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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997 Commission file number: 1-5529
----------------------------
Borg-Warner Security Corporation
(Exact name of registrant as specified in its charter)
Delaware 13-3408028
(State of incorporation) (I.R.S. Employer
Identification No.)
200 South Michigan Avenue
Chicago, Illinois 60604
(312) 322-8500
(Address and telephone number of principal executive offices)
----------------------------
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $.01 per share New York Stock Exchange
9-1/8% Senior Subordinated Notes due 2003 New York Stock Exchange
9-5/8% Senior Subordinated Notes due 2007 New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
----------------------------
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
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<PAGE>
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 6, 1998 was
approximately $219.9 million. As of March 6, 1998, the registrant had 23,364,931
shares of Common Stock and 249,600 shares of Series I Non-Voting Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated herein by reference into
the Part of the Form 10-K indicated.
Document Part of Form 10-K into which
-------- ----------------------------
incorporated
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The Company's annual report to stockholders Parts I, II and IV
for the year ended December 31, 1997
The Company's proxy statement for the 1998 Part III
annual meeting of stockholders
<PAGE>
BORG-WARNER SECURITY CORPORATION
FORM 10-K
YEAR ENDED DECEMBER 31, 1997
INDEX
<TABLE>
<CAPTION>
Item Number Page
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PART I
<S> <C>
1. Business 3
2. Properties 9
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 13
6. Selected Financial Data 13
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
7A.Quantitative and Qualitative Disclosures
About Market Risk 14
8. Financial Statements and Supplementary Data 14
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 world'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 11 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.
Physical Security Services
The Company provides guard services, as well as background screening,
contract employment and investigative services, to approximately 16,000 clients
in the United States, Canada, the United Kingdom and Colombia. The Company
services these clients with approximately 68,000 employees in approximately 294
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.
The physical security services unit employs approximately 65,000 security
officers. Security officers undergo a standardized pre-employment screening
program that features mandatory drug screening, criminal record checks at the
county and municipal court level and verification of consumer credit reports,
Social Security information and drivers' license records. Security officers
receive classroom orientation and field training in safety, first aid and
security techniques and in the handling of specific problems applicable to
particular industries or situations.
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The physical security services unit markets guard services through
approximately 141 sales representatives nationwide and in Canada, the United
Kingdom and Colombia. 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 27,000 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 11,000 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.
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.
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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
27,000 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 11,000 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 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.
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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.
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 in all 50 states and Puerto Rico 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 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 5,700 employees. The collective bargaining
agreements expire at various dates from 1998 to 2000 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
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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
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
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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. The unit transports time-sensitive packages for
commercial businesses and non-negotiable financial documents for Federal Reserve
banks and financial institutions in 36 states under the Pony Express(R) service
mark. The unit employs approximately 3,600 persons and uses a fleet of
approximately 3,000 vehicles, many of which are vehicles provided by the unit's
employees. The courier services unit operates both as a common and contract
carrier and uses a combination of tariffs and shipping contracts to control the
terms, conditions and rates applicable to the transportation of shipments. Rates
are dependent upon many factors, including the weight and type of the shipped
item, the distance and urgency of the shipment and the geographical location.
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.
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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,
1998.
<TABLE>
<CAPTION>
Name Age Position with Company
<S> <C> <C>
J. Joe Adorjan........ 59 Chairman of the Board, Chief Executive Officer and
President; Director
John D. O'Brien....... 55 Senior Vice President
Timothy M. Wood....... 50 Vice President, Finance
Robert E.T. Lackey.... 49 Vice President, General Counsel and Secretary
</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.,
a manufacturer of electronic, electrical and other products, from 1992 to 1995.
Mr. Adorjan is also a director of 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.
Mr. Lackey has been Vice President, General Counsel and Secretary of the
Company since 1997 and was Vice President, General Counsel and Secretary of
Transamerica Commercial Finance Corp. from 1991 to 1995.
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 central alarm stations, plants
and general offices in various cities in the United States, Canada, the United
Kingdom and Colombia. At December 31, 1997, the physical security services unit
occupied approximately 294 branch and satellite offices, all
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but one of which were leased. At December 31, 1997, the electronic security
services unit operated 12 central stations, of which 5 were leased, 28
additional branch and headquarters offices, 11 of which were owned and 48
additional 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 claim
liabilities at an aggregate level that is not in excess of Centaur's assets. In
rehabilitation, Centaur's assets are currently being used to satisfy claim
liabilities under direct insurance policies written by Centaur. Any remaining
assets will be applied to Centaur's obligations to other insurance companies
under reinsurance contracts. The foregoing has resulted in one pending lawsuit
against the Company for recovery of alleged damages from the failure of Centaur
to satisfy its reinsurance obligations. Certain former officers and directors of
the Company's current and former subsidiaries have been named as defendants in
such lawsuit and the Company has agreed to indemnify such individuals. Centaur
is not a defendant in this lawsuit against the Company. Although the Illinois
Director of Insurance has not made any claims against the Company for any of
Centaur's liabilities, the Illinois Director of Insurance has requested, and the
Company has agreed to, an extension of the statute of limitations for any such
claims.
As of December 31, 1996, Centaur's total liabilities were $166.9 million
and its deficit in net worth was $84.4 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 for direct
insurance based on estimates of Centaur's potential exposure and liabilities for
reinsurance based on the amount of the reinsurer's
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claim. 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.
Subsequently, seven of the 11 individual defendants were dismissed from the
lawsuit. 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 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.
The parties have agreed to split the trial into two phases; the first phase
was to address liability issues and the second phase was to address damages
issues. The liability phase of the trial was held in 1996. The court requested
post-trial briefs and set a schedule for closing arguments. Before hearing
closing arguments, the presiding judge declared a mistrial and recused himself
from the case. A new judge has been assigned to the case and a new trial to
address liability issues is scheduled to be held in 1998. 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.
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.
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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 $7 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.
Borg-Warner Automotive
The Company has requested that its former subsidiary, Borg-Warner
Automotive, Inc., indemnify it against certain past and future costs relating to
environmental and financing liabilities associated with certain former
automotive operations. At December 31, 1997 such past costs were approximately
$3.5 million. Borg-Warner Automotive has contested its indemnification
obligation with respect to such liabilities, and the parties submitted the
dispute to binding arbitration. In November 1997, the arbitrator found in favor
of the Company. In February 1998, an appellate panel upheld the arbitration
award.
Separately, in January 1998, Borg-Warner Automotive filed suit in Circuit
Court of Cook County, Illinois against the Company, Merrill Lynch Capital
Partners, Inc. and certain current and former directors, officers and employees
of the Company. The lawsuit seeks declaratory, injunctive and other equitable
relief, and for the recovery of assets, losses and unspecified compensatory and
punitive damages arising from alleged fraudulent misrepresentations, breaches of
fiduciary duties, breaches of contract and civil conspiracy relating to the 1993
spin-off of Borg-Warner Automotive to the Company's stockholders. The Company
intends to defend this lawsuit vigorously.
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 1997.
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PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
As of March 6, 1998, there were approximately 161 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. 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 1996 and 1997 were:
<TABLE>
<CAPTION>
Quarter ended High Low
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<S> <C> <C> <C>
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
1997 March 31 $15 1/8 $10 1/8
June 30 18 13 3/4
September 30 19 9/16 16 1/8
December 31 19 3/4 15 1/4
</TABLE>
Item 6. Selected Financial Data
The selected financial data for the five years ended December 31, 1997,
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 Financial Condition and Results
of Operations (set forth on pages 16 through 18) in the Annual Report are
incorporated herein by reference and made a part of this report.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Inapplicable.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements (including the notes thereto) of the
Company (set forth on pages 19 through 34) 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, 1997 and 1996 is set forth in Note 15 of the Notes to
Consolidated 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 1998 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 1998 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 1998 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 1998 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 1998 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 34 of the
Annual Report, and the Independent Auditors' Report, set forth on page 35 of the
Annual Report, are incorporated herein by reference:
Consolidated Statement of Operations--three years ended December 31,
1997
Consolidated Balance Sheet--December 31, 1997 and 1996
Consolidated Statement of Cash Flows--three years ended December 31,
1997
Consolidated Statement of Shareholders' Equity--three years ended
December 31, 1997
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, 1997.
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, 1997 and 1996, and for each of
the three years in the period ended December 31, 1997, and have issued our
report thereon dated February 3, 1998; such consolidated financial statements
and report are included in your 1997 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.
/s/ Deloitte & Touche LLP
---------------------
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 3, 1998
<PAGE>
SCHEDULE II
BORG-WARNER SECURITY CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
($ MILLIONS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- ---------- ----------------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Years Ended December 31, (1) (2)
Balance at Charged to Charged to Balance at
Beginning Costs and Other Close of
Description of Period Expenses Accounts Deductions Period
- ----------- --------- ---------- ---------- ---------- ----------
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
========= ========== ========== ========== ==========
1997
Allowance for Doubtful Accounts $6.3 $1.8 $3.5 $6.7 $4.9
========= ========== ========== ========== ==========
</TABLE>
<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 20, 1998
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 20, 1998.
<TABLE>
Signature Title
- --------- ------
<S> <C>
/s/ J. Joe Adorjan Chairman of the Board, Chief Executive
- -------------------------------- Officer and President and Director (Principal
J. Joe Adorjan 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
</TABLE>
<PAGE>
/s/ Dale W. Lang Director
________________________________
Dale W. Lang
/s/ Robert A. McCabe Director
- --------------------------------
Robert A. McCabe
/s/ Andrew McNally IV
- --------------------------------
Andrew McNally IV Director
/s/ Alexis P. Michas Director
- --------------------------------
Alexis P. Michas
/s/ H. Norman Schwarzkopf Director
- --------------------------------
H. Norman Schwarzkopf
/s/ Donald C. Trauscht Director
- --------------------------------
Donald C. Trauscht
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Document Description
- ------- --------------------
<C> <S>
*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 March 24, 1997 among the Company, the
lenders party thereto and the agents named therein (incorporated by
reference to Exhibit 4.5 to the Company's Registration Statement No.
333-26573).
*4.2 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).
*4.3 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).
*4.4 Indenture dated as of March 24, 1997 by and between the Company and
The Bank of New York, as trustee (incorporated by reference to
Exhibit 4.3 to Registration Statement No. 333-26573).
+*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).
</TABLE>
B-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document Description
- ------- --------------------
<C> <S>
+10.3 Borg-Warner Security Corporation 1993 Stock Incentive Plan, conformed
to include amendments thereto.
+10.4 Borg-Warner Security Corporation Performance Share Plan, conformed to
include amendments thereto.
+10.5 Borg-Warner Security Corporation Executive Officer Incentive Plan.
+*10.6 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).
+10.7 Amendment to Employment Agreement dated as of September 5, 1997 for
J.J. Adorjan.
+10.8 Noncompetition Agreement dated as of September 5, 1997 by and between
the Company and J.J. Adorjan.
+10.9 Employment Agreement dated September 5, 1997 for J.D. O'Brien.
+10.10 Noncompetition Agreement dated as of September 5, 1997 by and between
the Company and J.D. O'Brien.
+10.11 Employment Agreement dated September 5, 1997 for T.M. Wood.
+10.12 Noncompetition Agreement dated as of September 5, 1997 by and between
the Company and T.M. Wood.
+*10.13 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).
+*10.14 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).
*10.15 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).
</TABLE>
B-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document Description
- ------- --------------------
<C> <S>
*10.16 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.
13 Portions of the 1997 Annual Report to Stockholders.
21 Subsidiaries of the Company.
23 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule.
99 Cautionary Statement.
</TABLE>
- --------
* Incorporated by reference.
+ Indicates a management contract or compensatory plan or arrangement
required to be filed pursuant to Item 14(c).
B-3
<PAGE>
EXHIBIT 10.3
BORG-WARNER SECURITY CORPORATION
1993 STOCK INCENTIVE PLAN
(As Amended Through July 8, 1997)
<PAGE>
SECTION 1. Purpose; Definitions.
The purpose of the Plan is to give the Company a significant advantage in
attracting, retaining and motivating officers, employees and directors and to
provide the Company and its subsidiaries with the ability to provide incentives
more directly linked to the profitability of the Company's businesses and
increases in stockholder value.
For purposes of the Plan, the following terms are defined as set forth
below:
a. "Affiliate" means a corporation or other entity controlled by the
Company and designated by the Committee as such.
b. "Award" means a Stock Appreciation Right, Stock Option or Restricted
Stock.
c. "Board" means the Board of Directors of the Company.
d. "Cause" has the meaning set forth in Section 5(i).
e. "Change in Control" and "Change in Control Price" have the meanings
set forth in Sections 8(b) and (c), respectively.
f. "Code" means the Internal Revenue Code of 1986, as amended from time
to time, and any successor thereto.
g. "Commission" means the Securities and Exchange Commission or any
successor agency.
h. "Committee" means the Committee referred to in Section 2.
i. "Company" means Borg-Warner Security Corporation, a Delaware
corporation.
j. "Disability" means permanent and total disability as determined under
procedures established by the Committee for purposes of the Plan.
k. "Disinterested Person" shall mean a member of the Board who qualifies
as a disinterested person as defined in Rule 16b-3(c)(2), as
promulgated by the Commission under the Exchange Act, or any successor
definition adopted by the Commission.
l. "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and any successor thereto.
m. "Fair Market Value" means, except as provided in Section 5(j) and
6(b)(ii)(2), as of any given date, the mean between the highest and
lowest reported sales prices of the Stock on the New York Stock
Exchange Composite Tape or, if not listed on such exchange, on
<PAGE>
any other national securities exchange on which the Stock is listed or
on NASDAQ. If there is no regular public trading market for such
Stock, the Fair Market Value of the Stock shall be determined by the
Committee in good faith.
n. "Incentive Stock Option" means any Stock Option intended to be and
designated as an "incentive stock option" within the meaning of
Section 422 of the Code.
o. "Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
p. "Plan" means the Borg-Warner Security Corporation 1993 Stock Incentive
Plan, as set forth herein and as hereinafter amended from time to
time.
q. "Restricted Stock" means an award granted under Section 7.
r. "Retirement" means retirement from active employment under a pension
plan of the Company, any subsidiary or Affiliate, or under an
employment contract with any of them, or termination of employment at
or after age 55 under circumstances which the Committee, in its sole
discretion, deems equivalent to retirement.
s. "Rule 16b-3" means Rule 16b-3, as promulgated by the Commission under
Section 16(b) of the Exchange Act, as amended from time to time.
t. "Stock" means Common Stock, par value $.01 per share, of the Company.
u. "Stock Appreciation Right" means a right granted under Section 6.
v. "Stock Option" means an option granted under Section 5.
w. "Termination of Employment" means the termination of any participant's
employment with the Company and any subsidiary or Affiliate. A
participant employed by a subsidiary or an Affiliate shall also be
deemed to incur a Termination of Employment if the subsidiary or
Affiliate ceases to be such a subsidiary or Affiliate, as the case may
be, and the participant does not immediately thereafter become an
employee of the Company or another subsidiary or Affiliate.
In addition, certain other terms used herein have definitions given to them
in the first place in which they are used.
-2-
<PAGE>
SECTION 2. Administration
The Plan shall be administered by the Executive Compensation Committee of
the Board or such other committee of the Board, composed of not less than two
Disinterested Persons, each of whom shall be appointed by and serve at the
pleasure of the Board. If at any time no Committee shall be in office, the
functions of the Committee specified in the Plan shall be exercised by the
Board.
The Committee shall have plenary authority to grant Awards pursuant to the
terms of the Plan to officers, employees and directors of the Company and its
subsidiaries and Affiliates.
Among other things, the Committee shall have the authority, subject to the
terms of the Plan:
(a) to select the officers, employees and directors to whom Awards may
from time to time be granted; provided that awards to non-employee
directors may be made only in accordance with Section 13;
(b) to determine whether and to what extent Incentive Stock Options, Non-
Qualified Stock Options, Stock Appreciation Rights and Restricted
Stock or any combination thereof are to be granted hereunder;
(c) to determine the number of shares of Stock to be covered by each Award
granted hereunder;
(d) to determine the terms and conditions of any Award granted hereunder
(including, but not limited to, the option price (subject to Section
5(a)), any vesting restriction or limitation and any vesting
acceleration or forfeiture waiver regarding any Award and the shares
of Stock relating thereto, based on such factors as the Committee
shall determine);
(e) to modify, amend or adjust the terms and conditions of any Award, at
any time or from time to time, including, but not limited to, with
respect to performance goals and measurements applicable to
performance-based Awards pursuant to the terms of the Plan;
(f) to determine to what extent and under what circumstances Stock and
other amounts payable with respect to an Award shall be deferred; and
(g) to determine under what circumstances a Stock Option may be settled in
cash or Stock under Section 5(j).
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time, deem advisable, to interpret the terms and provisions of the
Plan and any Award issued under the Plan (and any agreement relating thereto)
and to otherwise supervise the administration of the Plan.
-3-
<PAGE>
The Committee may act only by a majority of its members then in office,
except that the members thereof may (i) delegate to an officer of the Company
the authority to make decisions pursuant to paragraphs (c), (f), (g), (h), and
(i) of Section 5 (provided that no such delegation may be made that would cause
Awards or other transactions under the Plan to cease to be exempt from Section
16(b) of the Exchange Act) and (ii) authorize any one or more of their number or
any officer of the Company to execute and deliver documents on behalf of the
Committee.
Any determination made by the Committee or pursuant to delegated authority
pursuant to the provisions of the Plan with respect to any Award shall be made
in the sole discretion of the Committee or such delegate at the time of the
grant of the Award or, unless in contravention of any express term of the Plan,
at any time thereafter. All decisions made by the Committee or any appropriately
delegated officer pursuant to the provisions of the Plan shall be final and
binding on all persons, including the Company and Plan participants.
SECTION 3. Stock Subject to Plan.
Subject to adjustment as provided herein, the total number of shares of
Stock of the Company available for grant under the Plan shall be 1,900,000,
provided that no "covered employee" (as such term is defined in Section 162(m)
of the Code) shall be granted more than 100,000 shares of Stock in any taxable
year. Shares subject to an Award under the Plan may be authorized and unissued
shares or may be treasury shares.
If any shares of Restricted Stock are forfeited for which the participant
did not receive any benefits of ownership (as such phrase is construed by the
Commission or its Staff), or if any Stock Option (and related Stock Appreciation
Right, if any) terminates without being exercised, or if any Stock Appreciation
Right is exercised for cash, shares subject to such Awards shall again be
available for distribution in connection with Awards under the Plan.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, stock split, extraordinary distribution with
respect to the Stock or other change in corporate structure affecting the Stock,
the Committee or Board may make such substitution or adjustments in the
aggregate number and kind of shares reserved for issuance under the Plan, in the
number, kind and option price of shares subject to outstanding Stock Options and
Stock Appreciation Rights, in the number and kind of shares subject to other
outstanding Awards granted under the Plan and/or such other substitution or
adjustments in the consideration receivable upon exercise as it may determine to
be appropriate in its sole discretion; provided, however, that the number of
shares subject to any Award shall always be a whole number. Such adjusted option
price shall also be used to determine the amount payable by the Company upon the
exercise of any Stock Appreciation Right associated with any Stock Option.
-4-
<PAGE>
SECTION 4. Eligibility.
Officers, employees and directors of the Company, its subsidiaries and
Affiliates who are responsible for or contribute to the management, growth and
profitability of the business of the Company, its subsidiaries and Affiliates
are eligible to be granted Awards under the Plan. Except as expressly authorized
by Section 13 of the Plan, however, no grant shall be made to a director who is
not an officer or a salaried employee.
SECTION 5. Stock Options.
Stock Options may be granted alone or in addition to other Awards granted
under the Plan and may be of two types: Incentive Stock Options and Non-
Qualified Stock Options. Any Stock Option granted under the Plan shall be in
such form as the Committee may from time to time approve.
The Committee shall have the authority to grant any optionee Incentive
Stock Options, Non-Qualified Stock Options or both types of Stock Options (in
each case with or without Stock Appreciation Rights). Incentive Stock Options
may be granted only to employees of the Company and its subsidiaries (within the
meaning of Section 424(f) of the Code). To the extent that any Stock Option is
not designated as an Incentive Stock Option or even if so designated does not
qualify as an Incentive Stock Option, it shall constitute a Non-Qualified Stock
Option.
The Committee may authorize the Chief Executive Officer of the Corporation,
who need not be a Disinterested Person, to grant in any calendar year a Non-
Qualified Stock Option (with or without Stock Appreciation Rights) for up to
3,000 shares of Stock to any employee of the Company who is not an executive
officer of the Company subject to Section 16 of the Exchange Act. The Committee
may limit or qualify such authorization in any manner it deems appropriate.
Stock Options granted by the Chief Executive Officer shall have the terms and
conditions determined by the Committee and the Committee shall periodically
review such grants.
Stock Options shall be evidenced by option agreements, the terms and
provisions of which may differ. An option agreement shall indicate on its face
whether it is intended to be an agreement for an Incentive Stock Option or a
Non-Qualified Stock Option. The grant of a Stock Option shall occur on the date
the Committee by resolution selects an individual to be a participant in any
grant of a Stock Option, determines the number of shares of Stock to be subject
to such Stock Option to be granted to such individual and specifies the terms
and provisions of the Stock Option. The Company shall notify a participant of
any grant of a Stock Option, and a written option agreement or agreements shall
be duly executed and delivered by the Company to the participant. Such agreement
or agreements shall become effective upon execution by the participant.
Anything in the Plan to the contrary notwithstanding, no term of the Plan
relating to Incentive Stock Options shall be interpreted, amended or altered nor
shall any discretion or authority granted under the Plan be exercised so as to
disqualify the Plan under Section 422 of the Code or, without
-5-
<PAGE>
the consent of the optionee affected, to disqualify any Incentive Stock Option
under such Section 422.
Stock Options granted under the Plan shall be subject to the following
terms and conditions and shall contain such additional terms and conditions as
the Committee shall deem desirable:
(a) Option Price. The option price per share of Stock purchasable under a Stock
Option shall be determined by the Committee and set forth in the option
agreement and shall not be less than the Fair Market Value of the Stock
subject to the Stock Option on the date of grant.
(b) Option Term. The term of each Stock Option shall be fixed by the Committee,
but no Stock Option shall be exercisable more than 10 years after the date
the Stock Option is granted.
(c) Exercisability. Except as otherwise provided herein, Stock Options shall be
exercisable at such time or times and subject to such terms and conditions
as shall be determined by the Committee. If the Committee provides that any
Stock Option is exercisable only in installments, the Committee may at any
time waive such installment exercise provisions, in whole or in part, based
on such factors as the Committee may determine. In addition, the Committee
may at any time, in whole or in part, accelerate the exercisability of any
Stock Option.
(d) Method of Exercise. Subject to the provisions of this Section 5, Stock
Options may be exercised, in whole or in part, at any time during the
option term by giving written notice of exercise to the Company specifying
the number of shares of Stock subject to the Stock Option to be purchased.
The option price of Stock to be purchased upon exercise of any Option shall
be paid in full in cash (by certified or bank check or such other
instrument as the Company may accept) or, if and to the extent set forth in
the option agreement, may also be paid by one or more of the following: (i)
in the form of unrestricted Stock already owned by the optionee (and, in
the case of the exercise of a Non-Qualified Stock Option, Restricted Stock
subject to an Award hereunder) based in any such instance on the Fair
Market Value of the Stock on the date the Stock Option is exercised;
provided, however, that, in the case of an Incentive Stock Option, the
right to make a payment in the form of already owned shares of Stock may be
authorized only at the time the Stock Option is granted; (ii) by requesting
the Company to withhold from the number of shares of Stock otherwise
issuable upon exercise of the Stock Option that number of shares having an
aggregate fair market value on the date of exercise equal to the exercise
price for all of the shares of Stock subject to such exercise; or (iii) by
a combination thereof, in each case in the manner provided in the option
agreement.
In the discretion of the Committee, payment for any shares subject to a
Stock Option may also be made by delivering a properly executed exercise
notice to the Company, together with a copy of irrevocable instructions to
a broker to deliver promptly to the Company the amount of
-6-
<PAGE>
sale or loan proceeds to pay the purchase price. To facilitate the
foregoing, the Company may enter into agreements for coordinated procedures
with one or more brokerage firms.
If payment of the option exercise price of a Non-Qualified Stock Option is
made in whole or in part in the form of Restricted Stock, the number of
shares of Stock to be received upon such exercise equal to the number of
shares of Restricted Stock used for payment of the option exercise price
shall be subject to the same forfeiture restrictions to which such
Restricted Stock was subject, unless otherwise determined by the Committee.
No shares of Stock shall be issued until full payment therefor has been
made. Subject to any forfeiture restrictions that may apply if a Stock
Option is exercised using Restricted Stock, an optionee shall have all of
the rights of a stockholder of the Company holding the Stock that is
subject to such Stock Option (including, if applicable, the right to vote
the shares and the right to receive dividends), when the optionee has given
written notice of exercise, has paid in full for such shares and, if
requested, has given the representation described in Section 11(a).
(e) Transferability of Stock Options. The Committee may in its discretion
authorize all or a portion of the Stock Options to be granted to an
optionee to be on terms that permit transfer by such optionee to (i) the
spouse, children or grandchildren of the optionee ("Immediate Family
Members"), (ii) a trust or trusts for the exclusive benefit of such
Immediate Family Members or (iii) a partnership in which such Immediate
Family Members are the only partners, provided that (x) such transfer shall
be by gift with no consideration, (y) the stock option agreement pursuant
to which such Stock Options are granted must expressly provide for the
transferability of Stock Options in a manner consistent with this Section
and (z) no subsequent transfers of Stock Options shall be permitted other
than by will or by the laws of descent and distribution. Except as
permitted in the first sentence of this section, no Stock Option shall be
transferable by the optionee other than (i) by will or by the laws of
descent and distribution or (ii) in the case of a Non-Qualified Stock
Option, pursuant to a qualified domestic relations order (as defined in the
Code or Title I of the Employee Retirement Income Security Act of 1974, as
amended, or the rules thereunder). All Stock Options shall be exercisable,
during the optionee's lifetime, only by the optionee or by the guardian or
legal representative of the optionee or, in the case of a Non-Qualified
Stock Option, its alternate payee pursuant to such qualified domestic
relations order, it being understood that the terms "holder" and "optionee"
include the guardian and legal representative of the optionee named in the
option agreement and any person to whom an option is transferred by will or
the laws of descent and distribution or, in the case of a Non-Qualified
Stock Option, pursuant to a qualified domestic relations order.
(f) Termination by Death. If an optionee's employment terminates by reason of
death, any Stock Option held by such optionee may thereafter be exercised,
to the extent then exercisable, or on such accelerated basis as the
Committee may determine, for a period of one year (or such other period as
the Committee may specify in the option agreement) from the date of such
death or until the expiration of the stated term of such Stock Option,
whichever period is the shorter. In the event of termination of employment
due to death, if an Incentive Stock Option is
-7-
<PAGE>
exercised after the expiration of the exercise periods that apply for
purposes of Section 422 of the Code, such Stock Option will thereafter be
treated as a Non-Qualified Stock Option.
(g) Termination by Reason of Disability. If an optionee's employment terminates
by reason of Disability, any Stock Option held by such optionee may
thereafter be exercised by the optionee, to the extent it was exercisable
at the time of termination, or on such accelerated basis as the Committee
may determine, for a period of three years (or such shorter period as the
Committee may specify in the option agreement) from the date of such
termination of employment or until the expiration of the stated term of
such Stock Option, whichever period is the shorter; provided, however, that
if the optionee dies within such three-year period (or such shorter
period), any unexercised Stock Option held by such optionee shall,
notwithstanding the expiration of such three-year (or such shorter) period,
continue to be exercisable to the extent to which it was exercisable at the
time of death for a period of 12 months from the date of such death or
until the expiration of the stated term of such Stock Option, whichever
period is the shorter. In the event of termination of employment by reason
of Disability, if an Incentive Stock Option is exercised after the
expiration of the exercise periods that apply for purposes of Section 422
of the Code, such Stock Option will thereafter be treated as a
Non-Qualified Stock Option.
(h) Termination by Reason of Retirement. If an optionee's employment terminates
by reason of Retirement, any Stock Option held by such optionee may
thereafter be exercised by the optionee, to the extent it was exercisable
at the time of such Retirement or on such accelerated basis as the
Committee may determine, for a period of three years (or such shorter
period as the Committee may specify in the option agreement) from the date
of such termination of employment or until the expiration of the stated
term of such Stock Option, whichever period is the shorter; provided,
however, that if the optionee dies within such three-year (or such shorter)
period, any unexercised Stock Option held by such optionee shall,
notwithstanding the expiration of such three-year (or such shorter) period,
continue to be exercisable to the extent to which it was exercisable at the
time of death for a period of 12 months from the date of such death or
until the expiration of the stated term of such Stock Option, whichever
period is the shorter. In the event of termination of employment by reason
of Retirement, if an Incentive Stock Option is exercised after the
expiration of the exercise periods that apply for purposes of Section 422
of the Code, such Stock Option will thereafter be treated as a Non-
Qualified Stock Option.
