<PAGE>
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, 1998 Commission file number: 1-5529
______________
Borg-Warner Security Corporation
(Exact name of registrant as specified in its charter)
Delaware 13-3408028
(State of incorporation) (I.R.S. Employer
Identification No.)
200 South Michigan Avenue
Chicago, Illinois 60604
(312) 322-8500
(Address and telephone number of principal executive offices)
__________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ---------------------- ---------------------------------------------
Common Stock, par value $.01 per share New York Stock Exchange
9-5/8% Senior Subordinated Notes due 2007 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
___________________
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ---
<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 5, 1999 was
approximately $413.9 million. As of March 5, 1999, the registrant had 23,904,760
shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated herein by reference into
the Part of the Form 10-K indicated.
Document Part of Form 10-K into which
-------- ----------------------------
incorporated
------------
The Company's annual report to stockholders Parts I, II and IV
for the year ended December 31, 1998
The Company's proxy statement for the 1999 Part III
annual meeting of stockholders
1
<PAGE>
BORG-WARNER SECURITY CORPORATION
FORM 10-K
YEAR ENDED DECEMBER 31, 1998
INDEX
Item Number Page
----------- ----
<TABLE>
<CAPTION>
PART I
<S> <C>
1. Business 3
2. Properties 8
3. Legal Proceedings 8
4. Submission of Matters to a Vote of Security Holders 10
PART II
5. Market for the Registrant's Common Stock
and Related Stockholder Matters 11
6. Selected Financial Data 11
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
7A. Quantitative and Qualitative Disclosures
About Market Risk 12
8. Financial Statements and Supplementary Data 12
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 12
PART III
10. Directors and Executive Officers of the Registrant 13
11. Executive Compensation 13
12. Security Ownership of Certain Beneficial
Owners and Management 13
13. Certain Relationships and Related Transactions 13
PART IV
14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 14
</TABLE>
2
<PAGE>
PART I
Item 1. Business
The Company is North America's largest supplier of contract guard and
related security services. As a result of its significant market presence,
breadth of product offerings and strategic alliances, the Company is well
positioned to service local, multi-location and national accounts and provide
total security solutions to its customers.
The Company provides guard services, as well as background screening,
contract employment and investigative services, to approximately 14,000 clients
in the United States, Canada, the United Kingdom and Colombia. The Company
services these clients with approximately 73,000 employees in approximately 300
offices under the Wells Fargo, Burns, Globe and other service marks.
The Company 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, background screening, investigative services and
contract staffing services.
The Company employs approximately 67,500 security officers. Security
officers undergo a standardized pre-employment screening program that features
mandatory drug screening, criminal record checks at the county and municipal
court level and verification of consumer credit reports, social security
information and drivers' license records. Security officers receive classroom
orientation and field training in safety, first aid and security techniques and
in the handling of specific problems applicable to particular industries or
situations.
The Company markets guard services through approximately 150 sales
representatives nationwide and in Canada, the United Kingdom and Colombia. Sales
personnel operate out of local branch and sales offices. The Company also bids
on contracts with governmental agencies.
Physical security service 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.
3
<PAGE>
Information concerning the revenues and identifiable assets of the Company
is incorporated herein by reference to Note 11 of the Notes to Consolidated
Financial Statements.
Electronic Security Services
On May 29, 1998, the Company sold its electronic security services
business, Wells Fargo Alarm Services ("Alarm"), to ADT Security Services, a
subsidiary of Tyco International, Ltd. ("ADT") for approximately $425 million
plus the assumption of approximately $6 million of debt by the buyer. The
Company recorded a net after-tax gain of $42.5 million for the transaction in
the second quarter. As a result of the sale, the division's results have been
restated and reflected as discontinued operations for all periods presented.
Through Alarm, the Company provided integrated electronic security systems,
including intrusion and fire detection, sprinkler and critical industrial
process monitoring, closed circuit television and access control. Alarm
designed, installed, monitored and serviced electronic security systems located
on the premises of commercial and residential customers in the United States and
Canada under the Wells Fargo and Pony Express service marks. Alarm also
provided, under the Bel-Air Patrol trade name, an integrated guard, patrol and
alarm service to customers in Bel Air, Beverly Hills and other Los Angeles
communities. The unit had approximately 2,200 employees.
The Company and ADT entered into a strategic alliance agreement for the
furnishing of electronic and physical security services to their respective
clients.
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 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 continued
until December 31, 1998. Refer to the discussion of environmental proceedings
on page 9. The Company also agreed to indemnify Loomis Fargo against certain
other claims, including claims relating to cargo losses 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 the Loomis Fargo
chief executive officer. The number of directors that may be designated
pursuant to the stockholder agreement may be adjusted 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.
4
<PAGE>
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 6,100 employees. The collective bargaining
agreements expire at various dates from 1999 to 2001 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 of
employees other than guards, an employer of guards can refuse to bargain with
such union and such union cannot be certified as the representative of a unit of
guards. As a result, the Company has in many instances refused to recognize or
withdrawn recognition of labor organizations that admit as members employees
other than guards.
Competition
The Company competes with major national and international 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.
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. 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. The Company believes that its operations are in substantial
compliance with those laws, regulations and requirements. Federal legislation
has been introduced relating to security
5
<PAGE>
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.
From time to time, in the ordinary course of business, the Company is
subjected to penalties or fines as the result of licensing irregularities or the
misconduct of one or more of its agents or employees. In addition, under
principles of common law, the Company can generally be held liable for acts or
omissions of its agents or employees performed in the course and scope of their
employment. In addition, some states have statutes that expressly impose on the
Company legal responsibility for the conduct of its employees.
Risk Management
The nature of the services provided by the Company potentially exposes it
to greater risks of liability for employee acts, injuries (including workers'
compensation claims) or omissions than may be posed by other service businesses.
The Company generally obtains customer indemnification or liability
limitations in its contracts to mitigate this risk exposure. The Company carries
insurance of various types, including workers' compensation, automobile and
general liability coverage. These policies include deductibles per occurrence
for which the Company is self-insured. The Company obtains its insurance at
rates and upon terms negotiated periodically with various underwriters. The loss
experience of the Company and, to some extent, other protective services
companies affects premium rates charged to the Company. The Company does not
believe that limitations on, or the uncertainty of, insurance coverage for
punitive damages in certain states in which it operates is likely to be
material, based upon the Company's prior experience with punitive damages
claims. The Company also attempts to manage its risk liability through analysis
of customer facilities, customer profiles and employee screening, training,
supervision and evaluation.
Discontinued Operations
On May 29, 1998, the Company sold its courier services business, Pony
Express Delivery Services, Inc. In the first quarter of 1998, the Company
recorded a $15.9 million after-tax charge to reduce its investment in this
business and to provide for costs associated with its disposition. The Company
did not record a gain or loss as a result of completing the sale.
Since September 1996, the Company had treated its courier services unit as
a discontinued operation. The unit transported 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 employed approximately 3,600 persons and used a fleet of
approximately 3,000 vehicles, many of which were vehicles provided by the unit's
employees. The courier services unit operated both as a common and contract
carrier and used a combination of tariffs and shipping contracts to control the
terms, conditions and rates applicable to the transportation of shipments. Rates
were dependent upon many factors, including the weight
6
<PAGE>
and type of the shipped item, the distance and urgency of the shipment and the
geographical location.
As previously mentioned, the May 29, 1998 sale of Alarm caused the
Company's results to be restated and for Alarm to be reflected as a discontinued
operation for all periods presented.
Trademarks and Patents
The Company maintains several service marks of importance 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.
The Company entered into an agreement with Borg-Warner Automotive, Inc.
("Automotive") effective July 31, 1998 whereby the Company sold its rights to
the "Borg-Warner" name and mark in the security field. Automotive granted the
Company an exclusive, royalty-free license to use the "Borg Warner" name and
mark in the security field for a four-year period.
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,
1999.
<TABLE>
<CAPTION>
Name Age Position With Company
<S> <C> <C>
J. Joe Adorjan 60 Chairman of the Board
John A. Edwardson 49 Chief Executive Officer and President
John D. O'Brien 56 Senior Vice President
Timothy M. Wood 51 Vice President, Finance
Robert E. T. Lackey 50 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 (from October 1995 to March
1999) and President (from April 1995 to March 1999). 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. Edwardson was appointed Chief Executive Officer and President of the
Company in March 1999 and will be presented for election to the board of
directors at the Company's Annual Meeting on April 20, 1999. Mr. Edwardson was
President of United Airlines from July 1994 to September 1998 and Chief
Operating Officer of United Airlines from April 1995 to September
7
<PAGE>
1998. Mr. Edwardson was also Executive Vice-President and Chief Financial
Officer of Ameritech Corp. from March 1991 to July 1994. Mr. Edwardson is a
director of Household International and Focal Communications Corporation.
Mr. O'Brien has been Senior Vice President of the Company since 1993 and
was Vice President of the Company from 1987 to 1993. Mr. 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 general offices in various cities
in the United States, Canada, the United Kingdom and Colombia. At December 31,
1998, the Company occupied approximately 300 branch and satellite offices, all
but one of which were leased. The Company leases approximately 57,000 square
feet of office space in Chicago, Illinois for its executive offices. However, it
currently subleases 23,000 square feet of such office space to third parties.
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).
8
<PAGE>
Centaur Litigation
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 remaining reinsurance
contracts.
On August 10, 1998 the Mission Trust and the Company agreed to settle the
suit against the Company, subject to court approval. The suit had alleged
damages in excess of $100 million because of Centaur's failure to satisfy its
reinsurance obligations. As a part of the settlement, the Company agreed to pay
the Mission Trust $4 million and one-third of any dividend or other distribution
that may be paid to the Company after rehabilitation of Centaur. Any future
payments by the Company will not have an effect on Company earnings. Separately,
the Mission Trust and Centaur agreed to an uncontested liquidated claim in the
Centaur estate of $48 million, for which the Company is not liable.
Additionally, the Illinois Director of Insurance, on behalf of the Centaur
estate, and the Company agreed to exchange mutual releases of any remaining
liability of the Company to the Centaur estate. The parties have finalized and
executed the settlement and release agreements. The required court approvals of
the settlement are being sought by the parties with final approval and dismissal
of the lawsuit anticipated by the end of the first half of 1999.
Environmental Proceedings
The Company and certain of its current and former subsidiaries have been
identified by the U.S. Environmental Protection Agency and certain state
environmental agencies as potentially responsible parties ("PRPs") at a number
of hazardous waste disposal sites under the Comprehensive Environmental
Response, Compensation and Liability Act ("Superfund") and equivalent state laws
and, as such, may be liable for the cost of cleanup and other remedial
activities at these sites. Responsibility for cleanup and other remedial
activities at a Superfund site is typically shared among PRPs based on an
allocation formula. In addition, the Company has or may have liability for
environmental matters at properties it presently or previously owned or leased.
Based on currently available information, the Company believes that none of
these matters individually or in the aggregate will have a material adverse
affect on its financial position or future operating results, generally either
because the maximum potential liability at a site is not large or because
liability will be shared with other PRPs, although no assurance can be given
with respect to the ultimate outcome of any such liability. Based on its
estimate of allocations of liability among PRPs, the probability that other
PRPs, many of whom are large, solvent public companies, will fully pay the costs
allocated to them, currently available information concerning the scope of
contamination at such sites, estimated remediation costs at such sites,
indemnification obligations in favor of the Company from the current owners of
certain sold or discontinued operations, estimated legal fees and other factors,
the Company has made provisions for indicated environmental liabilities in its
financial statements in the aggregate amount of approximately $5 million
(relating to environmental matters with respect to discontinued operations of
the
9
<PAGE>
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.
Loomis, Fargo Indemnification Claims
In November and December, 1998, Loomis, Fargo made various claims against
the Company for indemnification under the Contribution agreement dated November
28, 1996 for certain cargo losses and environmental losses. The Company has
objected to the claims. If the parties are unable to resolve their dispute, it
will be referred to arbitration as provided for under the Contribution
Agreement.
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 1998.
10
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
As of March 5, 1999, there were approximately 150 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 1997 and 1998 were:
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- ---- ---
<C> <S> <C> <C>
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
1998 March 31 $19 7/16 $15 5/16
June 30 24 3/4 17 7/8
September 30 23 1/16 13 1/4
December 31 20 1/16 13 1/16
</TABLE>
Item 6. Selected Financial Data
The selected financial data for the five years ended December 31, 1998,
with respect to the following line items shown under the "Consolidated
Statistical Review" on page 18 of the Annual Report, are 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 20 through 23) in the Annual Report are
incorporated herein by reference and made a part of this Report.
11
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Disclosures about market risk are contained within page 23 of the
Management's Discussion and Analysis of Financial Condition and Results of
Operations in the Annual Report, and are incorporated herein by reference and
made a part of this report.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements (including the notes thereto) of the
Company (set forth on pages 24 through 38) in the Annual Report are incorporated
herein by reference and made a part of this report. Supplementary financial
information regarding quarterly results of operations (unaudited) for the years
ended December 31, 1998 and 1997 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.
12
<PAGE>
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 through 4 of the Company's
Proxy Statement for the 1999 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 8 of the Company's Proxy
Statement for the 1999 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 8 and 9, and "Compensation
of Directors" on pages 5 and 6, of the Company's Proxy Statement for the 1999
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 6 through 8 of the Company's Proxy Statement for the 1999 Annual Meeting
of Stockholders.
Item 13. Certain Relationships and Related Transactions
Information with respect to certain relationships and related transactions
is incorporated herein by reference to the information under the caption
"Certain Relationships and Related Transactions" on page 18 of the Company's
proxy statement for the 1999 Annual Meeting of Stockholders.
13
<PAGE>
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 24 through 38 of the
Annual Report, and the Independent Auditors' Report, set forth on page 39 of the
Annual Report, are incorporated herein by reference:
Consolidated Statement of Operations--three years ended December 31, 1998
Consolidated Balance Sheet--December 31, 1998 and 1997
Consolidated Statement of Cash Flows--three years ended December 31, 1998
Consolidated Statement of Shareholders' Equity--three years ended
December 31, 1998
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, 1998.
