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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended March 31, 1996
Commission file number: 1-5529
BORG-WARNER SECURITY CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3408028
- ------------------------------ -------------------
State or other jurisdiction of (I.R.S. Employer
Incorporation or organization Identification No.)
200 South Michigan Avenue, Chicago, Illinois 60604
- -------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312)322-8500
-------------
Indicate by check mark whether the 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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
On April 30, 1996 the registrant had 22,110,542 shares of Common Stock and
1,149,600 shares of Series I Non-Voting Common Stock outstanding.
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BORG-WARNER SECURITY CORPORATION AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
THREE MONTHS ENDED MARCH 31, 1996
INDEX
Page No.
--------
PART I. Financial Information
---------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheet
at March 31, 1996 and December 31, 1995....................... 2
Consolidated Statement of Earnings for
the three months ended March 31, 1996 and 1995................ 3
Condensed Consolidated Statement of Cash Flows for
the three months ended March 31, 1996 and 1995................ 4
Notes to the Consolidated
Financial Statements.......................................... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 10
PART II. Other Information
-----------------
Item 1. Legal Proceedings....................................... 13
Item 2. Changes in Securities................................... 13
Item 3. Defaults Upon Senior Securities......................... 13
Item 4. Submission of Matters to a Vote of
Security Holders....................................... 13
Item 5. Other Information....................................... 13
Item 6. Exhibits and Reports on Form 8-K........................ 13
SIGNATURES......................................................... 14
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Part I. Financial Information
Item 1. Financial Statements
--------------------
BORG-WARNER SECURITY CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
<S> <C> <C>
ASSETS
- ------
Cash and cash equivalents $ 16.4 $ 21.1
Receivables, net 95.0 102.7
Inventories 13.4 12.5
Other current assets 73.2 59.5
------ ------
Total current assets 198.0 195.8
------ ------
Property, plant and equipment, at cost 490.3 500.7
Less accumulated depreciation 249.7 249.8
------ ------
Net property, plant and equipment 240.6 250.9
------ ------
Net excess purchase price
over net assets acquired 269.4 273.0
Deferred tax asset 52.8 52.8
Other assets 84.0 78.9
------ ------
Total assets $844.8 $851.4
====== ======
LIABILITIES & STOCKHOLDERS' EQUITY
- ----------------------------------
Notes payable $ 5.9 $ 7.0
Accounts payable and accrued expenses 184.5 193.9
------ ------
Total current liabilities 190.4 200.9
------ ------
Long-term debt 488.8 482.1
Other long-term liabilities 115.4 118.7
Capital stock:
Common stock 0.2 0.2
Series I non-voting common stock - -
Other stockholders' equity 50.0 49.5
------ ------
Total stockholders' equity 50.2 49.7
------ ------
Total liabilities & stockholders'
equity $844.8 $851.4
====== ======
</TABLE>
(The accompanying notes are an integral part of these financial statements)
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BORG-WARNER SECURITY CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
------ ------
<S> <C> <C>
Net service revenues $450.0 $462.4
Cost of services 363.2 371.2
Selling, general and
administrative expenses 54.8 58.9
Depreciation 13.2 14.9
Amortization of excess purchase
price over net assets acquired 3.6 3.8
Interest expense and finance charges 15.0 13.8
------ ------
Earnings (loss) before income taxes 0.2 (0.2)
Income tax benefit 0.3 0.3
------ ------
Net earnings $ 0.5 $ 0.1
====== ======
Net earnings per share $ 0.02 $ -
====== ======
</TABLE>
(The accompanying notes are an integral part of these financial statements)
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BORG-WARNER SECURITY CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
------ ------
<S> <C> <C>
OPERATING:
Net earnings $ 0.5 $ 0.1
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Non-cash charges to earnings:
Depreciation and amortization 16.8 18.7
Provision for losses on receivables 1.3 0.8
Amortization of debt discounts 0.5 0.4
Changes in assets and liabilities:
Decrease in receivables 6.2 8.4
Increase in other current assets (3.9) (4.1)
Increase/(decrease) in accounts payable and
accrued expenses (9.4) 1.6
Net change in other long-term assets and liabilities (0.3) (3.3)
Other (1.0) (0.9)
------ ------
Net cash provided by operating activities 10.7 21.7
------ ------
INVESTING:
Capital expenditures and investments in sales-type
leases (10.5) (13.3)
Other, net 0.5 (0.3)
------ ------
Net cash used in investing activities (10.0) (13.6)
------ ------
FINANCING:
Net decrease in notes payable (1.1) (4.7)
Increase in debt outstanding under revolving
credit facility 7.0 51.4
Reductions in long-term debt (0.8) (29.4)
Net decrease in receivables sold (10.6) (24.0)
Sales of treasury common stock 0.1 0.3
------ ------
Net cash used in financing activities (5.4) (6.4)
------ ------
NET INCREASE(DECREASE)IN CASH AND CASH EQUIVALENTS (4.7) 1.7
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 21.1 15.8
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16.4 $ 17.5
====== ======
</TABLE>
(The accompanying notes are an integral part of these financial statements)
<PAGE>
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) The financial statements of Borg-Warner Security Corporation and
Consolidated Subsidiaries ("Company") have been prepared in accordance with the
instructions to Form 10-Q. The statements are unaudited, but include all
adjustments, consisting of normal recurring items, which the Company considers
necessary for a fair presentation of the information set forth herein. The
results of operations for the three months ended March 31, 1996 are not
necessarily indicative of the results to be expected for the entire year.
Certain 1995 amounts have been reclassified to conform with the 1996
presentation.
(2) The allowance for doubtful accounts was $7.2 million at March 31, 1996 and
$7.3 million at December 31, 1995. The accumulated amortization on excess
purchase price over net assets acquired was $86.8 million at March 31, 1996 and
$93.0 million at December 31, 1995.
In November 1995, the Company entered into a three-year agreement to sell a $120
million undivided interest in a revolving pool of customer receivables. This
sold interest was reflected as a reduction of "Receivables" in the accompanying
Condensed Consolidated Balance Sheet at March 31, 1996 and December 31, 1995.
The Company retains, on a subordinated basis, an undivided interest in the pool
of receivables. The Company's retained interest of $8.6 million and $17.0
million at March 31, 1996 and December 31, 1995, respectively, is included with
"Receivables, net" on the balance sheet. "Other current assets" at March 31,
1996 and December 31, 1995 included interest-bearing cash deposits of $41.7
million and $31.1 million, respectively, held in trust under the terms of the
accounts receivable facility. These deposits represent collections held back by
the trustee 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.
Net cash payments for interest and income taxes were as follows (in millions of
dollars):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1996 1995
---- ----
<S> <C> <C>
Interest paid $9.1 $9.4
Income taxes paid (refunded) 0.3 (2.4)
</TABLE>
(3) The Company's provision for income taxes for the three months ended March
31, 1996 and 1995 reflect estimated annual tax rates for the year applied to
federal, state and foreign income.
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(4) The following tables summarize the capitalization of the Company at March
31, 1996 and December 31, 1995 (in millions of dollars):
<TABLE>
<CAPTION>
March 31, 1996 December 31,1995
------------------ ------------------
DEBT Current Long-Term Current Long-Term
------------------ ------------------
<S> <C> <C> <C> <C>
Bank term loan due 1998 (at
an average rate of 8.8%
in 1996 and 8.3% in 1995;
and 8.5% at March 31, 1996) $ - $100.0 $ - $100.0
Bank revolving commitment
loan due through 1999 (at
an average rate of 8.6% in
1996 and 7.3% in 1995; and
8.3% at March 31, 1996) - 131.6 - 124.6
8% notes (face amount of
$100 million due 1996) - 100.0 - 99.5
Unsecured notes (at an average
rate of 7.4% in 1996 and 7.0%
in 1995; and 7.3% at March 31,
1996) 0.2 0.7 0.4 0.6
Capital lease liability (at an
average rate of 8.0% in 1996
and 8.4% in 1995; and 8.0% at
March 31, 1996) 5.7 7.4 6.6 8.3
9-1/8% senior subordinated
notes (face amount of
$150 million due 2003) - 149.1 - 149.1
---- ------ ---- ------
Total notes payable and
long-term debt $5.9 $488.8 $7.0 $482.1
==== ====== ==== ======
</TABLE>