(i) Other Termination. Unless otherwise determined by the Committee, if an
optionee incurs a Termination of Employment for any reason other than
death, Disability or Retirement, any Stock Option held by such optionee
shall thereupon terminate, except that such Stock Option, to the extent
then exercisable, or on such accelerated basis as the Committee may
determine, may be exercised for the lesser of one year from the date of
such Termination of Employment or the balance of such Stock Option's term
if such Termination of Employment of the optionee is involuntary and
without Cause; provided, however, that if the optionee dies within such
one-year period, any unexercised Stock Option held by such optionee shall
notwithstanding the
-8-
<PAGE>
expiration of such one-year period, continue to be exercisable to the
extent to which it was exercisable at the time of death for a period of 12
months from the date of such death or until the expiration of the stated
term of such Stock Option, whichever period is the shorter. In the event of
Termination of Employment for any reason other than death, Disability or
Retirement, if an Incentive Stock Option is exercised after the expiration
of the exercise periods that apply for purposes of Section 422 of the Code,
such Stock Option will thereafter be treated as a Non-Qualified Stock
Option. Unless otherwise determined by the Committee, for the purposes of
the Plan "Cause" shall mean (i) the conviction of the optionee for
committing a felony under Federal law or the law of the state in which such
action occurred, (ii) dishonesty in the course of fulfilling the optionee's
employment duties or (iii) willful and deliberate failure on the part of
the optionee to perform his employment duties in any material respect.
(j) Cashing Out of Stock Option. On receipt of written notice of exercise, the
Committee may elect to cash out all or part of the portion of the shares of
Stock for which a Stock Option is being exercised by paying the optionee an
amount, in cash or Stock, equal to the excess of the Fair Market Value of
the Stock over the option price times the number of shares of Stock for
which to the Option is being exercised on the effective date of such cash
out.
Cash outs pursuant to this Section 5(j) relating to options held by
optionees who are actually or potentially subject to Section 16(b) of the
Exchange Act shall comply with the "window period" provisions of Rule
16(b)-3(e), to the extent applicable, and in the case of cash outs of
Non-Qualified Stock Options held by such optionees, the Committee may
determine Fair Market Value under the pricing rule set forth in Section
6(b)(ii)(2).
(k) Change in Control Cash Out. Notwithstanding any other provision of the
Plan, during the 60-day period from and after a Change in Control (the
"Exercise Period"), unless the Committee shall determine otherwise at the
time of grant, an optionee shall have the right, whether or not the Stock
Option is fully exercisable and in lieu of the payment of the exercise
price for the shares of Stock being purchased under the Stock Option and by
giving notice to the Company, to elect (within the Exercise Period) to
surrender all or part of the Stock Option to the Company and to receive
cash, within 30 days of such notice, in an amount equal to the amount by
which the Change in Control Price per share of Stock on the date of such
election shall exceed the exercise price per share of Stock under the Stock
Option (the "Spread") multiplied by the number of shares of Stock granted
under the Stock Option as to which the right granted under this Section
5(k) shall have been exercised; provided, however, that if the Change in
Control is within six months of the date of grant of a particular Stock
Option held by an optionee who is an officer or director of the Company and
is subject to Section 16(b) of the Exchange Act no such election shall be
made by such optionee with respect to such Stock Option prior to six months
from the date of grant. Notwithstanding any other provision hereof, if the
end of such 60-day period from and after a Change in Control is within six
months of the date of grant of a Stock Option held by an optionee who is an
officer or director of the Company and is subject to Section 16(b) of the
Exchange Act, such Stock Option shall be cancelled in exchange for a cash
payment to the optionee, effected on the day which is six
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<PAGE>
months and one day after the date of grant of such Option, equal to the
Spread multiplied by the number of shares of Stock granted under the Stock
Option.
SECTION 6. Stock Appreciation Rights.
(a) Grant and Exercise. Stock Appreciation Rights may be granted in conjunction
with all or part of any Stock Option granted under the Plan. In the case of
a Non-Qualified Stock Option, such rights may be granted either at or after
the time of grant of such Stock Option. In the case of an Incentive Stock
Option, such rights may be granted only at the time of grant of such Stock
Option. A Stock Appreciation Right shall terminate and no longer be
exercisable upon the termination or exercise of the related Stock Option.
A Stock Appreciation Right may be exercised by an optionee in accordance
with Section 6(b) by surrendering the applicable portion of the related
Stock Option in accordance with procedures established by the Committee.
Upon such exercise and surrender, the optionee shall be entitled to receive
an amount determined in the manner prescribed in Section 6(b). Stock
Options which have been so surrendered shall no longer be exercisable to
the extent the related Stock Appreciation Rights have been exercised.
(b) Terms and Conditions. Stock Appreciation Rights shall be subject to such
terms and conditions as shall be determined by the Committee, including the
following:
(i) Stock Appreciation Rights shall be exercisable only at such time or
times and to the extent that the Stock Options to which they relate
are exercisable in accordance with the provisions of Section 5 and
this Section 6.
(ii) Upon the exercise of a Stock Appreciation Right, an optionee shall be
entitled to receive an amount in cash, shares of Stock or both equal
in value to the excess of the Fair Market Value of one share of Stock
over the option price per share specified in the related Stock Option
multiplied by the number of shares in respect of which the Stock
Appreciation Right shall have been exercised, with the Committee
having the right to determine the form of payment.
In the case of Stock Appreciation Rights relating to Stock Options
held by optionees who are actually or potentially subject to Section
16(b) of the Exchange Act, the Committee:
(1) may require that such Stock Appreciation Rights be exercised for
cash only in accordance with the applicable "window period"
provisions of Rule 16b-3; and
(2) in the case of Stock Appreciation Rights relating to Non-
Qualified Stock Options, may provide that any amount to be paid
in cash upon exercise of such Stock Appreciation Rights during a
Rule 16b-3 "window period" shall be based on the
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<PAGE>
highest of the daily means between the highest and lowest
reported sales prices of the Stock on the New York Stock Exchange
or other national securities exchange on which the shares are
listed or on NASDAQ, as applicable, occurring during such "window
period".
(iii) Stock Appreciation rights shall be transferable only to permitted
transferees of the underlying Stock Option in accordance with
Section 5(e).
SECTION 7. Restricted Stock.
(a) Administration. Shares of Restricted Stock may be awarded either alone or
in addition to other Awards granted under the Plan. The Committee shall
determine the officers and employees to whom and the time or times at which
grants of Restricted Stock will be awarded, the number of shares to be
awarded to any participant, the time or times within which such Awards may
be subject to forfeiture and any other terms and conditions of the Awards,
in addition to those contained in Section 7(c).
The Committee may condition the grant of Restricted Stock upon the
attainment of specified performance goals of the participant or of the
Company or subsidiary, division or department of the Company for or within
which the participant is primarily employed or upon such other factors or
criteria as the Committee shall determine. The provisions of Restricted
Stock Awards need not be the same with respect to each recipient.
(b) Awards and Certificates. Shares of Restricted Stock shall be evidenced in
such manner as the Committee may deem appropriate, including book-entry
registration or issuance of one or more stock certificates. Any certificate
issued in respect of shares of Restricted Stock shall be registered in the
name of such participant and shall bear an appropriate legend referring to
the terms, conditions, and restrictions applicable to such Award,
substantially in the following form:
"The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) of the 1993 Stock Incentive Plan and a Restricted Stock
Agreement. Copies of such Plan and Agreement are on file at the
offices of Borg-Warner Security Corporation, 200 South Michigan
Avenue, Chicago, Illinois 60604."
The Committee may require that the certificates evidencing such shares be
held in custody by the Company until the restrictions thereon shall have
lapsed and that, as a condition of any Award of Restricted Stock, the
participant shall have delivered a stock power, endorsed in blank, relating
to the Stock covered by such Award.
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<PAGE>
(c) Terms and Conditions. Shares of Restricted Stock shall be subject to the
following terms and conditions:
(i) Subject to the provisions of the Plan and the Restricted Stock
Agreement referred to in Section 7(c)(vi), during a period set by
the Committee, commencing with the date of such Award (the
"Restriction Period"), the participant shall not be permitted to
sell, assign, transfer, pledge or otherwise encumber shares of
Restricted Stock. The Committee may provide for the lapse of such
restrictions in installments or otherwise and may accelerate or
waive such restrictions, in whole or in part, in each case based on
period of service, performance of the participant or of the Company
or the subsidiary, division or department for which the participant
is employed or such other factors or criteria as the Committee may
determine.
(ii) Except as provided in this paragraph (ii) and Section 7(c)(i) and
the Restricted Stock Agreement, the participant shall have, with
respect to the shares of Restricted Stock, all of the rights of a
stockholder of the Company holding the class or series of Stock that
is the subject of the Restricted Stock, including, if applicable,
the right to vote the shares and the right to receive any cash
dividends. If so determined by the Committee in the applicable
Restricted Stock Agreement and subject to Section 11(f) of the Plan,
(1) cash dividends on the shares of Stock that are the subject of
the Restricted Stock Award shall be automatically deferred and
reinvested in additional Restricted Stock, and (2) dividends payable
in Stock shall be paid in the form of Restricted Stock.
(iii) Except to the extent otherwise provided in the applicable Restricted
Stock Agreement and Sections 7(c)(i), 7(c)(iv) and 8(a)(ii), upon a
participant's Termination of Employment for any reason during the
Restriction Period, all shares still subject to restriction shall be
forfeited by the participant.
(iv) Except to the extent otherwise provided in Section 8(a)(ii), in the
event of an involuntary Termination of Employment of a participant
for any reason (other than for Cause), the Committee shall have the
discretion to waive in whole or in part any or all remaining
restrictions with respect to any or all of such participant's shares
of Restricted Stock.
(v) If and when the Restriction Period expires without a prior
forfeiture of the Restricted Stock subject to such Restriction
Period, unlegended certificates for such shares shall be delivered
to the participant.
(vi) Each Award shall be confirmed by, and be subject to the terms of, a
Restricted Stock Agreement.
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<PAGE>
SECTION 8. Change In Control Provisions.
(a) Impact of Event. Notwithstanding any other provision of the Plan to the
contrary, in the event of a Change in Control:
(i) Any Stock Options and Stock Appreciation Rights outstanding as of the
date such Change in Control is determined to have occurred and not
then exercisable and vested shall become fully exercisable and vested
to the full extent of the original grant.
(ii) The restrictions applicable to any Restricted Stock shall lapse, and
such Restricted Stock shall become free of all restrictions and become
fully vested and transferable to the full extent of the original
grant.
(b) Definition of Change in Control. For purposes of the Plan, a "Change in
Control" shall mean the happening of any of the following events:
(i) An acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of 20% or more of either (1) the then
outstanding shares of common stock of the Company (the "Outstanding
Company Common Stock") or (2) the combined voting power of the then
outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Company
Voting Securities"); excluding, however, the following: (1) any
acquisition directly from the Company, other than an acquisition by
virtue of the exercise of a conversion privilege unless the security
being so converted was itself acquired directly from the Company, (2)
any acquisition by the Company, (3) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the Company
or any corporation controlled by the Company or (4) any acquisition by
any Person pursuant to a transaction which complies with clauses (1),
(2) and (3) of subsection (iii) of this Section 8(b); or
(ii) A change in the composition of the Board such that the individuals
who, as of the effective date of the Plan, constitute the Board (such
Board shall be hereinafter referred to as the "Incumbent Board") cease
for any reason to constitute at least a majority of the Board;
provided, however, for purposes of this Section 8(b), that any
individual who becomes a member of the Board subsequent to such
effective date, whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least a majority
of those individuals who are members of the Board and who were also
members of the Incumbent Board (or deemed to be such pursuant to this
proviso) shall be considered as though such individual were a member
of the Incumbent Board; but, provided further, that any such
individual whose initial assumption of office occurs as a result of
either an actual or threatened election contest (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Exchange
Act) or other actual or
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<PAGE>
threatened solicitation of proxies or consents by or on behalf of a
Person other than the Board shall not be so considered as a member
of the Incumbent Board; or
(iii) The approval by the shareholders of the Company of a reorganization,
merger or consolidation or sale or other disposition of all or
substantially all of the assets of the Company ("Corporate
Transaction"); excluding, however, such a Corporate Transaction
pursuant to which (1) all or substantially all of the individuals
and entities who are the beneficial owners, respectively, of the
outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such Corporate Transaction will
beneficially own, directly or indirectly, more than 60% of,
respectively, the outstanding shares of common stock, and the
combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such Corporate Transaction
(including, without limitation, a corporation which as a result of
such transaction owns the Company or all or substantially all of the
Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their
ownership, immediately prior to such Corporate Transaction, of the
outstanding Company Common Stock and Outstanding Company Voting
Securities, as the case may be, (2) no Person (other than the
Company, any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the
Company or such corporation resulting from such Corporate
Transaction) will beneficially own, directly or indirectly, 20% or
more of, respectively, the outstanding shares of common stock of the
corporation resulting from such Corporate Transaction or the
combined voting power of the outstanding voting securities of such
corporation entitled to vote generally in the election of directors
except to the extent that such ownership existed with respect to the
Company prior to the Corporate Transaction and (3) individuals who
were members of the Incumbent Board will constitute at least a
majority of the members of the board of directors of the corporation
resulting from such Corporate Transaction; or
(iv) The approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
(c) Change in Control Price. For purposes of the Plan, "Change in Control
Price" means the higher of (i) the highest reported sales price, regular
way, of a share of Stock in any transaction reported on the New York Stock
Exchange Composite Tape or other national securities exchange on which such
shares are listed or on NASDAQ, as applicable, during the 60-day period
prior to and including the date of a Change in Control and (ii) if the
Change in Control is the result of a tender or exchange offer or a
Corporate Transaction, the highest price per share of Stock paid in such
tender or exchange offer or Corporate Transaction; provided, however, that
(x) in the case of a Stock Option which (A) is held by an optionee who is
an officer or director of the Company and is subject to Section 16(b) of
the Exchange Act and (B) was granted within 240 days of the Change in
Control, then the Change in Control Price for such Stock Option shall be
the Fair Market Value of the Stock on the date such Stock Option
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<PAGE>
is exercised or cancelled and (y) in the case of Incentive Stock Options
and Stock Appreciation Rights relating to Incentive Stock Options, the
Change in Control Price shall be in all cases the Fair Market Value of the
Stock on the date such Incentive Stock Option or Stock Appreciation Right
is exercised. To the extent that the consideration paid in any such
transaction described above consists all or in part of securities or other
non-cash consideration, the value of such securities or other non-cash
consideration shall be determined in the sole discretion of the Board.
SECTION 9. Term, Amendment and Termination.
The Plan will terminate on December 31, 2003. Under the Plan, Awards
outstanding as of December 31, 2003 shall not be affected or impaired by the
termination of the Plan.
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration or discontinuation shall be made which would (i) impair the rights of
an optionee under a Stock Option or a recipient of a Stock Appreciation Right or
Restricted Stock Award theretofore granted without the optionee's or recipient's
consent, except such an amendment made to cause the Plan to qualify for the
exemption provided by Rule 16b-3, or (ii) disqualify the Plan from the exemption
provided by Rule 16b-3. In addition, no such amendment shall be made without the
approval of the Company's stockholders to the extent such approval is required
by law or agreement.
The Committee may amend the terms of any Stock Option or other Award
theretofore granted, prospectively or retroactively, but no such amendment shall
impair the rights of any holder without the holder's consent except such an
amendment made to cause the Plan or Award to qualify for the exemption provided
by Rule 16b-3. The Committee may also substitute new Stock Options for
previously granted Stock Options, including previously granted Stock Options
having higher option prices.
Subject to the above provisions, the Board shall have authority to amend
the Plan to take into account changes in law and tax and accounting rules, as
well as other developments and to grant Awards which qualify for beneficial
treatment under such rules without stockholder approval.
SECTION 10. Unfunded Status of Plan.
It is presently intended that the Plan constitute an "unfunded" plan for
incentive and deferred compensation. The Committee may authorize the creation of
trusts or other arrangements to meet the obligations created under the Plan to
deliver Stock or make payments; provided, however, that unless the Committee
otherwise determines, the existence of such trusts or other arrangements is
consistent with the "unfunded" status of the Plan.
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<PAGE>
SECTION 11. General Provisions.
(a) The Committee may require each person purchasing or receiving shares
pursuant to an Award to represent to and agree with the Company in writing
that such person is acquiring the shares without a view to the distribution
thereof. The certificates for such shares may include any legend which the
Committee deems appropriate to reflect any restrictions on transfer.
All certificates for shares of Stock or other securities delivered under
the Plan shall be subject to such stock transfer orders and other
restrictions as the Committee may deem advisable under the rules,
regulations and other requirements of the Commission, any stock exchange
upon which the Stock is then listed and any applicable Federal or state
securities law, and the Committee may cause a legend or legends to be put
on any such certificates to make appropriate reference to such
restrictions.
(b) Nothing contained in the Plan shall prevent the Company or any subsidiary
or Affiliate from adopting other or additional compensation arrangements
for its employees.
(c) The adoption of the Plan shall not confer upon any employee any right to
continued employment nor shall it interfere in any way with the right of
the Company or any subsidiary or Affiliate to terminate the employment of
any employee at any time.
(d) No later than the date as of which an amount first becomes includible in
the gross income of the participant for Federal income tax purposes with
respect to any Award under the Plan, the participant shall pay to the
Company, or make arrangements satisfactory to the Company regarding the
payment of, any Federal, state, local or foreign taxes of any kind required
by law to be withheld with respect to such amount. Unless otherwise
determined by the Committee, withholding obligations may be settled with
Stock, including Stock that is part of the Award that gives rise to the
withholding requirement. The obligations of the Company under the Plan
shall be conditional on such payment or arrangements, and the Company, its
Subsidiaries and its Affiliates shall, to the extent permitted by law, have
the right to deduct any such taxes from any payment otherwise due to the
participant. The Committee may establish such procedures as it deems
appropriate, including the making of irrevocable elections, for the
settlement of withholding obligations with Stock.
(e) At the time of grant, the Committee may provide in connection with any
grant made under the Plan that the shares of Stock received as a result of
such grant shall be subject to a right of first refusal pursuant to which
the participant shall be required to offer to the Company any shares that
the participant wishes to sell at the then Fair Market Value of the Stock,
subject to such other terms and conditions as the Committee may specify at
the time of grant.
(f) The reinvestment of dividends in additional Restricted Stock at the time of
any dividend payment shall only be permissible if sufficient shares of
Stock are available under Section 3 for such reinvestment (taking into
account then outstanding Stock Options and other Awards).
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<PAGE>
(g) The Committee shall establish such procedures as it deems appropriate for a
participant to designate a beneficiary to whom any amounts payable in the
event of the participant's death are to be paid.
(h) The Plan and all Awards made and actions taken thereunder shall be governed
by and construed in accordance with the laws of the State of Delaware.
SECTION 12. Effective Date of Plan.
The Plan shall be effective on the date it is approved by the shareholders
of the Company.
SECTION 13. Director Stock Options.
(a) Each director of the Company who is not otherwise an employee of the
Company, any of its subsidiaries or Merrill Lynch Capital Partners, Inc.
shall be granted Non-Qualified Stock Options to purchase 10,000 shares of
Stock having an exercise price per share equal to the Fair Market Value of
the Stock on November 16, 1993. Any person who initially becomes a director
after November 16, 1993 shall automatically be awarded a grant of Non-
Qualified Stock Options to purchase 10,000 shares of Stock having an
exercise price equal to 100% of the Fair Market Value of the Stock as of
the date such person becomes a director. All Non-Qualified Stock Options
granted pursuant to this paragraph shall be exercisable in accordance with
the following schedule, if as of each such date such director is still a
director of the Company:
<TABLE>
<CAPTION>
Anniversary Date Cumulative Percentage
of Grant Exercisable
---------------- ---------------------
<S> <C>
First 20
Second 40
Third 60
Fourth 80
Fifth 100
</TABLE>
(b) An automatic director Stock Option shall be granted hereunder only if as of
each date of grant (or, in the case of any initial grant, from and after
the effective date of the Plan) the director (i) is not otherwise an
employee of the Company, any Affiliate or Merrill Lynch Capital Partners,
Inc., (ii) has not been an employee of the Company or any subsidiary for
any part of the preceding fiscal year, and (iii) has served on the Board
continuously since the commencement of his term.
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(c) Each holder of a Stock Option granted pursuant to this Section 13 shall
also have the rights specified in Section 5(k).
(d) In the event that the number of shares of Stock available for future grant
under the Plan is insufficient to make all automatic grants required to be
made on such date, then all non-employee directors entitled to a grant on
such date shall share ratably in the number of options on shares available
for grant under the Plan.
(e) The provisions of paragraph (a) of this Section 13 may not be amended more
often than once every six months. Except as expressly provided in this
Section 13, any Stock Option granted hereunder shall be subject to the
terms and conditions of the Plan as if the grant were made pursuant to
Section 5 hereof.
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EXHIBIT 10.4
BORG-WARNER SECURITY CORPORATION
PERFORMANCE SHARE PLAN
(As amended through July 8, 1997)
<PAGE>
TABLE OF CONTENTS
- -----------------
<TABLE>
<CAPTION>
<C> <C> <S> <C>
I. GENERAL.................................................... 1
1.1 Purpose.............................................. 1
1.2 Effective Date....................................... 1
II. DEFINITIONS................................................ 1
2.1 "Beneficiary"........................................ 1
2.2 "Board of Directors"................................. 1
2.3 "Change in Control".................................. 1
2.4 "Code"............................................... 2
2.5 "Committee".......................................... 2
2.6 "Common Stock"....................................... 2
2.7 "Company"............................................ 3
2.8 "Covered Employee"................................... 3
2.9 "Disability"......................................... 3
2.10 "Disinterested Person"............................... 3
2.11 "Eligibility Period"................................. 3
2.12 "Fair Market Value".................................. 3
2.13 "Normal Retirement".................................. 3
2.14 "Participant"........................................ 3
2.15 "Performance Goals".................................. 3
2.16 "Performance Period"................................. 3
2.17 "Performance Share".................................. 4
2.18 "Plan"............................................... 4
2.19 "Pro-rated" or "Pro-rata"............................ 4
III. ELIGIBILITY AND PARTICIPATION.............................. 4
3.1 Eligibility.......................................... 4
3.2 Participation in Performance Share Awards............ 4
IV. PLAN DESIGN................................................ 5
4.1 Eligibility Period................................... 5
4.2 Performance Period................................... 5
4.3 Performance Share Awards............................. 5
4.4 Performance Goals.................................... 5
4.5 Available Common Stock............................... 6
4.6 Adjustment to Shares................................. 6
4.7 Maximum Award........................................ 6
4.8 Committee Discretion to Adjust Awards................ 7
V. PAYMENT.................................................... 7
5.1 Committee Determination of Common Stock Payable...... 7
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<C> <C> <S> <C>
5.2 Timing and Form of Payment........................... 7
5.3 Distribution upon Termination of Employment.......... 8
5.4 Beneficiary Designation.............................. 9
5.5 Securities Exchange Act of 1934 Restrictions......... 9
VI. ADMINISTRATION............................................. 9
6.1 Committee............................................ 9
6.2 General Rights, Powers, and Duties of Committee...... 9
6.3 Information to be Furnished to Committee............. 10
6.4 Responsibility and Indemnification................... 10
VII. AMENDMENT AND TERMINATION.................................. 10
7.1 Amendment............................................ 10
7.2 Company's Right to Terminate......................... 11
VIII. MISCELLANEOUS.............................................. 11
8.1 No Implied Rights; Rights on Termination of Service.. 11
8.2 No Right to Company Assets........................... 11
8.3 No Employment Rights................................. 11
8.4 Other Benefits....................................... 11
8.5 Offset............................................... 11
8.6 Non-assignability.................................... 12
8.7 Notice............................................... 12
8.8 Governing Laws....................................... 12
8.9 Gender and Number.................................... 12
8.10 Severability......................................... 12
</TABLE>
ii
<PAGE>
I. GENERAL
1.1. Purpose. The purposes of the Plan are to retain officers and other key
employees, to support the achievement of the Company's strategic business
objectives, and to encourage increased ownership of Company stock by
officers and other key employees by providing to such persons competitive
long-term incentive opportunities that are linked to the profitability of
the Company's business and increases in stockholder value.
1.2. Effective Date. The Plan shall become effective as of January 1, 1996,
subject to its approval by the Company's stockholders.
II. DEFINITIONS
2.1 "Beneficiary" means the person or persons so designated by a Participant
pursuant to Section 5.4.
2.2 "Board of Directors" means the Board of Directors of the Company.
2.3 A "Change in Control" of the Company shall be deemed to have occurred upon
the happening of any of the following events:
(i) An acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange
Act of 1934 (the "Exchange Act")) (a "Person") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 50% or more of either (1) the then outstanding
shares of common stock of the Company (the "Outstanding Company
Common Stock") or (2) the combined voting power of the then
outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Company
Voting Securities"); excluding, however, the following: (1) any
acquisition directly from the Company, other than an acquisition by
virtue of the exercise of a conversion privilege unless the
security being so converted was itself acquired directly from the
Company, (2) any acquisition by the Company, (3) any acquisition by
any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the
Company or (4) any acquisition by any Person pursuant to a
transaction which complies with clauses (A), (B) and (C) of
subsection (iii) hereof; or
(ii) A change in the composition of the Board such that the individuals
who, as of July 8, 1997, constitute the Board (such Board shall be
hereinafter referred to as the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board; provided,
however, for purposes of this definition, that any individual who
becomes a member of the Board subsequent to such date, whose
election, or nomination for election by the Company's shareholders,
was approved by a vote of at least a majority of those individuals
who are members of the Board and who were also members of the
Incumbent Board (or deemed to be such pursuant to this proviso)
shall be considered as though such
<PAGE>
individual were a member of the Incumbent Board; but, provided
further, that any such individual whose initial assumption of
office occurs as a result of either an actual or threatened
election contest (as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act) or other actual
or threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board shall not be so considered as a
member of the Incumbent Board; or
(iii) The approval by the shareholders of the Company of a
reorganization, merger or consolidation or sale or other
disposition of all or substantially all of the assets of the
Company ("Corporate Transaction"); excluding, however, such a
Corporate Transaction pursuant to which (A) all or substantially
all of the individuals and entities who are the beneficial owners,
respectively, of the outstanding Company Common Stock and
Outstanding Company Voting Securities immediately prior to such
Corporate Transaction will beneficially own, directly or
indirectly, more than 60% of, respectively, the outstanding shares
of common stock, and the combined voting power of the then
outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation
resulting from such Corporate Transaction (including, without
limitation, a corporation which as a result of such transaction
owns the Company or all or substantially all of the Company's
assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership, immediately
prior to such Corporate Transaction, of the outstanding Company
Common Stock and Outstanding Company Voting Securities, as the case
may be, (B) no Person (other than the Company, any employee benefit
plan (or related trust) sponsored or maintained by the Company or
any corporation controlled by the Company or such corporation
resulting from such Corporate Transaction) will beneficially own,
directly or indirectly, 20% or more of, respectively, the
outstanding shares of common stock of the corporation resulting
from such Corporate Transaction or the combined voting power of the
outstanding voting securities of such corporation entitled to vote
generally in the election of directors except to the extent that
such ownership existed with respect to the Company prior to the
Corporate Transaction and (C) individuals who were members of the
Incumbent Board will constitute at least a majority of the members
of the board of directors of the corporation resulting from such
Corporate Transaction; or
(iv) The approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
2.4 "Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor thereto.
2.5 "Committee" means the committee referred to in Section 6.1.
2.6 "Common Stock" means common stock, par value $.01 per share, of the
Company.
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2.7 "Company" means Borg-Warner Security Corporation, a Delaware corporation.
2.8 "Covered Employee" means any Participant who is or may be a "covered
employee," within the meaning of Section 162(m)(3) of the Code, in the
year in which the payment of any shares of Common Stock in satisfaction of
a Performance Share award will be taxable to such Participant.
2.9 "Disability" shall have the same meaning as under the Company-sponsored
long-term disability plan under which the applicable Participant is then
eligible to participate.