14
<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, 1998 and 1997, and for each of
the three years in the period ended December 31, 1998, and have issued our
report thereon dated February 2, 1999; such consolidated financial statements
and report are included in your 1998 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 2, 1999
15
<PAGE>
SCHEDULE II
BORG-WARNER SECURITY CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
($ MILLIONS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
---------- --------------------------- ---------- ----------
Years Ended December 31,
Additions
---------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other Close of
Description of Period Expenses Accounts Deductions Period
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1996
Allowance for Doubtful Accounts $5.9 $2.9 $2.0 $5.4 $5.4
========== ========== ========== ========== ==========
1997
Allowance for Doubtful Accounts $5.4 $3.1 $0.4 $4.9 $4.0
========== ========== ========== ========== ==========
1998
Allowance for Doubtful Accounts $4.0 $5.1 $0.3 $2.4 $7.0
========== ========== ========== ========== ==========
</TABLE>
The above table sets forth the valuation and qualifying accounts for the
previous three years. Previously reported amounts have been restated to reflect
the discontinued operations related to the May 29, 1998 sales of the Company's
electronic security division and the Company's courier services division.
16
<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: February 2, 1999
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 February 2, 1999.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ J. Joe Adorjan Chairman of the Board, Chief Executive
- --------------------------------- Officer and President* and Director
J. Joe Adorjan (Principal Executive Officer)
/s/ Timothy M. Wood Vice President, Finance
- --------------------------------- (Principal Financial and Accounting Officer)
Timothy M. Wood
/s/ James J. Burke, Jr. Director
- ---------------------------------
James J. Burke, Jr.
/s/ Albert J. Fitzgibbons, III Director
- ---------------------------------
Albert J. Fitzgibbons, III
/s/ Arthur F. Golden Director
- ---------------------------------
Arthur F. Golden
</TABLE>
* Effective 3/1/99, resigned as Chief Executive Officer and President
17
<PAGE>
/s/ Dale W. Lang Director
- -------------------------------
Dale W. Lang
/s/ Robert A. McCabe Director
- -------------------------------
Robert A. McCabe
/s/ Andrew McNally, IV Director
- -------------------------------
Andrew McNally IV
/s/ Alexis P. Michas Director
- -------------------------------
Alexis P. Michas
/s/ H. Norman Schwarzkopf Director
- -------------------------------
H. Norman Schwarzkopf
/s/ Donald C. Trauscht Director
- -------------------------------
Donald C. Trauscht
/s/ John A. Edwardson* *Chief Executive Officer and President
- ------------------------------- Effective 3/1/99
John A. Edwardson Signature date: March 16, 1999
18
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
19
<PAGE>
EXHIBIT INDEX
Exhibit
Number Document Description
- ------- -----------------------------------------------------------------------
*3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992).
*3.2 Amended and Restated Bylaws of the Company (incorporated by reference
to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1992).
*4.1 Amended and Restated Credit Agreement dated as of June 30, 1998 among
the Company, the lenders party thereto and the agents named therein
(incorporated by reference to Exhibit 4 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998).
*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 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, 1988).
+*10.2 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, 1992).
+*10.3 Borg-Warner Security Corporation 1993 Stock Incentive Plan, conformed
to include amendments thereto (incorporated by reference to Exhibit
10.3 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
20
<PAGE>
+*10.4 Borg-Warner Security Corporation Performance Share Plan, conformed to
include amendments thereto (incorporated by reference to Exhibit 10.4
to the Company's Annual Report on Form 10-K for the year ended December
31, 1997).
+*10.5 Borg-Warner Security Corporation Executive Officer Incentive Plan.
(incorporated by reference to Exhibit 10.5 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997).
+*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 (incorporated by reference to Exhibit 10.7 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1997).
+*10.8 Noncompetition Agreement dated as of September 5, 1997 by and between
the Company and J.J. Adorjan. (incorporated by reference to Exhibit
10.8 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
+*10.9 Employment Agreement dated September 5, 1997 for J.D. O'Brien
(incorporated by reference to Exhibit 10.9 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997).
+*10.10 Noncompetition Agreement dated as of September 5, 1997 by and between
the Company and J.D. O'Brien (incorporated by reference to Exhibit
10.10 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997)
+*10.11 Employment Agreement dated September 5, 1997 for T.M. Wood
(incorporated by reference to Exhibit 10.11 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997).
+*10.12 Noncompetition Agreement dated as of September 5, 1997 by and between
the Company and T.M. Wood (incorporated by reference to Exhibit 10.12
to the Company's Annual Report on Form 10-K for the year ended December
31, 1997).
+*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).
21
<PAGE>
+*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 amended as of August 31, 1998 between the Company
and H. Norman Schwarzkopf.
*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).
+10.17 Employment Agreement dated February 23, 1999 for J. A. Edwardson.
+10.18 Employment Agreement dated August 31, 1998 for R. E. T. Lackey.
10.19 Stock Purchase Agreement, dated as of April 17, 1998, among ADT
Security Services, Inc., Tyco International (US) Inc. and the Company
relating to the purchase and sale of the common stock of Wells Fargo
Alarm Services, Inc., BW-Canada Alarm (Wells Fargo) Corporation and
Wells Fargo Pyro Technologies, Inc.
10.20 Stock Purchase Agreement, dated as of April 22, 1998, by and between
the Company and Mustang Holdings, Inc. relating to the purchase and
sale of the common stock of Pony Express Delivery Services, Inc.
*10.21 Amended and Restated Credit Agreement dated as of June 30, 1998 among
the Company, Lenders listed therein, Canadian Imperial Bank of
Commerce, as Documentation Agent, NationsBank N.A., as Syndication
Agent, and Bankers Trust Company, as Administrative Agent related to
the Company's receivables facility (incorporated by reference to
Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998).
+*10.22 Borg-Warner Security Corporation's 1999 Stock Incentive Plan
(incorporated by reference to Appendix A of the Company's Proxy
Statement dated March 19, 1999).
13 Portions of the 1998 Annual Report to Stockholders.
21 Subsidiaries of the Company.
23 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule.
99 Cautionary Statement.
_________
* Incorporated by reference.
+ Indicates a management contract or compensatory plan or arrangement
required to be filed pursuant to Item 14(c)
22
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
23
<PAGE>
Exhibit 10.15
- -------------
AMENDMENT TO CONSULTING AGREEMENT
---------------------------------
This Amendment effective August 31, 1998, to the Consulting Agreement between H.
Norman Schwarzkopf of Tampa, Florida ("Consultant") and Borg-Warner Security
Corporation, a Delaware corporation (the "Company").
WHEREAS, Consultant and the Company are parties to a Consulting Agreement dated
as of September 1, 1993 and as amended August 31, 1997 ("Agreement") and such
parties desire to further amend such Agreement;
NOW, THEREFORE, Consultant and the Company agree that Item 5 of the Agreement is
amended as follows:
TERM - It is contemplated this Agreement will run until August 31, 1999 and
to automatically renew for successive one (1) year terms thereafter.
Provided however, this Agreement may be terminated for any reason by either
party giving thirty (30) days written notice to the other party. In the
event of the Consultant's death, the Agreement shall automatically
terminate as of the Consultant's death.
IN WITNESS WHEREOF, the parties have executed this Amendment to the Consulting
Agreement as of the 31st day of August 1998.
BORG-WARNER SECURITY
CORPORATION
/s/ H. Norman Schwarzkopf /s/ J. Joe Adorjan
- ----------------------------- ----------------------------
H. Norman Schwarzkopf J. Joe Adorjan
Chief Executive Officer and President
<PAGE>
EXHIBIT 10.17
-------------
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
AMENDED AND RESTATED EMPLOYMENT AGREEMENT by and between Borg-Warner
Security Corporation, a Delaware corporation (the "Company"), and John Edwardson
(the "Executive"), dated as of the 26th day of March, 1999.
WHEREAS, Executive and the Company are parties to an Employment Agreement
dated February 23, 1999 (the "Original Agreement"), providing for the Company's
employment of Executive pursuant to the terms therein stated; and
WHEREAS, Executive and the Board of Directors of the Company (the "Board")
deem it to be in Executive's and the Company's best interests to amend and
restate the Original Agreement in its entirety by substituting for all terms
thereof the terms set forth herein;
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Employment Period. The Company shall employ the Executive, and the
Executive shall serve the Company, on the terms and conditions set forth in this
Agreement, for the Employment Period. As used herein, the phrase "Employment
Period" shall mean the period beginning with the Executive's commencement of
employment with the Company on March 1, 1999 (the "Commencement Date"), and
ending three years from the Commencement Date; provided, however, that on any
anniversary of the Commencement Date at which time the then remaining Employment
Period is two years, the Employment Period shall automatically be extended by an
additional year so that as a result of such extension the then remaining
Employment Period will be three (3) years. Notwithstanding the foregoing, the
Employment Period shall terminate on the first to occur of any of the events
described in Section 4 of this Agreement.
2. Position and Duties.
(a) During the Employment Period , the Executive shall serve as President
and Chief Executive Officer of the Company, reporting to the Board, with such
duties and responsibilities as are customarily assigned to such positions, and
such other duties and responsibilities not inconsistent therewith as may be
assigned to him from time to time by the Board.
(b) During the Employment Period, the Executive shall be nominated to
serve as a member of the Board, subject to the Executive's election in
accordance with the By-Laws of the Company. The Executive shall be elected to
serve as Chairman of the Board not later than December 31, 1999.
(c) During the Employment Period, and excluding any periods of vacation
and sick leave
1
<PAGE>
to which the Executive is entitled, the Executive shall devote his full-time
efforts to the business and affairs of the Company and use his best efforts to
carry out such responsibilities faithfully and efficiently. It shall not be
considered a violation of the foregoing for the Executive to (i) serve on
corporate, civic or charitable boards or committees, (ii) deliver lectures or
fulfill speaking engagements and (iii) manage personal investments, so long as
such activities do not interfere with the performance of his responsibilities as
an executive employee of the Company in accordance with this Agreement or
violate the provisions of Section 8 of this Agreement.
(d) The Executive's services shall be performed primarily at the Company's
headquarters in Chicago, Illinois, and shall require business travel
commensurate with Executive's responsibilities.
3. Compensation.
(a) Base Salary. During the Employment Period, the Executive shall
receive a base salary (the "Annual Base Salary") at the annual rate of $750,000.
The Annual Base Salary shall be payable in accordance with the Company's payroll
practices for key executives as in effect from time to time. During the
Employment Period, the Annual Base Salary shall be reviewed for possible
increase at least annually. Any increase in the Annual Base Salary shall not
limit or reduce any other obligation of the Company under this Agreement. The
Annual Base Salary shall not be reduced after any such increase, and the term
"Annual Base Salary" shall thereafter refer to the Annual Base Salary as so
increased.
(b) Annual Bonus.
(i) In addition to the Annual Base Salary, for each calendar year or
portion of a calendar year during the Employment Period, the Executive
shall be eligible to earn an annual cash bonus (the "Annual Bonus")
pursuant to the Company's annual cash bonus program. The Annual Bonus for
each calendar year during the Employment Period shall be based on
achievement of performance goals established by the Compensation Committee
of the Board for senior management, as reflected in the minutes of the
Compensation Committee of the Board during 1998, such that (i) if the
minimum performance goals are achieved, the Annual Bonus shall be a total
-------
of $300,000, (ii) if the targeted performance goals are achieved, the
--------
Annual Bonus shall be increased by $300,000, for an aggregate of $600,000,
and (iii) if the maximum goals are achieved or exceeded, the Annual Bonus
-------
shall be increased by an additional $200,000, for an aggregate of $800,000;
provided that Executive's Annual Bonus for the calendar year 1999 shall in
no event be less than $500,000.
(ii) Each Annual Bonus shall be paid in a single cash lump sum no
later than 60 days after the end of the period for which the Annual Bonus
is awarded or the achievement of the performance goals is determined by the
Compensation Committee of the Board, whichever is later. Except for any
Annual Bonus payable with respect to calendar year 1999, the Annual Bonus,
if any, payable to Executive for any period that is less than an entire
calendar year shall be prorated to reflect the portion of such calendar
2
<PAGE>
year in which Executive was employed by the Company. During the Employment
Period, the Annual Bonus shall be reviewed for possible increase at least
annually. Any increase in the Annual Bonus shall not limit or reduce any
other obligation of the Company under this Agreement. The Annual Bonus
shall not be reduced after any such increase, and the term "Annual Bonus"
shall thereafter refer to the Annual Bonus as so increased.
(iii) Notwithstanding Section 3(b)(ii) above, the Company shall have
the right to defer all or a portion of the $500,000 minimum Annual Bonus
payable to Executive under Section 3(b)(i) above with respect to calendar
year 1999 (the "Guaranteed Bonus") in accordance with the terms and
conditions set forth in this Section 3(b)(iii). If, after taking into
account Executive's "applicable employee remuneration" (as defined in
Internal Revenue Code Section 162(m)(4)) with respect to calendar year 1999
other than the Guaranteed Bonus, the Company shall determine that any
portion of the Guaranteed Bonus would, if paid at the time prescribed in
Section 3(b)(ii) above, not be deductible by the Company by reason of
Internal Revenue Code (S)162(m), the Company shall have the right to defer
payment of all or any part of such non-deductible portion (collectively the
"Deferred Bonus") in accordance with this Section 3(b)(iii). The Deferred
Bonus, together with interest thereon as prescribed by the last sentence of
this Section 3(b)(iii) (the "Deferred Amount"), shall be paid in
installments, commencing on December 31, 2001, and continuing on each
December 31 thereafter until the Deferred Amount has been paid in full.
