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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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
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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)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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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
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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
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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.
<TABLE>
<CAPTION>
Document Part of Form 10-K into which incorporated
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<S> <C>
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
</TABLE>
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BORG-WARNER SECURITY CORPORATION
FORM 10-K
YEAR ENDED DECEMBER 31, 1996
INDEX
PART I
<TABLE>
<CAPTION>
Item Number Page
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<S> <C>
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
</TABLE>
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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.
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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.
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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
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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
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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
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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
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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.
<TABLE>
<CAPTION>
Name Age Position with Company
<S> <C> <C>
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
</TABLE>
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.
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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
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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.
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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.
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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:
<TABLE>
<CAPTION>
Quarter ended High Low
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<S> <C> <C> <C>
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
</TABLE>
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
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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
<PAGE>
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
<PAGE>
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
<PAGE>
SCHEDULE II
Borg-Warner Security Corporation
Valuation and Qualifying Accounts
(millions of dollars)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- -------- ------------------- -------- --------
<S> <C> <C> <C> <C>
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
==== ==== ==== ==== ====
</TABLE>
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
EXHIBIT 11
Borg-Warner Security Corporation
Computation of Per Share Earnings
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands)
--------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
<PAGE>
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.
<TABLE>
<CAPTION>
Year Ended December 31,
Statement of Operation Data (millions of dollars, except per share)
- -----------------------------------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
Stock Prices
- -----------------------------------------------------------------------------------------------------------------------------
1996 Quarters First Second Third Fourth
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
(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.
<PAGE>
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:
<TABLE>
<CAPTION>
1995 vs. 1996
(millions of dollars) 1994 1995 1996 Percent Change
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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%
=============================================================================
</TABLE>
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
<PAGE>
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
<PAGE>
$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.
<PAGE>
<TABLE>
<CAPTION>
BORG-WARNER SECURITY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------
(millions of dollars, except per share) 1994 1995 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
==============================================================================================================
</TABLE>
(See accompanying notes to consolidated financial statements)
<PAGE>
Borg-Warner Security Corporation
Consolidated Balance Sheet
<TABLE>
<CAPTION>
<S> <C> <C>
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
=============================================================================================================
</TABLE>
(See accompanying notes to consolidated financial statements)
<PAGE>
Borg-Warner Security Corporation
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31,
- ------------------------------------------------------------------------------------------------------------------
(millions of dollars) 1994 1995 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
(See accompanying notes to consolidated financial statements)
<PAGE>
Borg-Warner Security Corporation
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Year Ended December 31, 1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
(millions of dollars, except share data) Shares Amount Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(See accompanying notes to consolidated financial statements)
<PAGE>
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
<PAGE>
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.
<PAGE>
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Note 2--Balance Sheet Information
Detailed balance sheet data are as follows:
December 31,
- --------------------------------------------------------------------------------
(millions of dollars) 1995 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
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
================================================================================
</TABLE>
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.
<PAGE>
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.
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------
(millions of dollars, except per share) 1994 1995 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
=====================================================================================================
</TABLE>
<PAGE>
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:
<TABLE>
<CAPTION>
Fiscal year (millions of dollars)
- -------------------------------------------------
<S> <C>
1997 $19.4
1998 16.3
1999 9.9
2000 6.4
2001 4.3
2002 and after 8.9
- -------------------------------------------------
Total $65.2
- -------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------
(millions of dollars) Current Long-Term Current Long-Term
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Funded Status December 31, 1995 December 31, 1996
- --------------------------------------------------------------------------------------------------------
(millions of dollars) Over Under Over Under
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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)
- --------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
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:
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------
(millions of dollars) 1994 1995 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
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
=================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
(percent) 1994 1995 1996
- ----------------------------------------------
<S> <C> <C> <C>
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
- ----------------------------------------------
</TABLE>
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.
<PAGE>
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:
<TABLE>
<CAPTION>
Number of Shares Aggregate Option Price
- -----------------------------------------------------------------------------------------------------------------------------------
(shares in thousands, dollars in millions) 1994 1995 1996 1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
==========================================================================================
</TABLE>
Additional information regarding options outstanding as of December 31, 1996 is
as follows (thousands of shares):
<TABLE>
<CAPTION>
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
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$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
======================================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------------------------------
(millions of dollars, except per share) 1995 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
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.
<PAGE>
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
Summarized financial information by business segment for 1994, 1995 and 1996 is
as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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
================================================================================================
</TABLE>
<PAGE>
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:
<TABLE>
<CAPTION>
1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------
(millions of dollars) U.S. Non-U.S. Total U.S. Non-U.S. Total U.S. Non-U.S. Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
(millions of dollars) 1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
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:
<TABLE>
<CAPTION>
(millions of dollars) 1995 1996
- -----------------------------------------------------------------------------------
<S> <C> <C>
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
===================================================================================
</TABLE>
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:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
- -----------------------------------------------------------------------------------
(thousands of shares) 1995 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
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 - -
</TABLE>
<PAGE>
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:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------
(millions of dollars) 1995 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Carrying amount $473.8 $432.9
Fair value 463.6 432.4
</TABLE>
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.
<PAGE>
<TABLE>
<CAPTION>
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
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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)
====================================================================================================================================
</TABLE>
<PAGE>
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.
<TABLE>
<CAPTION>
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
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
<PAGE>
Borg-warner Security Corporation
Notes To Consolidated Financial Statements, continued
Pro Forma Consolidated Balance Sheet (Unaudited)
<TABLE>
<CAPTION>
Year Ended December 31, 1996
- ----------------------------------------------------------------------------------------------------------------------
Pro Forma
(millions of dollars) Historical Adjustments /(e)/ Pro Forma
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
======================================================================================================================
</TABLE>
<PAGE>
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.
<PAGE>
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
<PAGE>
Exhibit 21
<TABLE>
<CAPTION>
PERCENT OF CAPITAL STOCK
BENEFICIALLY OWNED BY
BORG-WARNER SECURITY
CORPORATION OR ITS
NAME OF SUBSIDIARY SUBSIDIARIES
- ------------------ ------------------------
<S> <C>
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%
</TABLE>
<PAGE>
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 18
<SECURITIES> 0
<RECEIVABLES> 106
<ALLOWANCES> 6
<INVENTORY> 12
<CURRENT-ASSETS> 167
<PP&E> 443
<DEPRECIATION> 240
<TOTAL-ASSETS> 761
<CURRENT-LIABILITIES> 178
<BONDS> 438
0
0
<COMMON> 0
<OTHER-SE> 41
<TOTAL-LIABILITY-AND-EQUITY> 761
<SALES> 0
<TOTAL-REVENUES> 1711
<CGS> 0
<TOTAL-COSTS> 1360
<OTHER-EXPENSES> 60
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> 57
<INCOME-PRETAX> 23
<INCOME-TAX> 9
<INCOME-CONTINUING> 14
<DISCONTINUED> (29)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15)
<EPS-PRIMARY> (.62)
<EPS-DILUTED> (.62)
</TABLE>
<PAGE>
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
<PAGE>
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-