2.10 "Disinterested Person" means a member of the Board of Directors who
qualifies as (i) a "disinterested person," as defined in Rule 16b-3(c)(2),
as promulgated by the Securities Exchange Commission under the Exchange
Act, or any successor definition adopted by the Securities Exchange
Commission, and as (ii) an "outside director," as defined in Section
1.162-27(e)(3) of the Treasury Regulations issued under Section 162(m) of
the Code, or any successor definition adopted by the Department of the
Treasury.
2.11 "Eligibility Period" means a period, as determined by the Committee
pursuant to Section 4.1.
2.12 "Fair Market Value" means as of any given date the mean between the
highest and lowest reported sales prices of Common Stock on the New York
Stock Exchange Composite Tape or, if not listed on such exchange, on any
other national securities exchange on which such Common Stock is listed or
on NASDAQ. If there is no regular public trading market for such Common
Stock, the Fair Market Value of such Common Stock shall be determined by
the Committee in good faith.
2.13 "Normal Retirement" means termination of employment after attainment of
age 65. However, the Committee, within its discretion, may determine that
a Participant who terminates employment prior to age 65 has terminated by
virtue of Normal Retirement.
2.14 "Participant" means a person who is designated, pursuant to Article III,
to be eligible to receive benefits under the Plan.
2.15 "Performance Goals" means the performance standards established by the
Committee pursuant to Section 4.4.
2.16 "Performance Period" means a period of service, as determined pursuant to
Section 4.2, over which the extent of achievement of established
Performance Goals will be measured. For purposes of applying to Covered
Employees the various rules of the performance-based compensation
exemption under Section 162(m)(4)(C) of the Code and the Treasury
Regulations issued thereunder, the Performance Period shall be the "period
of service to which the Performance Goals relate" (as defined in Treasury
Regulation Section 1.162-27(e)(2)).
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2.17 "Performance Share" means an award, designated in terms of a share of
Common Stock, granted pursuant to the Plan.
2.18 "Plan" means this Borg-Warner Security Corporation Performance Share
Plan, as amended from time to time.
2.19 "Pro-rated" or "Pro-rata" means, for purposes of determining the amount of
Common Stock payable to a Participant whose eligibility to participate in
the Plan with respect to an Eligibility Period ceases prior to the end of
such Eligibility Period for any of the reasons described in Section 3.2 or
subsection (a), (b), or (c) of Section 5.3, the percentage to be applied
to the Common Stock that would have been payable at the end of the
Performance Period to such Participant if he had been eligible to
participate for the entire Eligibility Period. Such percentage shall equal
the number of months (rounded to the nearest whole month) of the
Eligibility Period during which the Participant was designated by the
Committee as eligible to participate in the Plan divided by the number of
months (rounded to the nearest whole month) in such Eligibility Period. A
Participant who, pursuant to Section 3.2, is designated as eligible to
participate in the Plan after the applicable Eligibility Period has
commenced, shall, for purposes of this Section 2.18, be deemed to have
been eligible as of the beginning of such Eligibility Period; provided,
however, that the Committee shall, in accordance with its authority under
Section 4.8, have the discretion to reduce the Pro-rated Common Stock
award that is otherwise payable to such Participant to account for such
late commencement of participation.
III. ELIGIBILITY AND PARTICIPATION
3.1 Eligibility. Participation in the Plan shall be limited to officers and
other key employees of the Company or any of its subsidiaries or other
affiliates who are designated to be eligible by the Committee.
3.2 Participation in Performance Share Awards. The Committee will determine
the persons who will participate for each Eligibility Period under the
Plan. Subject to Section 4.3, after an Eligibility Period has commenced,
persons may be designated as eligible to participate in the Plan with
respect to such Eligibility Period. Persons who have been selected for
participation in a given Eligibility Period may subsequently be designated
as ineligible to participate in the Plan for the remainder of such
Eligibility Period. Such persons may remain eligible to receive Pro-rated
distributions of Common Stock with respect to such Eligibility Period, as
determined by the Committee in its sole discretion. The grant of
Performance Shares with respect to a Performance Period contained in any
Eligibility Period does not guarantee participation in subsequent
Eligibility Periods.
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<PAGE>
IV. PLAN DESIGN
4.1 Eligibility Period. An Eligibility Period is a certain period of time, as
determined by the Committee, over which eligibility to receive benefits
under the Plan shall be measured. The initial Eligibility Period under the
Plan shall begin on January 1, 1996 and terminate on December 31, 1998.
Subsequent Eligibility Periods under the Plans shall commence and
terminate as determined by the Committee in its sole discretion.
4.2 Performance Period. Each Eligibility Period under the Plan shall include a
Performance Period which shall be a specified period of service over which
the achievement of applicable Performance Goals will be measured. The
initial Performance Period under the Plan shall begin on January 1, 1998
and terminate on December 31, 1998. Subsequent Performance Periods shall
commence and terminate as determined by the Committee; provided that each
such Performance Period shall commence coincident with or after the
commencement of the corresponding Eligibility Period and shall terminate
coincident with or prior to the termination of the corresponding
Eligibility Period.
4.3 Performance Share Awards. On or about the commencement of each Eligibility
Period under the Plan, the Committee shall establish and grant Performance
Shares to each Participant in the Plan for such Eligibility Period. The
Committee may also grant Performance Shares to persons determined to be
eligible for participation after the commencement of any Eligibility
Period. Notwithstanding the foregoing, no Performance Shares shall be
granted to Covered Employees on or after the 90th day of the Performance
Period contained within the applicable Eligibility Period or, if earlier,
after 25% of such Performance Period has elapsed. Performance Shares must
be granted to Covered Employees at a time when the outcome of the
Performance Goals established or to be established for the applicable
Performance Period is substantially uncertain. The Performance Shares
granted to any Covered Employee and the terms and conditions applicable to
such Performance Shares must be finalized in writing by the Committee on
or prior to the applicable adjustment deadline described in the preceding
sentences. Each grant of Performance Shares under the Plan shall be
evidenced by a written "Notice of Award," which shall be signed by an
authorized officer of the Company and by the Participant and shall contain
such terms and conditions as are approved by the Committee. Such terms and
conditions need not be the same in all cases.
4.4 Performance Goals.
(a) Performance Goals with respect to each Performance Period shall be
established by the Committee. The Committee may in its discretion
adjust the terms of such Performance Goals; provided that Performance
Goals applied to Covered Employees ("Covered Employees' Performance
Goals") shall not be adjusted on or after the 90th day of the
applicable Performance Period or, if earlier, after 25% of the
applicable Performance Period has elapsed. No Covered Employees'
Performance Goals shall be adjusted at a time when the outcome of
such Performance Goals is no longer substantially uncertain.
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<PAGE>
Covered Employees' Performance Goals must be finalized in writing by
the Committee on or prior to the applicable adjustment deadline
described in the preceding sentences.
(b) The Performance Goals set by the Committee shall be based on
specified criteria as determined by the Committee, which shall
specify the manner in which such Performance Goals shall be
calculated. Covered Employees' Performance Goals shall be based on
objective business criteria, which shall include one or more of the
following: earnings per share, total shareholder return, return on
equity, return on capital, market share, stock price, sales, costs,
net income, cash flow, retained earnings, results of customer
satisfaction surveys, customer retention, employee retention,
aggregate product price and other product price measures, safety
record, service reliability, and operating and maintenance cost
management. Performance Goals also may be based upon the attainment
of specified levels of performance of the Company under one or more
of the measures described above relative to the performance of other
corporations.
(c) All of the provisions of this Section 4.4 are subject to the
requirement that all Covered Employees' Performance Goals shall be
objective performance goals satisfying the requirement for
"performance-based compensation" within the meaning of Section
162(m)(4) of the Code and the Treasury Regulations issued thereunder.
(d) Nothwithstanding any other provision of the Plan to the contrary, in
the event of a Change in Control, any award of Performance Shares
outstanding as of the date such Change in Control is determined to
have occurred and not then exercisable and vested shall become fully
exercisable and vested to the fullest extent of the original grant as
though all Performance Goals had been satisfied.
4.5 Available Common Stock. The maximum number of shares of Common Stock which
shall be available for distribution in satisfaction of awards under the
Plan during its term shall not exceed 400,000, subject to adjustment as
provided in Section 4.6. The shares of Common Stock available for issuance
under the Plan may be authorized and unissued shares or treasury shares.
4.6 Adjustment to Shares. In the event of any merger, reorganization,
consolidation, recapitalization, stock dividend, stock split,
extraordinary distribution with respect to Common Stock or other change in
corporate structure affecting such Common Stock, the Committee may make
such substitution or adjustments in the aggregate number and kind of
shares reserved for issuance under the Plan or in the number and kind of
shares subject to outstanding Performance Share grants under the Plan. The
Committee shall make such substitutions or adjustments as in its
discretion it determines to be appropriate and equitable to prevent
dilution or enlargement of rights hereunder; provided, however, that the
number of shares of Common Stock subject to any Performance Share award
shall always be a whole number.
4.7 Maximum Award. The maximum number of shares of Common Stock that may be
issued to any Covered Employee with respect to any Eligibility Period
pursuant to any Performance
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<PAGE>
Share award is 95,000 (subject to adjustment as provided in Section 4.6).
This limit includes any portion or amount of Common Stock that is withheld
for taxes (as described in Section 5.2).
4.8 Committee Discretion to Adjust Awards. At any time prior to the time the
Committee determines, pursuant to Section 5.1, the amount of shares of
Common Stock that are to be paid to any Participant in satisfaction of a
Performance Share award hereunder, the Committee shall have the authority
to modify, amend, or adjust the terms and conditions of such Performance
Share award, the terms and conditions of the corresponding Performance
Goals, and/or the amount of Common Stock payable. However, the Committee
shall have no authority to increase directly or indirectly or to otherwise
adjust upwards the amount of Common Stock payable to a Covered Employee
with respect to a particular Performance Share award or to take any other
action to the extent that such action or the Committee's ability to take
such action would cause any payment under the Plan to any Covered Employee
to fail to qualify as "performance-based compensation" within the meaning
of Code Section 162(m)(4) and the Treasury Regulations issued thereunder.
V. PAYMENT
5.1 Committee Determination of Common Stock Payable. After a Performance
Period has ended, each Participant who has been granted Performance Shares
and satisfied the Performance Goals with respect to such Performance
Period shall be entitled to receive a specified percentage of the value
thereof in shares of Common Stock as determined by the Committee. The
Committee shall determine the extent to which the Performance Goals set
pursuant to Section 4.4 have been met, the applicable percentage (which
may exceed 100%) to be applied, and applying such percentage, the number
of shares of Common Stock to be received by the Participant (as Pro-rated
in accordance with Sections 2.18, 3.2, and/or 5.3, if applicable). With
respect to Performance Shares granted to Covered Employees, no payment of
Common Stock shall be made hereunder prior to written certification by the
Committee that the applicable Performance Goal or Goals have been
satisfied to a particular extent for the Performance Period, and no Common
Stock shall be awarded unless a preestablished minimum level of
achievement of the Performance Goals has been met. The date on which the
Committee determines the number of shares of Common Stock payable to a
Participant shall be the date on which such Participant will become the
owner of such shares, regardless of when the underlying stock certificate
or certificates are actually delivered to such Participant, and such
Participant will enjoy all rights of ownership of such shares of Common
Stock as of that date (the "Ownership Date").
5.2 Timing and Form of Payment. Shares of Common Stock payable to Participants
pursuant to Section 5.1 shall be distributed as follows:
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<PAGE>
(a) Shares of Common Stock to be distributed shall be converted to a
dollar amount equal to the number of such shares multiplied by the
Fair Market Value of Common Stock on the Ownership Date.
(b) The Company shall have the right to deduct from all Common Stock
distributions hereunder any federal, state, or local taxes required
by law to be withheld with respect to such distributions.
Accordingly, the amount of federal, state, and/or local taxes
required to be withheld by the Company with respect to the dollar
amount determined pursuant to subsection (a) above shall, for
purposes of satisfying these withholding obligations, be deducted
from this dollar amount and paid by the Company to the appropriate
taxing authorities.
(c) The remainder of this dollar amount shall be paid to the Participant
in shares of Common Stock as soon as practicable following the end of
the Performance Period. The number of shares distributed shall be
determined by dividing the remaining dollar amount by the Fair Market
Value of Common Stock on the Ownership Date.
5.3 Distribution upon Termination of Employment.
(a) Death. If a Participant in the Plan dies before the end of an
Eligibility Period for which Performance Shares have been granted to
him, such Participant's Beneficiary will be eligible for a Pro-rated
portion of the shares of Common Stock that would have otherwise been
payable to the Participant after the end of the applicable
Performance Period. This distribution, if any is payable, will be
made to the Beneficiary in the same form and at the same time that
all other Participants under the Plan receive their distributions
with respect to that Performance Period.
(b) Disability. If a Participant in the Plan, upon becoming Disabled,
terminates employment with the Company before the end of an
Eligibility Period for which Performance Shares have been granted to
him, the Participant will be eligible for a Pro-rated portion of the
shares of Common Stock that would have otherwise been payable to him
after the end of the applicable Performance Period. This
distribution, if any is payable, will be made to the Participant in
the same form and at the same time that all other Participants under
the Plan receive their distributions with respect to that Performance
Period.
(c) Normal Retirement. If a Participant in the Plan terminates employment
upon attaining Normal Retirement before the end of an Eligibility
Period for which Performance Shares have been granted to him, the
Participant will be eligible for a Pro-rated portion of the shares of
Common Stock that would have otherwise been payable to him after the
end of the applicable Performance Period. This distribution, if any
is payable, will be made to the Participant in the same form and at
the same time that all other Participants under the Plan receive
their distributions with respect to that Performance Period.
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<PAGE>
(d) Other Termination of Employment. If, before the end of an Eligibility
Period for which Performance Shares have been granted to him, a
Participant in the Plan incurs a termination of employment for any
reason other than those specified in subsections (a)-(c) of this
Section 5.3, whether voluntary or involuntary, he shall forfeit all
rights to receive any payment of shares of Common Stock with respect
to such Eligibility Period.
5.4. Beneficiary Designation. A Participant may designate a Beneficiary who is
to receive, upon his death, the distributions that otherwise would have
been paid to him. All designations shall be in writing and shall be
effective only if and when delivered to the Director of the Compensation
Department of the Company during the lifetime of the Participant. If a
Participant designates a Beneficiary without providing in the designation
that the Beneficiary must be living at the time of each distribution, the
designation shall vest in all of the distribution whether payable before
or after the Beneficiary's death, and any distributions remaining upon the
Beneficiary's death shall be made to the Beneficiary's estate.
A Participant may from time to time during his lifetime change his
Beneficiary by a written instrument delivered to the Director of the
Compensation Department of the Company. In the event a Participant shall
not designate a Beneficiary as aforesaid, or if for any reasons such
designation shall be ineffective, in whole or in part, the distribution
that otherwise would have been paid to such Participant shall be paid to
his estate, and in such event the term "Beneficiary" shall include his
estate.
5.5. Securities Exchange Act of 1934 Restrictions. Notwithstanding any other
provisions of the Plan, to the extent necessary to exempt Common Stock
distributions under the Plan from the short-swing liability provisions of
Section 16(b) of the Securities Exchange Act of 1934 by complying with
Rule 16b-3 or any other applicable rule or regulation thereunder, Common
Stock acquired by Participants in satisfaction of Performance Share awards
hereunder must not be sold for at least six months after its acquisition,
except in the case of the acquisition of such Common Stock hereunder upon
the Disability or death of a Participant.
VI. ADMINISTRATION
6.1 Committee. The Plan shall be administered by the Compensation Committee of
the Board of Directors, or such other Committee of the Board of Directors,
composed exclusively of not less than two Disinterested Persons, each of
whom shall be appointed by and serve at the pleasure of the Board of
Directors. The Committee may designate person(s) who are Company employees
to oversee the day to day administration of the Plan.
6.2 General Rights, Powers, and Duties of Committee. The Committee shall be
responsible for the management, operation, and administration of the Plan.
Subject to the limitations contained in Section 4.8 and to the remaining
terms of the Plan, the Committee shall, in addition to those provided
elsewhere in the Plan, have the following powers, rights, and duties:
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(a) To maintain records concerning the Plan sufficient to prepare
reports, returns and other information required by the Plan or by
law;
(b) To direct the payment of benefits under the Plan, and to give such
other directions and instructions as may be necessary for the proper
administration of the Plan; and
(c) To be responsible for the preparation, filing and disclosure on
behalf of the Plan of such documents and reports as are required by
any applicable federal or state law.
The Committee shall also have the authority to adopt, alter, and repeal
such administrative rules, guidelines, and practices governing the Plan as
it shall, from time to time, deem advisable, to interpret the terms and
provisions of the Plan and any award issued under the Plan (and any Notice
of Award or other agreement relating thereto), and to otherwise supervise
the administration of the Plan.
Any determination made by the Committee pursuant to the provisions of the
Plan with respect to any grants, payments, or other transactions under the
Plan shall be made in the sole discretion of the Committee at the time of
the grant, payment, or other transaction or, unless in contravention of
any express term of the Plan, at any time thereafter. All decisions made
by the Committee pursuant to the provisions of the Plan shall be final and
binding on all persons, including the Company and Plan Participants.
6.3 Information to be Furnished to Committee. Participants and their
Beneficiaries shall furnish to the Committee such evidence, data, or
information and execute such documents as the Committee requests.
6.4 Responsibility and Indemnification. No member of the Committee or of the
Board of Directors or any person who is designated to oversee the day to
day administration of the Plan (as provided in Section 6.1) shall be
liable to any person for any action taken or omitted in connection with
the administration of this Plan unless attributable to his own fraud or
willful misconduct; nor shall the Company be liable to any person for any
such action unless attributable to fraud or willful misconduct on the part
of a director, officer, or employee of the Company within the scope of his
Company duties. Each member of the Committee shall be indemnified and held
harmless by the Company for any liability arising out of the
administration of the Plan, to the maximum extent permitted by law.
VII. AMENDMENT AND TERMINATION
7.1 Amendment. The Plan may be amended in whole or in part by the Company, by
action of the Board of Directors, at any time. The Committee reserves the
unilateral right to change any rule under the Plan if it deems such a
change necessary to avoid the application of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), to the Plan. No
amendment
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<PAGE>
shall be made without the approval of the Company's stockholders to the
extent such approval is required by law or by agreement.
7.2 Company's Right to Terminate. The Company reserves the sole right to
terminate the Plan, by action of the Board of Directors, at any time.
VIII. MISCELLANEOUS
8.1 No Implied Rights; Rights on Termination of Service. Neither the
establishment of the Plan nor any amendment thereof shall be construed as
giving any Participant, Beneficiary, or any other person any legal or
equitable right unless such right shall be specifically provided for in
the Plan or conferred by specific action of the Committee in accordance
with the terms and provisions of the Plan. Except as expressly provided in
this Plan, the Company shall not be required or be liable to make any
payment under the Plan.
8.2 No Right to Company Assets. Neither the Participant nor any other person
shall acquire, by reason of the Plan, any right in or title to any assets,
funds or property of the Company whatsoever including, without limiting
the generality of the foregoing, any specific funds, assets, or other
property which the Company, in its sole discretion, may set aside in
anticipation of a liability hereunder. Any benefits which become payable
hereunder shall be paid from the general assets of the Company. The
Participant shall have only a contractual right to the amounts, if any,
payable hereunder unsecured by any asset of the Company. Nothing contained
in the Plan constitutes a guarantee by the Company that the assets of the
Company shall be sufficient to pay any benefit to any person.
8.3 No Employment Rights. Nothing herein shall constitute a contract of
employment or of continuing service or in any manner obligate the Company
to continue the services of the Participant, shall obligate the
Participant to continue in the service of the Company, or shall serve as a
limitation of the right of the Company to discharge any of its employees,
with or without cause. Nothing herein shall be construed as fixing or
regulating the compensation payable to the Participant.
8.4 Other Benefits. No Common Stock paid under the Plan shall be considered
compensation for purposes of computing benefits under any "employee
benefit plan" (as defined in Section 3(3) of ERISA) of the Company nor
affect any benefits or compensation under any other benefit or
compensation plan of the Company now or subsequently in effect (except as
provided to the contrary in such Company plan).
8.5 Offset. If, at the time payments are to be made hereunder, the
Participant or the Beneficiary or both are indebted or obligated to the
Company, then the payments under the Plan remaining to be made to the
Participant or the Beneficiary or both may, at the discretion of the
Company, be reduced by the amount of such indebtedness or obligation,
provided, however, that an
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election by the Company not to reduce any such payment or payments shall
not constitute a waiver of its claim for such indebtedness or obligation.
8.6 Non-assignability. Neither the Participant nor any other person shall
have any voluntary or involuntary right to commute, sell, assign, pledge,
anticipate, mortgage, or otherwise encumber, transfer, hypothecate, or
convey in advance of actual receipt the amounts, if any payable hereunder
or any part thereof, which are expressly declared to be unassignable and
non-transferable. No part of the amounts payable prior to actual payment
shall be subject to seizure or sequestration for the payment of any debts,
judgments, alimony, or separate maintenance owed by the Participant or any
other person, or be transferable by operation of law in the event of the
Participant's or any other person's bankruptcy or insolvency.
8.7 Notice. Any notice required or permitted to be given under the Plan shall
be sufficient if in writing and hand delivered, sent by registered or
certified mail, or sent by facsimile to the Company at its principal
office, directed to the attention of the Committee c/o the Director of the
Compensation Department of the Company. Such notice shall be deemed given
as of the date of delivery or, if delivery is made by mail or facsimile,
as of the date shown on the postmark, facsimile, or the receipt for
registration or certification.
8.8 Governing Laws. The Plan and all awards made and actions taken under the
Plan shall be governed and construed according to the laws of the State of
Delaware.
8.9 Gender and Number. Where appropriate, references in this Plan to the
masculine shall include the feminine, and references to the singular shall
include the plural.
8.10 Severability. In the event any provision of the Plan shall be held
legally invalid for any reasons, the illegality or invalidity shall not
affect the remaining parts of the Plan, and the Plan shall be construed
and enforced as if the illegal or invalid provision had not been included.
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EXHIBIT 10.5
BORG-WARNER SECURITY CORPORATION
EXECUTIVE OFFICER INCENTIVE PLAN
(Effective January 1, 1997)
<PAGE>
ARTICLE I GENERAL
1.1. Purpose. The purpose of the Plan is to motivate and reward
executive participants competitively for the attainment of specific annual
performance objectives. The Plan is intended to attract and retain high-quality
executive participants by linking a significant portion of their annual
compensation to the accomplishment of financial and strategic goals of the
Company.
1.2. Effective Date. The Plan shall become effective as of January 1,
1997, subject to its approval by the Company's stockholders.
ARTICLE II DEFINITIONS
2.1. "Annual Incentive Award" means the cash amounts established by the
Committee pursuant to Section 4.1.
2.2. "Board of Directors" means the Board of Directors of the Company.
2.3. "Code" means the Internal Revenue Code of 1986, as amended from time
to time, and any successor thereto.
2.4. "Commission" means the Securities and Exchange Commission or any
successor agency.
2.5. "Committee" means the committee referred to in Section 6.1.
2.6. "Company" means Borg-Warner Security Corporation, a Delaware
corporation.
2.7. "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and any successor thereto.
2.8. "Fair Market Value" means, as of any given date, the mean between
the highest and lowest reported sales prices of the Stock on the New York Stock
Exchange Composite Tape or, if not listed on such exchange, on any other
national securities exchange on which the Stock is listed or on NASDAQ. If there
is no regular public trading market for such Stock, the Fair Market Value of the
Stock shall be determined by the Committee in good faith.
2.9. "Participant" means a person who is designated, pursuant to Section
3.1, to be eligible to receive benefits under the Plan.
2.10. "Performance Goals" means the performance standards established by
the Committee pursuant to Section 4.2.
2.11. "Performance Period" means for each Participant, the period
beginning on the first day of the applicable calendar year that said Participant
was designated by the Company to participate in the Plan and ending on December
31st of that calendar year. For purposes of applying to Covered Employees (as
defined in the Code) the various rules of the performance-based
<PAGE>
compensation exemption under Section 162(m)(4)(C) of the Code and the Treasury
Regulations issued thereunder, the Performance Period shall be the "period of
service to which the Performance Goals relate" (as defined in Treasury
Regulation Section 1.162-27(e)(2)).
2.12. "Plan" means this Borg-Warner Security Corporation Executive Officer
Incentive Plan, as amended from time to time.
2.13. "Stock" means common stock, par value $.01 per share, of the
Company.
2.14. "Stock Option" means a non-qualified stock option granted under
Article V.
ARTICLE III ELIGIBILITY AND PARTICIPATION
3.1. Eligibility. Participation in the Plan shall be limited to
executive officers of the Company who are designated to be eligible by the
Committee.
ARTICLE IV ANNUAL INCENTIVE AWARDS
4.1. Annual Incentive Award.
(a) On or about the commencement of each Performance Period under the
Plan, the Committee shall establish an Annual Incentive Award for each
Participant for such Performance Period. Each Annual Incentive Award may have
multiple potential award payouts. Each such award payout will correspond with a
different Performance Goal. The level of attainment of a Participant's
Performance Goals determines the amount of the award that the Company will pay
such Participant. Only one Annual Incentive Award shall be established for any
one Participant in any Performance Period.
(b) All Annual Incentive Awards and corresponding Performance Goals
shall be established:
(i) For persons designated by the Company to participate in the
Plan on or before the first day of the respective calendar year, before April
1st of the Performance Period.
(ii) For persons designated by the Company to participate in the
Plan after the first day of the respective calendar year, before the day
representing one-fourth of the number of days from the day said Participant was
first so designated by the Company during the respective calendar year to the
subsequent December 31st.
In all cases, at such time that the Annual Incentive Awards are
established, the outcome of the corresponding Performance Goals must be
substantially uncertain. Performance Goals must be finalized in writing by the
Committee on or prior to the applicable deadline described in the preceding
sentences.
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<PAGE>
4.2. Performance Goals.
(a) The Performance Goals set by the Committee shall be based on
specified criteria, as determined by the Committee and shall be based on
objective business criteria. The Committee shall establish specific performance
targets with respect to the chosen business criteria. The business criteria
shall include one or more of the following: earnings per share, total
shareholder return, return on equity, return on capital, market share, stock
price, sales, costs, net income, cash flow, retained earnings, results of
customer satisfaction surveys, shareholder value, aggregate product price and
other product price measures, safety record, service reliability, operating and
maintenance cost management, and other quantifiable business criteria.
Performance Goals also may be based upon the attainment of specified levels of
performance of the Company under one or more of the measures described above
relative to the performance of other corporations. At the time of establishing
Performance Goals, the Committee shall specify the manner in which such
Performance Goals shall be calculated. In so doing, the Committee may exclude
the impact of certain specified events from the calculation of the Performance
Goal.
(b) For all Covered Employees, all of the provisions of this Section
4.2 are subject to the requirement that all Performance Goals shall be objective
performance goals satisfying the requirement for "performance-based
compensation" within the meaning of Section 162(m)(4) of the Code and the
Treasury Regulations issued thereunder.
4.3. Maximum Cash Payment Under an Annual Incentive Award. The maximum
Annual Incentive Award cash payment that may be made to any Participant with
respect to any Performance Period pursuant to this Plan is two times the
Participant's gross base salary for the Performance Period.
4.4. Committee Discretion to Adjust Awards. At any time prior to the time
the Committee determines, pursuant to Section 4.6, the amount of the Annual
Incentive Award to be paid to a Participant hereunder, the Committee shall have
the authority to modify, amend, or adjust the terms and conditions of such
Annual Incentive Awards, the terms and conditions of the corresponding
Performance Goals, the manner in which such Performance Goals are calculated
and/or the amount of Annual Incentive Awards payable. However, the Committee
shall have no authority to increase directly or indirectly or to otherwise
adjust upwards the amount of Annual Incentive Awards payable to a Covered
Employee or to take any other action to the extent that such action or the
Committee's ability to take such action would cause any payment under the Plan
to fail to qualify as "performance-based compensation" within the meaning of
Code Section 162(m)(4) and the Treasury Regulations issued thereunder.
4.5. Conflict with Employment Agreements. If the Plan conflicts with any
employment agreement between the Company and a Participant, then the terms of
the Plan shall control.
4.6. Committee Determination of Annual Incentive Awards Payable. After a
Performance Period has ended, each Participant shall be entitled to receive the
Annual Incentive Award as
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determined by the Committee. The Committee shall determine the extent to which
(i) the Performance Goals set pursuant to Section 4.2 have been met and (ii) any
Annual Incentive Awards are payable. No cash payment shall be made hereunder
prior to written certification by the Committee that the applicable Performance
Goal(s) have been satisfied to a particular extent for the Performance Period.