Each installment payment of the Deferred Amount shall equal the positive
excess, if any, of (i) the annual deduction limitation under Internal
------
Revenue Code (S)162(m) with respect to the calendar year within which such
installment payment is to be made over (ii) Executive's "applicable
----
employee remuneration" (determined without regard to any payment under this
Section 3(b)(iii)) with respect to such calendar year. Notwithstanding the
above, the remaining unpaid balance of such Deferred Amount shall be paid
in full to the Executive (or to his designated beneficiary in the event of
his death) in a lump sum not later than sixty (60) days following the first
to occur of (A) the date on which Executive is no longer a "covered
employee" within the meaning of Internal Revenue Code (S)162(m); or (B) a
Change in Control of the Company. For purposes of this Section 3(b)(iii),
the Deferred Amount shall be credited with "interest" thereon during the
period beginning March 1, 2000, and ending on the date of payment, at a
rate equal to the Certificate Rate as defined in Section 4.1 of the
Company's Series 1998-1 Supplement to Pooling and Servicing Agreement dated
December 31, 1998, compounded quarterly; provided however that in the event
----------------
the Certificate Rate is no longer available, the Deferred Amount shall
thereafter be credited with "interest" at LIBOR plus 30 basis points, or at
such other rate of return as shall be agreed between the Executive and the
Compensation Committee of the Board. The Company may, but shall not be
required to, set aside funds in a grantor trust or otherwise to provide for
such payment, but the Executive's rights to such deferred compensation
shall at all times be as a general creditor of the Company, and he shall
have no right to or other interest in any such funds set aside by the
Company.
3
<PAGE>
(c) Equity Compensation.
(i) Stock Option. Upon the execution of this Agreement, the
Executive shall be a granted a non-qualified stock option to purchase
400,000 shares of the Company's common stock. The exercise price for such
option shall be based on the average of the opening and closing price of
the Company's common stock on such date. Such option shall have a term of
thirteen (13) years, and shall become exercisable in three equal annual
installments on each of the first three anniversaries of the date of this
Agreement, and shall include such other terms and conditions as are set
forth in the written stock option agreement to be entered into between the
Company and Executive. To the extent this option is granted other than
pursuant to a shareholder approved incentive plan, the Executive agrees not
to exercise such option, to the extent any such exercise would give rise to
a deduction limitation for the Company under Internal Revenue Code
(S)162(m), prior to the earliest to occur of (A) the Executive is no longer
a "covered employee" within the meaning of Internal Revenue Code (S)162(m);
(B) a Change in Control of the Company; or (C) the six (6) month period
immediately prior to the expiration of the term of the option. The Company
shall take such reasonable efforts as may be necessary to cause any shares
to be issued in connection with such option to be registered under the
Federal Securities Act of 1933, as amended, or under applicable state
securities laws, or to secure an appropriate exemption from such
registration.
(ii) Performance Shares. Upon the Commencement Date, the Company
shall award 100,000 Performance Shares to the Executive under the Company's
1999 Stock Incentive Plan (the "Plan"), which is subject to approval by the
Company's shareholders. The Performance Shares shall entitle the Executive
to a payment under the terms of the Plan upon the attainment of performance
targets previously set by the Compensation Committee of the Board for
senior management for the three-year period ending December 31, 2000, as
reflected in the minutes of the Compensation Committee of the Board during
1998, and shall include such other terms and conditions as are set forth in
the written Performance Share Award to be entered into between the Company
and Executive on the date of grant thereof. The Company agrees to award to
the Executive an additional 100,000 Performance Shares not later than the
end of the first quarter, March 31, 2000. Such additional Performance
Shares shall vest upon the attainment of the performance targets
established by the Compensation Committee of the Board for senior
management at the time of such award for the three-year period ending
December 31, 2002.
(iii) Restricted Shares. Upon the execution of this Agreement, the
Company shall award 100,000 shares of restricted stock to the Executive.
The restricted shares shall vest in five equal annual installments of
20,000 shares, commencing on the first anniversary of the date of this
Agreement, and shall include such other terms and conditions as are set
forth in the written Stock Award to be entered into between the Company and
Executive. The Company shall take such reasonable efforts as may be
necessary to cause any shares
4
<PAGE>
to be issued in connection with such award to be registered under the
Federal Securities Act of 1933, as amended, or under applicable state
securities laws, or to secure an appropriate exemption from such
registration.
(iv) In the event that (1) Executive's employment is terminated by
reason of his death or Disability, by the Company without Cause, or by
Executive for Good Reason, or (2) upon a Change in Control of the Company,
any unvested option shares, performance shares, or restricted shares
awarded under this Section 3(c) shall vest in full at the time of such
termination or Change in Control. In the event that Executive's employment
is terminated by the Company with Cause, or by Executive without Good
---- -------
Reason, any unvested option shares, performance shares, or restricted
shares awarded under this Section 3(c) shall be forfeited by Executive for
no consideration. Following a termination of Executive's employment,
Executive's option shall be exercisable for a period of (1) two-years from
the date of termination in the event of a termination due to death,
Disability, by the Company without Cause, or by Executive with Good Reason,
and (2) 90-days from the date of termination in the event of a termination
by Executive without Good Reason or a upon a termination of employment by
the Company for Cause, in either case not beyond the original term of such
option.
(v) Executive shall be eligible to receive future grants under the
Company's stock incentive programs consistent with, and in a manner
appropriate to, awards made to other senior executives of the Company.
(d) Supplemental Benefit Compensation. The Company will make
contributions, at times consistent with normal Company practice, of not less
than $165,000 annually, to a tax-deferred annuity for Executive of a type
substantially equivalent to those currently provided to senior executive's of
the Company.
(e) Other Benefits. During the Employment Period:
(i) the Executive shall be entitled to participate in all incentive,
savings and retirement plans, practices, policies and programs of the
Company to the same extent as other senior management; and
(ii) the Executive and/or the Executive's family, as the case may be,
shall be eligible for participation in, and shall receive all benefits
under, all welfare benefit plans, practices, policies and programs provided
by the Company and its affiliated companies (including, without limitation,
medical, prescription, dental, disability, salary continuance, employee
life insurance, group life insurance, accidental death and travel accident
insurance plans and programs) to the same extent as other senior
management.
(f) Expenses. During the Employment Period, the Executive shall be
entitled to receive prompt reimbursement for all reasonable expenses incurred by
the Executive in carrying out the Executive's duties under this Agreement,
provided that the Executive complies with the policies, practices and procedures
of the Company for submission of expense reports, receipts, or similar
5
<PAGE>
documentation of such expenses.
(g) Fringe Benefits. During the Employment Period, the Executive shall be
entitled to paid vacation, the use of a Company-provided car of the Executive's
choice, tax and financial planning services, and payment of annual dues,
assessments and expenses at one country club and one dinner club selected by the
Executive, in each case on the terms and conditions as are in effect for other
senior management of the Company from time to time or, if not made available to
other senior management, on terms and conditions that are determined by the
Compensation Committee of the Board to be fair and reasonable.
(h) Deferred Compensation. Notwithstanding anything to the contrary
herein, Executive may elect to defer the payment of all or any portion of his
Annual Base Salary or Annual Bonus for any calendar year during the Employment
Period, provided that before the first day of the calendar year with respect to
which such Annual Base Salary or Annual Bonus relates, he notifies the Company
in writing of his election to do so. Any compensation that is so deferred shall
accrue "interest" at the rate described in Paragraph 3(b)(iii) hereof, or at
such other rate of return as shall be agreed between the Executive and the
Compensation Committee of the Board at the time the deferral election is made.
Any such deferred compensation, together with the accrued interest or other
deemed earnings thereon, shall be paid to the Executive in cash upon the
termination of his employment with the Company in a single lump sum or, if so
specified in the deferral election, in up to five equal annual installments. The
Company may, but shall not be required to, set aside funds in a grantor trust or
otherwise to provide for such payment, but the Executive's rights to such
deferred compensation shall at all times be as a general creditor of the
Company, and he shall have no right to or other interest in any such funds set
aside by the Company. Notwithstanding the preceding sentence, in the event of a
Change in Control of the Company (as defined below), the Company shall pay to
Executive the aggregate amount of compensation deferred under this Paragraph
3(h) not later than thirty (30) days following the effective date of such Change
in Control.
4. Termination of Employment.
(a) Death or Disability. The Executive's employment shall terminate
automatically upon the Executive's death during the Employment Period. The
Company shall be entitled to terminate the Executive's employment because of the
Executive's Disability during the Employment Period. "Disability" means that
(i) the Executive has been unable, for a period of six months, or for a total of
180 days in any given period of twelve months, to perform the Executive's duties
under this Agreement, as a result of physical or mental illness or injury, and
(ii) a physician selected by the Company or its insurers, and acceptable to the
Executive or the Executive's guardian or legal representative, has determined
that the Executive's incapacity is total and permanent. A termination of the
Executive's employment by the Company for Disability shall be communicated to
the Executive by written notice, and shall be effective on the 30th day after
receipt of such notice by the Executive (the "Disability Effective Date"),
unless the Executive is able to, and does, return to full-time performance of
the Executive's duties before the Disability Effective Date.
(b) By the Company.
6
<PAGE>
(i) The Company may terminate the Executive's employment during the
Employment Period for Cause or without Cause. "Cause" means Executive has
(A) been convicted of, or pleaded guilty or nolo contendere to, a felony
involving theft or moral turpitude, or (B) engaged in conduct that
constitutes willful gross neglect or willful gross misconduct with respect
to his employment duties, resulting, in either case, in material economic
harm to the Company; provided, however, that an act or failure to act on
the part of the Executive shall be considered "willful" if it is done, or
omitted to be done, by the Executive in bad faith and without reasonable
belief that Executive's action or omission was in the best interests of the
Company and in accordance with the policies of the Board, and no act or
omission will constitute Cause unless the Company has given reasonable
written notice thereof to Executive and he then fails to promptly remedy
the act or omission.
(ii) A termination of employment by the Company for Cause shall be
effectuated by giving the Executive written notice ("Notice of Termination
for Cause") of the termination, setting forth the conduct of the Executive
that constitutes Cause. Except as provided in clause A of Section 4(b)(i)
above, a termination of employment by the Company for Cause shall be
effective on the date when the Notice of Termination for Cause is given,
unless the notice sets forth a later date (which date shall in no event be
later than 30 days after the notice is given).
(iii) A termination of the Executive's employment by the Company
without Cause shall be effected by giving the Executive written notice of
the termination.
(c) By the Executive.
(i) The Executive may terminate employment for Good Reason. "Good
Reason" means:
A. the assignment to the Executive of any duties inconsistent in
any respect with Executive's position, including status, offices,
titles and reporting relationships, authority, duties, or
responsibilities as contemplated by this Agreement, or any other
action by the Company which results in a significant diminution in
such position, authority, duties, or responsibilities, excluding any
isolated, immaterial, and inadvertent action not taken in bad faith
and which is remedied by the Company promptly after receipt of a
reasonable written notice thereof given by Executive;
B. any failure by the Company to provide compensation and
benefits to the Executive as described in this Agreement, other than
isolated, immaterial, and inadvertent failure not taken in bad faith
and which is remedied by the Company promptly after receipt of a
reasonable written notice thereof given by Executive;
C. receipt by the Executive of notice of non-renewal of the
automatic
7
<PAGE>
evergreen feature of the Employment Period; or
D. failure by the Company to obtain the assumption in writing of
its obligations under this Agreement by any successor to all or
substantially all of the assets of the Company within 15 calendar days
after a Change in Control of the Company; or
E. failure of the Company to elect the Executive as a director
of the Company at its annual shareholder meeting scheduled for April
20, 1999; or
F. failure of the Board of Directors of the Company to elect the
Executive Chairman of the Board on or before December 31, 1999; or
G. the Executive being required to relocate to a principal place
of employment more than thirty-five (35) miles from his current place
of employment without his consent; or
H. any other material breach by the Company of its obligations
to Executive under this Agreement; or
I. 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 (3) 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.
For purposes of this Agreement, "Change in Control" means the
happening of any of the following events:
(1) 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 50% or more of either (A) the
then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (B) 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: (A) 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, (B)
any acquisition by the Company, (C) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the Company
or any corporation controlled by the Company or (D) any acquisition by
any Person pursuant to a transaction which complies with clauses (A),
(B) and (C) of subsection (3) of this Section 4(c)(i); or
8
<PAGE>
(2) A change in the composition of the Board such that the
individuals who, as of the first day of the Employment Period,
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
4(c)(i), 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 two-
thirds (2/3) 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 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
(3) 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
9
<PAGE>
(4) The approval by the shareholders of the Company of a
complete liquidation or dissolution of the Company.
(ii) A termination of employment by the Executive for Good Reason
shall be effectuated by giving the Company written notice ("Notice of
Termination for Good Reason") of the termination, setting forth the conduct
of the Company that constitutes Good Reason. A termination of employment
by the Executive for Good Reason shall be effective on the fifth business
day following the date when the Notice of Termination for Good Reason is
given, unless the notice sets forth a later date (which date shall in no
event be later than 30 days after the notice is given).
(iii) Executive may, by at least 30 days prior written notice,
voluntarily terminate this Agreement, without liability by virtue of such
termination at any time without Good Reason.
(d) No Waiver. The failure to set forth any fact or circumstance in a
Notice of Termination for Cause or a Notice of Termination for Good Reason shall
not constitute a waiver of the right to assert, and shall not preclude the party
giving notice from asserting, such fact or circumstance in an attempt to enforce
any right under or provision of this Agreement; provided, that the foregoing
shall not mean that a notice purporting to be a Notice of Termination for Cause
pursuant to clause A of Section 4(b)(i) that fails to comply with said clause A
will be treated as a valid Notice of Termination for Cause.
(e) Date of Termination. The "Date of Termination" means the date of the
Executive's death, the Disability Effective Date, the date on which the
termination of the Executive's employment by the Company for Cause or by the
Executive for Good Reason is effective, or the date on which the Company gives
the Executive notice of a termination of employment without Cause or the
Executive gives the Company not less than thirty (30) days prior written notice
of a termination of employment without Good Reason, as the case may be.
5. Obligations of the Company upon Termination and/or a Change in
Control.
