, 1995 and 1996, respectively. The following table sets forth the funded status of the defined benefit plans:
Funded Status December 31, 1995 December 31, 1996 - -------------------------------------------------------------------------------------------------------- (millions of dollars) Over Under Over Under - -------------------------------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefits $45.6 $ 44.1 $60.6 $25.7 Non-vested benefits 1.4 2.0 2.6 0.1 - -------------------------------------------------------------------------------------------------------- Accumulated benefit obligations 47.0 46.1 63.2 25.8 Effect of projected future compensation levels 5.3 -- 5.0 -- - -------------------------------------------------------------------------------------------------------- Projected benefit obligation 52.3 46.1 68.2 25.8 Plan assets at fair value 55.9 34.4 81.4 20.5 - -------------------------------------------------------------------------------------------------------- Assets in excess of (less than) projected benefit obligation 3.6 (11.7) 13.2 (5.3) Unrecognized net loss (gain) 2.9 9.7 (4.9) 3.1 Unrecognized prior service cost (benefit) (1.7) 2.7 0.8 -- - -------------------------------------------------------------------------------------------------------- Net asset (liability) before minimum liability 4.8 0.7 9.1 (2.2) Adjustment required to recognize minimum liability -- (12.4) -- (3.1) - -------------------------------------------------------------------------------------------------------- Net asset (liability) on balance sheet $ 4.8 $(11.7) $ 9.1 $(5.3) - --------------------------------------------------------------------------------------------------------
BORG-WARNER SECURITY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Assets held in trust for the defined benefit plans are comprised primarily 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) 1994 1995 1996 - ----------------------------------------------------------------- Service cost $ 3.0 $ 2.4 $ 3.3 Interest cost 6.7 6.9 7.0 Actual return on assets 1.1 (20.4) (12.5) Net amortization and deferrals (6.9) 13.8 4.9 - ----------------------------------------------------------------- Net periodic pension cost $ 3.9 $ 2.7 $ 2.7 =================================================================
The Company's assumptions used as of December 31, 1994, 1995 and 1996 in determining the pension cost and pension liability shown above were as follows:
(percent) 1994 1995 1996 - ---------------------------------------------- Discount rate 8.5 7.5 8.0 Rate of salary progression 4.0 4.0 4.0 Long-term rate of return on assets 9.5 9.5 10.0 - ----------------------------------------------
The Company also has post-employment benefits covering certain existing and former employees, including employees of certain businesses which have been divested by the Company. The liabilities on the Company's balance sheet for these benefits as of December 31, 1995 and 1996 were $12.4 million and $11.5 million, respectively, and are included in "Other Long-Term Liabilities." The discount rate used in determining this liability was 7.5% in 1995 and 8.0% in 1996. Medical expense increases are projected to be 7.25% in 1997 grading to 5.25% in 1999. - -------------------------------------------------------------------------------- NOTE 8-STOCK OPTIONS AND NOTES RECEIVABLE- MANAGEMENT STOCK PURCHASE Stock Option Plan The Company has two plans which authorize the grant of options to purchase 3,900,000 shares of the Company's common stock. All options granted to date carry exercise prices ranging from $5.00 to $20.75 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 with a graded vesting schedule between two to three years. In 1994, 1995 and 1996 there were no options canceled or converted. Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued Common shares under option for the years ended December 31, 1994, 1995 and 1996 are summarized as follows:
Number of Shares Aggregate Option Price - ----------------------------------------------------------------------------------------------------------------------------------- (shares in thousands, dollars in millions) 1994 1995 1996 1994 1995 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Shares under option at January 1 1,472 1,843 1,810 $ 19.9 $26.7 $ 24.2 Granted 593 390 159 9.7 3.3 1.7 Exercised (114) (141) (66) (1.1) (0.7) (0.3) Forfeited (108) (282) (358) (1.8) (5.1) (6.7) - ----------------------------------------------------------------------------------------------------------------------------------- Shares under option at end of period 1,843 1,810 1,545 $ 26.7 $24.2 $ 18.9 =================================================================================================================================== Options exercisable 881 800 985 ========================================================================================== Shares available for future grant 186 78 1,177 ========================================================================================== Weighted-average fair value of options granted during the year $ 3.57 $ 4.00 ==========================================================================================
Additional information regarding options outstanding as of December 31, 1996 is as follows (thousands of shares):