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<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY March 31, December 31,
1996 1995
--------- ------------
<S> <C> <C>
Common stock:
Common stock $ 0.2 $ 0.2
Series I non-voting common stock - -
Preferred stock - -
Capital in excess of par value 28.2 28.1
Notes receivable - management
stock purchase (0.3) (0.3)
Retained earnings 31.5 31.2
Cumulative translation adjustment (0.4) (0.4)
----- -----
59.2 58.8
Less treasury common stock,
1,913,008 shares in 1996 and
1,928,861 shares in 1995, at cost (9.0) (9.1)
----- -----
Total stockholders' equity $50.2 $49.7
===== =====
</TABLE>
<TABLE>
<CAPTION>
CAPITAL STOCK - NUMBER OF SHARES March 31, December 31,
(Thousands of shares) 1996 1995
--------- ------------
<S> <C> <C>
Common Stock, $.01 par value:
Authorized 50,000.0 50,000.0
Issued 22,446.1 22,446.1
Outstanding 22,103.5 22,087.6
Series I non-voting common stock,
$.01 par value:
Authorized 25,000.0 25,000.0
Issued 2,720.0 2,720.0
Outstanding 1,149.6 1,149.6
Preferred stock, $.01 par value:
Authorized 5,000.0 5,000.0
Issued and outstanding - -
</TABLE>
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(5) 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. The number of shares used in the computation of earnings
per share were as follows (in thousands of shares):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1996 1995
------ ------
<S> <C> <C>
Average common shares
outstanding 23,245 22,933
Common share equivalents 279 174
------ ------
Total used for computation
of per share earnings 23,524 23,107
====== ======
</TABLE>
(6) 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 currently being used to satisfy claim liabilities under
direct insurance policies written by Centaur. Any remaining assets will be
applied to Centaur's obligations to other insurance companies under reinsurance
contracts. If all of Centaur's obligations are not satisfied through
rehabilitation, it is possible that satisfaction could be sought from the
Company for Centaur's liabilities.
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
<PAGE>
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or in the aggregate will have a material adverse effect on its financial
position or future operating results, generally either because the maximum
potential liability at a site is not large or because liability will be shared
with other PRPs, although no assurance can be given with respect to the ultimate
outcome of any such liability. Based on its estimate of allocations of liability
among PRPs, the probability that other PRPs, many of whom are large, solvent
public companies, will fully pay the costs allocated to them, currently
available information concerning the scope of contamination at such sites,
estimated remediation costs at such sites, estimated legal fees and other
factors, the Company has made provisions for indicated environmental liabilities
in the aggregate amount of approximately $9 million (relating to environmental
matters with respect to discontinued operations of the Company).
If any environmental liability claim relating to the Company's former chemical
and plastics business is made, the Company is indemnified by the purchaser of
such business, General Electric Company. Since the disposition, the Company has
notified General Electric Company of various claims made with respect to the
Company's former chemical and plastic business, and General Electric Company has
assumed all of such claims and has not contested its indemnification
obligations. There is no dollar limitation on the General Electric Company's
indemnification obligations and there are no other material limitations or
exclusions with respect thereto. If any environmental liability claim relating
to the operations of the Company's discontinued automotive subsidiary is made,
the Company will be indemnified by such former subsidiary.
The Company believes that the various asserted claims and litigation in which it
is involved will not materially affect its financial position or future
operating results, although no assurance can be given with respect to the
ultimate outcome of any such claim or litigation.
<PAGE>
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Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
- ---------------------
Operating profit increased 8.9% for the first quarter of 1996 compared to 1995
despite a 2.7% decline in revenue to $450.0 million from $462.4 million. Net
earnings were $0.5 million, or $.02 per share, in 1996 compared with break-even
results in the 1995 first quarter.