4.7. Settlement of Annual Incentive Award. The Company shall pay to each
Participant the cash amount determined by the Committee pursuant to Section 4.6
as soon as practicable following such determination; provided that the Company
shall have the right to deduct from all payments of Annual Incentive Awards
hereunder any federal, state, or local taxes required by law to be withheld with
respect to such distributions and pay the applicable amounts to the appropriate
taxing authorities.
4.8. Distribution upon Termination of Employment. If a Participant's
employment terminates prior to the end of the Performance Period, such
Participant will be eligible for a pro-rated portion of the Annual Incentive
Award that would have otherwise been payable to the Participant after the end of
the applicable Performance Period based upon the number of days that Participant
is employed during the applicable Performance Period. Any such distribution will
be made to the Participant in the same form and at the same time that all other
Participants under the Plan receive their distributions with respect to that
Performance Period unless otherwise determined by the Committee.
ARTICLE V STOCK OPTION AWARDS
5.1. Stock Options Subject to Plan.
(a) Subject to adjustment as provided herein, the total number of
shares of stock options of the Company available for grant under the Plan shall
be 150,000, provided that no "Covered Employee" (as such term is defined in
Section 162(m) of the Code) shall be granted more than 136,800 stock options in
any taxable year. Shares subject to an award under the Plan may be authorized
and unissued shares or may be treasury shares.
(b) If any Stock Option terminates without being exercised, shares
subject to such Awards shall again be available for distribution in connection
with Awards under the Plan.
(c) In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, stock split, extraordinary distribution with
respect to the Stock or other change in corporate structure affecting the Stock,
the Committee or Board of Directors may make such substitution or adjustments in
the aggregate number and kind of shares reserved for issuance under the Plan, in
the number, kind and option price of shares subject to outstanding Stock Options
granted under the Plan and/or such other substitution or adjustments in the
consideration receivable upon exercise as it may determine to be appropriate in
its sole discretion; provided, however, that the number of shares subject to any
Stock Option shall always be a whole number.
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<PAGE>
(d) Stock Options may be granted alone or in addition to other Annual
Incentive Awards granted under the Plan.
5.2. Stock Option Agreements.
Stock Options shall be evidenced by option agreements, the terms and
provisions of which may differ. The grant of a Stock Option shall occur on the
date the committee by resolution selects an individual to be a participant in
any grant of a Stock Option, determines the number of shares of Stock to be
subject to such Stock Option to be granted to such individual and specifies the
terms and provisions of the Stock Option. The Company shall notify a participant
of any grant of a Stock Option, and a written option agreement or agreements
shall be duly executed and delivered by the Company to the participant. Such
agreement or agreements shall become effective upon execution by the
participant.
Stock Options granted under the Plan shall be subject to the following
terms and conditions and shall contain such additional terms and conditions as
the Committee shall deem desirable:
(a) Option Price. The option price per share of Stock purchasable under a
Stock Option shall be determined by the Committee and set forth in the
option agreement and shall not be less than the Fair Market Value of
the Stock subject to the Stock Option on the date of grant.
(b) Option Term. The term of each Stock Option shall be fixed by the
Committee, but no Stock Option shall be exercisable more than 10 years
after the date the Stock Option is granted.
ARTICLE VI ADMINISTRATION
6.1. Committee. The Plan shall be administered by the Compensation
Committee of the Board of Directors, or such other Committee of the Board of
Directors, composed exclusively of not less than two outside directors, as such
term is used in section 162(m) of the Code, and non-employee directors, as such
term is defined in Rule 16b-3(b)(3) promulgated by the Commission under the
Exchange Act (or any successor definition promulgated by the Commission), each
of whom shall be appointed by and serve at the pleasure of the Board of
Directors. The Committee may designate person(s) who are Company employees to
oversee the day to day administration of the Plan.
6.2. General Rights, Powers, and Duties of Committee. The Committee will
be responsible for the management, operation, and administration of the Plan.
Subject to the limitations contained in Section 4.4 and to the remaining terms
of the Plan, the Committee will have the following powers, rights and duties in
addition to those provided elsewhere in the Plan:
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<PAGE>
(a) To maintain records concerning the Plan sufficient to prepare
reports, returns and other information required by the Plan or by law;
(b) To direct the payment of awards under the Plan, and to give such
other directions and instructions as may be necessary for the proper
administration of the Plan; and
(c) To be responsible for the preparation, filing and disclosure on
behalf of the Plan of such documents and reports as are required by any
applicable federal or state law.
The Committee will also have the authority to adopt, alter and repeal such
administrative rules, guidelines, and practices governing the Plan as it may,
from time to time, deem advisable, to interpret the terms and provisions of the
Plan and any award issued under the Plan (and any other agreement relating
thereto), and to otherwise supervise the administration of the Plan.
Any determination made by the Committee pursuant to the provisions of the
Plan with respect to any grants, payments or other transactions under the Plan
shall be made in the sole discretion of the Committee at the time of the grant,
payment or other transaction or, unless in contravention of any express term of
the Plan, at any time thereafter. All decisions made by the Committee pursuant
to the provisions of the Plan shall be final and binding on all persons,
including the Company and Participants.
6.3. Information to be Furnished to Committee. Participants and their
beneficiaries shall furnish to the Committee such necessary evidence, data or
information and execute such documents as the Committee requests.
6.4. Responsibility and Indemnification. No member of the Committee or of
the Board of Directors or any person who is designated to oversee the day to day
administration of the Plan (as provided in Section 6.1) shall be liable to any
person for any action taken or omitted in connection with the administration of
this Plan unless attributable to his own fraud or willful misconduct; nor shall
the Company be liable to any person for any such action unless attributable to
fraud or willful misconduct on the part of a director, officer, or employee of
the Company within the scope of his Company duties. Each member of the Committee
shall be indemnified and held harmless by the Company for any liability arising
out of the administration of the Plan, to the maximum extent permitted by law.
ARTICLE VII AMENDMENT AND TERMINATION
7.1. Amendment. The Plan may be amended in whole or in part by the
Company, by action of the Board of Directors, at any time. The Committee
reserves the unilateral right to change any rule under the Plan if it deems such
a change necessary to avoid the application of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), to the Plan. No amendment shall be
made without the approval of the Company's stockholders to the extent such
approval is required by law or by agreement.
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<PAGE>
7.2. Company's Right to Terminate. The Company reserves the sole right to
terminate the Plan, by action of the Board of Directors, at any time.
ARTICLE VIII MISCELLANEOUS
8.1. No Implied Rights; Rights on Termination of Service. Neither the
establishment of the Plan nor any amendment thereof shall be construed as giving
any Participant or any other person any legal or equitable right unless such
right shall be specifically provided for in the Plan or conferred by specific
action of the Committee in accordance with the terms and provisions of the Plan.
Except as expressly provided in this Plan, the Company shall not be required or
be liable to make any payment under the Plan.
8.2. No Right to Company Assets. No Participant or any other person shall
acquire, by reason of the Plan, any right in or title to any assets, funds or
property of the Company whatsoever including, without limiting the generality of
the foregoing, any specific funds, assets, or other property which the Company,
in its sole discretion, may set aside in anticipation of a liability hereunder.
Any benefits which become payable hereunder shall be paid from the general
assets of the Company. A Participant shall have only a contractual right to the
amounts, if any, payable hereunder unsecured by any asset of the Company.
Nothing contained in the Plan constitutes a guarantee by the Company that the
assets of the Company shall be sufficient to pay any benefit to any person.
8.3. No Employment Rights. Nothing herein shall constitute a contract of
employment or of continuing service or in any manner obligate the Company to
continue the services of any Participant, shall obligate any Participant to
continue in the service of the Company, or shall serve as a limitation of the
right of the Company to discharge any of its employees, with or without cause.
Nothing herein shall be construed as fixing or regulating the compensation
payable to any Participant.
8.4. Other Benefits. No payment made under the Plan shall be considered
compensation for purposes of computing benefits under any "employee benefit
plan" (as defined in Section 3(3) of ERISA) of the Company nor affect any
benefits or compensation under any other benefit or compensation plan of the
Company now or subsequently in effect (except as provided to the contrary in
such Company plan).
8.5. Offset. If, at the time payments are to be made hereunder, a
Participant is indebted or obligated to the Company, then the payments under the
Plan remaining to be made to the Participant may, at the discretion of the
Company, be reduced by the amount of such indebtedness or obligation, provided,
however, that an election by the Company not to reduce any such payment or
payments shall not constitute a waiver of its claim for such indebtedness or
obligation.
8.6. Non-assignability. No Participant or any other person shall have any
voluntary or involuntary right to commute, sell, assign, pledge, anticipate,
mortgage, or otherwise encumber,
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<PAGE>
transfer, hypothecate, or convey in advance of actual receipt the amounts, if
any payable hereunder or any part thereof, which are expressly declared to be
unassignable and non-transferable. No part of the amounts payable prior to
actual payment shall be subject to seizure or sequestration for the payment of
any debts, judgments, alimony, or separate maintenance owed by any Participant
or any other person, or be transferable by operation of law in the event of any
Participant's or any other person's bankruptcy or insolvency.
8.7. Notice. Any notice required or permitted to be given under the Plan
shall be sufficient if in writing and hand delivered, or sent by registered or
certified mail, and if given to the Company, delivered to the principal office
of the Company, directed to the attention of the Committee, c/o the Director of
the Compensation Department of the Company. Such notice shall be deemed given as
of the date of delivery or, if delivery is made by mail, as of the date shown on
the postmark or the receipt for registration or certification.
8.8. Governing Laws. The Plan and all awards made and actions taken under
the Plan shall be governed and construed according to the laws of the State of
Delaware.
8.9. Gender and Number. Where appropriate, references in this Plan to the
masculine shall include the feminine, and references to the singular shall
include the plural.
8.10. Severability. In the event any provision of the Plan shall be held
legally invalid for any reasons, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
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<PAGE>
EXHIBIT 10.7
AMENDMENT TO EMPLOYMENT AGREEMENT
AMENDMENT dated as of September 5, 1997 by and between Borg-Warner Security
Corporation, a Delaware corporation (the "Company"), and J.J. Adorjan (the
"Executive") to the Employment Agreement dated as of March 28, 1995 (as amended
by letter dated August 28, 1995 and memorandum dated December 21, 1995, the
"Employment Agreement").
W I T N E S S E T H :
WHEREAS, the parties hereto have heretofore entered into the Employment
Agreement; and
WHEREAS, the parties hereto desire to amend the Employment Agreement;
NOW, THEREFORE, the parties hereto agree as follows:
Section 1. Definitions; References. Unless otherwise specifically defined
herein, each term used herein that is defined in the Employment Agreement shall
have the meaning assigned to such term in the Employment Agreement.
Section 2. Amendment to Section 3(d) of the Employment Agreement.
Section 3(d) of the Employment Agreement is hereby amended by adding the
following clause (iv) at the end thereof:
"(iv) Notwithstanding the foregoing, upon a Change in Control of the
Company (as defined in Section 4(c)), the shares in the Trust,
together with any dividends and other distributions made or scheduled
to be made with respect thereto to the trustee of the Trust, and the
amount of any Special Deferred Compensation that has not yet been
paid, shall be delivered to the Executive immediately."
Section 3. Amendment to Section 4(c) of the Employment Agreement.
Section 4(c)(i)(D) of the Employment Agreement is hereby amended by deleting it
in its entirety and replacing it with the following:
<PAGE>
"D. should there be a Change in Control of the Company (as defined
below), a termination by the Executive, at his own initiative, for any
reason during the 30-day period immediately following the end of the
three month period (or such shorter transition period to which the
Company may in its discretion consent) immediately following the date
of the Change in Control."
SECTION 4. Amendment to Section 5(a) of the Employment Agreement. Section
5(a) of the Employment Agreement is hereby amended by deleting it in its
entirety and replacing it with the following:
"(a) Other Than for Cause, Death or Disability; Good Reason. If,
during the Employment Period, the Company terminates the Executive's
employment other than for Cause or Disability, or the Executive
terminates his employment for Good Reason, the Company shall pay the
amounts described in subparagraph (i) below to the Executive in a lump
sum in cash within 30 days after the Date of Termination and shall
provide the benefits described in subparagraph (ii) below. The
payments provided pursuant to this Section 5(a) are intended as
liquidated damages for a termination of the Executive's employment by
the Company other than for Cause or Disability or for the actions of
the Company leading to a termination of the Executive's employment by
the Executive for Good Reason, and shall be the sole and exclusive
remedy therefor.
(i) The amounts to be paid in a lump sum as described above are:
A. The Executive's accrued but unpaid cash compensation
(the "Accrued Obligations"), which shall equal the sum of (l) any
portion of the Executive's Annual Base Salary and supplemental
benefit compensation payable pursuant to Section 3(g) of this
Agreement through the Date of Termination that has not yet been
paid; (2) an amount (reduced, in the case of a termination of
employment following a Change in Control, by the Change in
Control Bonus (as defined in Section 5(d))) equal to the product
of the Annual Bonus the Executive would have received for the
year of termination if all goals had been achieved at the
"expected" level (as such term is used to calculate bonuses under
the Company's annual bonus plan)
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<PAGE>
(the "Severance Bonus") times a fraction, the numerator of which
is the number of days in the current fiscal year through the Date
of Termination and the denominator of which is 365; (3) any
compensation previously deferred by the Executive pursuant to
Section 3(c) of this Agreement (together with any accrued
interest or earnings thereon) that has not yet been paid; and (4)
any accrued but unpaid Annual Bonuses and vacation pay; and
B. Severance pay equal to (1) the sum of (I) the Annual
Base Salary, (II) the Severance Bonus and (III) the annual
supplemental benefit compensation which, absent termination,
would have been payable pursuant to Section 3(g) of this
Agreement for the twelve month period following the Date of
Termination at the rate in effect at the Date of Termination; (2)
the assets then held in the Trust (if any) together with any
dividends and other distributions then scheduled to be made to
the trustee of the Trust; and (3) the amount of any Special
Deferred Compensation that has not yet been paid.
(ii) The benefits to be provided are benefits to the Executive
and/or the Executive's family at least as favorable as those that
would have been provided to them under Section 3(f) and clause (ii) of
Section 3(h) of this Agreement if the Executive's employment had
continued through the end of the second anniversary of the Date of
Termination; provided, however, that during any period when the
Executive is eligible to receive such benefits under another employer-
provided plan, the benefits provided by the Company under this Section
5(a)(ii) may be made secondary to those provided under such other
plan. In addition, effective as of the second anniversary of the Date
of Termination, the Executive shall be provided with post-retirement
benefits on the same terms and conditions as provided to retirees and
their beneficiaries pursuant to the Borg-Warner Security Corporation
Retiree Health Care Plan and any other plans maintained for retirees,
without regard to the Executive's age or years of service.
(iii) In the event that the Executive becomes entitled to the
payments and benefits provided above and/or any other payments or
benefits in connection with a change in control or termination of the
Executive's employment with the Company (whether pursuant
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<PAGE>
to the terms of this Agreement or any other plan, arrangement or
agreement with the Company, any person whose actions result in a
change in control or any person affiliated with the Company or such
person) (collectively, the "Payments"), if any of the Payments will be
subject to the tax (the "Excise Tax") imposed by Section 4999 of the
Code, the Company shall pay the Executive, at least 30 days prior to
the time payment of any such Excise Tax is due, an additional amount
(the "Gross-Up Payment") such that the net amount retained by the
Executive, after deduction of any Excise Tax and any federal and state
and local income tax imposed on the Gross-Up Payment, shall be equal
to the Excise Tax imposed on the Payments. For purposes of determining
whether any of the Payments will be subject to the Excise Tax and the
amount of such Excise Tax, (A) the Payments shall be treated as
"parachute payments" within the meaning of Section 280G(b)(2) of the
Code, and all "excess parachute payments" within the meaning of
Section 280G(b)(1) of the Code shall be treated as subject to the
Excise Tax, unless in the opinion of tax counsel selected by the
Company's independent auditors and acceptable to the Executive the
Payments (in whole or in part) do not constitute parachute payments or
excess parachute payments or are otherwise not subject to the Excise
Tax, (B) the amount of the Payments which shall be treated as subject
to the Excise Tax shall be equal to the lesser of (i) the total amount
of the Payments or (ii) the amount of excess parachute payments within
the meaning of Section 280G(b)(1) (after applying clause (A) above),
and (C) the value of any non-cash benefits or any deferred payment or
benefit shall be determined by the Company's independent auditors in
accordance with the principles of Section 280G(d)(3) and (4) of the
Code. For purposes of determining the amount of the Gross-Up Payment,
the Executive shall be deemed to pay federal income taxes at the
highest marginal rate of federal income taxation in the calenday year
in which the Gross-Up Payment is to be made and state and local income
taxes at the highest marginal rate of taxation in the state and
locality of the Executive's residence on the Date of Termination, net
of the maximum reduction in federal income taxes which could be
obtained from deduction of such state and local taxes. In the event
that the Excise Tax is subsequently determined to be less than the
amount taken into account hereunder at the time of termination of
employment, the Executive shall repay to the Company at the time that
the amount of such reduction in Excise Tax is finally determined, the
portion of the Gross-Up Payment attributable to such reduction (plus
the portion of the Gross-Up
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Payment attributable to the Excise Tax and federal and state and local
income tax imposed on the Gross-Up Payment being repaid by the
Executive if such repayment results in a reduction in Excise Tax
and/or a federal and state and local income tax deduction) plus
interest on the amount of such repayment at the rate provided in
Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is
determined to exceed the amount taken into account hereunder at the
time of the termination of employment (including by reason of any
payment the existence or amount of which cannot be determined at the
time of the Gross-Up Payment), the Company shall make an additional
Gross-Up Payment in respect of such excess (plus any interest payable
with respect to such excess) at the time that the amount of such
excess is finally determined."
SECTION 5. Amendment to Section 5 of the Employment Agreement. Section 5
of the Employment Agreement is hereby amended by deleting the heading in its
entirety and replacing it with "Obligations of the Company Upon Termination
and/or a Change in Control" and adding the following at the end thereof:
"(d) Change in Control. Within 60 days following a Change in Control of
the Company, the company shall pay the Executive a pro rata annual bonus for the
year in which such Change in Control occurs, based on the Company's performance
for the period ending upon such Change in Control, as determined by the
Compensation Committee prior to the Change in Control (the "Change in Control
Bonus").
SECTION 6. No Waiver. Except as expressly provided herein, this Amendment
shall not operate as a waiver or amendment of any right, power or privilege of
the parties under the Employment Agreement. Except as expressly modified hereby,
all of the terms and conditions of the Employment Agreement shall remain
unaltered and in full force and effect.
SECTION 7. Counterparts; Effectiveness. This Amendment may be signed in
any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Amendment shall become effective as of the date hereof when the Company
shall have received a duly executed counterpart hereof signed by the Executive.
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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first above written.
BORG-WARNER SECURITY
CORPORATION
By: /s/ Robert A. McCabe
-----------------------------
Name: Robert A. McCabe
Title: Director
/s/ J. Joe Adorjan
---------------------------------
J.J. Adorjan
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EXHIBIT 10.8
NONCOMPETITION AGREEMENT
AGREEMENT by and between Borg-Warner Security Corporation, a Delaware
corporation (the "Company"), and J. J. Adorjan (the "Executive"), dated as of
September 5, 1997.
WHEREAS, the Executive is currently serving as the President and Chief
Executive Officer of the Company pursuant to an Employment Agreement between the
Company and the Executive dated as of March 25, 1995, as amended by Amendment
No. 1 dated as of September 5, 1997 (the "Employment Agreement");
WHEREAS, due to the highly competitive nature of the business of the
Company, the Company has determined that it is desirable to enter into a non-
competition agreement with the Executive on the terms and conditions set forth
in this Agreement; and
WHEREAS, the Executive is willing to enter into such non-competition
agreement upon such terms and conditions;
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Noncompetition. (a) In the event the Executive's employment under the
Employment Agreement is terminated by the Company without Cause or by the
Executive for Good Reason (as so defined):
<PAGE>
(i) During the Noncompetition Period (as defined below), the Executive
shall not, without the prior written consent of the Board of Directors of
the Company (the "Board"), engage in or become associated with a
Competitive Activity.
(ii) During the one year period beginning on the termination of the
Executive's Employment under the Employment Agreement, the Executive will
not directly or indirectly induce any employee of the Company to engage in
any activity in which the Executive is prohibited from engaging by
paragraph (i) above or to terminate his employment with the Company, and
will not directly or indirectly employ or offer employment to any person
who is employed by the Company.
(iii) For purposes of Section 1(a)(i): (x) the "Noncompetition Period"
means the period beginning on such termination of the Executive's
employment under the Employment Agreement the third anniversary of the
Executive's termination of employment under the Employment Agreement; (y) a
"Competitive Activity" means any service business or other endeavor that
provides guard and investigative services, alarm systems installation and
monitoring services, armored transport or automated teller machine (ATM)
services or overnight or same day courier delivery services; and (z) the
Executive shall be considered to have become "associated with a Competitive
Activity" if he becomes
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directly or indirectly involved as an owner, employee, officer, director,
independent contractor, agent, partner, advisor, or in any other capacity
calling for the rendition of the Executive's personal services, with any
individual, partnership, corporation or other organization that is engaged
in a Competitive Activity. Notwithstanding the foregoing, the Executive may
make and retain investments during the Noncompetition Period and thereafter
in not more than five percent of the equity of any entity engaged in a
Competitive Activity, if such equity is listed on a national securities
exchange or regularly traded in an over-the-counter market.
(b) Immediately upon the termination of the Executive's employment by the
Company without Cause or by the Executive for Good Reason (each as defined in
the Employment Agreement), in consideration of the Executive's entering into
this Agreement, the Company shall pay the Executive an amount equal to the sum
of (I) the Annual Base Salary (as defined in the Employment Agreement), (II) the
Severance Bonus (as defined in the Employment Agreement) and (III) the annual
supplemental benefit compensation which, absent termination, would have been
payable pursuant to Section 3(g) of the Employment Agreement for the twelve
month period following such termination at the rate in effect at the date of the
Executive's termination of employment.
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(c) The Executive acknowledges and agrees that his obligations under this
Section 1 are of a special, unique and extraordinary character and that a
failure to perform any such obligation or a violation thereof may cause
irreparable injury to the Company, the amount of which will be impossible to
estimate or determine and which cannot be adequately compensated. Therefore, the
Executive agrees that the Company shall be entitled, as a matter of course, to
an injunction, restraining order, writ of mandamus or other equitable relief
from any court of competent jurisdiction, including relief in the form of
specific performance, restraining any violation or threatened violation of any
term of this Section 1, or requiring compliance with or performance of any
obligation under this Section 1 by the Executive and such other persons as the
court shall order. The rights and remedies provided the Company hereunder are
cumulative and shall be in addition to the rights and remedies otherwise
available to the Company under any other agreement or applicable law. In
addition, the Executive agrees that if he breaches any provision of this Section
1, the Executive shall remit to the Company any amounts paid to him pursuant to
paragraph (b) above. The Executive acknowledges and agrees that the provisions
of this paragraph (c) are reasonable and necessary for the protection of the
Company.
2. Arbitration; Attorneys' Fees. Except as provided in Section 1(c) above,
any dispute or controversy arising under or in connection with this Agreement
shall be settled exclusively by arbitration in the State of Illinois, in
accordance with the rules of the American Arbitration Association then in
effect,
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and judgment may be entered on the arbitrator's award in any court having
jurisdiction. If the Executive shall prevail, in whole or in part, as to any
material issue in any contest (whether initiated by the Executive or by the
Company) as to the validity, enforceability or interpretation of any provision
of this Agreement, the Company shall pay all reasonable expenses incurred by the
Executive with respect to such contest, including, without limitation, his
reasonable attorney's fees.
3. Successors. (a) This Agreement is personal to the Executive and, without
the prior written consent of the Company, shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.
(c) The Company shall require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company expressly to assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
have been required to perform it if no such succession had taken place. As used
in this Agreement, "Company" shall mean both the Company as defined above and
any such successor that assumes and agrees to perform this Agreement, by
operation of law or otherwise.
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4. Miscellaneous. (a) This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Delaware, without reference to
principles of conflict of laws. The captions of this Agreement are not part of
the provisions hereof and shall have no force or effect. This Agreement may not
be amended or modified except by a written agreement executed by the parties
hereto or their respective successors and legal representatives.
(b) All notices and other communications under this Agreement shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive:
J. J. Adorjan
223 North Bemiston
Clayton, Missouri 63105
If to the Company:
Borg-Warner Security Corporation
200 South Michigan Avenue
Chicago, Illinois 60604
Attention: General Counsel
or to such other address as either party furnishes to the other in writing in
accordance with this Section 4(b). Notices and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement. If any provision of this Agreement shall be held invalid or
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unenforceable in part, the remaining portion of such provision, together with
all other provisions of this Agreement, shall remain valid and enforceable and
continue in full force and effect to the fullest extent consistent with law.
(d) Notwithstanding any other provision of this Agreement, the Company may
withhold from amounts payable under this Agreement all federal, state, local and
foreign taxes that are required to be withheld by applicable laws or
regulations.
(e) The failure of the Executive or the Company to insist upon strict
compliance with any provision of, or to assert any right under, this Agreement
shall not be deemed to be a waiver of such provision or right or of any other
provision of or right under this Agreement.
(f) This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, and which together shall constitute one
instrument.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization of the Board, the Company has caused this
Agreement to be executed in its name on its behalf, all as of the day and year
first above written.
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/s/ J. Joe Adorjan
------------------
J. J. Adorjan
BORG-WARNER SECURITY
CORPORATION
By: /s/ Robert E.T. Lackey
----------------------
Name: Robert E.T. Lackey
Title: Vice President and
General Counsel
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EXHIBIT 10.9
BORG-WARNER SECURITY CORPORATION
200 South Michigan Avenue
Chicago, Illinois 60604-2499
September 5, 1997
John D. O'Brien
c/o Borg-Warner Security Corporation
200 South Michigan
Chicago, Illinois 60604
Dear John:
Borg-Warner Security Corporation (the "Company") considers it essential to
the best interest of its stockholders to foster the continuous employment of key
management personnel.
The Company has previously entered into a letter agreement with you
providing for certain severance benefits in the event your employment with the
Company is terminated.
In order to induce you to continue employment with, and to remain in the
employ of the Company, the Company wishes to amend the letter agreement (as so
amended, the "Agreement"). In the event your employment with the Company is
terminated under the circumstances described below you shall receive the
severance benefits described in this Agreement.
1. Term. The term of your employment with the Company under this Agreement
shall continue in effect until the termination of your employment pursuant to
this Agreement.
2. Termination. You shall be entitled to the benefits provided in
Subsection 3(c) hereof upon the termination of your employment, unless such
termination is (A) because of your death, (B) because of your "Disability" or
"Retirement" (as defined in Subsection 2(a)), (C) by the Company for "Cause" (as
defined in Subsection 2(b)), or (D) by you other than for "Good Reason" (as
defined in Subsection 2(c)).
(a) Disability; Retirement. If, as a result of your incapacity due to
physical or mental illness or infirmity, you shall have been absent from the
full-
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time performance of your duties with the Company for six (6) consecutive months,
and within thirty (30) days after written notice of intended termination is
given you shall not have returned to the full-time performance of your duties,
your employment may be terminated for "Disability". Termination by the Company
or you of your employment based on "Retirement" shall mean termination of
employment after attainment of age 65.
(b) Cause. Termination by the Company of your employment for "Cause" shall
mean termination upon (i) the willful and continued failure by you to perform
substantially your duties with the Company (other than any such failure
resulting from your incapacity due to physical or mental illness or infirmity or
any such actual or anticipated failure after the issuance of a "Notice of
Termination", as defined in Subsection 2(d) or by you for Good Reason) within a
reasonable period of time after a written demand for substantial performance is
delivered to you by the Board of Directors of the Company (the "Board") which
demand specifically identifies the manner in which the Board believes that you
have not substantially performed your duties, or (ii) the willful engaging by
you in conduct which is demonstrably and materially injurious to the Company,
momentarily or otherwise. For purposes of this Subsection, no act, or failure to
act, on your part shall be deemed "willful" unless done, or omitted to be done,
by you not in good faith and without reasonable belief that your action or
omission was in the best interest of the Company. Notwithstanding the foregoing,
you shall not be deemed to have been terminated for Cause unless and until there
shall have been delivered to you a copy of a resolution duly adopted by the
affirmative vote of not less than three-quarters (3/4) of the entire membership
of the Board at a meeting of the Board called and held for such purpose (after
reasonable notice to you and an opportunity for you, together with your counsel,
to be heard before the Board), finding that in the good faith opinion of the
Board you were guilty of conduct set forth above in clauses (i) or (ii) of the
first sentence of this Subsection and specifying the particulars thereof in
detail.