(a) Termination by Company Other Than for Cause; Voluntary Termination for
Good Reason. If, during the Employment Period, the Company terminates the
Executive's employment other than for Cause, death, 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
continuing 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:
10
<PAGE>
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(d) of this Agreement
through the Date of Termination that has not yet been paid; (2) an
amount 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 targeted level (as such term is used in clause (ii) of
---------
Section 3(b) above to calculate bonuses under the Company's annual
bonus plan) multiplied by a fraction, the numerator of which is the
number of days in the current calendar year through the Date of
Termination and the denominator of which is 365; (3) any accrued but
unpaid vacation pay; and (4) any accrued but unpaid Annual Bonus
relating to the calendar year prior to the year in which such
termination occurs; and
B. Severance pay equal to the sum of (1) the Annual Base Salary,
(2) the Annual Bonus and (3) the annual supplemental benefit
compensation which, absent termination, that would have been payable
to Executive pursuant to Sections 3(a), (b) and (d) of this Agreement
as if Executive were still employed hereunder during the period
commencing on the Date of Termination and ending on the last day of
the then current Employment Period (as determined under Section 1
hereof without regard to any further automatic extensions occurring
after the effective date of such termination (the "Severance Pay
Period"). For purposes of this Section 5(a)(i)(B), the amounts
payable under the preceding sentence shall be based on the amounts in
effect as of the Date of Termination, prorated to reflect any partial
years during the Severance Pay Period; provided that the Annual Bonus
shall be based on the Annual Bonus that would otherwise have been paid
to Executive under Section 3(b) for the year of termination if all
goals had been achieved at the targeted level (as such term is used in
---------
clause (ii) of Section 3(b) above).
(ii) During the Severance Pay Period, Executive and/or the
Executive's family shall be provided with benefits at least as favorable as
those that would have been provided to them under clause (ii) of Section
3(e) of this Agreement if the Executive's employment had continued through
the end of Severance Pay Period; 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.
(b) Death or Disability. If the Executive's employment is terminated by
reason of the Executive's death or Disability during the Employment Period , 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.
(i) The amounts to be paid in a lump sum as described above are:
11
<PAGE>
A. The Company shall pay the Accrued Obligations to the
Executive or the Executive's estate or legal representative, as
applicable; and
B. Severance pay equal to the sum of (1) the Annual Base Salary,
(2) the Annual Bonus and (3) the annual supplemental benefit
compensation which, absent termination, that would have been payable
to Executive pursuant to Sections 3(a), (b) and (d) of this Agreement
as if Executive were still employed hereunder during the period
commencing on the Date of Termination and ending on the first
anniversary thereof. For purposes of this Section 5(b)(i)(B), the
amounts payable under the preceding sentence shall be based on the
amounts in effect as of the Date of Termination, prorated to reflect
any partial years during the Severance Pay Period; provided that the
Annual Bonus shall be based on the Annual Bonus that would otherwise
have been paid to Executive under such Section 3(b) for the year of
termination if all goals had been achieved at the targeted level (as
---------
such term is used in clause (ii) of Section 3(b) above).
(ii) During the one year period following the Executive's termination
of employment due to death or Disability, Executive and/or the Executive's
family, as the case may be, shall be provided with benefits at least as
favorable as those that would have been provided to them under clause (ii)
of Section 3(e) of this Agreement if the Executive's employment had
continued through the end of such one year period; 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(b)(ii) may be made secondary to those provided under
such other plan.
(c) Cause; Other than for Good Reason. If the Executive's employment is
terminated by the Company for Cause during the Employment Period, or if the
Executive terminates his employment during the Employment Period other than for
Good Reason, the Company shall pay the Executive the sum of (i) the Annual Base
Salary through the Date of Termination, and (ii) any accrued but unpaid Annual
Bonus relating to the calendar years prior to the year in which such termination
occurs, in each case to the extent not yet paid, and the Company shall have no
further obligations under this Agreement.
(d) Change in Control. If, during the two (2) year period following a
Change in Control of the Company, either the Company terminates the Executive's
employment other than for Cause, death, or Disability, or the Executive
terminates his employment for Good Reason, the Company shall pay the amounts and
provide the benefits described in Sections 5(a)(i) and (ii) above to the
Executive at the time and in the amounts determined under Section 5(a), provided
--------
that the Severance Pay Period as used in subparagraphs 5(a)(i)(A) and 5(a)(ii)
- ----
shall, for purposes of this Section 5(d), be a period of three (3) years.
(e) In the event that the Executive becomes entitled to the payments and
benefits provided under this Section 5 and/or any other payments or benefits in
connection with a Change
12
<PAGE>
in Control or termination of the Executive's 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 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 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 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 Payment attributable to the Excise Tax). 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 and penalties payable with respect to such
excess) at the time that the amount of such excess is finally determined. The
Executive shall notify the Company of any audit or review by the Internal
Revenue Service of the Executive's federal income tax return for the year in
which a payment under this Agreement is made within ten (10) days of the
Executive's receipt of notification of such audit or review. In addition, the
Executive shall also notify the Company of the final resolution of such audit or
review within ten (10) days of such resolution.
6. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any plan, program,
policy or practice provided by the Company or any of its affiliated companies
for which the Executive may qualify, nor shall
13
<PAGE>
anything in this Agreement limit or otherwise affect such rights as the
Executive may have under any contract or agreement with the Company or any of
its affiliated companies. Vested benefits and other amounts that the Executive
is otherwise entitled to receive under any plan, policy, practice or program of,
or any contract or agreement with, the Company or any of its affiliated
companies on or after the Date of Termination shall be payable in accordance
with such plan, policy, practice, program, contract or agreement, as the case
may be, except as explicitly modified by this Agreement.
7. No Mitigation. In no event shall the Executive be obligated to seek
other employment or take any other action by way of mitigation of the amounts
payable to the Executive under any of the provisions of this Agreement and,
except as specifically provided in Section 5(a)(ii) and 5(b)(ii) of this
Agreement, such amounts shall not be reduced, regardless of whether the
Executive obtains other employment.
8. Confidential Information; Noncompetition.
(a) The Executive shall hold in a fiduciary capacity for the benefit of
the Company all secret or confidential information, knowledge or data relating
to the Company or any of its affiliated companies and their respective
businesses that the Executive obtains during the Executive's employment by the
Company or any of its affiliated companies and that is not public knowledge
(other than as a result of the Executive's violation of this Section 8(a))
("Confidential Information"). The Executive shall not communicate, divulge or
disseminate Confidential Information at any time during or after the Executive's
employment with the Company, except with the prior written consent of the
Company or as otherwise required by law or legal process.
(b) During the Noncompetition Period (as defined below), the Executive
shall not, without the prior written consent of the Board, engage in or become
associated with a Competitive Activity. For purposes of this Section 8(b): (i)
the "Noncompetition Period" means the period beginning with the Commencement
Date and ending on the last day of the Employment Period (as determined under
Section 1 hereof without regard to any automatic extensions occurring after the
effective date of the termination of Executive's employment), plus, if the
Executive's employment is terminated by the Company for Cause or voluntarily by
the Executive other than with Good Reason, plus two years after the end of the
Employment Period; (ii) a "Competitive Activity" means any business or other
endeavor whose primary business is to provide guard, alarm or armored
transport protective services or courier services, or related security or
staffing services; and (iii) 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 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 Employment 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.
14
<PAGE>
9. Arbitration; Attorneys' Fees. 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. The Company agrees to pay,
as incurred, to the fullest extent permitted by law, all legal fees and expenses
that the Executive may reasonably incur as a result of any contest (regardless
of the outcome) by the Company, the Executive or others of the validity or
enforceability of or liability under, or otherwise involving, any provision of
this Agreement; provided, that in the case of any contest in which the Executive
seeks to obtain any relief from the Company pursuant to this Agreement, such
fees and expenses shall be paid by the Company only if the Executive obtains a
substantial portion of the relief he seeks; and provided, further, that in the
case of any action brought by the Company to enforce any provision of Section 8
of this Agreement, such fees and expenses shall be paid by the Company only if
it fails to obtain a substantial portion of the relief it seeks. The Company
further agrees to reimburse Executive for reasonable professional fees and
related expenses incurred in the negotiation and preparation of this Agreement,
but not in excess of the amount of legal fees paid by the Company to its outside
counsel in the preparation and negotiation of this Agreement.
10. 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.
11. 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
15
<PAGE>
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 Edwardson
747 Sheridan Road
Wilmette, IL 60091
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 11(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.
(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
(including, without limitation, the right of the Executive to terminate
employment for Good Reason pursuant to Section 4(c) of 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) The Executive and the Company acknowledge that this Agreement
supersedes any other agreement between them concerning the subject matter
hereof, including but not limited to the Original Agreement.
(g) 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.
16
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization of its Board of Directors, 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.
EXECUTIVE:
/s/ John A. Edwardson
---------------------------------------------
BORG-WARNER SECURITY CORPORATION
By /s/ Robert E. T. Lackey
-------------------------------------------
Name: Robert E. T. Lackey
Title: Vice President and General Counsel
17
<PAGE>
Exhibit 10.18
- -------------
August 31, 1998
Mr. Robert E. T. Lackey
1907 Buckingham Road
Mundelein, IL 60060
Dear Bob:
This will serve to formalize the commitment that Borg-Warner Security
Corporation and/or its affiliates ("Company") agrees to provide you in the event
that you are involuntarily terminated by the Company in the event of a Change-
In-Control, or within eighteen (18) months after a Change-In-Control.
The benefits to be either paid or provided to you ("Benefits") will be as
follows:
1. Your full base salary (plus all other amounts being paid to you, or on your
behalf, including, but not limited to, any compensation, retirement, or
insurance plan(s) of the Company) through your date of termination
("Termination Date");
2. Within ten (10) business days after your Termination Date:
a. a lump sum payment equal to eighteen (18) months' full base salary,
b. the amount equal to the prior year's annual bonus award, and
c. the amount equal to eighteen (18) months' Company contribution
(including any matching contributions) which would have been made
by the Company to the retirement plan on account of your
participation therein;
d. The amount of your current year's annual bonus award prorated for
the number of months, or portion thereof, actually completed in the
year;
4. For a period ending the earlier of either eighteen (18) months from your
Termination Date, or the date on which you and your family are covered by
comparable benefits, the Company will provide you and your family with
insurance coverages substantially similar to the insurance coverages in
force on your Termination Date (subject to your continued payment of any
premiums that you were paying prior to your Termination Date and your right
to elect full COBRA coverage thereafter); and
5. Outplacement services by a qualified outplacement agency selected by you
and agreed to by the Company for a period not to exceed the earlier of the
date of your new employment, or eighteen (18) months after your Termination
Date.
<PAGE>
Mr. Robert E. T. Lackey
August 31, 1998
Page 2
You will not be required to mitigate the amount of any payment set forth herein,
nor will any Benefit be reduced or offset (except as specifically stated herein)
by any subsequent employment.
As a condition of your receipt of the Benefits, you and the Company will execute
a mutually satisfactory release agreement.
Any payments made to you will be subject to appropriate taxes and withholdings.
A "Change-in-Control" of the Corporation shall be defined as set forth on
Exhibit A attached to and made a part of this agreement.
Nothing herein is intended, or is to be construed, as a waiver by you of your
right to receive any benefits or payments payable to you pursuant to any
retirement or disability plan of the Company in which you are a participant.
This Agreement will be binding upon the Company and any of its successors or
assigns whether direct or indirect, by purchase, merger, consolidation or
otherwise.
Borg-Warner Security Corporation
/s/ J. Joe Adorjan
By________________________________
J. Joe Adorjan
Agreed to and accepted this 31st day of August, 1998 in Chicago, Illinois
/s/ Robert E. T. Lackey
By________________________________
Robert E. T. Lackey
<PAGE>
EXHIBIT A
---------
A Change-in-Control shall be deemed to have occurred if:
A. there is an acquisition by an individual, entity or group of beneficial
ownership of 25% or more of the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally in
the election of directors; or
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 (whose election or nomination for election was duly
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 consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent at least 70% of the
combined voting power of the voting securities of the Company or such
surviving entity 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.