Options Outstanding Options Exercisable -------------------------------------- ---------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life (yrs) Price Exercisable Price - ------------------------------------------------------------------------------------------------------ $5.00-8.75 668 5.3 $ 7.04 378 $ 5.92 10.94-15.94 548 7.2 14.75 294 15.84 16.03-18.83 263 4.3 17.99 263 17.99 19.63-20.75 66 6.6 20.14 50 20.21 - ------------------------------------------------------------------------------------------------------ 5.00-20.75 1,545 5.9 12.20 985 12.84 ======================================================================================================
The 560 thousand options outstanding at December 31, 1996 that are not presently exercisable will vest according to various schedules between two to three years. The Company has retained the "intrinsic value" method of accounting for stock- based compensation expense under APB 25. Had compensation cost been determined based on the "fair value" method under SFAS 123, the Company's pro forma net income and earnings per share would have been as follows:
Year Ended December 31, - -------------------------------------------------------------------------------- (millions of dollars, except per share) 1995 1996 - -------------------------------------------------------------------------------- Net income (loss) As reported $ 1.2 $(14.6) Pro forma 1.1 (14.9) Earnings (loss) per share As reported $0.05 $(0.62) Pro forma 0.04 (0.63) - --------------------------------------------------------------------------------
Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1995 and 1996, respectively: expected volatility of 43% and 41%; risk-free interest rates of 6.00-6.81% and 6.15-6.22%; and expected lives of 4 and 3-4 years. Notes Receivable-Management Stock Purchase Included among the Company's equity holders are members of management. Purchases of shares by management have been funded in part by loans from the Company. These loans, which totaled approximately $0.3 million at December 31, 1995 and 1996, bear interest at approximately 6% and are offset against stockholders' equity in the Consolidated Balance Sheet. - -------------------------------------------------------------------------------- Note 9--Business Segment Information The Company's continuing operations have been classified into three business segments: guard, alarm and armored 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. 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. Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued Summarized financial information by business segment for 1994, 1995 and 1996 is as follows:
Year Ended December 31, - ------------------------------------------------------------------------------------------------ (millions of dollars) 1994 1995 1996 - ------------------------------------------------------------------------------------------------ NET SERVICE REVENUES: Guard services $1,209.4 $1,222.8 $1,223.8 Alarm services 206.2 254.7 241.1 Armored services 211.2 231.0 246.3 - ------------------------------------------------------------------------------------------------ Total net service revenues $1,626.8 $1,708.5 $1,711.2 ================================================================================================ OPERATING PROFIT: Guard services $ 54.5 $ 56.4 $ 62.1 Alarm services 14.9 15.8 18.9 Armored services 6.7 13.7 12.1 - ------------------------------------------------------------------------------------------------ Total operating profit 76.1 85.9 93.1 - ------------------------------------------------------------------------------------------------ Corporate expenses 26.5 14.7 13.1 Other income (9.8) - - Interest expense 48.8 55.9 56.6 - ------------------------------------------------------------------------------------------------ Earnings before taxes 10.6 15.3 23.4 Provision (benefit) for income taxes (3.2) 6.9 9.5 - ------------------------------------------------------------------------------------------------ Earnings from continuing operations $ 13.8 $ 8.4 $ 13.9 ================================================================================================ DEPRECIATION: Guard services $ 7.4 $ 7.3 $ 5.7 Alarm services 38.0 37.4 34.2 Armored services 7.0 7.1 7.0 Corporate 0.4 0.3 0.1 - ------------------------------------------------------------------------------------------------ Total depreciation $ 52.8 $ 52.1 $ 47.0 ================================================================================================ AMORTIZATION OF EXCESS PURCHASE PRICE OVER NET ASSETS ACQUIRED: Guard services $ 11.1 $ 8.9 $ 8.9 Alarm services 2.3 2.8 2.9 Armored services 1.3 1.5 1.4 Corporate 0.1 0.2 0.2 - ------------------------------------------------------------------------------------------------ Total amortization $ 14.8 $ 13.4 $ 13.4 ================================================================================================ CAPITAL EXPENDITURES: Guard services $ 8.6 $ 3.6 $ 3.1 Alarm services 44.6 40.5 29.5 Armored services 6.2 3.7 8.1 - ------------------------------------------------------------------------------------------------ Total capital expenditures $ 59.4 $ 47.8 $ 40.7 ================================================================================================ IDENTIFIABLE ASSETS: Guard services $ 259.2 $ 231.1 Alarm services 364.6 348.2 Armored services 89.1 87.4 Discontinued operations 36.8 12.6 Corporate 88.8 81.5 - ------------------------------------------------------------------------------------------------ Total identifiable assets $ 838.5 $ 760.8 ================================================================================================
Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued Note 10--Other Income, Net Other income in 1994 included a $9.9 million gain on the sale of certain trademarks and other rights to Borg-Warner Automotive. - -------------------------------------------------------------------------------- Note 11--Income Taxes Earnings before income taxes from continuing operations and provision (benefit) for income taxes consist of:
1994 1995 1996 - ----------------------------------------------------------------------------------------------------------------------- (millions of dollars) U.S. Non-U.S. Total U.S. Non-U.S. Total U.S. Non-U.S. Total - ----------------------------------------------------------------------------------------------------------------------- Earnings before income taxes $ 7.9 $ 2.7 $10.6 $11.9 $ 3.4 $15.3 $19.1 $ 4.3 $23.4 - ----------------------------------------------------------------------------------------------------------------------- Income taxes: Current: Federal/Foreign $ 3.6 $1.7 $ 5.3 $ 9.9 $ 1.5 $11.4 $10.5 $ 1.3 $11.8 State 0.9 -- 0.9 1.0 -- 1.0 1.5 -- 1.5 - ----------------------------------------------------------------------------------------------------------------------- 4.5 1.7 6.2 10.9 1.5 12.4 12.0 1.3 13.3 Deferred (9.4) -- (9.4) (5.5) -- (5.5) (3.8) -- (3.8) - ----------------------------------------------------------------------------------------------------------------------- Provision (benefit) for income taxes $(4.9) $ 1.7 $(3.2) $ 5.4 $ 1.5 $ 6.9 $ 8.2 $ 1.3 $ 9.5 - -----------------------------------------------------------------------------------------------------------------------
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) 1994 1995 1996 - ----------------------------------------------------------------------------------------------------------------------- Income taxes at U.S. statutory rate of 35% $ 3.7 $ 5.3 $ 8.2 Increases (decreases) resulting from: Change in tax basis (7.0) -- -- State income taxes 0.6 0.8 0.8 Non-temporary differences 0.6 0.7 0.7 Other, net (1.1) 0.1 (0.2) - ----------------------------------------------------------------------------------------------------------------------- Income taxes reported $(3.2) $ 6.9 $ 9.5 - -----------------------------------------------------------------------------------------------------------------------
Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued Following are the components of the net deferred tax asset as of December 31, 1995 and 1996:
(millions of dollars) 1995 1996 - ----------------------------------------------------------------------------------- Deferred tax assets: Liabilities for casualty insurance $ 35.8 $ 35.6 Liabilities related to discontinued operations 9.8 9.6 Liabilities for pension benefits 4.4 0.4 Liabilities for other post-retirement benefits 5.1 4.6 Other, net 8.0 2.8 Net operating loss carry-forward 16.7 10.9 General business credit 25.5 26.3 Minimum tax credit 27.0 26.6 Foreign tax credit 2.3 1.3 - ----------------------------------------------------------------------------------- Total deferred tax assets 134.6 118.1 Valuation allowance (10.6) (6.8) - ----------------------------------------------------------------------------------- 124.0 111.3 Deferred tax liabilities: Fixed assets (49.5) (43.9) Investments (13.1) (13.1) Net excess purchase price over net assets acquired (8.6) (7.5) - ----------------------------------------------------------------------------------- Total deferred tax liabilities (71.2) (64.5) - ----------------------------------------------------------------------------------- Net deferred tax asset $ 52.8 $ 46.8 ===================================================================================
The foreign tax credit carry-forward has been fully considered in the valuation allowance at both December 31, 1995 and 1996 while an additional allowance of $8.3 million and $5.5 million at December 31, 1995 and 1996, 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, 1995 and 1996: - --------------------------------------------------------------------------------
December 31, - ----------------------------------------------------------------------------------- (thousands of shares) 1995 1996 - -------------------------------------------------------------------------------- Common stock, $.01 par value: Authorized 50,000.0 50,000.0 Issued 22,446.1 22,446.1 Outstanding 22,087.6 22,154.2 Series I non-voting common stock, $.01 par value: Authorized 25,000.0 25,000.0 Issued 2,720.0 2,720.0 Outstanding 1,149.6 1,149.6 Preferred stock, $.01 par value: Authorized 5,000.0 5,000.0 Issued and Outstanding - -
Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued - -------------------------------------------------------------------------------- Note 13--Fair Value of Financial Instruments The methods and assumptions used to estimate the fair value of each class of financial instrument are as follows: Cash and cash equivalents, receivables, notes payable and accounts payable The carrying amounts approximate fair value because of the short maturity of these instruments. 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, 1995 and 1996 were as follows:
December 31, - -------------------------------------------------------------------------------- (millions of dollars) 1995 1996 - -------------------------------------------------------------------------------- Carrying amount $473.8 $432.9 Fair value 463.6 432.4
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, 1996 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 and $125 million at December 31, 1996. Letters of credit The Company utilizes third-party letters of credit to guarantee certain casualty 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, 1995 and 1996 were $150.3 million and $136.3 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.
Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued - ------------------------------------------------------------------------------------------------------------------------------------ Note 14--Interim Financial Information (Unaudited) 1995 Quarter Ended 1996 Quarter Ended - ------------------------------------------------------------------------------------------------------------------------------------ (millions of dollars, except per share) Mar. 31 June 30 Sept. 30 Dec. 31 Year 1995 Mar. 31 June 30 Sept. 30 Dec. 31 Year 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Net service revenues $423.8 $427.6 $427.8 $429.3 $1,708.5 $414.1 $418.3 $434.9 $443.9 $1,711.2 Cost of services 336.0 341.5 341.0 340.8 1,359.3 329.6 332.2 348.2 350.2 1,360.2 Selling, general and administrative expenses 56.8 54.6 51.7 49.4 212.5 52.7 52.2 51.8 53.9 210.6 Depreciation 13.6 13.0 13.0 12.5 52.1 12.1 11.8 11.7 11.4 47.0 Amortization of excess purchase price over net assets acquired 3.5 3.4 3.1 3.4 13.4 3.3 3.4 3.4 3.3 13.4 Interest expense and finance charges 13.4 13.9 13.7 14.9 55.9 14.5 14.1 14.1 13.9 56.6 - ------------------------------------------------------------------------------------------------------------------------------------ Earnings before income taxes 0.5 1.2 5.3 8.3 15.3 1.9 4.6 5.7 11.2 23.4 Provision (benefit) for income taxes (0.1) 0.3 2.5 4.2 6.9 0.3 1.7 2.5 5.0 9.5 - ------------------------------------------------------------------------------------------------------------------------------------ Earnings from continuing operations 0.6 0.9 2.8 4.1 8.4 1.6 2.9 3.2 6.2 13.9 Loss from discontinued operations, net of income taxes (0.5) (0.3) (0.4) (1.3) (2.5) (1.1) (1.0) (26.4) -- (28.5) - ------------------------------------------------------------------------------------------------------------------------------------ Earnings (loss) before extraordinary item 0.1 0.6 2.4 2.8 5.9 0.5 1.9 (23.2) 6.2 (14.6) Extraordinary item: Loss from early extinguishment of debt, net of income taxes -- -- -- (4.7) (4.7) -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Net earnings (loss) $ 0.1 $ 0.6 $ 2.4 $ (1.9) $ 1.2 $ 0.5 $ 1.9 $(23.2) $ 6.2 $ (14.6) ==================================================================================================================================== Earnings (loss) per common share: Continuing operations $ 0.02 $ 0.04 $ 0.12 $ 0.18 $ 0.36 $ 0.07 $ 0.12 $ 0.14 $ 0.26 $ 0.59 Discontinued operations (0.02) (0.01) (0.02) (0.06) (0.11) (0.05) (0.04) (1.13) -- (1.21) Extraordinary item -- -- -- (0.20) (0.20) -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Net earnings (loss) per share -- $ 0.03 $ 0.10 $(0.08) $ 0.05 $ 0.02 $ 0.08 $(0.99) $ 0.26 $ (0.62) ====================================================================================================================================
Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued - -------------------------------------------------------------------------------- Note 15--Subsequent Event and Related Pro Forma Financial Information (Unaudited) The following unaudited Pro Forma Financial Information has been prepared as a result of the combination on January 24, 1997, of the Company's armored services unit with Loomis Holding Corporation. The unaudited Pro Forma Financial Information is based on the historical financial statements of the Company and gives effect to (i) the disposition of substantially all of the assets and certain liabilities of the armored unit and other adjustments related to the business combination and (ii) the application of the net proceeds received by the Company to repay certain indebtedness. The accompanying unaudited Pro Forma Consolidated Statement of Operations for the year ended December 31, 1996 gives effect to the transactions as if they had been consummated on January 1, 1996. The unaudited Pro Forma Consolidated Balance Sheet at December 31, 1996 is presented giving effect to the transactions as if they had been consummated as of that date. While the Company anticipates that it will recognize a gain from the sale of the armored unit's net assets, the ultimate gain is subject to potential purchase price adjustments and other contingencies of which the amounts have not been finalized at this time. However, the Company does not anticipate that the gain will be material, and the Company does not expect any material nonrecurring charges or credits to result from the transaction. The unaudited Pro Forma Financial Information is intended for informational purposes only and is not necessarily indicative of the future results of operations or financial position of the Company had the transactions described above occurred on the indicated dates or been in effect for the periods presented. The unaudited Pro Forma Financial Information and the accompanying notes should be read in conjunction with the historical Consolidated Financial Statements of the Company, including the related notes thereto.