(c) Good Reason. You shall be entitled to terminate your employment for
Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without
your express written consent, the occurrence of any of the following
circumstances unless such circumstances are fully corrected prior to the Date of
Termination specified in the Notice of Termination, as defined in Subsections
2(e) and 2(d), respectively, given in respect thereof:
(i) the assignment to you of any duties inconsistent with your
position and status as a senior executive officer of the Company or a
substantial adverse alteration in the nature or status of your employment
responsibilities from those in existence on the date hereof;
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(ii) a reduction by the Company in your base salary to less than the
sum of $325,000 plus the amount of increases from time to time after the
date hereof in your base salary (hereinafter called the "Base Guarantee");
(iii) the relocation of your office or job location to a location not
within fifty miles of your present office or job location, except for
required travel on the Company's business to an extent substantially
consistent with your present business travel obligations;
(iv) the failure by the Company, without your consent, to pay to you
any portion of your current compensation, or to pay to you any portion of
an installment of deferred compensation under any deferred compensation
program of the Company, within ten (10) business days of the date such
compensation is due;
(v) a reduction in the life insurance, medical, dental, health,
accident or disability benefits provided to you by the Company or a
reduction in your entitlement to paid vacation days under the Company's
vacation policy;
(vi) the failure of the Company to obtain a satisfactory agreement
from any successor to assume and agree to perform this Agreement, as
contemplated in Section 4 hereof; or
(vii) any purported termination of your employment which is not
effected pursuant to a Notice of Termination satisfying the requirements of
Subsection (d) below (and, if applicable, the requirements of Subsection
(b) above); provided that for purposes of this Agreement, no such purported
termination shall be effective.
In addition, termination by you of your employment within the 30-day period
following the first anniversary of the date a Change-in-Control has occurred
shall constitute termination of your employment for Good Reason. A Change-in-
Control shall be deemed to have occurred if:
(A) there is an acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act
of 1934 (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act)
of 25% or more of the combined voting power of the then outstanding
voting securities of
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the Company entitled to vote generally in the election of directors
(the "Outstanding Company Voting Securities") (an "Acquisition");
excluding, however, the following: (a) any Acquisition by Merrill
Lynch & Co., Inc. and its affiliates who collectively on January 1,
1991 were a "beneficial owner" of approximately 51% of the Outstanding
Company Voting Securities, (b) any Acquisition by a corporation or
partnership controlled by a majority of the persons holding the title
of Managing Partner of the Company on January 1, 1991, (c) any
Acquisition by a trustee or other fiduciary holding securities under
an employee benefit plan of the Company, (d) any Acquisition by which
a corporation owned, directly or indirectly, by the stockholders of
the Company in substantially the same proportion as their ownership of
the Outstanding Voting Securities becomes the beneficial owner,
directly or indirectly, of Outstanding Voting Securities representing
25% or more of the Outstanding Voting Securities or (e) any
Acquisition, where the percentage of the Outstanding Voting Securities
owned by such Person following such Acquisition is less than the
percentage of Outstanding Company Voting Securities beneficially owned
in the aggregate by Merrill Lynch & Co., Inc. and its affiliates;
provided that if, after an Acquisition, the Outstanding Company Voting
Securities owned by Merrill Lynch & Co., Inc. and/or its affiliates
decreases such that if such Acquisition had occurred immediately after
such decrease, such Acquisition would have been a Change in Control,
then such decrease shall constitute a Change in Control;
(B) during any period of two consecutive years, individuals who at the
beginning of such period constitute the Board of Directors of the
Company and any new director (other than a director designated by a
person who has entered into an agreement with the Company to effect a
transaction described in paragraphs (A) or (C) of this Section) whose
election by the Board of Directors of the Company or nomination for
election by the Company's stockholders was approved by a vote of at
least two-thirds (2/3) of the directors then still in office who
either were directors at the beginning of the period or whose election
or nomination for election was previously so approved, cease for any
reason to constitute a majority thereof; or
(C) the stockholders of the Company approve a merger or consolidation of
the Company with any other corporation, other than a merger or
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consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or through the surviving entity) at
least 70% of the combined voting power of the voting securities of the
Company or such surviving entity outstanding immediately after such
merger or consolidation, or the stockholders of the Company approve a
plan of complete liquidation of the Company or an agreement for the
sale or disposition by the Company of all or substantially all the
Company's assets.
Your right to terminate your employment pursuant to this Subsection shall not be
affected by your incapacity due to physical or mental illness or infirmity. Your
continued employment shall not constitute consent to, or a waiver of rights with
respect to, any circumstance constituting Good Reason hereunder.
(d) Notice of Termination. Any purported termination of your employment by
the Company or by you shall be communicated by written Notice of Termination to
the other party hereto in accordance with Section 6 hereof. For purposes of this
Agreement, a "Notice of Termination" shall mean a notice which shall indicate
the specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of your employment under the provision so indicated.
(e) Date of Termination, Etc. "Date of Termination" shall mean (i) if your
employment is terminated for Disability, thirty (30) days after Notice of
Termination is given (provided that you shall not have returned to the full-time
performance of your duties during such thirty (30) day period), and (ii) if your
employment is terminated pursuant to Subsection (b) or (c) above or for any
other reason (other than death or Disability), the date specified in the Notice
of Termination (which, in the case of a termination pursuant to Subsection (b)
above shall not be less than thirty (30) days, and in the case of a termination
pursuant to Subsection (c) above shall not be less than fifteen (15) nor more
than sixty (60) days, respectively, from the date such Notice of Termination is
given); provided that if prior to the Date of Termination (as determined without
regard to this provision), the party receiving such Notice of Termination
notifies the other party that a dispute exists concerning the termination, the
Date of Termination shall be the date on which the dispute is finally
determined, either by mutual written agreement of the parties, by a binding
arbitration award, or by a final judgment, order or decree of a court of
competent jurisdiction (which is not appealable or with respect to which the
time for appeal therefrom has expired and no appeal has been perfected);
provided further that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party
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giving such notice pursues the resolution of such dispute with reasonable
diligence. Notwithstanding the pendency of any such dispute, the Company will
continue to pay you your full compensation in effect when the notice giving rise
to the dispute was given (including, but not limited to, base salary) and
continue you as a participant in all compensation, benefit and insurance plans
in which you were participating when the notice giving rise to the dispute was
given, until the dispute is finally resolved in accordance with this Subsection.
Amounts paid under this Subsection are in addition to all other amounts due
under this Agreement and shall not be offset against or reduce any other amounts
due under this Agreement.
3. Compensation in connection with Termination and/or a Change in Control.
You shall be entitled to the following:
(a) During any period that you fail to perform your full-time duties with
the Company as a result of incapacity due to physical or mental illness or
infirmity, you shall continue to receive your base salary at the rate in effect
at the commencement of any such period, together with all amounts payable to you
and insurance to which you are entitled under any compensation and insurance
plan of the Company during such period, until your employment under this
Agreement is terminated pursuant to Section 2(a) hereof. Thereafter, or in the
event your employment shall be terminated by the Company or by you for
Retirement or by reason of your death, your compensation and benefits shall be
determined under the Company's retirement, insurance and other compensation
programs then in effect in accordance with the terms of such programs.
(b) If your employment shall be terminated by the Company for Cause or by
you other than for Good Reason, Disability, death or Retirement, the Company
shall pay you your full base salary through the Date of Termination at the rate
in effect at the time Notice of Termination is given, plus all other amounts to
which you are entitled under any compensation or insurance plan of the Company
at the time such payments are due, and the Company shall have no further
obligations to you under this Agreement.
(c) If your employment by the Company shall be terminated (i) by the
Company other than for Cause, Disability or Retirement or (ii) by you for Good
Reason, then you shall be entitled to the benefits provided below:
(i) the Company shall pay you (A) your full base salary and supplemental
benefit compensation through the Date of Termination at the rate in
effect at the time Notice of Termination is given, (B) an amount
(reduced, in the case of a termination of employment following a Change
in Control, by
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the Change in Control Bonus (as defined in Section 3(f)) equal to the
product of the annual bonus you would have received for the year of
termination if all goals had been achieved at the "expected" level (as
such term is used to calculate bonuses under the Company's annual bonus
plan) (the "Severance Bonus") times a fraction, the numerator of which is
the number of days in the current fiscal year through the Date of
Termination, and the denominator of which is 365, plus (C) all other
amounts to which you are entitled under any compensation or insurance
plan of the Company through the Date of Termination, at the time such
payments are due, except as otherwise provided below;
(ii) in lieu of any further salary or bonus payment to you for periods
subsequent to the Date of Termination, the Company shall pay to you a
lump-sum severance payment (together with the payments provided in
paragraphs (iii) through (vi) below) equal to the product of (A) the sum
of (x) the Base Guarantee, (y) the Severance Bonus and (z) the amount of
your annual supplemental benefit compensation which, absent termination,
would have been payable to you for the twelve month period following the
Date of Termination;
(iii) the Company shall pay to you in cash any deferred compensation;
(iv) the Company shall provide you with life, medical, dental, health,
accident and disability insurance coverage substantially similar to the
coverage you are receiving from the Company immediately prior to the
occurrence of the circumstance cited as the reason for termination in the
Notice of Termination (and if you have elected the Optional Health
Insurance Plan coverage or the Supplemental Dental and Vision Plan
coverage, or both, subject to your continuing to pay for such coverage or
coverages at the same contribution rate as was in effect immediately
prior to the occurrence of the circumstance cited as the reason for
termination in the Notice of Termination) for a period of two years after
your termination, or until your death or Retirement, whichever is the
shorter period, provided that benefits otherwise receivable by you
pursuant to this paragraph (iv) shall be reduced to the extent comparable
benefits are actually received by you during this period. You agree that
you shall immediately report to the Company any such comparable benefits
actually received by you. Following the termination of such benefit
continuation period you shall be entitled to post-retirement benefits on
the same terms and conditions as provided to retirees and their
beneficiaries pursuant to the Borg-Warner Security Corporation Retiree
Health Care Plan and any other plan maintained for retirees, without
regard to your age or years of service;
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(v) the Company shall pay to you an amount equal to your unpaid accrued
benefit under the Borg-Warner Excess Retirement Benefit Plan;
(vi) the Company shall pay to you all legal fees and expenses incurred by you
as a result of such termination (including all such fees and expenses, if
any, incurred in contesting or disputing any such termination or in
seeking to obtain or enforce any right or benefit provided by this
Agreement or in connection with any tax audit or proceeding to the extent
attributable to the application of Section 4999 of the Internal Revenue
Code of 1986, as amended (the "Code"), to any payment or benefit provided
hereunder); and
(vii) the payments provided for in paragraphs (i), (ii), (iii) and (v) above
shall be made not later than the thirtieth day following the Date of
Termination.
(d) You shall not be required to mitigate the amount of any payment
provided for in this Section 3 by seeking other employment or otherwise, nor
shall the amount of any payment or benefit provided for in this Section 3 be
reduced by any compensation earned by you as the result of employment by another
employer, by retirement benefits, by offset against any amount claimed to be
owed by you to the Company or otherwise except as specifically provided in this
Section 3.
(e) In addition to all other amounts payable to you under this Section 3,
following the termination of your employment you shall be entitled to receive
all benefits payable to you under any plan or agreement relating to retirement
benefits.
(f) Within 60 days following a Change in Control of the Company, the
Company shall pay you (i) a pro rata annual bonus for the year in which such
Change in Control occurs, based on the Company's performance for the period
ending upon such Change in Control, as determined by the Compensation Committee
prior to the Change in Control (the "Change in Control Bonus") and (ii) an
amount equal to your accrued benefit under the Borg-Warner Excess Retirement
Benefit Plan.
(g) In the event that you become entitled to the payments and benefits
provided under subsection 3(c) or (f) above and/or any other payments or
benefits in connection with a change in control or termination of your
employment with the Company (whether pursuant to the terms of this Agreement or
any other plan, arrangement or agreement with the Company, any person whose
actions result in a change in control or any person affiliated with the Company
or such person) (collectively, the "Payments"), if any of the Payments will be
subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code, the
Company shall pay to you, at least 30 days prior to the time payment of any such
Excise Tax is due, an additional amount (the "Gross-Up Payment") such that the
net amount retained by
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you, after deduction of any Excise Tax and any federal and state and local
income tax imposed on the Gross-Up Payment, shall be equal to the Excise Tax
imposed on the Payments. For purposes of determining whether any of the
Severance Payments will be subject to the Excise Tax and the amount of such
Excise Tax, (A) the Payments shall be treated as "parachute payments" within the
meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments"
within the meaning of Section 280G(b)(l) of the Code shall be treated as subject
to the Excise Tax, unless in the opinion of tax counsel selected by the
Company's independent auditors and acceptable to you the Payments (in whole or
in part) do not constitute parachute payments or excess parachute payments or
are otherwise not subject to the Excise Tax, (B) the amount of the Payments
which shall be treated as subject to the Excise Tax shall be equal to the lesser
of (i) the total amount of the Payments or (ii) the amount of excess parachute
payments within the meaning of Section 280G(b)(l) (after applying clause (A)
above), and (C) the value of any non-cash benefits or any deferred payment or
benefit shall be determined by the Company's independent auditors in accordance
with the principles of Section 280G(d)(3) and (4) of the Code. For purposes of
determining the amount of the Gross-Up Payment, you shall be deemed to pay
federal income taxes at the highest marginal rate of federal income taxation in
the calendar year in which the Gross-Up Payment is to be made and state and
local income taxes at the highest marginal rate of taxation in the state and
locality of your residence on the Date of Termination, net of the maximum
reduction in federal income taxes which could be obtained from deduction of such
state and local taxes. In the event that the Excise Tax is subsequently
determined to be less than the amount taken into account hereunder at the time
of termination of your employment, you shall repay to the Company at the time
that the amount of such reduction in Excise Tax is finally determined, the
portion of the Gross-Up Payment attributable to such reduction (plus the portion
of the Gross-Up Payment attributable to the Excise Tax and federal and state and
local income tax imposed on the Gross-Up Payment being repaid by you if such
repayment results in a reduction in Excise Tax and/or a federal and state and
local income tax deduction) plus interest on the amount of such repayment at the
rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise
Tax is determined to exceed the amount taken into account hereunder at the time
of the termination of your employment (including by reason of any payment the
existence or amount of which cannot be determined at the time of the Gross-Up
Payment), the Company shall make an additional Gross-Up Payment in respect of
such excess (plus any interest payable with respect to such excess) at the time
that the amount of such excess is finally determined.
4. Successors; Binding Agreement. (a) The Company will require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company to expressly assume and agree to perform this Agreement in the same
manner and
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to the same extent that the Company would be required to perform it if no such
succession had taken place. Failure of the Company to obtain such assumption and
agreement prior to the effectiveness of any such succession shall be a breach of
this Agreement and shall entitle you to compensation from the Company in the
same amount and on the same terms as you would be entitled to hereunder if you
terminated your employment for Good Reason, except that for purposes of
implementing the foregoing, the date on which any such succession becomes
effective shall be deemed the Date of Termination. As used in this Agreement,
"Company" shall mean the Company as hereinbefore defined and any successor to
its business and/or assets as aforesaid which assumes and agrees to perform this
Agreement by operation of law, or otherwise.
(b) This Agreement shall inure to the benefit of and be enforceable by your
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If you should die while any amount would
still be payable to you hereunder if you had continued to live, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to your "Beneficiary" as designated and defined under
the 1981 Contingent Compensation Plan under the Borg-Warner Corporation
Management Incentive Program unless superceded, in which case payment shall be
made in accordance with the most recent beneficiary designation which you may
have executed and delivered to the Company after the date of this Agreement.
(c) If your employment is continued with a successor (whether directly or
indirectly) to all or substantially all of the business and assets of the
Company and such successor assumes the obligations of the Company under this
Agreement, you will not be entitled to any severance benefits under this
Agreement solely by reason of the assumption of this Agreement and the technical
termination of your employment with the Company in connection with such
succession; provided that this Subsection 4(c) shall in no way diminish your
right to terminate your employment for Good Reason pursuant to Section 2(c) and
to receive severance in connection with such a termination.
5. Non-Compete; Confidentiality. (a) You agree that while you are employed
by the Company, you will not directly or indirectly, whether as owner, partner,
officer, employee, agent or consultant, engage in or be employed in any way by
any business engaged in the design, manufacture, marketing or servicing of
products which constituted 10% or more of the annual sales of the Company
provided, however, that in no event shall this Section 5 preclude you from
owning less than 5% of the outstanding voting stock of any publicly-traded
corporation.
(b) You shall hold in a fiduciary capacity for the benefit of the Company
all secret or confidential information, knowledge or data relating to the
Company
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or any of its affiliated companies, and their respective businesses, which shall
have been obtained by you during your employment by the Company and which shall
not be public knowledge. While employed by the Company and for three years from
the Date of Termination, if you are receiving or have received payments under
Section 3(c), you shall not, without prior written consent of the Company,
communicate or divulge any such information, knowledge or data to anyone other
than the Company and those designated by it; except the foregoing prohibition
shall not apply to the extent such information, knowledge or data (a) was
publicly known at the time of disclosure to you, (b) becomes publicly known or
available thereafter other than by any means in violation of this Agreement, or
(c) is required to be disclosed by you as a matter of law or pursuant to any
court or regulatory order.
(c) You hereby acknowledge and agree that your obligations under this
Section 5 are of a special, unique and extraordinary character and that a
failure to perform any such obligation or a violation thereof may cause
irreparable injury to the Company, the amount of which will be impossible to
estimate or determine and which cannot be adequately compensated. Therefore, you
agree that the Company shall be entitled, as a matter of course, to an
injunction, restraining order, writ of mandamus or other equitable relief from
any court of competent jurisdiction, including relief in the form of specific
performance, restraining any violation or threatened violation of any term of
this Section 5, or requiring compliance with or performance of any obligation
under this Section 5 by you and such other persons as the court shall order. The
rights and remedies provided the Company hereunder are cumulative and shall be
in addition to the rights and remedies otherwise available to the Company under
any other agreement or applicable law.
6. Notice. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth on the first page of this Agreement, provided
that all notice to the Company shall be directed to the attention of the Board
of Directors, with a copy to the Secretary of the Company, or to such other
address as either party may have furnished to the other in writing in accordance
herewith, except that notice of change in address shall be effective only upon
receipt.
7. Miscellaneous. No provision of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing and signed by you and such officer as may be specifically designated by
the Board. No waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or
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dissimilar provisions or conditions at the same or at any prior or subsequent
time. No agreements or representations, oral or otherwise, express or implied,
with respect to the subject matter hereof have been made by either party which
are not expressly set forth in this Agreement. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of Illinois. All references to sections of the Code shall be deemed
also to refer to any successor provisions to such sections. Any payments
provided for hereunder shall be paid net of any applicable withholding required
under federal, state, or local law.
8. No Vested Interest. Neither you nor your Beneficiary shall have any
right, title or interest in any benefit under this Agreement prior to the
occurrence of the right to the payment thereof, or in any property of the
Company or its subsidiaries or affiliates.
9. Prior Agreements. This Agreement contains the entire understanding
between the parties hereto with respect to severance benefits and supercedes any
such prior agreement between the Company (or any predecessor of the Company) and
you. If there is any discrepancy or conflict between this Agreement and any
plan, policy or program of the Company regarding any term or condition of
severance benefits, the language of this Agreement shall govern.
10. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
11. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
12. Arbitration. Except as provided in Section 5(c), any dispute or
controversy arising under or in connection with this Agreement shall be settled
exclusively by arbitration in the State of Illinois, in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that you shall be entitled to seek specific performance of your right
to be paid until the Date of Termination during the pendency of any dispute or
controversy arising under or in connection with this Agreement.
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If this letter sets forth our agreement on the subject matter hereof, kindly
sign and return to the Company the enclosed copy of this letter which will then
constitute our agreement on this subject.
Sincerely,
BORG-WARNER SECURITY
CORPORATION
By /s/ J. Joe Adorjan
-----------------------
Agreed to and Accepted
September 5, 1997
/s/ John D. O'Brien
- -----------------------
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EXHIBIT 10.10
NONCOMPETITION AGREEMENT
AGREEMENT by and between Borg-Warner Security Corporation, a Delaware
corporation (the "Company"), and John D. O'Brien (the "Executive"), dated as of
September 5, 1997.
WHEREAS, the Executive is currently serving as the Senior Vice President
and President of Protected Services of the Company pursuant to an Amended and
Restated Letter Agreement between the Company and the Executive dated as of
September 5, 1997 (the "Letter Agreement");
WHEREAS, due to the highly competitive nature of the business of the
Company, the Company has determined that it is desirable to enter into a non-
competition agreement with the Executive on the terms and conditions set forth
in this Agreement; and
WHEREAS, the Executive is willing to enter into such non-competition
agreement upon such terms and conditions;
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Noncompetition. (a) In the event the Executive's employment under the
Letter Agreement is terminated by the Company without Cause or by the Executive
for Good Reason (as so defined):
<PAGE>
(i) During the Noncompetition Period (as defined below), the Executive
shall not, without the prior written consent of the Board of Directors of
the Company (the "Board"), engage in or become associated with a
Competitive Activity.
(ii) During the one year period beginning on the termination of the
Executive's Employment under the Letter Agreement, the Executive will not
directly or indirectly induce any employee of the Company to engage in any
activity in which the Executive is prohibited from engaging by paragraph
(i) above or to terminate his employment with the Company, and will not
directly or indirectly employ or offer employment to any person who is
employed by the Company.
(iii) For purposes of Section 1(a)(i): (x) the "Noncompetition Period"
means the period beginning on such termination of the Executive's
employment under the Letter Agreement the third anniversary of the
Executive's termination of employment under the Letter Agreement; (y) a
"Competitive Activity" means any service business or other endeavor that
provides guard and investigative services, alarm systems installation and
monitoring services, armored transport or automated teller machine (ATM)
services or overnight or same day courier delivery services; and (z) the
Executive shall be considered to have become "associated with a Competitive
Activity" if he becomes directly
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or indirectly involved as an owner, employee, officer, director,
independent contractor, agent, partner, advisor, or in any other capacity
calling for the rendition of the Executive's personal services, with any
individual, partnership, corporation or other organization that is engaged
in a Competitive Activity. Notwithstanding the foregoing, the Executive may
make and retain investments during the Noncompetition Period and thereafter
in not more than five percent of the equity of any entity engaged in a
Competitive Activity, if such equity is listed on a national securities
exchange or regularly traded in an over-the-counter market.
(b) Immediately upon the termination of the Executive's employment by the
Company without Cause or by the Executive for Good Reason (each as defined in
the Letter Agreement), in consideration of the Executive's entering into this
Agreement, the Company shall pay the Executive an amount equal to the sum of (I)
the Base Guarantee (as defined in the Letter Agreement), (II) the Severance
Bonus (as defined in the Letter Agreement) and (III) the annual supplemental
benefit compensation which, absent termination, would have been payable for the
twelve month period following such termination at the rate in effect at the date
of the Executive's termination of employment.
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(c) The Executive acknowledges and agrees that his obligations under this
Section 1 are of a special, unique and extraordinary character and that a
failure to perform any such obligation or a violation thereof may cause
irreparable injury to the Company, the amount of which will be impossible to
estimate or determine and which cannot be adequately compensated. Therefore, the
Executive agrees that the Company shall be entitled, as a matter of course, to
an injunction, restraining order, writ of mandamus or other equitable relief
from any court of competent jurisdiction, including relief in the form of
specific performance, restraining any violation or threatened violation of any
term of this Section 1, or requiring compliance with or performance of any
obligation under this Section 1 by the Executive and such other persons as the
court shall order. The rights and remedies provided the Company hereunder are
cumulative and shall be in addition to the rights and remedies otherwise
available to the Company under any other agreement or applicable law. In
addition, the Executive agrees that if he breaches any provision of this Section
1, the Executive shall remit to the Company any amounts paid to him pursuant to
paragraph (b) above. The Executive acknowledges and agrees that the provisions
of this paragraph (c) are reasonable and necessary for the protection of the
Company.
2. Arbitration; Attorneys' Fees. Except as provided in Section 1(c) above,
any dispute or controversy arising under or in connection with this Agreement
shall be settled exclusively by arbitration in the State of Illinois, in
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<PAGE>
accordance with the rules of the American Arbitration Association then in
effect, and judgment may be entered on the arbitrator's award in any court
having jurisdiction. If the Executive shall prevail, in whole or in part, as to
any material issue in any contest (whether initiated by the Executive or by the
Company) as to the validity, enforceability or interpretation of any provision
of this Agreement, the Company shall pay all reasonable expenses incurred by the
Executive with respect to such contest, including, without limitation, his
reasonable attorney's fees.
3. Successors. (a) This Agreement is personal to the Executive and, without
the prior written consent of the Company, shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.
(c) The Company shall require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company expressly to assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
have been required to perform it if no such succession had taken place. As used
in this Agreement, "Company" shall mean both the Company as defined
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<PAGE>
above and any such successor that assumes and agrees to perform this Agreement,
by operation of law or otherwise.
4. Miscellaneous. (a) This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware, without reference to
principles of conflict of laws. The captions of this Agreement are not part of
the provisions hereof and shall have no force or effect. This Agreement may not
be amended or modified except by a written agreement executed by the parties
hereto or their respective successors and legal representatives.
(b) All notices and other communications under this Agreement shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive:
John D. O'Brien
892 Timber Lane
Lake Forest, Illinois 60045
If to the Company:
Borg-Warner Security Corporation
200 South Michigan Avenue
Chicago, Illinois 60604
Attention: General Counsel
or to such other address as either party furnishes to the other in writing in
accordance with this Section 4(b). Notices and communications shall be effective
when actually received by the addressee.
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<PAGE>
(c) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement. If any provision of this Agreement shall be held invalid or
unenforceable in part, the remaining portion of such provision, together with
all other provisions of this Agreement, shall remain valid and enforceable and
continue in full force and effect to the fullest extent consistent with law.
(d) Notwithstanding any other provision of this Agreement, the Company may
withhold from amounts payable under this Agreement all federal, state, local and
foreign taxes that are required to be withheld by applicable laws or
regulations.
(e) The failure of the Executive or the Company to insist upon strict
compliance with any provision of, or to assert any right under, this Agreement
shall not be deemed to be a waiver of such provision or right or of any other
provision of or right under this Agreement.
(f) This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, and which together shall constitute one
instrument.
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<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization of the Board, the Company has caused this
Agreement to be executed in its name on its behalf, all as of the day and year
first above written.
/s/ John D. O'Brien
-------------------
John D. O'Brien
BORG-WARNER SECURITY
CORPORATION
By: /s/ J. Joe Adorjan
Name:
------------------
Title:
8
<PAGE>
EXHIBIT 10.11
BORG-WARNER SECURITY CORPORATION
200 South Michigan Avenue
Chicago, Illinois 60604-2499
September 5, 1997
Timothy M. Wood
c/o Borg-Warner Security Corporation
200 South Michigan
Chicago, Illinois 60604
Dear Tim:
Borg-Warner Security Corporation (the "Company") considers it essential to
the best interest of its stockholders to foster the continuous employment of key
management personnel.
The Company has previously entered into a letter agreement with you
providing for certain severance benefits in the event your employment with the
Company is terminated.
In order to induce you to continue employment with, and to remain in the
employ of the Company, the Company wishes to amend the letter agreement (as so
amended, the "Agreement"). In the event your employment with the Company is
terminated under the circumstances described below you shall receive the
severance benefits described in this Agreement.
1. Term. The term of your employment with the Company under this
Agreement shall continue in effect until the termination of your employment
pursuant to this Agreement.
2. Termination. You shall be entitled to the benefits provided in
Subsection 3(c) hereof upon the termination of your employment, unless such
termination is (A) because of your death, (B) because of your "Disability" or
"Retirement" (as defined in Subsection 2(a)), (C) by the Company for "Cause" (as
defined in Subsection 2(b)), or (D) by you other than for "Good Reason" (as
defined in Subsection 2(c)).
(a) Disability; Retirement. If, as a result of your incapacity due to
physical or mental illness or infirmity, you shall have been absent from the
full-
<PAGE>
time performance of your duties with the Company for six (6) consecutive
months, and within thirty (30) days after written notice of intended termination
is given you shall not have returned to the full-time performance of your
duties, your employment may be terminated for "Disability". Termination by the
Company or you of your employment based on "Retirement" shall mean termination
of employment after attainment of age 65.