<PAGE>
Exhibit 10.19
-------------
[CONFORMED]
STOCK PURCHASE AGREEMENT
dated as of
April 17, 1998
among
ADT SECURITY SERVICES, INC.,
TYCO INTERNATIONAL (US) INC.
and
BORG-WARNER SECURITY CORPORATION
relating to the purchase and sale
of
the common stock
of
Wells Fargo Alarm Services, Inc.,
BW-Canada Alarm (Wells Fargo) Corporation
and
Wells Fargo Pyro Technologies, Inc.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1
---------
Definitions
-----------
Section 1.01. Definitions.................................................. 1
-
ARTICLE 2
---------
Purchase and Sale
-----------------
Section 2.01. Purchase and Sale............................................ 6
-
Section 2.02. Closing...................................................... 6
-
Section 2.03. Closing Balance Sheet........................................ 6
-
Section 2.04. Adjustment of Purchase Price................................. 8
-
ARTICLE 3
---------
Representations and Warranties of Seller
----------------------------------------
Section 3.01. Corporate Existence and Power................................ 9
-
Section 3.02. Corporate Authorization...................................... 9
-
Section 3.03. Governmental Authorization................................... 9
-
Section 3.04. Noncontravention............................................. 9
-
Section 3.05. Capitalization............................................... 10
--
Section 3.06. Ownership of Shares.......................................... 10
--
Section 3.07. Subsidiaries................................................. 11
--
Section 3.08. Financial Statements......................................... 11
--
Section 3.09. Absence of Certain Changes................................... 11
--
Section 3.10. No Undisclosed Material Liabilities.......................... 13
--
Section 3.11. Material Contracts........................................... 14
--
Section 3.12. Litigation................................................... 15
--
Section 3.13. Compliance with Laws and Court Orders........................ 15
--
Section 3.14. Assets....................................................... 16
--
Section 3.15. Intellectual Property........................................ 16
--
Section 3.16. Insurance.................................................... 16
--
Section 3.17. Finders' Fees................................................ 17
--
Section 3.18. Employees.................................................... 17
--
Section 3.19. Employee Benefit Plans....................................... 17
--
Section 3.20. Environmental Matters........................................ 18
--
Section 3.21. Labor Matters................................................ 19
--
Section 3.22. Books and Records............................................ 19
--
Section 3.23. Customers and Suppliers...................................... 20
--
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 3.24. Product Liability............................................ 20
--
ARTICLE 4
---------
Representations and Warranties of Buyer
------------------------------------------------
Section 4.01. Corporate Existence and Power................................ 20
--
Section 4.02. Corporate Authorization...................................... 20
--
Section 4.03. Governmental Authorization................................... 21
--
Section 4.04. Noncontravention............................................. 21
--
Section 4.05. Financing.................................................... 21
--
Section 4.06. Purchase for Investment...................................... 21
--
Section 4.07. Litigation................................................... 21
--
Section 4.08. Finders' Fees................................................ 22
--
Section 4.09. Inspections; No Other Representations........................ 22
--
ARTICLE 5
---------
Covenants of Seller
-------------------
Section 5.01. Conduct of the Companies..................................... 22
--
Section 5.02. Access to Information........................................ 23
--
Section 5.03. Notices of Certain Events.................................... 24
--
Section 5.04. Resignations................................................. 24
--
Section 5.05. Non-Competition.............................................. 25
--
Section 5.06. Non-Solicitation............................................. 26
--
Section 5.07. Intercompany Accounts........................................ 26
--
ARTICLE 6
---------
Covenants of Buyer
------------------
Section 6.01. Confidentiality.............................................. 26
--
Section 6.02. Access....................................................... 27
--
Section 6.03. Trademarks; Tradenames....................................... 27
--
Section 6.04. Notices of Certain Events.................................... 28
--
Section 6.05. Agreements Guaranteed by Seller.............................. 28
--
ARTICLE 7
---------
Covenants of Buyer and Seller
-----------------------------
Section 7.01. Best Efforts; Further Assurances............................. 29
--
Section 7.02. Certain Filings.............................................. 31
--
Section 7.03. Public Announcements......................................... 31
--
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 8
---------
Tax Matters
-----------
Section 8.01. Tax Definitions............................................... 32
--
Section 8.02. Tax Representations.......................................... 32
--
Section 8.03. Tax Covenants................................................ 33
--
Section 8.04. Termination of Existing Tax Sharing Agreements............... 34
--
Section 8.05. Cooperation on Tax Matters................................... 35
--
Section 8.06. Indemnification by Seller and Buyer.......................... 35
--
ARTICLE 9
---------
Employee Benefits
-----------------
Section 9.01. Employee Benefits............................................ 37
--
Section 9.02. Seller Welfare Plans......................................... 39
--
ARTICLE 10
----------
Conditions to Closing
---------------------
Section 10.01. Conditions to Obligations of Buyer and Seller............... 40
--
Section 10.02. Conditions to Obligation of Buyer........................... 40
--
Section 10.03. Conditions to Obligation of Seller.......................... 41
--
ARTICLE 11
----------
Survival; Indemnification
-------------------------
Section 11.01. Survival.................................................... 42
--
Section 11.02. Indemnification............................................. 42
--
Section 11.03. Procedures.................................................. 44
--
Section 11.04. Calculation of Damages...................................... 45
--
Section 11.05. Assignment of Claims........................................ 45
--
Section 11.06. Exclusivity................................................. 45
--
ARTICLE 12
----------
Termination
-----------
Section 12.01. Grounds for Termination..................................... 46
--
Section 12.02. Effect of Termination....................................... 46
--
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 13
----------
Miscellaneous
-------------
Section 13.01. Notices..................................................... 47
--
Section 13.02. Entire Agreement............................................ 48
--
Section 13.03. Amendments and Waivers...................................... 48
--
Section 13.04. Expenses.................................................... 49
--
Section 13.05. Successors and Assigns...................................... 49
--
Section 13.06. Governing Law............................................... 49
--
Section 13.07. Jurisdiction................................................ 49
--
Section 13.08. WAIVER OF JURY TRIAL........................................ 49
--
Section 13.09. Counterparts; Effectiveness; Third Party Beneficiaries...... 49
--
Section 13.10. Interpretation.............................................. 50
--
Section 13.11. Severability................................................ 50
--
Section 13.12. Disclosure Schedules........................................ 50
--
Section 13.13. Tyco (US) Guarantee......................................... 50
--
</TABLE>
Exhibit 9.02 Form of Transition Services Agreement
Schedules
iv
<PAGE>
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT dated as of April 17, 1998 among ADT Security
Services, Inc., a Delaware corporation ("Buyer"), Tyco International (US) Inc.,
a Massachusetts corporation ("Tyco (US)"), and Borg-Warner Security Corporation,
a Delaware corporation ("Seller").
WHEREAS, Seller is the record and beneficial owner of the Shares and
desires to sell the Shares to Buyer, and Buyer desires to purchase the Shares
from Seller on the terms and conditions set forth herein;
The parties hereto agree as follows:
ARTICLE 1
Definitions
Section 1.01. Definitions. (a) The following terms, as used herein, have
the following meanings:
"Accounting Principles" means generally accepted accounting principles
consistently applied by Seller in the preparation of its audited consolidated
financial statements, taking into account (i) the accounting policies within
generally accepted accounting principles and (ii) the exceptions to generally
accepted accounting principles, in each case, accompanying the Balance Sheet
attached as part of Schedule 3.08.
----
"Affiliate" means, with respect to any Person, any other Person directly or
indirectly controlling, controlled by, or under common control with such Person;
provided that neither any Company nor any Subsidiary shall be considered an
Affiliate of Seller.
"Alarm" means Wells Fargo Alarm Services, Inc., a Delaware corporation.
"Alarm Common Stock" means the common stock, par value $0.01 per share, of
Alarm.
"Balance Sheet" means the unaudited pro forma combined balance sheet of the
Companies and the Subsidiaries as at December 31, 1997, a copy of which is
attached as part of Schedule 3.08.
----
<PAGE>
"Balance Sheet Date" means December 31, 1997.
"Benefit Arrangement" means any employment, severance or similar contract
or arrangement (whether or not written) or any plan, policy, fund, program or
contract or arrangement (whether or not written) providing for compensation,
bonus, profit-sharing, stock option, or other stock related rights or other
forms of incentive or deferred compensation, vacation benefits, insurance
coverage (including any self-insured arrangements), health or medical benefits,
disability benefits, workers' compensation, supplemental unemployment benefits,
severance benefits and post-employment or retirement benefits (including
compensation, pension, health, medical or life insurance or other benefits) that
(i) is not an Employee Plan, (ii) is entered into, maintained, administered or
contributed to, as the case may be, by Seller, any of its Affiliates, any
Company or any Subsidiary and (iii) covers any employee or former employee of
any Company or any Subsidiary employed in the United States or Canada.
"Canada Alarm" means BW-Canada Alarm (Wells Fargo) Corporation, a Delaware
corporation.
"Canada Alarm Common Stock" means the common stock, par value $0.01 per
share, of Canada Alarm.
"Closing Date" means the date of the Closing.
"Code" means the United States Internal Revenue Code of 1986, as amended.
"Companies" means, collectively, Alarm, Pyro and Canada Alarm (each, a
"Company").
"Employee Plan" means any "employee benefit plan", as defined in Section
3(3) of ERISA, that (i) is subject to any provision of ERISA, (ii) is
maintained, administered or contributed to by Seller, any of its Affiliates, any
Company or any Subsidiary and (iii) covers any employee or former employee of
any Company or any Subsidiary.
"Environmental Laws" means any and all statutes, laws, regulations and
rules, in each case as in effect on the date hereof, that have as their
principal purpose the protection of the environment and includes, but is not
limited to, the Comprehensive Environmental Response Compensation and Liability
Act ("CERCLA"), 42 U.S.C. (S) 9601 et seq., the Hazardous Materials
Transportation Act, 49 U.S.C. (S) 1801 et seq., the Resource Conservation and
Recovery Act ("RCRA"), 42 U.S.C. (S) 6901 et seq., the Clean Water Act, 33
U.S.C. (S) 1251 et
2
<PAGE>
seq., the Clean Air Act, 33 U.S.C. (S) 2601 et seq., the Toxic Substance Control
Act, 15 U.S.C. (S) 2601 et seq., and the Oil Pollution Act of 1990, 33 U.S.C.
(S) 2701 et seq., as such laws have been amended or supplemented on or prior to
the date hereof, and the regulations promulgated pursuant thereto, and all
analogous state or local statutes.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended and the rules and regulations promulgated thereunder.
"ERISA Affiliate" of any entity means any other entity which, together with
such entity, would be treated as a single employer under Section 414 of the
Code.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"knowledge of Seller", "Seller's knowledge" or any other similar knowledge
qualification in this Agreement means to the actual knowledge of the President,
the Chief Financial Officer or the General Counsel of Seller or any Company.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance in respect of such asset.
"Material Adverse Effect" means a material adverse effect on the business,
assets, financial condition or revenues of the Companies and the Subsidiaries,
taken as a whole, except any such effect resulting from or arising in connection
with (i) this Agreement or the transactions contemplated hereby, (ii) changes or
conditions affecting the physical and electronic security industries generally
or (iii) changes in economic, regulatory or political conditions generally.
"Multiemployer Plan" means each Employee Plan that is a multiemployer plan,
as defined in Section 3(37) of ERISA.
"1934 Act" means the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.
"Person" means an individual, a corporation, a limited liability company, a
partnership, an association, a trust or any other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
"Pyro" means Wells Fargo Pyro Technologies, Inc., a New Jersey corporation.
3
<PAGE>
"Pyro Common Stock" means the common stock, par value $1.00 per share, of
Pyro.
"Shares" means, collectively, 100 shares of Alarm Common Stock, 1,000
shares of Pyro Common Stock and 100 shares of Canada Alarm Common Stock.
"Subsidiary" means any corporation or other entity of which a majority of
the securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions are directly or indirectly owned by any Company; provided that, for
purposes of this Agreement, BW-Chemicals Corporation shall not be considered a
Subsidiary.
"Title IV Plan" means an Employee Plan subject to Title IV of ERISA other
than any Multiemployer Plan.
(b) Each of the following terms is defined in the Section set forth
opposite such term:
Term Section
Accounting Referee 8.01
----
Alarm Preferred Stock 3.05
----
Antitrust Law 7.01(b)
-------
Applicable Tax Rate 8.06(b)
-------
Base Net Tangible Assets 2.04
----
Buyer 401(k) Plan 9.01(b)
-------
Buyer Plan 9.01(b)
-------
Canada Alarm Preferred Stock 3.05
----
Claim 11.03
-----
Closing 2.02
----
Closing Net Tangible Assets 2.03
----
Closing Balance Sheet 2.03
----
Combined Return 8.01
----
Company Intellectual Property 3.15
----
Company Securities 3.05
----
Continuing Employees 9.01(b)
-------
DOJ 7.01(b)
-------
Damages 11.02
-----
Final Net Tangible Assets 2.04
----
FTC 7.01(b)
-------
Governmental Authority 7.01(b)
-------
Indemnified Party 11.03
-----
Indemnifying Party 11.03
-----
4
<PAGE>
Term Section
Licenses and Permits 3.13
----
Loss 8.06(a)
-------
Non-Compete Period 5.05(a)
-------
Potential Contributor 11.05
-----
Pre-Closing Uninsured Claims 11.02(d)
--------
Pre-Closing Tax Period 8.01
----
Price Allocation Schedule 8.03(d)
-------
Preferred Stock 3.05
----
Purchase Price 2.01
----
Retirement Plan 9.01(b)
-------
Returns 8.02
----
Section 338 Cost 8.06(g)
-------
Section 338(h)(10) Election 8.03(d)
-------
Seller Companies 5.05(a)
-------
Seller 401(k) Plans 9.01(b)
-------
Seller Group 8.01
----
Seller Welfare Plans 9.02(a)
-------
Seller Trademarks and Tradenames 6.03(a)
-------
State Tax 8.01
----
State Tax Benefit 8.06(b)
-------
Subsidiary Securities 3.07(b)
-------
Tax 8.01
----
Tax Sharing Agreement 8.01
----
Taxing Authority 8.01
----
Third Party Claim 11.03
-----
Transition Period 6.03(a)
-------
Transition Trademarks and Tradenames 6.03(a)
-------
ARTICLE 2
Purchase and Sale
Section 2.01. Purchase and Sale. Upon the terms and subject to the
conditions of this Agreement, Seller agrees to sell to Buyer, and Buyer agrees
to purchase from Seller, the Shares at the Closing. The purchase price for the
Shares (the "Purchase Price") is $425,000,000 in cash. The Purchase Price shall
be paid as provided in Section 2.02 and shall be subject to adjustment as
provided in Section 2.04.
5
<PAGE>
Section 2.02. Closing. The closing (the "Closing") of the purchase and sale
of the Shares hereunder shall take place at the offices of Davis Polk &
Wardwell, 450 Lexington Avenue, New York, New York, as soon as possible, but in
no event later than five business days, after satisfaction of the conditions set
forth in Article 10, or at such other time or place as Buyer and Seller may
agree. At the Closing:
(a) Buyer shall deliver to Seller the Purchase Price in immediately
available funds by wire transfer to an account of Seller with a bank in New York
City designated by Seller, by notice to Buyer, not later than two business days
prior to the Closing Date (or if not so designated, then by certified or
official bank check payable in immediately available funds to the order of
Seller in such amount).
(b) Seller shall deliver to Buyer certificates for the Shares duly endorsed
or accompanied by stock powers duly endorsed in blank, with any required
transfer stamps affixed thereto.