Revenue increased at the Armored unit, primarily from higher volume, but was
lower at Guard and Alarm as severe weather in the Eastern and Northeast sections
of the United States disrupted service and restricted billings. The revenue
contributed by each of the Company's business units was as follows (in millions
of dollars):
<TABLE>
<CAPTION>
Three Months Ended
March 31
------------------
1996 1995
------ ------
<S> <C> <C>
Guard $296.2 $302.0
Alarm 58.9 65.1
Armored 59.0 56.7
Courier 35.9 38.6
------ ------
Total $450.0 $462.4
====== ======
</TABLE>
Operating profit, which is pretax earnings before interest expense and
unallocated corporate expenses, increased 8.9% over the first quarter of 1995.
Higher margins at the Guard and Alarm units were the primary reason for the
improvement. A combination of improved profitability on service contracts and
cost reduction efforts led to the improved operating margin.
Guard revenue for the first quarter of 1996 decreased 1.9% from 1995. The
decline was partly due to substantial snowfall in the Eastern United States.
This disrupted service and adversely impacted billable hours. Volume, as
measured by average guard hours-in-force, declined 5.6% as reductions,
cancellations, and terminations exceeded new sales. The unit's program to reduce
under-performing contracts contributed to improved margins as operating profit
increased 26.8% in the first quarter of 1996. Field cost reduction and
streamlining programs and reduced amounts of unbilled overtime also contributed
to the improvement.
Alarm revenue decreased 9.5% in the first quarter of 1996 compared to 1995. The
decrease was partially due to severe weather conditions in the Northeast, Mid-
Atlantic and Midwest regions, which limited new installation revenue and the
subsequent monitoring revenue from those installations. In 1995, Alarm began
recognizing installation contracts
<PAGE>
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as sales-type leases rather than operating leases. This resulted in a 2.8%
revenue reduction in 1996 since related rental charges declined. There is no
significant impact on operating income since the rental revenue is substantially
offset by finance income earned on sales-type leases and lower depreciation
expense on operating leases. Alarm's 1996 operating profit increased 26.9%
primarily due to improved investment control performance, lower operating costs
and emphasis on improved sales productivity.
Armored revenue increased 4.1% in the first quarter of 1996 due primarily to
higher volume in the ATM service operations. Revenue for the armored transport
and cash services operations were comparable to 1995. Operating profit declined
18.4% due to higher labor and vehicle costs, and the absence of a pricing
surcharge implemented in the first quarter of 1995.
Courier revenue decreased 7.0% in the first quarter of 1996 compared to 1995.
The lower revenue reflects the reduced volume of traditional financial document
shipments and weather-related problems affecting deliveries. Operating results
declined due to the impact of reduced revenues over a fixed cost base in
established route structures. The Company is reviewing its route structure and
branch organization in light of the reduced volume of business.
Certain federal legislative forces have proposed an increase in the minimum
wage. The Company believes that it will be able to adjust its billing rates in
response to any such increase and that there would not be a material effect on
operating income from any increase in the minimum wage.
Interest expense and finance charges increased 8.7% in the first quarter of 1996
from the comparable 1995 period due to higher interest rates associated with
refinancing activities in late 1995.
FINANCIAL CONDITION AND LIQUIDITY
- ---------------------------------
In November 1995 the Company entered into a three-year agreement to sell a $120
million undivided interest in a revolving pool of customer receivables. Other
current assets at March 31, 1996 and December 31, 1995 included interest-bearing
cash deposits of $41.7 million and $31.1 million, respectively, held in trust
under the terms of the accounts receivable facility. These deposits represent
collections held back based on the amount of eligible receivables in the
revolving receivables pool. The levels of receivables and current liabilities
are influenced by the timing of billings, collections and payrolls. The
Company's policy is to keep working capital as low as is operationally feasible
to minimize related carrying costs.
Net cash provided by operating activities was $10.7 million in the first quarter
of 1996 compared with $21.7 million in the first quarter of 1995. The decline in
cash provided by operating activities is primarily due to timing fluctuations in
payroll accruals. Cash used for investing activities declined by $3.6 million
due primarily to controlled Alarm investment and lower capital expenditures.
Total funding, including debt and off-balance sheet facilities, declined to
$571.5 million at March 31, 1996 from $576.3 million at December 31, 1995. The
Company expects that continuing operations, together with
<PAGE>
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existing credit facilities and replacements thereof, will generate sufficient
cash to fund current operating requirements and capital expenditures.