(b) Cause. Termination by the Company of your employment for "Cause"
shall mean termination upon (i) the willful and continued failure by you to
perform substantially your duties with the Company (other than any such failure
resulting from your incapacity due to physical or mental illness or infirmity or
any such actual or anticipated failure after the issuance of a "Notice of
Termination", as defined in Subsection 2(d) or by you for Good Reason) within a
reasonable period of time after a written demand for substantial performance is
delivered to you by the Board of Directors of the Company (the "Board") which
demand specifically identifies the manner in which the Board believes that you
have not substantially performed your duties, or (ii) the willful engaging by
you in conduct which is demonstrably and materially injurious to the Company,
momentarily or otherwise. For purposes of this Subsection, no act, or failure to
act, on your part shall be deemed "willful" unless done, or omitted to be done,
by you not in good faith and without reasonable belief that your action or
omission was in the best interest of the Company. Notwithstanding the foregoing,
you shall not be deemed to have been terminated for Cause unless and until there
shall have been delivered to you a copy of a resolution duly adopted by the
affirmative vote of not less than three-quarters (3/4) of the entire membership
of the Board at a meeting of the Board called and held for such purpose (after
reasonable notice to you and an opportunity for you, together with your counsel,
to be heard before the Board), finding that in the good faith opinion of the
Board you were guilty of conduct set forth above in clauses (i) or (ii) of the
first sentence of this Subsection and specifying the particulars thereof in
detail.
(c) Good Reason. You shall be entitled to terminate your employment for
Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without
your express written consent, the occurrence of any of the following
circumstances unless such circumstances are fully corrected prior to the Date of
Termination specified in the Notice of Termination, as defined in Subsections
2(e) and 2(d), respectively, given in respect thereof:
(i) the assignment to you of any duties inconsistent with your
position and status as a senior executive officer of the Company or a
substantial adverse alteration in the nature or status of your employment
responsibilities from those in existence on the date hereof;
2
<PAGE>
(ii) a reduction by the Company in your base salary to less than the
sum of $290,000 plus the amount of increases from time to time after the
date hereof in your base salary (hereinafter called the "Base Guarantee");
(iii) the relocation of your office or job location to a location not
within fifty miles of your present office or job location, except for
required travel on the Company's business to an extent substantially
consistent with your present business travel obligations;
(iv) the failure by the Company, without your consent, to pay to you
any portion of your current compensation, or to pay to you any portion of
an installment of deferred compensation under any deferred compensation
program of the Company, within ten (10) business days of the date such
compensation is due;
(v) a reduction in the life insurance, medical, dental, health,
accident or disability benefits provided to you by the Company or a
reduction in your entitlement to paid vacation days under the Company's
vacation policy;
(vi) the failure of the Company to obtain a satisfactory agreement
from any successor to assume and agree to perform this Agreement, as
contemplated in Section 4 hereof; or
(vii) any purported termination of your employment which is not
effected pursuant to a Notice of Termination satisfying the requirements of
Subsection (d) below (and, if applicable, the requirements of Subsection
(b) above); provided that for purposes of this Agreement, no such purported
termination shall be effective .
In addition, termination by you of your employment within the 30-day period
following the first anniversary of the date a Change-in-Control has occurred
shall constitute termination of your employment for Good Reason. A Change-in-
Control shall be deemed to have occurred if:
(A) there is an acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act
of 1934 (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act)
of 25% or more of the combined voting power of the then outstanding
voting securities of
3
<PAGE>
the Company entitled to vote generally in the election of directors
(the "Outstanding Company Voting Securities") (an "Acquisition");
excluding, however, the following: (a) any Acquisition by Merrill
Lynch & Co., Inc. and its affiliates who collectively on January 1,
1991 were a "beneficial owner" of approximately 51% of the Outstanding
Company Voting Securities, (b) any Acquisition by a corporation or
partnership controlled by a majority of the persons holding the title
of Managing Partner of the Company on January 1, 1991, (c) any
Acquisition by a trustee or other fiduciary holding securities under
an employee benefit plan of the Company, (d) any Acquisition by which
a corporation owned, directly or indirectly, by the stockholders of
the Company in substantially the same proportion as their ownership of
the Outstanding Voting Securities becomes the beneficial owner,
directly or indirectly, of Outstanding Voting Securities representing
25% or more of the Outstanding Voting Securities or (e) any
Acquisition, where the percentage of the Outstanding Voting Securities
owned by such Person following such Acquisition is less than the
percentage of Outstanding Company Voting Securities beneficially owned
in the aggregate by Merrill Lynch & Co., Inc. and its affiliates;
provided that if, after an Acquisition, the Outstanding Company Voting
Securities owned by Merrill Lynch & Co., Inc. and/or its affiliates
decreases such that if such Acquisition had occurred immediately after
such decrease, such Acquisition would have been a Change in Control,
then such decrease shall constitute a Change in Control;
(B) during any period of two consecutive years, individuals who at the
beginning of such period constitute the Board of Directors of the
Company and any new director (other than a director designated by a
person who has entered into an agreement with the Company to effect a
transaction described in paragraphs (A) or (C) of this Section) whose
election by the Board of Directors of the Company or nomination for
election by the Company's stockholders was approved by a vote of at
least two-thirds (2/3) of the directors then still in office who
either were directors at the beginning of the period or whose election
or nomination for election was previously so approved, cease for any
reason to constitute a majority thereof; or
(C) the stockholders of the Company approve a merger or consolidation of
the Company with any other corporation, other than a merger or
4
<PAGE>
consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or through the surviving entity) at
least 70% of the combined voting power of the voting securities of the
Company or such surviving entity outstanding immediately after such
merger or consolidation, or the stockholders of the Company approve a
plan of complete liquidation of the Company or an agreement for the
sale or disposition by the Company of all or substantially all the
Company's assets.
Your right to terminate your employment pursuant to this Subsection shall not be
affected by your incapacity due to physical or mental illness or infirmity. Your
continued employment shall not constitute consent to, or a waiver of rights with
respect to, any circumstance constituting Good Reason hereunder.
(d) Notice of Termination. Any purported termination of your employment by
the Company or by you shall be communicated by written Notice of Termination to
the other party hereto in accordance with Section 6 hereof. For purposes of this
Agreement, a "Notice of Termination" shall mean a notice which shall indicate
the specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of your employment under the provision so indicated.
(e) Date of Termination, Etc. "Date of Termination" shall mean (i) if your
employment is terminated for Disability, thirty (30) days after Notice of
Termination is given (provided that you shall not have returned to the full-time
performance of your duties during such thirty (30) day period), and (ii) if your
employment is terminated pursuant to Subsection (b) or (c) above or for any
other reason (other than death or Disability), the date specified in the Notice
of Termination (which, in the case of a termination pursuant to Subsection (b)
above shall not be less than thirty (30) days, and in the case of a termination
pursuant to Subsection (c) above shall not be less than fifteen (15) nor more
than sixty (60) days, respectively, from the date such Notice of Termination is
given); provided that if prior to the Date of Termination (as determined without
regard to this provision), the party receiving such Notice of Termination
notifies the other party that a dispute exists concerning the termination, the
Date of Termination shall be the date on which the dispute is finally
determined, either by mutual written agreement of the parties, by a binding
arbitration award, or by a final judgment, order or decree of a court of
competent jurisdiction (which is not appealable or with respect to which the
time for appeal therefrom has expired and no appeal has been perfected);
provided further that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party
5
<PAGE>
giving such notice pursues the resolution of such dispute with reasonable
diligence. Notwithstanding the pendency of any such dispute, the Company will
continue to pay you your full compensation in effect when the notice giving rise
to the dispute was given (including, but not limited to, base salary) and
continue you as a participant in all compensation, benefit and insurance plans
in which you were participating when the notice giving rise to the dispute was
given, until the dispute is finally resolved in accordance with this Subsection.
Amounts paid under this Subsection are in addition to all other amounts due
under this Agreement and shall not be offset against or reduce any other amounts
due under this Agreement.
3. Compensation in connection with Termination and/or a Change in
Control. You shall be entitled to the following:
(a) During any period that you fail to perform your full-time duties with
the Company as a result of incapacity due to physical or mental illness or
infirmity, you shall continue to receive your base salary at the rate in effect
at the commencement of any such period, together with all amounts payable to you
and insurance to which you are entitled under any compensation and insurance
plan of the Company during such period, until your employment under this
Agreement is terminated pursuant to Section 2(a) hereof. Thereafter, or in the
event your employment shall be terminated by the Company or by you for
Retirement or by reason of your death, your compensation and benefits shall be
determined under the Company's retirement, insurance and other compensation
programs then in effect in accordance with the terms of such programs.
(b) If your employment shall be terminated by the Company for Cause or by
you other than for Good Reason, Disability, death or Retirement, the Company
shall pay you your full base salary through the Date of Termination at the rate
in effect at the time Notice of Termination is given, plus all other amounts to
which you are entitled under any compensation or insurance plan of the Company
at the time such payments are due, and the Company shall have no further
obligations to you under this Agreement.
(c) If your employment by the Company shall be terminated (i) by the
Company other than for Cause, Disability or Retirement or (ii) by you for Good
Reason, then you shall be entitled to the benefits provided below:
(i) the Company shall pay you (A) your full base salary and supplemental
benefit compensation through the Date of Termination at the rate in effect
at the time Notice of Termination is given, (B) an amount (reduced, in the
case of a termination of employment following a Change in Control, by
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<PAGE>
the Change in Control Bonus (as defined in Section 3(f)) equal to the
product of the annual bonus you would have received for the year of
termination if all goals had been achieved at the "expected" level (as
such term is used to calculate bonuses under the Company's annual bonus
plan) (the "Severance Bonus") times a fraction, the numerator of which is
the number of days in the current fiscal year through the Date of
Termination, and the denominator of which is 365, plus (C) all other
amounts to which you are entitled under any compensation or insurance
plan of the Company through the Date of Termination, at the time such
payments are due, except as otherwise provided below;
(ii) in lieu of any further salary or bonus payment to you for periods
subsequent to the Date of Termination, the Company shall pay to you a
lump-sum severance payment (together with the payments provided in
paragraphs (iii) through (vi) below) equal to the product of (A) the sum
of (x) the Base Guarantee, (y) the Severance Bonus and (z) the amount of
your annual supplemental benefit compensation which, absent termination,
would have been payable to you for the twelve month period following the
Date of Termination;
(iii) the Company shall pay to you in cash any deferred compensation;
(iv) the Company shall provide you with life, medical, dental, health,
accident and disability insurance coverage substantially similar to the
coverage you are receiving from the Company immediately prior to the
occurrence of the circumstance cited as the reason for termination in the
Notice of Termination (and if you have elected the Optional Health
Insurance Plan coverage or the Supplemental Dental and Vision Plan
coverage, or both, subject to your continuing to pay for such coverage or
coverages at the same contribution rate as was in effect immediately
prior to the occurrence of the circumstance cited as the reason for
termination in the Notice of Termination) for a period of two years after
your termination, or until your death or Retirement, whichever is the
shorter period, provided that benefits otherwise receivable by you
pursuant to this paragraph (iv) shall be reduced to the extent comparable
benefits are actually received by you during this period. You agree that
you shall immediately report to the Company any such comparable benefits
actually received by you. Following the termination of such benefit
continuation period you shall be entitled to post-retirement benefits on
the same terms and conditions as provided to retirees and their
beneficiaries pursuant to the Borg-Warner Security Corporation Retiree
Health Care Plan and any other plan maintained for retirees, without
regard to your age or years of service;
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(v) the Company shall pay to you an amount equal to your unpaid accrued
benefit under the Borg-Warner Excess Retirement Benefit Plan;
(vi) the Company shall pay to you all legal fees and expenses incurred by you
as a result of such termination (including all such fees and expenses, if
any, incurred in contesting or disputing any such termination or in
seeking to obtain or enforce any right or benefit provided by this
Agreement or in connection with any tax audit or proceeding to the extent
attributable to the application of Section 4999 of the Internal Revenue
Code of 1986, as amended (the "Code"), to any payment or benefit provided
hereunder); and
(vii) the payments provided for in paragraphs (i), (ii), (iii) and (v) above
shall be made not later than the thirtieth day following the Date of
Termination.
(d) You shall not be required to mitigate the amount of any payment
provided for in this Section 3 by seeking other employment or otherwise, nor
shall the amount of any payment or benefit provided for in this Section 3 be
reduced by any compensation earned by you as the result of employment by another
employer, by retirement benefits, by offset against any amount claimed to be
owed by you to the Company or otherwise except as specifically provided in this
Section 3.
(e) In addition to all other amounts payable to you under this Section
3, following the termination of your employment you shall be entitled to receive
all benefits payable to you under any plan or agreement relating to retirement
benefits.
(f) Within 60 days following a Change in Control of the Company, the
Company shall pay you (i) a pro rata annual bonus for the year in which such
Change in Control occurs, based on the Company's performance for the period
ending upon such Change in Control, as determined by the Compensation Committee
prior to the Change in Control (the "Change in Control Bonus") and (ii) an
amount equal to your accrued benefit under the Borg-Warner Excess Retirement
Benefit Plan.
(g) In the event that you become entitled to the payments and benefits
provided under subsection 3(c) or (f) above and/or any other payments or
benefits in connection with a change in control or termination of your
employment with the Company (whether pursuant to the terms of this Agreement or
any other plan, arrangement or agreement with the Company, any person whose
actions result in a change in control or any person affiliated with the Company
or such person) (collectively, the "Payments"), if any of the Payments will be
subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code, the
Company shall pay to you, at least 30 days prior to the time payment of any such
Excise Tax is due, an additional amount (the "Gross-Up Payment") such that the
net amount retained by
8
<PAGE>
you, after deduction of any Excise Tax and any federal and state and local
income tax imposed on the Gross-Up Payment, shall be equal to the Excise Tax
imposed on the Payments. For purposes of determining whether any of the
Severance Payments will be subject to the Excise Tax and the amount of such
Excise Tax, (A) the Payments shall be treated as "parachute payments" within the
meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments"
within the meaning of Section 280G(b)(l) of the Code shall be treated as subject
to the Excise Tax, unless in the opinion of tax counsel selected by the
Company's independent auditors and acceptable to you the Payments (in whole or
in part) do not constitute parachute payments or excess parachute payments or
are otherwise not subject to the Excise Tax, (B) the amount of the Payments
which shall be treated as subject to the Excise Tax shall be equal to the lesser
of (i) the total amount of the Payments or (ii) the amount of excess parachute
payments within the meaning of Section 280G(b)(l) (after applying clause (A)
above), and (C) the value of any non-cash benefits or any deferred payment or
benefit shall be determined by the Company's independent auditors in accordance
with the principles of Section 280G(d)(3) and (4) of the Code. For purposes of
determining the amount of the Gross-Up Payment, you shall be deemed to pay
federal income taxes at the highest marginal rate of federal income taxation in
the calendar year in which the Gross-Up Payment is to be made and state and
local income taxes at the highest marginal rate of taxation in the state and
locality of your residence on the Date of Termination, net of the maximum
reduction in federal income taxes which could be obtained from deduction of such
state and local taxes. In the event that the Excise Tax is subsequently
determined to be less than the amount taken into account hereunder at the time
of termination of your employment, you shall repay to the Company at the time
that the amount of such reduction in Excise Tax is finally determined, the
portion of the Gross-Up Payment attributable to such reduction (plus the portion
of the Gross-Up Payment attributable to the Excise Tax and federal and state and
local income tax imposed on the Gross-Up Payment being repaid by you if such
repayment results in a reduction in Excise Tax and/or a federal and state and
local income tax deduction) plus interest on the amount of such repayment at the
rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise
Tax is determined to exceed the amount taken into account hereunder at the time
of the termination of your employment (including by reason of any payment the
existence or amount of which cannot be determined at the time of the Gross-Up
Payment), the Company shall make an additional Gross-Up Payment in respect of
such excess (plus any interest payable with respect to such excess) at the time
that the amount of such excess is finally determined.
4. Successors; Binding Agreement. (a) The Company will require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company to expressly assume and agree to perform this Agreement in the same
manner and
9
<PAGE>
to the same extent that the Company would be required to perform it if no such
succession had taken place. Failure of the Company to obtain such assumption and
agreement prior to the effectiveness of any such succession shall be a breach of
this Agreement and shall entitle you to compensation from the Company in the
same amount and on the same terms as you would be entitled to hereunder if you
terminated your employment for Good Reason, except that for purposes of
implementing the foregoing, the date on which any such succession becomes
effective shall be deemed the Date of Termination. As used in this Agreement,
"Company" shall mean the Company as hereinbefore defined and any successor to
its business and/or assets as aforesaid which assumes and agrees to perform this
Agreement by operation of law, or otherwise.
(b) This Agreement shall inure to the benefit of and be enforceable by
your personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees. If you should die while any amount
would still be payable to you hereunder if you had continued to live, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to your "Beneficiary" as designated and defined under
the 1981 Contingent Compensation Plan under the Borg-Warner Corporation
Management Incentive Program unless superceded, in which case payment shall be
made in accordance with the most recent beneficiary designation which you may
have executed and delivered to the Company after the date of this Agreement.
(c) If your employment is continued with a successor (whether directly or
indirectly) to all or substantially all of the business and assets of the
Company and such successor assumes the obligations of the Company under this
Agreement, you will not be entitled to any severance benefits under this
Agreement solely by reason of the assumption of this Agreement and the technical
termination of your employment with the Company in connection with such
succession; provided that this Subsection 4(c) shall in no way diminish your
right to terminate your employment for Good Reason pursuant to Section 2(c) and
to receive severance in connection with such a termination.
5. Non-Compete; Confidentiality. (a) You agree that while you are
employed by the Company, you will not directly or indirectly, whether as owner,
partner, officer, employee, agent or consultant, engage in or be employed in any
way by any business engaged in the design, manufacture, marketing or servicing
of products which constituted 10% or more of the annual sales of the Company
provided, however, that in no event shall this Section 5 preclude you from
owning less than 5% of the outstanding voting stock of any publicly-traded
corporation.
(b) You shall hold in a fiduciary capacity for the benefit of the Company
all secret or confidential information, knowledge or data relating to the
Company
10
<PAGE>
or any of its affiliated companies, and their respective businesses, which shall
have been obtained by you during your employment by the Company and which shall
not be public knowledge. While employed by the Company and for three years from
the Date of Termination, if you are receiving or have received payments under
Section 3(c), you shall not, without prior written consent of the Company,
communicate or divulge any such information, knowledge or data to anyone other
than the Company and those designated by it; except the foregoing prohibition
shall not apply to the extent such information, knowledge or data (a) was
publicly known at the time of disclosure to you, (b) becomes publicly known or
available thereafter other than by any means in violation of this Agreement, or
(c) is required to be disclosed by you as a matter of law or pursuant to any
court or regulatory order.
(c) You hereby acknowledge and agree that your obligations under this
Section 5 are of a special, unique and extraordinary character and that a
failure to perform any such obligation or a violation thereof may cause
irreparable injury to the Company, the amount of which will be impossible to
estimate or determine and which cannot be adequately compensated. Therefore, you
agree that the Company shall be entitled, as a matter of course, to an
injunction, restraining order, writ of mandamus or other equitable relief from
any court of competent jurisdiction, including relief in the form of specific
performance, restraining any violation or threatened violation of any term of
this Section 5, or requiring compliance with or performance of any obligation
under this Section 5 by you and such other persons as the court shall order. The
rights and remedies provided the Company hereunder are cumulative and shall be
in addition to the rights and remedies otherwise available to the Company under
any other agreement or applicable law.
6. Notice. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth on the first page of this Agreement, provided
that all notice to the Company shall be directed to the attention of the Board
of Directors, with a copy to the Secretary of the Company, or to such other
address as either party may have furnished to the other in writing in accordance
herewith, except that notice of change in address shall be effective only upon
receipt.
7. Miscellaneous. No provision of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing and signed by you and such officer as may be specifically designated by
the Board. No waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or
11
<PAGE>
dissimilar provisions or conditions at the same or at any prior or subsequent
time. No agreements or representations, oral or otherwise, express or implied,
with respect to the subject matter hereof have been made by either party which
are not expressly set forth in this Agreement. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of Illinois. All references to sections of the Code shall be deemed
also to refer to any successor provisions to such sections. Any payments
provided for hereunder shall be paid net of any applicable withholding required
under federal, state, or local law.
8. No Vested Interest. Neither you nor your Beneficiary shall have any
right, title or interest in any benefit under this Agreement prior to the
occurrence of the right to the payment thereof, or in any property of the
Company or its subsidiaries or affiliates.
9. Prior Agreements. This Agreement contains the entire understanding
between the parties hereto with respect to severance benefits and supercedes any
such prior agreement between the Company (or any predecessor of the Company) and
you. If there is any discrepancy or conflict between this Agreement and any
plan, policy or program of the Company regarding any term or condition of
severance benefits, the language of this Agreement shall govern.
10. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
11. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
12. Arbitration. Except as provided in Section 5(c), any dispute or
controversy arising under or in connection with this Agreement shall be settled
exclusively by arbitration in the State of Illinois, in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that you shall be entitled to seek specific performance of your right
to be paid until the Date of Termination during the pendency of any dispute or
controversy arising under or in connection with this Agreement.
12
<PAGE>
If this letter sets forth our agreement on the subject matter hereof, kindly
sign and return to the Company the enclosed copy of this letter which will then
constitute our agreement on this subject.
Sincerely,
BORG-WARNER SECURITY
CORPORATION
By /s/ J. Joe Adorjan
---------------------------------
Agreed to and Accepted
September 5, 1997
/s/ Timothy M. Wood
- -----------------------------
13
<PAGE>
EXHIBIT 10.12
NONCOMPETITION AGREEMENT
AGREEMENT by and between Borg-Warner Security Corporation, a Delaware
corporation (the "Company"), and Timothy M. Wood (the "Executive"), dated as of
September 5, 1997.
WHEREAS, the Executive is currently serving as the Vice President--Chief
Financial Officer of the Company pursuant to an Amended and Restated Letter
Agreement between the Company and the Executive dated as of September 5, 1997
(the "Letter Agreement");
WHEREAS, due to the highly competitive nature of the business of the
Company, the Company has determined that it is desirable to enter into a non-
competition agreement with the Executive on the terms and conditions set forth
in this Agreement; and
WHEREAS, the Executive is willing to enter into such non-competition
agreement upon such terms and conditions;
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Noncompetition. (a) In the event the Executive's employment under the
Letter Agreement is terminated by the Company without Cause or by the Executive
for Good Reason (as so defined)
(i) During the Noncompetition Period (as defined below), the Executive
shall not, without the prior written consent of the Board of
<PAGE>
Directors of the Company (the "Board"), engage in or become associated with
a Competitive Activity.
(ii) During the one year period beginning on the termination of the
Executive's Employment under the Letter Agreement, the Executive will not
directly or indirectly induce any employee of the Company to engage in any
activity in which the Executive is prohibited from engaging by paragraph
(i) above or to terminate his employment with the Company, and will not
directly or indirectly employ or offer employment to any person who is
employed by the Company.
(iii) For purposes of Section 1(a)(i): (x) the "Noncompetition Period"
means the period beginning on such termination of the Executive's
employment under the Letter Agreement the third anniversary of the
Executive's termination of employment under the Letter Agreement; (y) a
"Competitive Activity" means any service business or other endeavor that
provides guard and investigative services, alarm systems installation and
monitoring services, armored transport or automated teller machine (ATM)
services or overnight or same day courier delivery services; and (z) the
Executive shall be considered to have become "associated with a Competitive
Activity" if he becomes directly or indirectly involved as an owner,
employee, officer, director, independent contractor, agent, partner,
advisor, or in any other capacity
2
<PAGE>
calling for the rendition of the Executive's personal services, with any
individual, partnership, corporation or other organization that is engaged
in a Competitive Activity. Notwithstanding the foregoing, the Executive may
make and retain investments during the Noncompetition Period and thereafter
in not more than five percent of the equity of any entity engaged in a
Competitive Activity, if such equity is listed on a national securities
exchange or regularly traded in an over-the-counter market.
(b) Immediately upon the termination of the Executive's employment by the
Company without Cause or by the Executive for Good Reason (each as defined in
the Letter Agreement), in consideration of the Executive's entering into this
Agreement, the Company shall pay the Executive an amount equal to the sum of (I)
the Base Guarantee (as defined in the Letter Agreement), (II) the Severance
Bonus (as defined in the Letter Agreement) and (III) the annual supplemental
benefit compensation which, absent termination, would have been payable for the
twelve month period following such termination at the rate in effect at the date
of the Executive's termination of employment.
(c) The Executive acknowledges and agrees that his obligations under this
Section 1 are of a special, unique and extraordinary character and that a
failure to perform any such obligation or a violation thereof may cause
irreparable injury to the Company, the amount of which will be impossible to
estimate or determine
3
<PAGE>
and which cannot be adequately compensated. Therefore, the Executive agrees that
the Company shall be entitled, as a matter of course, to an injunction,
restraining order, writ of mandamus or other equitable relief from any court of
competent jurisdiction, including relief in the form of specific performance,
restraining any violation or threatened violation of any term of this Section 1,
or requiring compliance with or performance of any obligation under this Section
1 by the Executive and such other persons as the court shall order. The rights
and remedies provided the Company hereunder are cumulative and shall be in
addition to the rights and remedies otherwise available to the Company under any
other agreement or applicable law. In addition, the Executive agrees that if he
breaches any provision of this Section 1, the Executive shall remit to the
Company any amounts paid to him pursuant to paragraph (b) above. The Executive
acknowledges and agrees that the provisions of this paragraph (c) are reasonable
and necessary for the protection of the Company.
2. Arbitration; Attorneys' Fees. Except as provided in Section 1(c)
above, any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration in the State of Illinois,
in accordance with the rules of the American Arbitration Association then in
effect, and judgment may be entered on the arbitrator's award in any court
having jurisdiction. If the Executive shall prevail, in whole or in part, as to
any material issue in any contest (whether initiated by the Executive or by the
Company) as to
4
<PAGE>
the validity, enforceability or interpretation of any provision of this
Agreement, the Company shall pay all reasonable expenses incurred by the
Executive with respect to such contest, including, without limitation, his
reasonable attorney's fees.
3. Successors. (a) This Agreement is personal to the Executive and,
without the prior written consent of the Company, shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.
(c) The Company shall require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company expressly to assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would have been required to perform it if no such succession had taken
place. As used in this Agreement, "Company" shall mean both the Company as
defined above and any such successor that assumes and agrees to perform this
Agreement, by operation of law or otherwise.
4. Miscellaneous. (a) This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware, without
reference to principles of conflict of laws. The captions of this Agreement are
not part of the
5
<PAGE>
provisions hereof and shall have no force or effect. This Agreement may not be
amended or modified except by a written agreement executed by the parties hereto
or their respective successors and legal representatives.
(b) All notices and other communications under this Agreement shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive:
Timothy M. Wood
6733 LeRoy
Lincolnwood, Illinois 60646
If to the Company:
Borg-Warner Security Corporation
200 South Michigan Avenue
Chicago, Illinois 60604
Attention: General Counsel
or to such other address as either party furnishes to the other in writing in
accordance with this Section 4(b). Notices and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement. If any provision of this Agreement shall be held invalid or
unenforceable in part, the remaining portion of such provision, together with
all other provisions of this Agreement, shall remain valid and enforceable and
continue in full force and effect to the fullest extent consistent with law.
6
<PAGE>
(d) Notwithstanding any other provision of this Agreement, the Company may
withhold from amounts payable under this Agreement all federal, state, local and
foreign taxes that are required to be withheld by applicable laws or
regulations.
(e) The failure of the Executive or the Company to insist upon strict
compliance with any provision of, or to assert any right under, this Agreement
shall not be deemed to be a waiver of such provision or right or of any other
provision of or right under this Agreement.
(f) This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, and which together shall constitute one
instrument.
7
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization of the Board, the Company has caused this
Agreement to be executed in its name on its behalf, all as of the day and year
first above written.
/s/ Timothy M. Wood
-------------------
Timothy M. Wood
BORG-WARNER SECURITY
CORPORATION
By: /s/ J. Joe Adorjan
------------------
Name:
Title:
8
<PAGE>
Borg-Warner Security Corporation
Innovation
"Wells Fargo Alarm Services provides electronic security services at more than
30 Caterpillar facilities nationwide. We chose Wells Fargo Alarm because they
offered innovative service options and advanced technology solutions on a
national level. Each of our locations presents a unique challenge and Wells
Fargo Alarm was able to customize each installation to meet those challenges." .
In 1997 we accelerated our investment in developing new products and services
that offer customers more complete and more reliable protection of life and
property. . Wells Fargo Alarm's newest product, SecurVision/R/, represents a
break-through in the electronic security industry. SecurVision is a video
recognition system that uses neural net technology to distinguish between human
and non-human movement. Confirmed intrusions are then encrypted and transmitted
as live video to a control center for evaluation and response, thereby reducing
the incidence of costly false alarms. . At Borg-Warner Protective Services, our
major investments in technology have provided us with the most modern and
efficient physical security services available. Touch-ToCo/R/, a security
officer tour-confirmation system; and PoCo/R/, a security officer post-
confirmation system are only two examples of technology that are adding value
and reliability to our physical security services. . Our customers depend on
Borg-Warner Security to provide them with the latest advances available in the
area of security technology and we remain committed to meeting this challenge.