Section 2.03. Closing Balance Sheet. (a) As promptly as practicable, but no
later than 60 days, after the Closing Date, Buyer will cause to be prepared and
delivered to Seller the Closing Balance Sheet and a certificate based on such
Closing Balance Sheet setting forth Buyer's calculation of Closing Net Tangible
Assets. The Closing Balance Sheet (the "Closing Balance Sheet") shall fairly
present the combined financial position of the Companies and the Subsidiaries as
at the close of business on the Closing Date in conformity and on a basis
consistent with the Accounting Principles. "Closing Net Tangible Assets" means
the combined stockholder's equity of the Companies and the Subsidiaries as shown
on the Closing Balance Sheet, with the following adjustments: (i) less, to the
extent included in the Closing Balance Sheet, all assets that in accordance with
the Accounting Principles would be classified as intangible assets, including,
without limitation, goodwill, patents, trademarks, deferred expenses and
unamortized debt discount and (ii) excluding (A) the effect (including the Tax
effect) of the purchase of the Shares and any act, event or transaction
occurring after the Closing and not in the ordinary course of business of the
Companies and the Subsidiaries, (B) any current or deferred income tax assets or
liabilities, (C) any liabilities indemnified by Seller (whether or not Buyer is
responsible for a portion thereof), (D) except as would be required of Seller by
generally accepted accounting principles, any write up or write down of assets
from their historic depreciated or amortized carrying cost to reflect any higher
or lower market value and (E) the balance in single interest retention.
(b) If Seller disagrees with Buyer's calculation of Closing Net Tangible
Assets delivered pursuant to Section 2.03(a), Seller may, within 45 days after
-------
6
<PAGE>
delivery of the documents referred to in Section 2.03(a), deliver a notice to
Buyer disagreeing with such calculation and setting forth Seller's calculation
of such amount. Any such notice of disagreement shall specify those items or
amounts as to which Seller disagrees, and Seller shall be deemed to have agreed
with all other items and amounts contained in the Closing Balance Sheet and the
calculation of Closing Net Tangible Assets delivered pursuant to Section
2.03(a).
(c) If a notice of disagreement shall be duly delivered pursuant to Section
2.03(b), Buyer and Seller shall, during the 15 days following such delivery, use
their best efforts to reach agreement on the disputed items or amounts in order
to determine, as may be required, the amount of Closing Net Tangible Assets,
which amount shall not be less than the amount thereof shown in Buyer's
calculations delivered pursuant to Section 2.03(a) nor more than the amount
thereof shown in Seller's calculation delivered pursuant to Section 2.03(b). If,
during such period, Buyer and Seller are unable to reach such agreement, they
shall promptly thereafter cause independent accountants of nationally recognized
standing reasonably satisfactory to Buyer and Seller (who shall not have any
material relationship with Buyer or Seller), promptly to review this Agreement
and the disputed items or amounts for the purpose of calculating Closing Net
Tangible Assets. In making such calculation, such independent accountants shall
consider only those items or amounts in the Closing Balance Sheet or Buyer's
calculation of Closing Net Tangible Assets as to which Seller has disagreed and,
in considering such items and amounts, shall apply the provisions of Section
2.03(a) and the Accounting Principles. Such independent accountants shall
deliver to Buyer and Seller, as promptly as practicable, a report setting forth
such calculation. Such report shall be final and binding upon Buyer and Seller.
The cost of such review and report shall be borne equally by Buyer and Seller.
(d) Buyer and Seller agree that they will, and agree to instruct their
respective independent accountants and cause each Company and each Subsidiary
to, cooperate and assist in the preparation of the Closing Balance Sheet and the
calculation of Closing Net Tangible Assets and in the conduct of the reviews
referred to in this Section 2.03, including without limitation, the making
available to the extent necessary of books, records, work papers and personnel.
Section 2.04. Adjustment of Purchase Price. (a) If Base Net Tangible Assets
exceed Final Net Tangible Assets, Seller shall pay to Buyer, as an adjustment to
the Purchase Price, in the manner and with interest as provided in Section
2.04(b), the amount of such excess. If Final Net Tangible Assets exceed Base Net
Tangible Assets, Buyer shall pay to Seller, in the manner and with interest as
provided in Section 2.04(b), the amount of such excess. "Base Net Tangible
Assets" means $228,474,000. Schedule 2.04 shows the calculation of Base Net
Tangible Assets based on the Balance Sheet and the provisions set forth
7
<PAGE>
in Section 2.03 and excluding cash of the Companies and the Subsidiaries shown
on the Balance Sheet. "Final Net Tangible Assets" means Closing Net Tangible
Assets (i) as shown in Buyer's calculation delivered pursuant to Section
2.03(a), if no notice of disagreement with respect thereto is duly delivered
pursuant to Section 2.03(b); or (ii) if such a notice of disagreement is
delivered, (A) as agreed by Buyer and Seller pursuant to Section 2.03(c) or (B)
in the absence of such agreement, as shown in the independent accountants'
calculation delivered pursuant to Section 2.03(c); provided that in no event
shall Final Net Tangible Assets be less than Buyer's calculation of Closing Net
Tangible Assets delivered pursuant to Section 2.03(a) or more than Seller's
calculation of Closing Net Tangible Assets delivered pursuant to Section
2.03(b).
(b) Any payment pursuant to Section 2.04(a) shall be made at a mutually
convenient time and place within 10 days after Final Net Tangible Assets have
been determined by delivery by Buyer or Seller, as the case may be, of a
certified or official bank check or by wire transfer payable in immediately
available funds to the other party or by causing such payments to be credited to
such account of such other party as may be designated by such other party. The
amount of any payment to be made pursuant to this Section 2.04 shall bear
interest from and including the Closing Date to but excluding the date of
payment at a rate per annum equal to the Prime Rate as published in the Wall
Street Journal, Eastern Edition, in effect from time to time during the period
from the Closing Date to the date of payment. Such interest shall be payable at
the same time as the payment to which it relates and shall be calculated daily
on the basis of a year of 365 days and the actual number of days elapsed.
ARTICLE 3
Representations and Warranties of Seller
Seller represents and warrants to Buyer as of the date hereof that:
Section 3.01. Corporate Existence and Power. Each of Seller and the
Companies is a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation and has the requisite
corporate power and authority and governmental approvals to own, lease and
operate its properties and to carry on its business as now conducted, except for
such matters as would not have a Material Adverse Effect. Each Company is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction where such qualification is necessary, except for such matters
as would not have a Material Adverse Effect. Each Company has heretofore
delivered or made
8
<PAGE>
available to Buyer true and complete copies of its certificate of incorporation
and bylaws as currently in effect.
Section 3.02. Corporate Authorization. The execution, delivery and
performance by Seller of this Agreement and the consummation by Seller of the
transactions contemplated hereby are within Seller's corporate powers and have
been duly authorized by all necessary corporate action. This Agreement
constitutes a valid and binding agreement of Seller enforceable against Seller
in accordance with its terms except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally.
Section 3.03. Governmental Authorization. The execution, delivery and
performance by Seller of this Agreement and the consummation by Seller of the
transactions contemplated hereby require no action by or in respect of, or
filing with, any governmental body, agency, official or authority, other than
(a) compliance with any applicable requirements of the HSR Act; (b) compliance
with any applicable requirements of the 1934 Act; (c) compliance with any other
applicable securities laws; (d) compliance with any applicable Canadian laws;
(e) any actions or filings which, if not taken or made, would not have a
Material Adverse Effect and (f) any filings or notices not required to be made
or given until after the Closing Date.
Section 3.04. Noncontravention. Except as set forth in Schedule 3.04, the
execution, delivery and performance by Seller of this Agreement do not and the
consummation of the transactions by Seller contemplated hereby will not (a)
contravene or conflict with the certificate of incorporation, bylaws or similar
organizational documents of Seller or any Company, (b) assuming compliance with
the matters referred to in Section 3.03, violate any applicable law, rule,
regulation, judgment, injunction, order or decree, (c) constitute a default
under or give rise to a right of termination, cancellation or acceleration of
any right or obligation of Seller, any Company or any Subsidiary or to a loss of
any benefit to which Seller, any Company or any Subsidiary is entitled under any
provision of any agreement or other instrument binding upon Seller, any Company
or any Subsidiary or (d) result in the creation or imposition of any Lien on any
asset of any Company or any Subsidiary pursuant to any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which any Company or any Subsidiary is a party or by
which any Company or any Subsidiary is bound or affected, except in the case of
clause (b), (c) or (d), for such matters as would not have a Material Adverse
Effect.
Section 3.05. Capitalization. The authorized capital stock of Alarm
consists of 9,000 shares of Alarm Common Stock and 1,000 shares of preferred
9
<PAGE>
stock, par value $0.01 per share ("Alarm Preferred Stock"); the authorized
capital stock of Pyro consists of 1,000 shares of Pyro Common Stock; and the
authorized capital stock of Canada Alarm consists of 9,000 shares of Canada
Alarm Common Stock and 1,000 shares of preferred stock, par value $0.01 per
share ("Canada Alarm Preferred Stock"). As of the date hereof, (A) 100 shares of
Alarm Common Stock and no shares of Alarm Preferred Stock were issued and
outstanding, (B) 1,000 shares of Pyro Common Stock were issued and outstanding,
and (C) 100 shares of Canada Alarm Common Stock and no shares of Canada Alarm
Preferred Stock were issued and outstanding. All outstanding shares of capital
stock of each Company have been duly authorized, validly issued, fully paid and
non-assessable. Except as set forth in this Section 3.05, there are no
outstanding (i) shares of capital stock or voting securities of any Company,
(ii) securities of any Company convertible into or exchangeable for shares of
capital stock or voting securities of any Company or (iii) options, warrants or
other rights to acquire from any Company, or other obligation of any Company to
issue, transfer or sell, any capital stock, voting securities or securities
convertible into or exchangeable for capital stock or voting securities of any
Company (the items in clauses (i), (ii) and (iii) being referred to collectively
as the "Company Securities"). There are no contractual obligations of any
Company or any Subsidiary to repurchase, redeem or otherwise acquire any Company
Securities.
Section 3.06. Ownership of Shares. Except as set forth in Schedule 3.06,
Seller is the record and beneficial owner of the Shares, free and clear of any
Lien, and will transfer and deliver to Buyer at the Closing valid title to the
Shares free and clear of any Lien.
Section 3.07. Subsidiaries. (a) Each Subsidiary is a corporation duly
incorporated, validly existing and in good standing under the laws of its
jurisdiction of incorporation and has the requisite corporate power and
authority and governmental approvals to own, lease and operate its properties
and to carry on its business as now conducted, except for such matters as would
not have a Material Adverse Effect.
(b) All of the outstanding capital stock or other voting securities of each
Subsidiary is owned by Canada Alarm, directly or indirectly, free and clear of
any Lien. There are no outstanding (i) securities of any Company or any
Subsidiary convertible into or exchangeable for shares of capital stock or
voting securities of any Subsidiary or (ii) options, warrants or other rights to
acquire from any Company or any Subsidiary, or other obligation of any Company
or any Subsidiary to issue, any capital stock, voting securities or securities
convertible into or exchangeable for capital stock or voting securities of any
Subsidiary (the items in clauses (i) and (ii) being referred to collectively as
the "Subsidiary Securities").
10
<PAGE>
There are no contractual obligations of any Company or any Subsidiary to
repurchase, redeem or otherwise acquire any outstanding Subsidiary Securities.
(c) None of the Companies directly or indirectly owns any equity or similar
interest in, or any interest convertible into or exchangeable or exercisable
for, any equity or similar interest in, any corporation, partnership, joint
venture or other business association or entity.
Section 3.08. Financial Statements. Schedule 308 sets forth the unaudited
pro forma combined balance sheet as of December 31, 1997 and the related
unaudited pro forma combined statements of operating income and operating cash
flows for the year ended December 31, 1997 of the Companies and the
Subsidiaries. Such financial statements fairly present, in all material
respects, in conformity with the Accounting Principles, the combined financial
position of the Companies and the Subsidiaries as of the date thereof and their
combined operating income and operating cash flows for the period then ended.
Section 3.09. Absence of Certain Changes. Except as set forth in Schedule
3.09, since the Balance Sheet Date, the business of the Companies and the
Subsidiaries has been conducted in the ordinary course consistent with past
practices and there has not been:
(a) any event, occurrence or development which has had a Material
Adverse Effect;
(b) any declaration, setting aside or payment of any dividend or other
distribution with respect to any shares of capital stock of any Company or
any Subsidiary or any repurchase, redemption or other acquisition by any
Company or any Subsidiary of any outstanding shares of capital stock or
other equity securities of, or other ownership interests in, any Company or
any Subsidiary;
(c) any amendment of any term of any outstanding security of any
Company or any Subsidiary that would materially increase the obligations of
such Company or Subsidiary under such security;
(d) (x) any incurrence or assumption by any Company or any Subsidiary
of any indebtedness for borrowed money, other than under existing credit
facilities (or any renewals, replacements or extensions that do not
increase the aggregate commitments thereunder) (A) in the ordinary course
of business consistent with past practices (it being understood that any
indebtedness incurred prior to the date hereof in respect of capital
expenditures shall be considered to have been in the ordinary course of
11
<PAGE>
business consistent with past practices) or (B) in connection with any
acquisition or capital expenditure permitted by Section 5.01 or (y) any
guarantee, endorsement or other incurrence or assumption of liability
(whether directly, contingently or otherwise) by any Company or any
Subsidiary for the obligations of any other Person (other than any wholly-
owned Subsidiary), other than in the ordinary course of business consistent
with past practices;
(e) any making of any loan, advance or capital contributions to or
investment in any Person by any Company or any Subsidiary other than (i)
any acquisition permitted by Section 5.01, (ii) loans, advances or capital
contributions to or investments in wholly-owned Subsidiaries, (iii) loans
or advances to employees of any Company or any Subsidiary made in the
ordinary course of business consistent with past practices or (iv) loans,
advances or capital contributions to or investments made in the ordinary
course of business consistent with past practices;
(f) (i) any contract or agreement entered into by any Company or any
Subsidiary on or prior to the date hereof relating to any material
acquisition or disposition of any assets or business or (ii) any
modification, amendment, assignment, termination or relinquishment by any
Company or any Subsidiary of any contract, license or other right
(including any insurance policy naming it as a beneficiary or a loss
payable payee) that would have a Material Adverse Effect, other than, in
the case of (i) and (ii), transactions, commitments, contracts or
agreements in the ordinary course of business consistent with past
practices and those contemplated by this Agreement;
(g) any material change in any method of accounting or accounting
practice by any Company or any Subsidiary except for any such change
required by reason of a change in generally accepted accounting principles;
(h) any (i) employment, deferred compensation, severance, retirement
or other similar agreement entered into with any director, officer or
employee of any Company or any Subsidiary (or any amendment to any such
existing agreement), (ii) grant of any severance or termination pay to any
director, officer or employee of any Company or any Subsidiary or (iii)
change in compensation or other benefits payable to any director, officer
or employee of any Company or any Subsidiary pursuant to any severance or
retirement plans or policies thereof, in each case, other than in the
ordinary course of business consistent with past practices;
12
<PAGE>
(i) any sale, lease, transfer, assignment, distribution or other
disposition of any material assets (except for sales in the ordinary course
of business) by any Company or any Subsidiary, or any disposal of any
Company or any Subsidiary of any material assets for any amount to Seller
or its Affiliates ;
(j) any disposal or lapse of any rights in, to or for the use of any
patent, trademark, trade name or copyright of any Company or any
Subsidiary, or any disclosure to any person who is not an employee, or
other disposition of, any customer lists of any Company or any Subsidiary,
in each case, which would have a Material Adverse Effect;
(k) any material damage, destruction or loss of any monitoring center;
or
(l) any material revaluation by any Company or any Subsidiary of any
of its assets, including, without limitation, writing down the value of
inventory or writing off notes or accounts receivable, other than in the
ordinary course of business.