On October 17, 1995, the Company entered into a credit agreement with a
syndicate of banks, providing for a $200 million term loan due December 31,
1998. On such date the Company also amended its existing revolving credit and
letter of credit facilities, principally to permit the term loan, change
pricing, amend covenants relating to interest coverage, leverage, net worth and
earnings, extend the maturity of the letter of credit facility to December 31,
1998 and reduce the level of commitments under the letter of credit facility to
$155 million.
The Company used the initial $100 million of proceeds from the term loan to
prepay an existing $50 million term loan and for general corporate purposes. The
remaining $100 million of term loan proceeds was used to repay the $100 million
principal amount of its 8% notes, which matured on April 1, 1996.
The Company is required to prepay the term loan with the proceeds from certain
asset sales, certain reversions of surplus pension plan assets, issuance of debt
or equity securities and excess cash flow. In the event that, as of the end of
each quarter beginning with the quarter ended March 31, 1997, the Company has
not achieved required covenants for the four consecutive quarters ending on such
date, the Company is required to prepay $150 million of the term loan not later
than 120 days after the end of such quarter. If the Company is required to make
such payment, it expects to fund such amount through some combination of
transactions that may include the issuance of debt or equity securities, the
sale of assets or other financing alternatives.
In March 1996 the Company entered into an agreement that provides for the
purchase of the installation and equipment lease payments due under certain
alarm unit customer leased installations.
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.
<PAGE>
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Part II. Other Information
Item 1. Legal Proceedings
-----------------
As previously reported in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995, Centaur Insurance Company ("Centaur"), the Company's
discontinued property and casualty insurance subsidiary, has been operating
under rehabilitation since September 1987. Rehabilitation is a process
supervised by the Illinois Director of Insurance to attempt to compromise
Centaur's liabilities at an aggregate level that is not in excess of its assets.
The foregoing has resulted in one pending lawsuit against the Company for
recovery of alleged damages incurred as a result of Centaur's failure to satisfy
its reinsurance obligations. The liability phase of such lawsuit has begun and
the Company intends to defend this lawsuit vigorously.
Item 2. Changes in Securities
---------------------
Inapplicable
Item 3. Defaults Upon Senior Securities
-------------------------------
Inapplicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
27 - Financial Data Schedule
99 - Cautionary Statement
(b) Reports on Form 8-K:
None
<PAGE>
-14-
SIGNATURES
Pursuant to the requirements 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
--------------------------------
(Registrant)
By /s/ Timothy M. Wood
-----------------------------
(Signature)
Timothy M. Wood
Vice President, Finance
(Principal Financial and
Accounting Officer)
Date: May 15, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 16
<SECURITIES> 0
<RECEIVABLES> 102
<ALLOWANCES> 7
<INVENTORY> 13
<CURRENT-ASSETS> 198
<PP&E> 490
<DEPRECIATION> 250
<TOTAL-ASSETS> 845
<CURRENT-LIABILITIES> 190
<BONDS> 489
<COMMON> 0
0
0
<OTHER-SE> 50
<TOTAL-LIABILITY-AND-EQUITY> 845
<SALES> 0
<TOTAL-REVENUES> 450
<CGS> 0
<TOTAL-COSTS> 363
<OTHER-EXPENSES> 17
<LOSS-PROVISION> 1
<INTEREST-EXPENSE> 15
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 1
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
<PAGE>
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 may increase the Company's direct costs through
higher wages and increased amounts of unbilled overtime. 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
<PAGE>
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. In addition
to self-insurance reserves, the Company carries insurance of various types,
including general liability coverage. The Company obtains such insurance at
rates and upon terms negotiated periodically with various underwriters. The loss
experience of the Company and, to some extent, other protective services
companies affects premium rates charged to the Company. Any significant increase
in the rates charged to the Company could have an adverse effect on the
Company's operating results.
6. Historically, the Company has grown through acquisitions. 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.
7. The protective services industry generally is highly fragmented and very
competitive. Certain of the Company's business units compete in a business
environment with low barriers to entry, while other business units compete 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 access to additional capital than
does the Company. 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.
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