[PHOTO]
Ron Smith, Corporate Security Services Systems Administrator, Caterpillar Inc.
13
<PAGE>
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. Previously reported results have
been restated to reflect the discontinued operations of the Company's courier
services unit in September 1996. In addition, the Company's armored security
services unit entered into a business combination with Loomis Armored in January
1997. The combined company, known as Loomis, Fargo & Co. ("Loomis, Fargo"), is
accounted for under the equity method. The business combination impacts the
comparison of the Company's 1997 results to prior periods because the armored
services unit was included in the Company's results of operations for only 23
days in 1997. The selected financial data should be read in connection with the
1997 Consolidated Financial Statements and accompanying notes.
<TABLE>
<CAPTION>
Statement of Operations Data Year Ended December 31,
(millions of dollars, except per share) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net service revenues $1,548.0 $1,711.2 $1,708.5 $1,626.8 $1,592.1
Earnings before interest and income taxes 72.0 80.0 71.2 59.4 (148.8)
Earnings (loss) before income taxes 30.0 23.4 15.3 10.6 (198.7)
Provision (benefit) for income taxes (1) 11.0 9.5 6.9 (3.2) 19.5
Earnings (loss) from continuing operations (2) 19.0 13.9 8.4 13.8 (218.2)
Earnings (loss) from continuing operations per share - basic(3) 0.81 0.60 0.36 0.60 (9.80)
Earnings (loss) from continuing operations per share - diluted(3) $ 0.79 $ 0.59 $ 0.36 $ 0.59 $ (9.54)
Average common shares - basic (in thousands)(4) 23,475 23,266 23,097 22,893 22,272
Average common shares and equivalents outstanding - diluted
(in thousands)(4) 24,075 23,517 23,399 23,170 22,858
Balance Sheet Data (at end of year)
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 659.6 $ 760.8 $ 838.5 $ 811.6 $ 773.5
Total debt 344.9 442.6 484.5 459.9 450.3
Shareholders' equity 65.0 41.2 49.7 43.8 27.5
Net assets of discontinued operations $ 15.4 $ 12.6 $ 36.8 $ 32.5 $ 35.1
Stock Prices First Second Third Fourth
- ---------------------------------------------------------------------------------------------------------------------------
1997 Quarters
High $ 15 1/8 $18 $19 9/16 $19 3/4
Low $ 10 1/8 $13 3/4 $16 1/8 $15 1/4
1996 Quarters
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
</TABLE>
(1) Income taxes for the year ended December 31, 1994 reflect certain
adjustments related to changes in tax bases.
(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) Earnings (loss) from continuing operations per share have been restated for
adoption of Statement of Financial Accounting Standards No. 128.
(4) The average common shares outstanding include 3,795,000 shares sold through
an initial public offering on January 27, 1993.
14
<PAGE>
Management's Responsibility for Consolidated Financial Statements Borg-Warner
Security Corporation
The information in this report is the responsibility of management. Borg-Warner
Security Corporation has in place reporting guidelines and policies designed to
ensure that the statements and other information contained in this report
present a fair and accurate financial picture of the Company. In fulfilling this
management responsibility, we make informed judgments and estimates conforming
with generally accepted accounting principles.
The accompanying financial statements have been audited by Deloitte &
Touche LLP, independent auditors. Management has made available all of the
Company's financial records and related information deemed necessary by Deloitte
& Touche LLP. Furthermore, management believes that all representations made by
it to Deloitte & Touche LLP during their audit were valid and appropriate.
Management is responsible for maintaining a comprehensive system of
internal control through its operations that provides reasonable assurance that
assets are protected from improper use, that material errors are prevented or
detected within a timely period and that records are sufficient to produce
reliable financial reports. The system of internal control is supported by
written policies and procedures that are updated by management as necessary.
The system is reviewed and evaluated regularly by the Company's internal
auditors, as well as by the independent auditors in connection with their annual
audit of the financial statements.
The independent auditors conduct their audit in accordance with generally
accepted auditing standards and perform such tests of transactions and balances
as they deem necessary. Management considers the recommendations of its internal
auditors and independent auditors concerning the Company's system of internal
control and takes the necessary actions that are cost-effective in the
circumstances. Management believes that, as of December 31, 1997, the Company's
system of internal control was adequate to accomplish the objectives set forth
in the previous paragraph.
An audit committee composed entirely of directors of the Company, who are
not employees, meets periodically with the Company's management and independent
auditors to review financial results and procedures, internal financial
controls, and internal and external audit plans and recommendations. To
guarantee independence, the audit committee and the independent auditors have
unrestricted access to each other with or without the presence of management
representatives.
/s/ J. Joe Adorjan
J. Joe Adorjan
Chairman, President and Chief Executive Officer
/s/ Timothy M. Wood
Timothy M. Wood
Vice President and Chief Financial Officer
15
<PAGE>
Results of Operations
Net Revenues
<TABLE>
<CAPTION>
1997 vs. 1996
(millions of dollars) 1997 1996 1995 Percent Change
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Physical Security Services $1,289.3 $1,223.8 $1,222.8 5.4%
Electronic Security Services 243.4 241.1 254.7 1.0%
Armored Security Services 15.3 246.3 231.0 (93.8%)
- -------------------------------------------------------------------------------
Total Revenues $1,548.0 $1,711.2 $1,708.5 (9.5%)
===============================================================================
</TABLE>
The Company's physical security services unit is the world's largest provider of
contract security personnel and related services with approximately 73,000
employees serving 14,000 customers in the United States, Canada, the United
Kingdom and Colombia. Revenue increased in 1997 principally due to new business
growth, higher billing rates and improved customer retention. Physical security
1996 revenues were essentially flat compared to 1995 primarily due to
management's decision to prune higher risk, low margin business during the year.
The Company's electronic security services unit is a leading full service
provider of integrated electronic security systems in the United States and
Canada, including intrusion and fire detection, closed circuit television and
access control. The unit has approximately 126,000 customers and 2,200
employees. The unit's revenues in 1997 increased modestly compared to 1996 as
higher direct sales of commercial installations and higher service revenue on
residential operations were principally offset by the negative impact of bank
consolidations. The electronic security services unit primarily recognizes
leased equipment under sales-type leases for certain contracts dated after
January 1, 1995 and as operating leases for prior periods. At December 31, 1997,
sales-type leases represented 46.4 percent of the lease base, compared to 25.0
percent and 15.6 percent at December 31, 1996 and 1995, respectively. The annual
aggregate retention rate, excluding the impact of bank consolidations, for all
subscriber installation leases was 90 percent in 1997 versus 89 percent in 1996
and 88 percent in 1995.
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 the
Company. The combination created a leading armored transportation and ATM
services company with broad geographic coverage. This transaction also allowed
the Company to reduce its debt by approximately $93 million through December 31,
1997. The excess of proceeds received over carrying value of net assets
contributed in the combination was substantially deferred and offset by purchase
price adjustments and provisions for other contingent liabilities related to the
contributed assets and liabilities of the armored services unit. The Company
accounts for its investment in the new company under the equity method. The
business combination impacts the comparison of the Company's 1997 results to
prior periods because the armored services unit was included in the Company's
results of operations for only 23 days in 1997. Armored security 1996 revenues
increased versus 1995 mainly due to higher volume in ATM services.
Costs and Expenses
Cost of services as a percent of revenue was 79.6 percent, 79.5 percent and 79.6
percent in 1997, 1996 and 1995, respectively. Gross profit margins remained
constant despite increased labor costs, as a result of the Company's commitment
to improve account profitability and internal productivity programs.
Depreciation expense was $39.1 million in 1997, down from $47.0 million in
1996 and $52.1 million in 1995. The 1997 decrease resulted principally from the
Loomis, Fargo combination, while the 1996 decrease resulted primarily from the
change to sales-type lease accounting for subscriber installations.
Selling, general and administrative (SG&A) expenses were $194.6 million,
$210.6 million and $212.5 million in 1997, 1996 and 1995, respectively. As a
percent of net sales, SG&A costs were 12.6 percent, 12.3 percent and 12.4
percent in 1997, 1996 and 1995, respectively. The 1997 increase as a percentage
of sales was principally due to investments in new product development,
information systems and marketing programs. The 1997 decreased spending
primarily reflects the Loomis, Fargo combination. The Company also received cash
proceeds of approximately $3.0 million from the sale of non-operating assets.
This sale resulted in a gain that was more than offset by the increases noted
above.
Operating Profit
Operating profit decreased to $80.3 million in 1997 from $93.1 million in 1996
and $85.9 million in 1995. Operating profit margin decreased to 5.2 percent in
1997 from 5.4 percent in 1996 and 5.0 percent in 1995. Operating profit from
physical security services increased to $64.9 million in 1997 from $62.1 million
in 1996 and $56.4 million in 1995. Physical security services operating profit
margins were 5.0 percent, 5.1 percent and 4.6 percent in 1997, 1996 and 1995,
respectively. Electronic security services
16
<PAGE>
Borg-Warner Security Corporation
operating profit decreased to $14.5 million in 1997 from $18.9 million in 1996
and $15.8 million in 1995. Electronic security services operating profit margins
were 6.0 percent, 7.8 percent and 6.2 percent in 1997, 1996 and 1995,
respectively. The decrease reflects the up-front cost of increased investment in
systems, sales and marketing and new product development. It also reflects the
lapse of certain purchase accounting credits related to the acquisition of Borg-
Warner in 1987. Armored security services operating profit was $0.9 million in
1997 compared with $12.1 million in 1996 and $13.7 million in 1995. The decrease
resulted from the Loomis, Fargo combination.
During 1997, the Company took several steps toward its long-term objective
of shifting from defined benefit to defined contribution retirement plans. The
Company recorded pre-tax income of approximately $3.7 million resulting from
defined pension benefit plan changes.
Other Income/Expense
Other expense in 1997 was $10.0 million versus $13.4 million in 1996 and 1995.
The 1997 decrease principally reflects a net gain of $2.2 million and reduced
amortization resulting from the Loomis, Fargo combination.
Interest Expense and Finance Charges
Interest expense, including the amortization of financing costs, decreased to
$42.0 million in 1997 from $56.6 million in 1996 and $55.9 million in 1995. The
1997 decrease from 1996 is principally due to the lower borrowing levels
resulting from the proceeds from the Loomis, Fargo combination and improved
terms under the subsequent refinancing of bank borrowings. The increase in 1996
from 1995 resulted from 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.
Income Taxes
Income taxes were $11.0 million, $9.5 million and $6.9 million in 1997, 1996 and
1995, respectively. The Company's effective tax rate in 1997 was 36.7 percent,
down from 40.6 percent in 1996 and 45.1 percent in 1995. The effective tax rate
generally exceeds the statutory rate because of non-deductible excess purchase
price amortization. The decreased 1997 effective tax rate principally relates to
Loomis, Fargo income which is included in the Company's financial statements
after-tax.
Net Earnings
Earnings from continuing operations for 1997 were $19.0 million, versus $13.9
million in 1996 and $8.4 million in 1995. Net earnings for 1997 were $19.0
million compared with a net loss of $14.6 million in 1996, which included the
impact of treating the courier services unit as a discontinued operation. Net
earnings of $1.2 million 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 1997 were $122.7 million compared with $116.7 million in 1996 and
$109.4 million in 1995. Operations are primarily in Canada, the United Kingdom
and Colombia and principally involve the employment of contract guard personnel.
Discontinued Operations
As of September 30, 1996, the Company's courier services unit has been treated
as a discontinued operation. The Company incurred an after-tax charge of $25
million, $1.06 per share, in 1996 to reflect the future realizable value of this
business.
Cash Flow
The Company generated cash flow from continuing operations of $47.4 million in
1997, compared to $57.7 million and $66.3 million in 1996 and 1995,
respectively. The decreased cash flow in 1997 was due primarily to increased
working capital requirements. Capital expenditures and investments in sales-type
leases totaled $47.9 million, $47.4 million and $52.7 million in 1997, 1996 and
1995, respectively. Core security services capital expenditures and investments
in sales-type leases totaled $47.7 million, $39.3 million and $49.0 million in
1997, 1996 and 1995, respectively. Increased 1997 spending, despite improved
spending controls, is due to higher electronic security installations. In March
1996, the Company began selling equipment payment rights due under customer
leases of certain electronic security installations. Net proceeds received by
the Company were approximately $2 million in 1997 and $10 million in 1996. For
cost and administrative reasons, the Company has suspended such sales and is
investigating alternative methods of financing its sales-type leases.
Liquidity
Total debt declined to $344.9 million at December 31, 1997 from $442.6 million
at December 31, 1996, a reduction of $97.7 million. This reduction resulted
primarily from the proceeds realized from the Loomis, Fargo combination.
17
<PAGE>
On March 24, 1997, the Company completed a refinancing pursuant to which it
issued $125 million principal amount of 9 5/8% senior subordinated notes due in
2007 and replaced its existing term loan, revolving credit and letter of credit
facilities with a new credit facility consisting of up to a $155 million
revolving credit facility and up to a $155 million letter of credit facility
subject to an overall limit on the aggregate amount outstanding under both
facilities of $285 million. The new credit facility matures on March 31, 2002
with mandatory semiannual reductions in the total commitments totaling $10
million in 1999, $20 million in 2000 and $30 million in 2001. At year-end 1997,
$63.9 million was outstanding under the revolving credit facility and letters of
credit totaling $110.8 million were issued and outstanding.
The Company has an accounts receivable facility providing for the sale of a
$120 million undivided interest in a revolving pool of customer receivables.
Other current assets at December 31, 1997 and December 31, 1996 included
interest bearing cash deposits of $17.6 million and $9.8 million, respectively,
that were held in trust under the terms of the accounts receivable facility.
These deposits represent collections held back based on the amount of eligible
receivables in the revolving receivables pool. The Company presently intends to
replace this facility with a similar facility.
The Company believes that cash generated from future operations and capital
resources will enable it to maintain its current level of operations and its
planned operations, including capital expenditures and investment in sales-type
leases, for the foreseeable future. Additionally, the Company has initiated
programs to review its computer systems and applications for compatibility with
the year 2000. Expenditures specifically related to modifications for year 2000
compatibility are not expected to be material.
As discussed more fully in Note 8 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.
18
<PAGE>
Consolidated Statement of Operations Borg-Warner Security Corporation
<TABLE>
<CAPTION>
Year Ended December 31,
(millions of dollars, except per share) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net service revenues $1,548.0 $1,711.2 $1,708.5
Cost of services 1,232.3 1,360.2 1,359.3
Selling, general and administrative expenses 194.6 210.6 212.5
Depreciation 39.1 47.0 52.1
Other expense, net 10.0 13.4 13.4
Interest expense and finance charges 42.0 56.6 55.9
- --------------------------------------------------------------------------------------------------------------
Earnings before income taxes 30.0 23.4 15.3
Provision for income taxes-Note 12 11.0 9.5 6.9
- --------------------------------------------------------------------------------------------------------------
Earnings from continuing operations 19.0 13.9 8.4
Loss from discontinued operations, net of income taxes-Note 4 -- (28.5) (2.5)
- --------------------------------------------------------------------------------------------------------------
Earnings (loss) before extraordinary item 19.0 (14.6) 5.9
Extraordinary item:
Loss from early extinguishment of debt, net of $3.2 tax benefit-Note 5 -- -- (4.7)
- --------------------------------------------------------------------------------------------------------------
Net earnings (loss) $19.0 $(14.6) $ 1.2
==============================================================================================================
Earnings (loss) per common share - basic:
Continuing operations $0.81 $ 0.60 $ 0.36
Discontinued operations -- (1.23) (0.11)
Extraordinary item -- -- (0.20)
- --------------------------------------------------------------------------------------------------------------
Net earnings (loss) per share $0.81 $(0.63) $ 0.05
==============================================================================================================
Earnings (loss) per common share - diluted:
Continuing operations $0.79 $ 0.59 $ 0.36
Discontinued operations -- (1.21) (0.11)
Extraordinary item -- -- (0.20)
- --------------------------------------------------------------------------------------------------------------
Net earnings (loss) per share $0.79 $(0.62) $ 0.05
==============================================================================================================
</TABLE>
(See accompanying notes to consolidated financial statements)
19
<PAGE>
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31,
(millions of dollars, except share data) 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 8.7 $ 17.8
Receivables, net 52.2 63.7
Inventories 11.0 12.1
Other current assets 72.3 73.5
- ---------------------------------------------------------------------------------------------------------------------
Total current assets 144.2 167.1
Property, plant and equipment
Land and buildings 30.4 46.9
Machinery and equipment 39.9 67.6
Subscribers' installations 278.5 312.8
Capital leases 2.8 14.3
Construction in progress 0.6 1.0
- ---------------------------------------------------------------------------------------------------------------------
352.2 442.6
Less accumulated depreciation 210.9 239.5
- ---------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 141.3 203.1
Net excess purchase price over net assets acquired 198.9 237.2
Deferred tax asset, net 39.1 46.8
Net assets of discontinued operations 15.4 12.6
Other assets 120.7 94.0
- ---------------------------------------------------------------------------------------------------------------------
Total other assets 374.1 390.6
- ---------------------------------------------------------------------------------------------------------------------
$659.6 $760.8
=====================================================================================================================
Liabilities and Shareholders' Equity
Notes payable $ 2.4 $ 4.4
Accounts payable and accrued expenses 145.5 173.7
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 147.9 178.1
Long-term debt 342.5 438.2
Other long-term liabilities 104.2 103.3
Capital stock:
Common stock, issued 23,362,806 shares in 1997 and 22,446,100 shares in 1996 0.2 0.2
Series I non-voting common stock, issued 2,720,000 shares in 1997 and 1996 -- --
Capital in excess of par value 30.8 29.0
Retained earnings 41.7 20.6
Notes receivable-management stock purchase -- (0.3)
Cumulative translation adjustment -- 0.5
- ---------------------------------------------------------------------------------------------------------------------
72.7 50.0
Treasury common stock, at cost, 2,506,400 shares in 1997 and 1,862,311 shares in 1996 (7.7) (8.8)
- ---------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 65.0 41.2
- ---------------------------------------------------------------------------------------------------------------------
$659.6 $760.8
=====================================================================================================================
</TABLE>
(See accompanying notes to consolidated financial statements)
20
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Cash Flows Borg-Warner Security Corporation
Year ended December 31,
(millions of dollars) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
Operating:
<S> <C> <C> <C>
Continuing operations:
Earnings from continuing operations $ 19.0 $ 13.9 $ 8.4
Adjustments to reconcile net earnings to net cash
provided by continuing operations:
Non-cash charges to earnings:
Depreciation and amortization 50.2 60.4 65.5
Provision for losses on receivables 1.8 2.7 4.4
Deferred income taxes 7.7 6.0 (2.0)
Amortization of debt discount -- 0.6 2.1
Principal reduction in sales-type leases 13.0 9.9 4.6
Changes in assets and liabilities:
(Increase) decrease in receivables (20.9) 7.3 10.9
(Increase) decrease in other current assets 4.1 (17.7) (21.7)
(Decrease) increase in accounts payable and accrued expenses (9.8) (11.9) 13.8
Net change in other long-term assets and liabilities (15.5) (13.5) (19.7)
Gain on sale of assets of armored services unit (2.2) -- --
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operations 47.4 57.7 66.3
Discontinued operations:
Net loss -- (28.5) (2.5)
Other cash related to discontinued operations (2.8) 24.2 (4.3)
- -------------------------------------------------------------------------------------------------------------------
Net cash used in discontinued operations (2.8) (4.3) (6.8)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 44.6 53.4 59.5
Investing:
Capital expenditures, excluding sales-type leases (8.9) (14.5) (10.9)
Investment in sales-type leases (39.0) (32.9) (41.8)
Net outsourcing of sales-type leases 1.7 9.6 --
Proceeds from sale of assets of armored services unit 92.9 -- --
Other, net 0.9 1.9 (1.1)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 47.6 (35.9) (53.8)
Financing:
(Decrease) increase in notes payable (1.5) 0.8 (6.1)
(Decrease) increase in debt outstanding under revolving credit facility (22.9) (37.8) 19.4
(Decrease) increase in receivables sold (7.8) 21.3 (23.1)
Issuance of long-term debt 125.0 100.0 100.0
Retirement of long-term debt (196.8) (105.5) (90.8)
Sales of treasury common stock 1.1 0.3 1.0
Other, net 1.6 1.8 (2.0)
- -------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (101.3) (19.1) (1.6)
- -------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (9.1) (1.6) 4.1
Cash and cash equivalents at beginning of year 17.8 19.4 15.3
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 8.7 $ 17.8 $ 19.4
===================================================================================================================
Supplemental cash flow information:
Interest paid $ 40.8 $ 57.7 $ 54.2
Income taxes paid 9.4 2.8 0.7
</TABLE>
(See accompanying notes to consolidated financial statements)
21
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
(millions of dollars, except share data) Shares Amount Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Common Stock Issued
Beginning balance 25,166,100 $ 0.2 25,166,100 $ 0.2 25,155,700 $ 0.2
Shares issued under stock option and
related plans 16,706 -- -- -- -- --
Conversion of Series I non-voting shares
to common shares 900,000 -- -- -- 10,400 --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 26,082,806 0.2 25,166,100 0.2 25,166,100 0.2
- ------------------------------------------------------------------------------------------------------------------------------------
Capital in Excess of Par Value
Beginning balance 29.0 28.1 30.9
Shares issued under stock option and
related plans 1.0 0.4 (5.4)
Tax benefit from trust distribution and exercise of
stock options 0.8 0.5 2.6
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 30.8 29.0 28.1
- ------------------------------------------------------------------------------------------------------------------------------------
Retained Earnings
Beginning balance 20.6 31.2 29.7
Net earnings (loss) 19.0 (14.6) 1.2
Adjustment for deferred pension experience loss 2.1 4.0 0.3
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 41.7 20.6 31.2
- ------------------------------------------------------------------------------------------------------------------------------------
Notes Receivable-Management Stock Purchase
Beginning balance (0.3) (0.3) (1.0)
Net activity 0.3 -- 0.7
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 -- (0.3) (0.3)
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative Translation Adjustment
Beginning balance 0.5 (0.4) (0.5)
Current year adjustment (0.5) 0.9 0.1
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 -- 0.5 (0.4)
- ------------------------------------------------------------------------------------------------------------------------------------
Treasury Stock
Beginning balance 1,862,311 (8.8) 1,928,861 (9.1) 2,237,344 (15.5)
Shares issued under stock option and
related plans (255,911) 1.1 (66,550) 0.3 (318,883) 6.4
Conversion of Series I non-voting shares
to common shares 900,000 -- -- -- 10,400 --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 2,506,400 (7.7) 1,862,311 (8.8) 1,928,861 (9.1)
====================================================================================================================================
Total Shareholders' Equity $65.0 $ 41.2 $49.7
====================================================================================================================================
</TABLE>
(See accompanying notes to consolidated financial statements)
22
<PAGE>
Notes to Consolidated Financial Statements Borg-Warner Security Corporation
Note 1 -- Summary of Significant Accounting Policies
The following paragraphs briefly describe significant accounting policies.
Certain 1996 and 1995 amounts have been reclassified to conform with the 1997
presentation.
Principles of Consolidation
The consolidated financial statements include all significant subsidiaries. As
of September 30, 1996, the Company's courier services 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 4). On
January 24, 1997, the Company's armored services unit 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 the
Company. The Company accounts for its investment in Loomis, Fargo under the
equity method. The business combination impacts the comparison of the Company's
1997 results to prior periods because the armored unit was included in the
Company's results of operations for only 23 days in 1997 (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
Amortization of Excess 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.
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. The Company has no interest rate swap agreements outstanding
(see Note 6).
Casualty Insurance Liabilities
The Company has accrued a discounted liability for the retained portion of
insurance costs related to its various deductible policies. This insurance
liability is determined by the Company based on claims filed and an estimate of
claims incurred but not yet reported (see Note 2).
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.
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 carryforward 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.
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.
23
<PAGE>
These contributions are charged to earnings as they are made to the various
plans (see Note 9).
Stock Options
The Company uses the intrinsic value method for expense recognition for stock
options and discloses additional information, including the impact under the
fair value method, in the notes to the financial statements (see Note 10).
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 12).
Earnings Per Common Share (EPS)
In 1997, the Company adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share." This statement replaced the presentation and
calculation of primary EPS and fully diluted EPS with basic EPS and diluted EPS.
The statement requires disclosure of basic and diluted EPS on the face of the
financial statements. Basic EPS is based on average outstanding common shares.
Diluted EPS is 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.
Prior years EPS have been restated under the new method (see Note 14).
New Accounting Pronouncements
In January 1997, the Company adopted Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". The adoption of this standard did not have a
material effect on the financial statements.
<TABLE>
<CAPTION>
Note 2 -- Balance Sheet Information
Detailed balance sheet data are as follows:
December 31,
(millions of dollars) 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Receivables
Customers $ 55.8 $ 66.1
Other 1.3 3.9
- -----------------------------------------------------------------------------
57.1 70.0
Less allowance for losses 4.9 6.3
- -----------------------------------------------------------------------------
Net receivables $ 52.2 $ 63.7
=============================================================================
Other current assets
Retained interest in receivables $ 30.8 $ 36.7
Restricted interest-bearing
cash deposits 17.6 9.8
Other 23.9 27.0
- -----------------------------------------------------------------------------
Total other current assets $ 72.3 $ 73.5
=============================================================================
Other assets
Net investment in sales-type leases $ 78.2 $ 54.4
Debt issuance costs 8.0 10.4
Deferred pension asset 12.1 9.1
Deferred subscribers' installation costs 6.3 5.4
Other 16.1 14.7
- -----------------------------------------------------------------------------
Total other assets $120.7 $ 94.0
=============================================================================
Accounts payable and accrued expenses
Trade payables $ 36.5 $ 42.5
Payroll and related 38.6 41.6
Casualty insurance 27.6 44.4
Interest 6.7 5.2
Liabilities to former shareholders 7.7 8.7
Deferred income 10.1 10.3
Other 18.3 21.0
- -----------------------------------------------------------------------------
Total accounts payable and
accrued expenses $145.5 $173.7
=============================================================================
</TABLE>
The Company has an agreement under which it sells a revolving pool of trade
accounts receivable to a special purpose subsidiary of the Company. At December
31, 1997 and 1996 the subsidiary had purchased $150.8 million and $156.7 million
of such accounts receivable. The subsidiary sells up to $120 million of
undivided interests in such accounts receivable. The difference represents the
interest retained by the Company which is considered as an interest in a
security and has been included in "Other current assets". The fair value of the
retained interest approximates its carrying value
24
<PAGE>
Borg-Warner Security Corporation
due to the short-term nature of the receivables. Also included in "Other current
assets" is $17.6 million and $9.8 million at December 31, 1997 and 1996,
respectively, representing interest-bearing cash deposits held in trust under
the terms of the agreement. These deposits represent proceeds of collections
held back based on the amount of eligible receivables in the pool. The Company's
retained interest in the receivables and cash deposits are generally restricted.
Selling, general and administrative expenses include provisions for losses
on receivables of $1.8 million, $2.7 million and $4.4 million in 1997, 1996 and
1995, respectively.
Accumulated depreciation related to capital leases amounted to $0.2 million
and $8.8 million at December 31, 1997 and 1996, respectively. Accumulated
amortization related to excess purchase price over net assets acquired amounted
to $74.9 million and $74.2 million at December 31, 1997 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 $25.6 million and $32.7 million at December 31, 1997 and 1996,
respectively.
The non-current portion of the casualty insurance liability, included in
other long-term liabilities, was $58.6 million and $44.2 million at December 31,
1997 and 1996, respectively. The total discounted insurance accrual, including
the portion reflected in accounts payable and accrued liabilities, was $86.2
million and $88.6 million at December 31, 1997 and 1996, respectively. The
estimated aggregate undiscounted insurance liability was $101.1 million and
$101.9 million at December 31, 1997 and 1996, respectively. The discount rate
used to value the future obligation at December 31, 1997 and 1996 was 6.0
percent and 5.5 percent, respectively.
Note 3 -- Investment in Affiliates
On January 24, 1997, the Company's armored security services unit 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 the Company. The Company's armored services unit contributed
substantially all of its assets and assigned certain of its liabilities to
Loomis, Fargo in exchange for (i) 4,900,000 shares of Loomis, Fargo common stock
and (ii) a cash payment of approximately $105 million which includes amounts
paid to satisfy intercompany indebtedness assumed by Loomis, Fargo. The cash
proceeds received were net of transaction costs and subject to certain
adjustments. At December 31, 1997, $3.5 million has been expended to settle
working capital adjustments and $8.7 million for payments of retained casualty
insurance liabilities.