Section 3.10. No Undisclosed Material Liabilities. There are no liabilities
of any Company or any Subsidiary (absolute, accrued, contingent or otherwise),
other than:
(a) liabilities adequately provided for in the Balance Sheet or
disclosed in the notes thereto;
(b) liabilities set forth in Schedule 3.10;
(c) liabilities disclosed in, related to or arising under any
agreements, instruments or other matters disclosed in this Agreement or any
Schedule hereto;
(d) liabilities incurred in the ordinary course of business since the
Balance Sheet Date; or
(e) other undisclosed liabilities which, individually or in the
aggregate, would not have a Material Adverse Effect.
Section 3.11. Material Contracts. (a) Except as set forth in Schedule 3.11,
as of the date hereof, neither any Company nor any Subsidiary is a party to or
bound by:
13
<PAGE>
(i) any lease (whether of real or personal property) providing for
annual rentals of $100,000 or more;
(ii) any agreement for the purchase of materials, supplies, goods,
services, equipment or other assets providing for either (A) annual
payments by the Companies and the Subsidiaries of $100,000 or more or (B)
aggregate future payments by the Companies and the Subsidiaries of $100,000
or more;
(iii) any sales, distribution or other similar agreement providing for
the sale by any Company or any Subsidiary of materials, supplies, goods,
services, equipment or other assets that provides for annual payments to
the Companies and the Subsidiaries of $100,000 or more, other than customer
and subscriber agreements;
(iv) any material partnership, joint venture or other similar
agreement or arrangement;
(v) any agreement relating to the acquisition or disposition of any
material business (whether by merger, sale of stock, sale of assets or
otherwise);
(vi) any agreement relating to indebtedness for borrowed money or the
deferred purchase price of property (in either case, whether incurred,
assumed, guaranteed or secured by any asset), except any such agreement
with an aggregate outstanding principal amount not exceeding $100,000;
(vii) any material agreement that limits the freedom of any Company or
any Subsidiary to compete in any line of business or with any Person or in
any area;
(viii) any material agreement with Seller or any of its Affiliates or
any director or officer of Seller or any of its Affiliates; or
(ix) any other agreement, commitment, arrangement or plan not made in
the ordinary course of business that is material to the Companies and the
Subsidiaries, taken as a whole.
(b) Each agreement, contract, plan, lease, arrangement or commitment
required to be disclosed pursuant to this Section is a valid and binding
agreement of a Company or a Subsidiary, as the case may be, and is in full force
and effect, and none of any Company, any Subsidiary or, to the knowledge of
Seller, any other party thereto is in default or breach in any respect under the
terms of any
14
<PAGE>
such agreement, contract, plan, lease, arrangement or commitment, except for any
such matters which would not have a Material Adverse Effect.
(c) The Companies have furnished or made available, or will furnish or make
available, prior to the Closing Date, to Buyer true and correct copies of all
material contracts disclosed pursuant to this Section.
Section 3.12. Litigation. Except as set forth in Schedule 3.12, there is no
action, suit, investigation or proceeding pending against, or to the knowledge
of Seller, threatened against or affecting, Seller, any Company or any
Subsidiary or any of their respective properties before any court or arbitrator
or any governmental body, agency or official which is reasonably likely to have
a Material Adverse Effect. There are no orders, writs, injunctions or decrees
currently in force against any Company or any Subsidiary or the directors,
officers, agents or employees of any Company or any Subsidiary with respect to
the conduct of the business of the Companies and the Subsidiaries which are
reasonably likely to have a Material Adverse Effect.
Section 3.13. Compliance with Laws and Court Orders. Neither any Company
nor any Subsidiary is in violation of any applicable law, rule, regulation,
judgment, injunction, order or decree, except for violations that have not had
and would not have a Material Adverse Effect. Except as set forth in Schedule
3.13, the Companies and the Subsidiaries own, hold or possess in their own
respective name, all licenses, franchises, permits, approvals and other
governmental authorization (collectively, "Licenses and Permits") necessary to
entitle them to use their respective corporate name, to own or lease, operate
and use their respective assets and properties and to carry on and conduct their
respective businesses and operations as presently conducted, except for such
matters as would not have a Material Adverse Effect. To the knowledge of Seller,
the Companies and the Subsidiaries are not in violation of or default under any
Licenses and Permits which are reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect. Schedule 3.13 sets forth a
complete and correct list of all material Licenses and Permits of the Companies
and the Subsidiaries with the Federal Communications Commission, all of which
are in full force and effect as of the date hereof.
Section 3.14. Assets. The assets, properties, rights and contracts,
including (as applicable) title or leaseholds thereto, of the Companies and the
Subsidiaries, taken as a whole, are sufficient to permit the Companies and the
Subsidiaries to conduct their business as currently being conducted with only
such exceptions as would not have a Material Adverse Effect. All material real
property owned by the Companies and the Subsidiaries is owned free and clear of
all Liens, except (A) those reflected or reserved against in the Balance Sheet,
(B) taxes and
15
<PAGE>
general and special assessments not in default and payable without
penalty or interest, (C) Liens set forth in Schedule 3.14 and (D) Liens that do
not materially adversely interfere with any present use of such property.
Section 3.15. Intellectual Property. Schedule 3.15 sets forth an accurate
and complete list of all material patents, trademarks, service marks, trade
names, trade secrets and other intellectual property rights (collectively, the
"Company Intellectual Property") owned or used by the Companies and the
Subsidiaries in the operation of their businesses. Except as set forth in
Schedule 3.15, the Companies and the Subsidiaries own or have a valid license to
use, free and clear of any lien or other encumbrance, all of the Company
Intellectual Property necessary to carry on their respective business as
currently conducted, and neither any Company nor any Subsidiary has received any
notice of infringements of or conflict with, and to the knowledge of the
Companies, there are no infringements of or conflicts with, the rights of others
with respect to the use of any of the Company Intellectual Property, except for
such matters that, individually or in the aggregate, would not have a Material
Adverse Effect.
Section 3.16. Insurance. Except as set forth in Schedule 3.16, the
Companies and the Subsidiaries are covered by insurance maintained by Seller
with insurers, reasonably believed by Seller to be of recognized financial
responsibility and solvency, against such losses and risks and in such amounts
as are customary in the businesses in which they are engaged. Neither any
Company nor any Subsidiary has been denied insurance or suffered the
cancellation of any insurance with respect to it in the past five years that, in
either case, has had a Material Adverse Effect.
Section 3.17. Finders' Fees. Except for Merrill Lynch, Pierce, Fenner &
Smith Incorporated, no investment banker, broker, finder or other intermediary
entitled to any fee or commission from any Company or any Subsidiary upon
consummation of the transactions contemplated by this Agreement.
Section 3.18. Employees. Schedule 3.18 sets forth a true and complete list
of (a) the names, titles, annual salaries and other compensation of all
presidents and vice presidents of the Companies and the Subsidiaries and all
other employees of the Companies and the Subsidiaries whose annual base salary
exceeds $100,000, (b) all employment agreements with executive officers of each
Company and each Subsidiary, (c) all agreements with consultants who are
individuals obligating any Company or any Subsidiary to make annual cash
payments, in each case, in an amount exceeding $100,000, (d) all material
agreements with respect to the services of independent contractors or leased
employees whether or not they participate in any of the Employee Plans, (e) all
executive officers of each Company and each Subsidiary who have executed a non-
competition agreement
16
<PAGE>
with such Company or such Subsidiary, (f) all severance agreements of each
Company and each Subsidiary with or relating to its employees, in each case,
with outstanding commitments exceeding Seller's generally applicable severance
policies, excluding programs and policies required to be maintained by law and
(g) all plans, programs, agreements and other arrangements of each Company and
each Subsidiary which contain change in control provisions.
Section 3.19. Employee Benefit Plans. (a) Schedule 3.19 identifies each
material Employee Plan. Seller has made available to Buyer copies of such
Employee Plans (and, if applicable, related trust agreements) and all amendments
thereto and written interpretations thereof together with the most recent annual
report (Form 5500 including, if applicable, Schedule B thereto) and the most
recent actuarial valuation report prepared in connection with any such Employee
Plan. Schedule 3.19 identifies each such Employee Plan which is (i) a
Multiemployer Plan, (ii) a Title IV Plan or (iii) maintained in connection with
any trust described in Section 501(c)(9) of the Code.
(b) Neither any Company or any Subsidiary nor any ERISA Affiliate of any
Company or any Subsidiary has (i) engaged in, or is a successor or parent
corporation to an entity that has engaged in, a transaction described in
Sections 4069 or 4212(c) of ERISA or (ii) incurred, or reasonably expects to
incur prior to the Closing Date, (A) any liability under Title IV of ERISA
arising in connection with the termination of, or a complete or partial
withdrawal from, any plan covered or previously covered by Title IV of ERISA or
(B) any liability under Section 4971 of the Code that in either case could
become a material liability of any Company or any Subsidiary or Buyer or any of
its ERISA Affiliates after the Closing Date.
(c) Except as set forth in Schedule 3.19, each Employee Plan that is
intended to be qualified under Section 401(a) of the Code has been determined by
the Internal Revenue Service to be so qualified and, to the knowledge of Seller,
there has been no event since the date of such determination which would
adversely affect such qualification; each trust created under any such Plan has
been determined by the Internal Revenue Service to be exempt from tax under
Section 501(a) of the Code and, to the knowledge of Seller, there has been no
event since the date of such exemption which would adversely affect such
exemption. Seller has provided Buyer with the most recent determination letter
of the Internal Revenue Service relating to each such Employee Plan. Each
Employee Plan has been maintained in substantial compliance with its terms and
with the requirements prescribed by any and all applicable statutes, orders,
rules and regulations, including but not limited to ERISA and the Code, except
for such matters as would not have a Material Adverse Effect.
17
<PAGE>
(d) Schedule 3.19 identifies each material Benefit Arrangement. Seller has
furnished or made available to Buyer copies or descriptions of each such Benefit
Arrangement (and, if applicable, related trust agreements) and all amendments
thereto and written interpretations thereof. Each such Benefit Arrangement has
been maintained in substantial compliance with its terms and with the
requirements prescribed by any and all applicable statutes, orders, rules and
regulations, except for such matters as would not have a Material Adverse
Effect.
(e) Except as set forth in Schedule 3.19, neither any Company nor any
Subsidiary has any contractual obligation which would result in any material
current or projected liability in respect of post-employment or post-retirement
health or medical or life insurance benefits for retired, former or current
employees of any Company or any Subsidiary, except as required to avoid excise
tax under Section 4980B of the Code.
Section 3.20. Environmental Matters. Except as set forth in Schedule 3.20
and except for such matters as would not have a Material Adverse Effect:
(a) no written notice, request for information, order, complaint or
penalty has been received relating to any Environmental Law, and there are
no judicial, administrative or other actions, suits or proceedings pending
or threatened which allege a violation of any Environmental Law, in each
case relating to any Company or any Subsidiary;
(b) each Company and each Subsidiary have all environmental permits
necessary for their operations to comply with all applicable Environmental
Laws and are in compliance with the terms of such permits and with all
other applicable Environmental Laws;
(c) there has been no written environmental audit conducted within the
past five years by Seller, any Company or any Subsidiary of any property
currently owned or leased by any Company or any Subsidiary which has not
been delivered or made available to Buyer prior to the date hereof; and
(d) to the knowledge of Seller, neither any Company nor any Subsidiary
has been identified as a potentially responsible party at any federal or
state national priority list ("Superfund") site.
Section 3.21. Labor Matters. (a) Except as set forth in Schedule 3.21 and
except for such matters as would not have a Material Adverse Effect, there are
no (i) labor strikes, disputes, slowdowns, representation campaigns or work
stoppages with respect to employees of any Company pending, or to the
18
<PAGE>
knowledge of Seller, threatened against or affecting any Company or any
Subsidiary, (ii) grievance or arbitration proceedings arising out of collective
bargaining agreements to which any Company or any Subsidiary is a party (other
than informal grievances), (iii) unfair labor practice complaints pending or, to
the knowledge of Seller, threatened against any Company or any Subsidiary or
(iv) collective bargaining agreements or other labor union contracts applicable
to persons employed by any Company or any Subsidiary, and to the knowledge of
Seller, there are no activities or proceedings of any labor union to organize
any such employees.