Pro Forma Consolidated Statement of Operations (Unaudited) Year Ended December 31, 1996 - -------------------------------------------------------------------------------------------------------------- Pro Forma (millions of dollars, except per share) Historical Adjustments/(a)/ Pro Forma - -------------------------------------------------------------------------------------------------------------- Net service revenues $1,711.2 $(246.3) $1,464.9 Cost of services 1,360.2 (204.5) 1,155.7 Selling, general and administrative expenses 210.6 (20.7) 189.9 Depreciation 47.0 (7.1) 39.9 Amortization of excess purchase price over net assets acquired 13.4 (1.5) 11.9 Interest expense and finance charges 56.6 (9.1)/(b)/ 47.5 - -------------------------------------------------------------------------------------------------------------- Earnings before income taxes and equity in earnings of unconsolidated subsidiaries 23.4 (3.4) 20.0 Provision for income taxes 9.5 (1.3)/(c)/ 8.2 - -------------------------------------------------------------------------------------------------------------- Earnings before equity in earnings of unconsolidated subsidiaries 13.9 (2.1) 11.8 Equity in earnings of Loomis, Fargo & Co. -- 3.8 /(d)/ 3.8 - -------------------------------------------------------------------------------------------------------------- Earnings from continuing operations $ 13.9 $ 1.7 $ 15.6 ============================================================================================================== Earnings per share from continuing operations $ 0.59 $ 0.66 Average shares outstanding (in thousands) 23,517 23,517
Borg-warner Security Corporation Notes To Consolidated Financial Statements, continued Pro Forma Consolidated Balance Sheet (Unaudited)
Year Ended December 31, 1996 - ---------------------------------------------------------------------------------------------------------------------- Pro Forma (millions of dollars) Historical Adjustments /(e)/ Pro Forma - ---------------------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 17.8 -- $ 17.8 Receivables, net 100.4 $(28.7) 71.7 Inventories 12.1 (1.8) 10.3 Other current assets 36.8 11.3 /(b)/ 48.1 - ---------------------------------------------------------------------------------------------------------------------- Total current assets 167.1 (19.2) 147.9 Property, plant and equipment, at cost 442.6 (76.5) 366.1 Less accumulated depreciation 239.5 (45.6) 193.9 - ---------------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 203.1 (30.9) 172.2 Net excess purchase price over net assets acquired 237.2 (27.4) 209.8 Deferred tax asset, net 46.8 (5.1) 41.7 Net assets of discontinued operations 12.6 -- 12.6 Investment in Loomis, Fargo & Co. -- 3.4 /(d)/ 3.4 Other assets 94.0 (11.3) 82.7 - ---------------------------------------------------------------------------------------------------------------------- Total assets $760.8 $(90.5) $670.3 ====================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Notes payable $ 4.4 $ (0.6) $ 3.8 Accounts payable and accrued expenses 173.7 (10.1) 163.6 - ---------------------------------------------------------------------------------------------------------------------- Total current liabilities 178.1 (10.7) 167.4 Long-term debt 438.2 (91.0)/(b)/ 347.2 Other long-term liabilities 103.3 11.2 /(f)/ 114.5 Capital stock: Common stock 0.2 -- 0.2 Series I non-voting common stock -- -- -- Capital in excess of par value 29.0 -- 29.0 Retained earnings 20.6 -- 20.6 Notes receivable - management stock purchase (0.3) -- (0.3) Cumulative translation adjustment 0.5 -- 0.5 - ---------------------------------------------------------------------------------------------------------------------- 50.0 -- 50.0 Treasury common stock (8.8) -- (8.8) - ---------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 41.2 -- 41.2 - ---------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $760.8 $(90.5) $670.3 ======================================================================================================================
Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued Notes to Pro Forma Statement of Operations and Balance Sheet a) To eliminate the historical revenues and expenses of the armored unit. b) To eliminate debt retired with proceeds received from the transaction and to adjust related interest expense. Cash proceeds from the transaction, net of transaction and related expenses, were approximately $105 million and were applied as follows: decrease in borrowings under the term loan, $80 million; decrease in borrowings under the revolving line of credit, $10 million; and increase in interest-bearing cash deposits under the accounts receivable facility, $15 million. The interest expense adjustment was computed using the average interest rates for the respective periods. Such rates were used because management believes these rates would have been the same if the facilities had been negotiated by the Company on a stand-alone basis without the armored unit. c) To record the estimated income tax effect for the pro forma adjustments described in Notes (a) and (b) for the respective periods. d) To recognize, under the equity method, the Company's 49% interest in the pro forma net assets and earnings of Loomis, Fargo & Co. e) To eliminate the sold assets and liabilities of the armored unit. f) For anticipated expenses incurred as a direct result of the business combination and for purchase price adjustments under the contribution agreement, including indemnifications and performance guarantees. Borg-Warner Security Corporation Independent Auditors' Report To the Board of Directors and Stockholders Borg-Warner Security Corporation We have audited the consolidated balance sheets of Borg-Warner Security Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Chicago, Illinois February 4, 1997 EX-21 4 SUBSIDIARIES OF THE COMPANY Exhibit 21
PERCENT OF CAPITAL STOCK BENEFICIALLY OWNED BY BORG-WARNER SECURITY CORPORATION OR ITS NAME OF SUBSIDIARY SUBSIDIARIES - ------------------ ------------------------ Baker Insurance Company 100% Borg-Warner Equities Corporation 100% Borg-Warner Equities Corporation of California 100% Borg-Warner Equities of Monterey, Inc. 100% Borg-Warner Insurance Holding Corporation 100% Centaur Insurance Company 100% NAL II, Ltd. 100% Borg-Warner Foundation, Inc. 100% Borg-Warner International Corporation 100% Borg-Warner Protective Services Corporation, Inc 100% Borg-Warner Information Services, Inc. 100% Burns International Security Services, Inc. 100% Burns Special Services, Inc. 100% Wells Fargo Guard Service Inc. of Florida 100% Wells Fargo Guard Services, Inc. 100% Wells Fargo Special Services, Inc. 100% BPS Financial Services, Inc. 100% BW - Canada Alarm (Wells Fargo) Corporation 100% Wells Fargo Alarm Services of Canada Limited 100% Pony Express Residential Security Ltd. 100% BW - Canadian Guard Corporation 100% Burns International Security Services, Ltd. 100% Les Services de Protection Burns International Ltee. 97% BW - Colombia Guard Corporation 100% Newerco, Inc. 100% BII, Inc. 100% Seguridad Burns De Colombia, S.A. 95% The William J. Burns International Detective Agency, Inc. 100% BW - U.K. Guard Corporation 100% Burns International Security Services, Ltd. (U.K.) 100% Globe Aviation Services Corporation 100% Globe Airport Security Services, Inc. 100% Globe Aviation Services Corporation of Puerto Rico 100% Globe Aviation Services of Canada, Limited 100% Pony Express Courier Corp. 100% Pyro Chem, Inc. 100% Wells Fargo Alarm Services, Inc. 100% BW - Chemicals Corporation 100% Wells Fargo Armored Service Corporation 100%
EX-23 5 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23 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 4, 1997 appearing in and incorporated by reference in the Annual Report on Form 10-K for the year ended December 31, 1996 filed by Borg-Warner Security Corporation. DELOITTE & TOUCHE LLP Chicago, Illinois March 28, 1996 EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 18 0 106 6 12 167 443 240 761 178 438 0 0 0 41 761 0 1711 0 1360 60 3 57 23 9 14 (29) 0 0 (15) (.62) (.62)
EX-99 7 CAUTIONARY STATEMENT EXHIBIT 99 Information provided by the Company from time to time may contain "forward- looking statements" as defined by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties including, but not limited to, those discussed below, which could cause actual results to differ materially from those projected in the forward-looking statement. 1. The Company's business is labor intensive and, accordingly, is affected by the availability of qualified personnel and the cost of labor. Contraction of the labor market in the various regions of the United States where the Company has its principal operations, whether caused by high economic growth in such regions or any other factors, may increase the Company's direct costs through higher wages and increased amounts of unbilled overtime. Employee turnover can result in increased recruiting, screening and training costs and affect the quality of service performed by the Company. In addition, while the Company's customer agreements typically adjust the billing rate based on changes in any law, ruling or collective bargaining agreement causing change in wage rates or other costs, competitive pricing conditions in the industry may constrain the Company's ability to adjust its billing rates to reflect such increased costs. 