The business combination impacts the comparison of the Company's 1997
results to prior periods because the armored services unit was included in the
Company's results of operations for only 23 days in 1997. Armored security
revenues were $15.3 million, $246.3 million and $231.0 million in 1997, 1996 and
1995, respectively. Armored security operating profit was $0.9 million in 1997,
compared with $12.1 million in 1996 and $13.7 million in 1995. Total assets at
December 31, 1996 were $87.4 million.
The Company accounts for its interest in Loomis, Fargo as a 49% owned
equity investment. The excess of proceeds received over carrying value of net
assets contributed in the Loomis, Fargo combination was substantially deferred
and offset by purchase price adjustments and provisions for other contingent
liabilities related to the contributed assets and liabilities of the armored
services unit. In 1997, the net gain recognized by the Company on the
combination was $2.2 million. The net loss recognized under the equity method
for the year was $1.1 million. The Company does not guarantee the indebtedness
of Loomis, Fargo nor is it required to fund Loomis, Fargo's future operations.
Note 4 -- Discontinued Operations
As of September 30, 1996, the Company's courier services 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. The Company
incurred an after-tax charge of $25 million, $1.06 per share, in 1996 to reflect
the future realizable value of this business.
At December 31, 1997, the net assets of the discontinued operation consist
mainly of customer receivables, property, plant and equipment and accounts
payable. Net service revenues were $142.2 million, $140.0 million and $154.0
million in 1997, 1996 and 1995, respectively. Net loss was $7.2 million (net of
$3.9 million tax benefit), $5.4 million (net of $2.8 million tax benefit) and
$2.5 million (net of $1.0 million tax benefit) in 1997, 1996 and 1995,
respectively. Management believes that the estimated loss for the disposal of
the unit recorded in 1996 continues to be adequate to cover the ultimate
disposition of the operation. The Company has an active program in place to find
a buyer for the unit and expects that the unit will be sold in the near future.
25
<PAGE>
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, 1997 December 31, 1996
(millions of dollars) Current Long-Term Current Long-Term
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
9 1/8% senior subordinated notes (face amount $150 million due 2003) $ -- $149.2 $ -- $149.2
9 5/8% senior subordinated notes (face amount $125 million due 2007) -- 124.2 -- --
Bank revolving credit loan due through 1999
(at an average rate of 7.9% in 1997 and 8.5% in 1996) -- 63.9 -- 86.8
Bank term loan due 1998 (at an average of 8.9% in 1996) -- -- -- 196.8
Capital lease liability (at an average rate of 9.2% in 1997
and 10.2% in 1996) 1.3 5.0 2.4 5.3
Unsecured notes (at an average rate of 7.6% in 1997
and 7.3% in 1996) 1.1 0.2 2.0 0.1
- -------------------------------------------------------------------------------------------------------------------
Total notes payable and long-term debt $2.4 $342.5 $4.4 $438.2
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Maturities of long-term debt, including unamortized discount of $1.6 million,
are as follows: 1999, $11.5 million; 2000, $21.3 million; 2001, $31.2 million;
2002, $4.6 million; and after 2002, $275.5 million.
Included in long-term debt at December 31, 1997 and 1996 were obligations
of $278.6 million and $154.5 million, respectively, with fixed interest rates
and $63.9 million and $283.7 million, respectively, with variable interest rates
(generally based on LIBOR or prime rate).
In 1997, the Company completed a refinancing which included a new $285
million bank facility and the issuance of $125 million principal amount of
9 5/8% senior subordinated notes due in 2007. The bank facility includes a
revolving credit commitment of $155 million and the capacity to issue up to $155
million letters of credit. The bank facility is available through March 31,
2002. The committed amount under the bank facility reduces semi-annually
beginning September 30, 1999. Available future commitments at December 31 are as
follows: 1998, $285 million; 1999, $275 million; 2000, $255 million; and 2001,
$225 million. At December 31, 1997, unused revolving credit commitments were
$91.1 million, and letters of credit totalling $110.8 million were issued and
outstanding.
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 - 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, 1997
and 1996 were as follows:
<TABLE>
<CAPTION>
December 31,
(millions of dollars) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Carrying amount $342.5 $438.2
Fair value 347.1 437.7
</TABLE>
Interest rate swaps
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. The Company has no interest rate swap agreements
outstanding.
26
<PAGE>
Borg-Warner Security Corporation
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, 1997 and 1996 were $110.8 million and $136.3 million, respectively. To
monitor the counter parties' ability to perform, these letters of credit are
only executed with major financial institutions.
Note 7 - 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, 1997 as follows:
<TABLE>
<CAPTION>
Fiscal year (millions of dollars)
- ----------------------------------------------------------------
<S> <C>
1998 $12.6
1999 9.2
2000 5.8
2001 2.8
2002 1.9
2003 and after 6.4
- ----------------------------------------------------------------
Total $38.7
================================================================
</TABLE>
Total rental expense amounted to $17.9 million, $26.7 million and $26.1 million
in 1997, 1996 and 1995, respectively.
Note 8 - 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. While the Company has recognized
provisions in its financial statements for potential claims related to the
Centaur litigation, it believes that any damages for failure to satisfy
reinsurance obligations are solely the responsibility of Centaur and that the
resolution of the lawsuit relating to Centaur, including the Company's
indemnification obligations to certain former officers and directors, will not
have a material adverse effect on its financial position or future operating
results; however, no assurance can be given as to the ultimate outcome with
respect to such lawsuit.
The Company and certain of its current and former subsidiaries have been
identified by the U.S. Environmental Protection Agency and certain state
environmental agencies as potentially responsible parties ("PRPs") at several
hazardous waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act ("Superfund") and equivalent state laws and, as
such, may be liable for the cost of cleanup and other remedial activities at
these sites. Responsibility for cleanup and other remedial activities at a
Superfund site is typically shared among PRPs based on an allocation formula.
The Company believes that none of these matters individually or in the aggregate
will have a material adverse effect on its financial position or future
operating results, generally either because the maximum potential liability at a
site is not large or because liability will be shared with other PRPs, although
no assurance can be given with respect to the ultimate outcome of any such
liability. Based on its estimate of allocations of liability among PRPs, the
probability that other PRPs, many of whom are large, solvent public companies,
will fully pay the costs allocated to them, currently available information
concerning the scope of contamination at such sites, estimated remediation costs
at such sites, 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 $7 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, 1997 such past costs were
approximately $3.5 million. Borg-Warner Automotive has contested its
indemnification obligation with respect to such liabilities. The parties
submitted the dispute to binding arbitration. In November 1997, the arbitrator
found in favor of the Company. In February 1998, an appellate panel upheld the
arbitration award. Separately, in January 1998, Borg-Warner Automotive filed
suit against the Company raising the same issues asserted in the arbitration and
other issues related to the 1993 spin-off of Borg-Warner Automotive. The lawsuit
seeks specific performance, equitable relief and unspecified compensatory and
punitive damages.
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.
27
<PAGE>
Note 9 - Retirement Benefits
The Company has various defined benefit and contribution plans which cover
eligible employees.
Retirement benefit expense (income) amounted to ($0.8) million, $4.5
million and $4.7 million in 1997, 1996 and 1995, respectively. This expense
includes post-retirement life insurance and medical benefits of $0.3 million for
1997, 1996 and 1995, respectively, as well as defined contribution plan expenses
of $1.5 million, $1.5 million and $1.7 million in 1997, 1996 and 1995,
respectively. Also, under the provisions of SFAS No. 88, "Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," benefit freezes resulted in the recognition of $3.7
million of net curtailment gains in 1997. This gain resulted from the net
decrease in the Company's benefit obligation for employees affected by the
armored services unit combination with Loomis Armored Inc., the treatment of the
courier services unit as a discontinued operation and other benefit freezes.
The following table sets forth the funded status of the defined benefit
plans:
<TABLE>
<CAPTION>
Funded Status December 31, 1997 December 31, 1996
(millions of dollars) Over Over Under
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits $102.0 $60.6 $ 25.7
Non-vested benefits 2.6 2.6 0.1
- ------------------------------------------------------------------------------------------------------
Accumulated benefit obligations 104.6 63.2 25.8
Effect of projected future compensation levels 2.0 5.0 --
- ------------------------------------------------------------------------------------------------------
Projected benefit obligation 106.6 68.2 25.8
Plan assets at fair value 124.4 81.4 20.5
- ------------------------------------------------------------------------------------------------------
Assets in excess of (less than) projected benefit obligation 17.8 13.2 (5.3)
Unrecognized net loss (gain) (6.5) (4.9) 3.1
Unrecognized prior service cost 0.8 0.8 --
- ------------------------------------------------------------------------------------------------------
Net asset (liability) before minimum liability 12.1 9.1 (2.2)
Adjustment required to recognize minimum liability -- -- (3.1)
- ------------------------------------------------------------------------------------------------------
Net asset (liability) on balance sheet $ 12.1 $ 9.1 ($5.3)
======================================================================================================
</TABLE>
Assets held in trust for the defined benefit plans are comprised primarily of
marketable equity and fixed income securities.
Provisions of FASB Statement No. 87 require the Company, under certain
circumstances, to record a minimum pension liability relating to unfunded
accumulated benefit obligations and reduce shareholders' equity, net of future
tax benefits. During 1997, minimum pension liability recorded in prior years was
eliminated as a result of the merger of several plans and performance of
invested assets.
Net periodic pension expense for the defined benefit plans was comprised as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
(millions of dollars) 1997 1996 1995
- --------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 2.4 $ 3.3 $ 2.4
Interest cost 7.6 7.0 6.9
Actual return on assets (25.7) (12.5) (20.4)
Net amortization and deferrals 16.8 4.9 13.8
- --------------------------------------------------------------
Net periodic pension cost $ 1.1 $ 2.7 $ 2.7
==============================================================
</TABLE>
The Company's assumptions used as of December 31, 1997, 1996 and 1995 in
determining the pension cost and pension liability shown above were as follows:
<TABLE>
<CAPTION>
(percent) 1997 1996 1995
- --------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.5 8.0 7.5
Rate of salary progression 4.0 4.0 4.0
Long-term rate of return on assets 10.0 10.0 9.5
</TABLE>
The Company also has post-employment benefits covering certain existing and
former employees, including employees of businesses which have been divested by
the Company. The liabilities on the Company's balance sheet for these benefits
as of December 31, 1997 and 1996 were $10.7 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 1997 and 8.0% in 1996.
Medical expense increases are projected to be 6.25% in 1998 grading to 5.25% in
1999.
28
<PAGE>
Borg-Warner Security Corporation
Note 10 - Stock Options
The Company has stock incentive plans that authorize the grant of options to
purchase 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 1997, 1996 and 1995 there were no options canceled or converted.
Common shares under option for the years ended December 31, 1997, 1996 and
1995 are summarized as follows:
<TABLE>
<CAPTION>
Number of Shares (thousands of shares) Weighted-Average Exercise Price
1997 1996 1995 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares under option at January 1 1,545 1,810 1,843 $12.20 $13.34 $14.49
Granted 843 159 390 11.30 10.98 8.50
Exercised (273) (66) (141) 6.12 5.00 5.00
Forfeited (143) (358) (282) 16.03 18.76 18.36
- ---------------------------------------------------------------------------------------------------------------------------
Shares under option at end of year 1,972 1,545 1,810 $12.38 $12.20 $13.34
===========================================================================================================================
Options exercisable 917 985 800
===================================================================================
Shares available for future grant 664 1,177 78
===================================================================================
Weighted-average fair value of options
granted during the year $ 4.39 $ 4.00 $ 3.57
===================================================================================
</TABLE>
Additional information regarding options outstanding as of December 31, 1997 is
as follows (thousands of shares):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------- ---------------------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life (yrs) Exercise Price Exercisable Exercise Price
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 5.00- 8.75 426 6.8 $ 8.20 281 $ 8.05
10.56-15.94 1,251 8.1 12.38 368 15.33
16.03-18.83 233 3.8 17.98 217 17.99
19.06-20.75 62 5.8 20.04 51 20.11
- ------------------------------------------------------------------------------------------------------------------------
$ 5.00-20.75 1,972 7.2 $12.38 917 $14.00
========================================================================================================================
</TABLE>
The 1,055 thousand options outstanding at December 31, 1997 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) 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) As reported $19.0 $(14.6)
Pro forma 18.2 (14.9)
Earnings (loss) per share-basic As reported $0.81 $(0.63)
Pro forma 0.78 (0.64)
Earnings (loss) per share-diluted As reported $0.79 $(0.62)
Pro forma 0.76 (0.63)
</TABLE>
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 1997 and 1996, respectively: expected volatility
of 41% and 41%; risk-free interest rates of 5.28-5.30% and 6.15-6.22%; and
expected lives of four and three to four years.
29
<PAGE>
Note 11 - Business Segment Information
The Company's continuing operations have been classified into three business
segments: physical, electronic and armored security services. The physical
security segment provides contract security officers to patrol client
facilities, monitor electronic systems and control public and employee access.
The electronic security segment primarily designs, installs, monitors and
services sophisticated electronic security systems and fire and intrusion
detection systems. The armored security segment transported currency, securities
and other valuables. Additionally, this segment provided full-service automated
teller machine operations and cash management services such as deposit
verification and currency processing.
As discussed in Note 3, the Company combined its armored security business
with Loomis Armored Inc. to form a new company, Loomis, Fargo & Co. The Company
accounts for its investment in Loomis, Fargo under the equity method. The
business combination impacts the comparison of the Company's 1997 results to
prior periods because the armored security segment was included in the Company's
results of operations for only 23 days in 1997.
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. Certain interim reported information has
been reclassified to conform with the full year presentation.
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.
30
<PAGE>
Borg-Warner Security Corporation
Summarized financial information by business segment for 1997, 1996 and 1995 is
as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
(millions of dollars) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net service revenues:
Physical security services $1,289.3 $1,223.8 $1,222.8
Electronic security services 243.4 241.1 254.7
Armored security services 15.3 246.3 231.0
- ------------------------------------------------------------------------------------------------------
Total net service revenues $1,548.0 $1,711.2 $1,708.5
======================================================================================================
Operating profit:
Physical security services $ 64.9 $ 62.1 $ 56.4
Electronic security services 14.5 18.9 15.8
Armored security services 0.9 12.1 13.7
- ------------------------------------------------------------------------------------------------------
Total operating profit 80.3 93.1 85.9
Other expense, net 8.3 13.1 14.7
Interest expense 42.0 56.6 55.9
- ------------------------------------------------------------------------------------------------------
Earnings before taxes 30.0 23.4 15.3
Provision for income taxes 11.0 9.5 6.9
- ------------------------------------------------------------------------------------------------------
Earnings from continuing operations $ 19.0 $ 13.9 $ 8.4
======================================================================================================
Depreciation:
Physical security services $ 4.3 $ 5.7 $ 7.3
Electronic security services/(a)/ 34.2 34.2 37.4
Armored security services 0.4 7.0 7.1
Corporate 0.2 0.1 0.3
- ------------------------------------------------------------------------------------------------------
Total depreciation $ 39.1 $ 47.0 $ 52.1
======================================================================================================
Amortization of excess purchase price over net assets acquired:
Physical security services $ 7.8 $ 8.9 $ 8.9
Electronic security services 3.0 2.9 2.8
Armored security services 0.1 1.4 1.5
Corporate 0.2 0.2 0.2
- ------------------------------------------------------------------------------------------------------
Total amortization $ 11.1 $ 13.4 $ 13.4
======================================================================================================
Capital expenditures and investment in sales-type leases:
Physical security services $ 4.1 $ 3.1 $ 3.6
Electronic security services 43.6 36.2 45.4
Armored security services 0.2 8.1 3.7
- ------------------------------------------------------------------------------------------------------
Total capital expenditures and investment in sales-type leases $ 47.9 $ 47.4 $ 52.7
======================================================================================================
Identifiable assets:
Physical security services $ 206.4 $ 231.1
Electronic security services 346.7 348.2
Armored security services -- 87.4
Discontinued operations 15.4 12.6
Corporate 91.1 81.5
- ------------------------------------------------------------------------------------------
Total identifiable assets $ 659.6 $ 760.8
==========================================================================================
</TABLE>
/(a)/ Excludes principal repayments of sales-type leases totalling $13.0
million, $9.9 million and $4.6 million in 1997, 1996 and 1995, respectively.
31
<PAGE>
Note 12 -- Income Taxes
Earnings before income taxes from continuing operations and provision for income
taxes consist of:
<TABLE>
<CAPTION>
Non- 1997 Non- 1996 Non- 1995
(millions of dollars) U.S. U.S. Total U.S. U.S. Total U.S. U.S. Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings before income taxes $26.7 $3.3 $30.0 $19.1 $4.3 $23.4 $11.9 $3.4 $15.3
=====================================================================================================================
Income taxes:
Current:
Federal/Foreign $ 0.5 $1.3 $ 1.8 $ 0.7 $1.3 $ 2.0 $ 6.4 $1.5 $ 7.9
State 1.5 -- 1.5 1.5 -- 1.5 1.0 -- 1.0
- ---------------------------------------------------------------------------------------------------------------------
2.0 1.3 3.3 2.2 1.3 3.5 7.4 1.5 8.9
Deferred 7.7 -- 7.7 6.0 -- 6.0 (2.0) -- (2.0)
- ---------------------------------------------------------------------------------------------------------------------
Provision for income taxes $ 9.7 $1.3 $11.0 $ 8.2 $1.3 $ 9.5 $ 5.4 $1.5 $ 6.9
=====================================================================================================================
</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) 1997 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes at U.S. statutory rate of 35% $10.5 $ 8.2 $ 5.3
Increases (decreases) resulting from:
State income taxes 1.0 0.8 0.8
Non-temporary differences 0.1 0.7 0.7
Other, net (0.6) (0.2) 0.1
- ----------------------------------------------------------------------------------------
Income taxes reported $11.0 $ 9.5 $ 6.9
========================================================================================
</TABLE>
Following are the components of the net deferred tax asset as of December 31,
1997 and 1996:
<TABLE>
<CAPTION>
(millions of dollars) 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Liabilities for casualty insurance $ 35.9 $ 35.6
Liabilities related to discontinued operations 7.9 9.6
Liabilities for pension benefits -- 0.4
Liabilities for other post-retirement benefits 4.2 4.6
Other, net 1.1 2.8
Net operating loss carry-forward -- 10.9
General business credit 24.8 26.3
Minimum tax credit 26.6 26.6
Foreign tax credit 0.4 1.3
- ----------------------------------------------------------------------------------------
Total deferred tax assets 100.9 118.1
Valuation allowance (5.3) (6.8)
- ----------------------------------------------------------------------------------------
95.6 111.3
Deferred tax liabilities:
Fixed assets (37.7) (43.9)
Investments (13.1) (13.1)
Net excess purchase price over net assets acquired (5.7) (7.5)
- ----------------------------------------------------------------------------------------
Total deferred tax liabilities (56.5) (64.5)
- ----------------------------------------------------------------------------------------
Net deferred tax asset $ 39.1 $ 46.8
========================================================================================
</TABLE>
32
<PAGE>
The foreign tax credit carry-forward has been fully considered in the valuation
allowance at both December 31, 1997 and 1996 while an additional allowance of
$4.8 million and $5.5 million at December 31, 1997 and 1996, respectively, has
been established against the other credits. The general business credit carry-
forward will expire in years 2004-2009 while the minimum tax credit can be
carried forward indefinitely.
Note 13 - Capital Stock
The following table summarizes the Company's capital stock at December 31, 1997
and 1996:
<TABLE>
<CAPTION>
December 31,
(thousands of shares) 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common stock, $.01 par value:
Authorized 50,000.0 50,000.0
Issued 23,362.8 22,446.1
Outstanding 23,326.8 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 249.6 1,149.6
Preferred stock, $.01 par value:
Authorized 5,000.0 5,000.0
Issued and Outstanding --- ---
Note 14 - Earnings Per Share
1997 1996 1995
Per Share Per Share Per Share
(millions of dollars, except per share) Earnings Shares Amount Earnings Shares Amount Earnings Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings from
continuing operations $ 19.0 $13.9 $8.4
Basic EPS
Earnings available to
common shareholders 19.0 23.5 $0.81 13.9 23.3 $0.60 8.4 23.1 $ 0.36
====================================================================================================================================
Effect of Dilutive Securities
Outstanding stock options - 0.6 - 0.2 - 0.3
Diluted EPS
Earnings available to
common shareholders +
assumed conversions $ 19.0 24.1 $0.79 $13.9 23.5 $0.59 $8.4 23.4 $ 0.36
====================================================================================================================================
33
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Note 15 - Interim Financial Information (Unaudited)
1997 Quarter Ended 1996 Quarter Ended
(millions of dollars, except per share)
Mar. 31 June 30 Sept. 30 Dec. 31 Year 1997 Mar. 31 June 30 Sept. 30 Dec. 31 Year 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net service revenues $382.4 $378.6 $390.8 $396.2 $1,548.0 $414.1 $418.3 $434.9 $443.9 $1,711.2
Cost of services 304.4 300.4 313.8 313.7 1,232.3 329.6 332.2 348.2 350.2 1,360.2
Selling, general and
administrative expenses 51.8 48.7 45.8 48.3 194.6 52.7 52.2 51.8 53.9 210.6
Depreciation 9.8 9.8 9.9 9.6 39.1 12.1 11.8 11.7 11.4 47.0
Other expense, net 0.6 2.5 3.3 3.6 10.0 3.3 3.4 3.4 3.3 13.4
Interest expense and finance
charges 10.6 10.2 10.6 10.6 42.0 14.5 14.1 14.1 13.9 56.6
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 5.2 7.0 7.4 10.4 30.0 1.9 4.6 5.7 11.2 23.4
Provision for income taxes 1.2 2.9 2.7 4.2 11.0 0.3 1.7 2.5 5.0 9.5
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings from continuing
operations 4.0 4.1 4.7 6.2 19.0 1.6 2.9 3.2 6.2 13.9
Loss from discontinued operations,
net of income taxes - - - - - (1.1) (1.0) (26.4) - (28.5)
- ----------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 4.0 $ 4.1 $ 4.7 $ 6.2 $ 19.0 $ 0.5 $ 1.9 $(23.2) $ 6.2 $ (14.6)
==================================================================================================================================
Earnings (loss) per common share - basic:
Continuing operations $ 0.17 $ 0.18 $ 0.20 $ 0.26 $ 0.81 $ 0.07 $ 0.12 $ 0.14 $ 0.27 $ 0.60
Discontinued operations - - - - - (0.05) (0.04) (1.14) - (1.23)
- ----------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) per
share $ 0.17 $ 0.18 $ 0.20 $ 0.26 $ 0.81 $ 0.02 $ 0.08 $(1.00) $ 0.27 $ (0.63)
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share - diluted:
Continuing operations $ 0.17 $ 0.17 $ 0.19 $ 0.26 $ 0.79 $ 0.07 $ 0.12 $ 0.14 $ 0.26 $ 0.59
Discontinued operations - - - - - (0.05) (0.04) (1.13) - (1.21)
- ----------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) per share
$ 0.17 $ 0.17 $ 0.19 $ 0.26 $ 0.79 $ 0.02 $ 0.08 $(0.99) $ 0.26 $ (0.62)
==================================================================================================================================
</TABLE>
34
<PAGE>
To the Board of Directors and Shareholders,
Borg-Warner Security Corporation
We have audited the consolidated balance sheets of Borg-Warner Security
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
----------------------
Deloitte & Touche LLP
Chicago, Illinois
February 3, 1998
35
<PAGE>
EXHIBIT 21
<TABLE>
<CAPTION>
% of
Voting
Securities
Owned by
PLACE OF Immediate
NAME OF SUBSIDIARY ORGANIZATION Parent
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Baker Insurance Company Illinois 100%
Borg-Warner Equities Corporation Delaware 100%
Borg-Warner Equities Corporation of California California 100%
Borg-Warner Equities of Monterey, Inc. California 100%
Borg-Warner Insurance Holding Corporation Delaware 100%
Centaur Insurance Company Illinois 100%
NAL II, Ltd. Delaware 100%
Borg-Warner Government Services, Inc. Delaware 100%
Borg-Warner International Corporation Delaware 100%
Borg-Warner Protective Services Corporation Delaware 100%
Borg-Warner Information Services, Inc. Delaware 100%
Burns International Security Services, Inc. American Samoa 100%
Burns Special Services, Inc. Delaware 100%
Wells Fargo Guard Services, Inc. Delaware 100%
Wells Fargo Guard Service, Inc. of Florida Florida 100%
Wells Fargo Special Services, Inc. Delaware 100%
BPS Financial Services, Inc. Delaware 100%
BW-Canada Alarm (Wells Fargo) Corporation Delaware 100%
Wells Fargo Alarm Services of Canada, Limited Ontario 100%
Pony Express Residential Security Ltd. Ontario 100%
BW-Canadian Guard Corporation Delaware 100%
Burns International Security Services, Ltd. (Ontario) Ontario 100%
Les Services De Protection Burns International Ltee. Quebec 97%
BW-Colombia Guard Corporation Delaware 100%
Newerco, Inc. Delaware 100%
BII, Inc. Delaware 100%
Seguridad Burns de Colombia, S.A. Colombia 99%
The William J. Burns International Detective Agency, Inc. Delaware 100%
BW-U.K. Guard Corporation Delaware 100%
Burns International Security Services, Ltd. (U.K.) United Kingdom 100%
Globe Aviation Services Corporation Delaware 100%
Globe Airport Security Services, Inc. Delaware 100%
Globe Aviation Services Corporation of Puerto Rico Delaware 100%
Globe Aviation Services of Canada, Limited Ontario 100%
Pony Express Delivery Services, Inc. Delaware 100%
Wells Fargo Alarm Services, Inc. Delaware 100%
BW-Chemicals Corporation Delaware 100%
Wells Fargo Armored Service Corporation Delaware 100%
Wells Fargo Pyro Technologies, Inc. New Jersey 100%
</TABLE>
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (No. 33-23046 and No.333-34877) and the Registration Statement on Form
S-3 (No. 33-60294) of our reports dated February 3, 1998 appearing in and
incorporated by reference in the Annual Report on Form 10-K of Borg-Warner
Security Corporation for the year ended December 31, 1997.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Chicago, Illinois
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 9
<SECURITIES> 0
<RECEIVABLES> 57
<ALLOWANCES> 5
<INVENTORY> 11
<CURRENT-ASSETS> 144
<PP&E> 352
<DEPRECIATION> 211
<TOTAL-ASSETS> 660
<CURRENT-LIABILITIES> 148
<BONDS> 343
0
0
<COMMON> 0
<OTHER-SE> 65
<TOTAL-LIABILITY-AND-EQUITY> 660
<SALES> 0
<TOTAL-REVENUES> 1548
<CGS> 0
<TOTAL-COSTS> 1232
<OTHER-EXPENSES> 49
<LOSS-PROVISION> 2
<INTEREST-EXPENSE> 42
<INCOME-PRETAX> 30
<INCOME-TAX> 11
<INCOME-CONTINUING> 19
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19
<EPS-PRIMARY> .81
<EPS-DILUTED> .79
</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
<PAGE>
such increased costs.
5. The nature of the Company's services potentially exposes it to greater risks
of liability for employee acts, injuries (including workers' compensation
claims) or omissions than may be posed by other service businesses. The Company
carries insurance of various types, including workers' compensation, automobile
and general liability coverage. These policies include deductibles per
occurrence for which the Company is self-insured. While the Company seeks to
maintain appropriate levels of insurance, there can be no assurance that the
Company will avoid significant future catastrophic claims or adverse publicity
related thereto. There can be no assurance that the Company's insurance will be
adequate to cover the Company's liabilities or that such insurance coverage will
remain available at acceptable costs. A successful claim brought against the
Company for which coverage is denied or which is in excess of its insurance
coverage could have a material adverse effect on the Company's business,
financial condition and results of operations.
6. The Company intends to grow by pursuing acquisitions when attractive
opportunities arise. However, 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-
<PAGE>
SCHEDULE II
BORG-WARNER SECURITY CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
($ MILLIONS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- ---------- ----------------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Years Ended December 31, (1) (2)
Balance at Charged to Charged to Balance at
Beginning Costs and Other Close of
Description of Period Expenses Accounts Deductions Period
- ----------- --------- ---------- ---------- ---------- ----------
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
========= ========== ========== ========== ==========
1997
Allowance for Doubtful Accounts $6.3 $5.3 $0.5 $7.2 $4.9
========= ========== ========== ========== ==========
</TABLE>