2. The Company has a significant amount of debt compared to stockholders' equity. The degree to which the Company is leveraged could have important consequences to the Company's operations, including (i) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be limited; (ii) a significant portion of the Company's cash flow from operations must be dedicated to the payment of principal and interest on its indebtedness, thereby reducing the funds available to the Company for its operations; (iii) certain of the Company's borrowings are and will continue to be at variable rates of interest, which could result in higher interest expenses in the event of increases in interest rates; (iv) such indebtedness contains and will contain financial and restrictive covenants, the failure to comply with which may result in an event of default which, if not cured or waived, could have a material adverse effect on the Company. 3. The Company continues to remain responsible for certain liabilities of businesses which the Company discontinued or disposed of in prior years, consisting primarily of environmental liabilities and indemnity obligations under contracts for sale of businesses. Although the Company believes that any liabilities remaining with respect to discontinued operations (including any potential environmental liabilities) will not have a material adverse effect on its financial position or operating results, no assurance can be given as to the ultimate outcome with respect to such liabilities. 4. Due to the nature of the Company's security services business, its operations are subject to a variety of federal, state, county and municipal laws, regulations and licensing requirements. Changes in such laws, regulations and licensing requirements may constrain the Company's ability to provide services to customers or increase the costs of such services. Competitive pricing conditions in the industry may constrain the Company's ability to adjust its billing rates to reflect such increased costs. 5. The nature of the Company's services 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 carries insurance of various types, including workers' compensation, automobile and general liability coverage. These policies include deductibles per occurrence for which the Company is self-insured. While the Company seeks to maintain appropriate levels of insurance, there can be no assurance that the Company will avoid significant future catastrophic claims or adverse publicity related thereto. There can be no assurance that the Company's insurance will be adequate to cover the Company's liabilities or that such insurance coverage will remain available at acceptable costs. A successful claim brought against the Company for which coverage is denied or which is in excess of its insurance coverage could have a material adverse effect on the Company's business, financial condition and results of operations. 6. Through 1993 the Company grew through acquisitions. More recently, cost pressures facing the Company and the entire protective services industry and expectations on pricing of acquisitions have made acquisitions less attractive to the Company. While the Company will continue to pursue acquisitions when attractive opportunities arise, there can be no assurance that the Company will complete acquisitions at favorable prices, that such acquisitions will be successfully integrated into the Company's existing operations or that such acquisitions will not be dilutive to earnings. In addition, the need to focus management's attention on integration of acquired businesses may limit the Company's ability to pursue other opportunities related to its business. 7. The protective services industry generally is highly fragmented and very competitive. The Company's physical security unit competes in a business environment with low barriers to entry, while its electronic security unit competes in a business environment characterized by relatively high capital investment due to the equipment and technology required. Consequently, the Company's business is subject to additional competition and the introduction of new technology or enhancements to existing technology. Some of the Company's competitors are materially larger than the Company and have greater financial and other resources available to them. Given the Company's high degree of leverage and the restrictions on capital spending contained in its credit facilities, there can be no assurance that the Company will be able to maintain levels of spending required to provide customers with advanced technological equipment. -2- -----END PRIVACY-ENHANCED MESSAGE-----