(b) Except to the extent set forth in Schedule 3.21 and except for such
matters as would not have a Material Adverse Effect, the Companies and the
Subsidiaries are in compliance with all applicable laws respecting employment
and employment practices, terms and conditions of employment and wages and
hours.
Section 3.22. Books and Records. The books of account, minute books, stock
record books and other records of the Companies and the Subsidiaries are
complete and correct in all material respects and have been maintained in
accordance with sound business practices.
Section 3.23. Customers and Suppliers. Schedule 3.23 sets forth a list of
the ten largest customers of the Companies and the Subsidiaries, by dollar
amount of annual service in force as at December 31, 1997, and the ten largest
suppliers of the Companies and the Subsidiaries, by dollar amount, over the
twelve months ended December 31, 1997. All purchase and sale orders and other
commitments for purchases and sales made by the Companies and the Subsidiaries
have been made in the ordinary course of business in accordance with past
practices, and no payments have been made to any supplier or customer or any of
their respective representatives, other than payments to such suppliers or the
payment of the invoiced price of supplies purchased or goods sold in the
ordinary course of business.
Section 3.24. Product Liability. (a) Except as set forth in Schedule 3.24,
Seller is not aware of any claim, or the basis of any claim, against any Company
or any Subsidiary for injury to person or property of employees or any third
parties suffered as a result of the sale of any product or performance of any
service by any Company or any Subsidiary, including claims arising out of the
defective or unsafe nature of its products or services, which would have a
Material Adverse Effect.
(b) Except as set forth in Schedule 3.24, there is no pending, or to
Seller's knowledge, threatened recall or investigation of any product sold by
any Company or any Subsidiary which would have a Material Adverse Effect.
19
<PAGE>
ARTICLE 4
Representations and Warranties of Buyer
Buyer represents and warrants to Seller as of the date hereof that:
Section 4.01. Corporate Existence and Power. Buyer is a corporation duly
incorporated, validly existing and in good standing under the laws of Delaware
and has the requisite corporate power and authority and governmental approvals
to own, lease and operate its properties and to carry on its business as now
conducted.
Section 4.02. Corporate Authorization. The execution, delivery and
performance by Buyer of this Agreement and the consummation by Buyer of the
transactions contemplated hereby are within the corporate powers of Buyer and
have been duly authorized by all necessary corporate action. This Agreement
constitutes a valid and binding agreement of Buyer enforceable against Buyer in
accordance with its terms except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
creditors' rights generally.
Section 4.03. Governmental Authorization. The execution, delivery and
performance by Buyer of this Agreement and the consummation by Buyer of the
transactions contemplated hereby require no action by or in respect of, or
filing with, any governmental body, agency, official or authority, other than
(a) compliance with any applicable requirements of the HSR Act; (b) compliance
with any applicable requirements of the 1934 Act; and (c) compliance with any
applicable Canadian laws.
Section 4.04. Noncontravention. The execution, delivery and performance by
Buyer of this Agreement do not and the consummation of the transactions by Buyer
contemplated hereby will not (i) contravene or conflict with the certificate of
incorporation or bylaws of Buyer, (ii) assuming compliance with the matters
referred to in Section 4.03, violate any applicable law, rule, regulation,
judgment, injunction, order or decree, (iii) constitute a default under, or give
rise to a right of termination, cancellation or acceleration of any right or
obligation of Buyer or to a loss of any benefit to which Buyer is entitled under
any provision of any agreement or other instrument binding upon Buyer or (iv)
result in the creation or imposition of any material Lien on any asset of Buyer
pursuant to any note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which Buyer is a
party or by which Buyer is bound or affected.
20
<PAGE>
Section 4.05. Financing. Buyer has sufficient cash, available lines of
credit or other sources of immediately available funds to enable it to make
payment of the Purchase Price and any other amounts to be paid by it hereunder.
Section 4.06. Purchase for Investment. Buyer is purchasing the Shares for
investment for its own account and not with a view to, or for sale in connection
with, any distribution thereof. Buyer (either alone or together with its
advisors) has sufficient knowledge and experience in financial and business
matters so as to be capable of evaluating the merits and risks of its investment
in the Shares and is capable of bearing the economic risks of such investment.
Section 4.07. Litigation. There is no action, suit, investigation or
proceeding pending against, or to the knowledge of Buyer threatened against or
affecting, Buyer or any of its properties before any court or arbitrator or any
governmental body, agency or official which in any manner challenges or seeks to
prevent, enjoin, alter or materially delay the transactions contemplated by this
Agreement.
Section 4.08. Finders' Fees. No investment banker, broker, finder or other
intermediary is entitled to any fee or commission from Buyer or any of its
Affiliates upon consummation of the transactions contemplated by this Agreement.
Section 4.09. Inspections; No Other Representations. Buyer agrees to accept
the Shares and the Companies in the condition they are in on the Closing Date
based upon its own inspection, examination and determination with respect
thereto as to all matters, and without reliance upon any express or implied
representations or warranties of any nature made by or on behalf of or imputed
to Seller, except as expressly set forth in this Agreement. Without limiting the
generality of the foregoing, Buyer acknowledges that Seller makes no
representation or warranty with respect to (i) any projections, estimates or
budgets delivered or made available to Buyer of future revenues, future results
of operations (or any component thereof), future cash flows or future financial
condition (or any component thereof) of the Companies and the Subsidiaries or
the future business and operations of the Companies and the Subsidiaries or (ii)
any other information or documents made available to Buyer or its counsel,
accountants or advisors with respect to any Company or any Subsidiary or their
respective businesses or operations, except as expressly set forth in this
Agreement.
21
<PAGE>
ARTICLE 5
Covenants of Seller
Seller agrees that:
Section 5.01. Conduct of the Companies. From the date hereof until the
Closing Date, except as expressly provided otherwise in this Agreement,
including Schedules 3.09 and 5.01 hereto, Seller shall cause each Company and
each Subsidiary to conduct their businesses in the ordinary course consistent
with past practices and to use their reasonable best efforts to preserve intact
their business organizations and relationships with third parties and to keep
available the services of their present officers and employees. Without limiting
the generality of the foregoing, from the date hereof until the Closing Date,
except as expressly provided otherwise in this Agreement, including Schedules
3.09 and 5.01 hereto, Seller will not permit any Company or any Subsidiary to:
(a) adopt or propose any change in its certificate of incorporation or any
material change in its bylaws;
(b) adopt a plan or agreement of complete or partial liquidation,
dissolution, merger, consolidation, restructuring, recapitalization or other
material reorganization of any Company or any Subsidiary (other than a
liquidation or dissolution of any Subsidiary or a merger or consolidation
between wholly-owned Subsidiaries);
(c) make any equity investment in or acquisition of any business of any
Person or any material amount of assets, except for any capital expenditure
permitted by Section 5.01(h);
(d) sell, lease, license or otherwise dispose of any assets in an amount
that would be material to the Companies and the Subsidiaries, taken as a whole,
except (i) pursuant to existing contracts or commitments or (ii) in the ordinary
course of business consistent with past practices;
(e) declare, set aside or pay any dividend or other distribution payable in
cash, stock or property with respect to its capital stock other than dividends
paid by any Subsidiary to any Company or any other Subsidiary;
(f) issue, sell, transfer, pledge, dispose of or encumber any additional
shares of, or securities convertible into or exchangeable for, or options,
warrants, calls, commitments or rights of any kind to acquire, any shares of
capital stock of any class or series of any Company or any Subsidiary;
22
<PAGE>
(g) redeem, purchase or otherwise acquire directly or indirectly any of the
capital stock of any Company or any Subsidiary;
(h) make or commit to make any capital expenditure, except in the ordinary
course of business and which is consistent with the 1998 budget plans made
available to Buyer; or
(i) agree or commit to do any of the foregoing.
Seller will not take, and will not permit any Company or any Subsidiary to take,
any action that would make any representation or warranty of Seller hereunder
inaccurate in any material respect at or as of any time prior to the Closing
Date.
Section 5.02. Access to Information. (a) To the extent permitted by
applicable law, from the date hereof until the Closing Date, Seller will (i)
give, and will cause each Company and each Subsidiary to give, to Buyer, its
counsel, financial advisors, auditors and other authorized representatives
reasonable access during normal business hours to the offices, properties, books
and records of the Companies and the Subsidiaries and to the books and records
of Seller relating to the Companies and the Subsidiaries, (ii) furnish, and will
cause each Company and each Subsidiary to furnish, to Buyer, its counsel,
financial advisors, auditors and other authorized representatives such financial
and operating data and other information as such Persons may reasonably request
and (iii) instruct the employees, auditors, counsel and financial advisors of
Seller, any Company or any Subsidiary to cooperate with Buyer in its
investigation of the business of the Companies and the Subsidiaries. Any
investigation pursuant to this Section shall be conducted in such manner as not
to interfere unreasonably with the conduct of the business of Seller or any of
its subsidiaries.
(b) On and after the Closing Date, Seller will afford promptly to Buyer and
its agents reasonable access to its books of account, financial and other
records (including, without limitation, accountant's work papers), information,
employees and auditors to the extent necessary or useful for Buyer in connection
with any audit, investigation, dispute or litigation or any other reasonable
business purpose relating to any Company or any Subsidiary; provided that any
such access by Buyer shall not unreasonably interfere with the conduct of the
business of Seller. Buyer shall bear all of the out-of-pocket costs and expenses
(including, without limitation, attorneys' fees, but excluding reimbursement for
general overhead, salaries and employee benefits) reasonably incurred in
connection with the foregoing.
Section 5.03. Notices of Certain Events. Seller shall promptly notify Buyer
of:
23
<PAGE>
(a) any notice or other communication from any Person alleging that
the consent of such Person is or may be required in connection with the
transactions contemplated by this Agreement;
(b) any notice or other communication from any governmental or
regulatory agency or authority in connection with the transactions
contemplated by this Agreement; and
(c) any actions, suits, claims, investigations or proceedings
commenced or, to its knowledge threatened against, relating to or involving
or otherwise affecting Seller or any Company or any Subsidiary which, if
pending on the date of this Agreement, would have been required to have
been disclosed pursuant to Section 3.12.
Section 5.04. Resignations. Seller will deliver to Buyer the resignations
of all officers and directors of each Company and each Subsidiary who will be
officers, directors or employees of Seller or any of its Affiliates after the
Closing Date from their positions with any Company or any Subsidiary at or prior
to the Closing Date.
Section 5.05. Non-Competition. (a) Seller agrees that, for a period of five
years from the Closing Date (the "Non-Compete Period"), neither Seller nor any
of its subsidiaries (Seller and its subsidiaries, collectively, the "Seller
Companies") shall engage in, or directly or indirectly acquire a controlling
interest in any Person engaged in, the following businesses: (i) the
installation, servicing and monitoring of electronic security systems in the
United States or Canada for commercial or residential customers which utilize
intrusion and fire detection systems, sprinklers and critical industrial
processing monitoring, closed circuit television and access control systems;
(ii) the furnishing of integrated guard, patrol and alarm service to residential
customers in the Bel Air, Beverly Hills and adjacent Los Angeles communities;
and (iii) the sale, distribution, installation and servicing in the United
States of commercial fire suppression systems. Notwithstanding the foregoing,
nothing in this Agreement shall restrict or otherwise limit the ability of the
Seller Companies to engage, directly or indirectly, in the business of (A)
marketing, designing, engineering or supplying integrated security solution,
provided that the installation, servicing or monitoring of the electronic
security systems are provided by another Person or Persons by contract or
subcontract or pursuant to one or more partnerships, alliances or other
arrangements, and (B) the research, design, development, manufacture,
distribution or supply of electronic and physical security equipment and
devices, including without limitation closed circuit television systems and
components and access control systems and components, provided that any such
equipment or devices is distributed or supplied only to
24
<PAGE>
security companies or through conventional distribution channels for original
equipment manufacturers.
(b) Seller agrees that, during the Non-Compete Period, the Seller Companies
shall not solicit integrated security solutions which include the installation,
servicing and monitoring of electronic security systems for locations that, as
of the Closing Date, have electronic security systems serviced or monitored by
the Companies and the Subsidiaries, unless such solicitation is in accordance
with the provisions of the Strategic Alliance Agreement dated as of April 17,
1998 between Seller and Buyer, as amended from time to time.
(c) Seller acknowledges that it is the exclusive world-wide licensee for
the tradename "Wells Fargo" for use in conjunction with the furnishing of
electronic security services, as more fully set forth in that certain agreement
dated September 20, 1979 with Wells Fargo & Company and Wells Fargo Bank, N.A.
Seller agrees, for a period of 10 years from the Closing Date, that the Seller
Companies shall not, and that Seller shall not grant or otherwise transfer to
any other Person a license to, utilize the "Wells Fargo" tradename in
conjunction with the installation, servicing and monitoring of electronic
security systems in the United States or Canada.
(d) If during the Non-Compete Period, Seller (or any successor) is merged
or consolidated with or otherwise acquired by any other Person, this Section
5.05 shall in no way restrict or otherwise limit the business or operations of
such other Person; provided that the Seller Companies shall remain subject to
the provisions of Section 5.05(a), 5.05(a) and 5.05(c) for the periods specified
therein.
Section 5.06. Non-Solicitation. Seller agrees that it shall not for a
period of one year from the Closing Date, directly or indirectly, solicit for
employment or hire any non-clerical employee of any Company or any Subsidiary,
except that Seller shall not be precluded from soliciting for employment or
hiring any such employee who has been discharged by any Company or any
Subsidiary from such employment.
Section 5.07. Intercompany Accounts. Except as otherwise provided herein,
Seller will reclassify to stockholder's equity all intercompany balances between
Seller and its Affiliates, on the one hand, and the Companies and the
Subsidiaries, on the other hand, at or prior to the Closing Date, and all
intercompany arrangements between Seller and its Affiliates, on the one hand,
and the Companies and the Subsidiaries, on the other hand, will be terminated as
of the Closing Date. Seller agrees to indemnify and hold harmless Buyer from any
costs
25
<PAGE>
or expenses resulting from the reclassification to stockholder's equity of such
balances.
ARTICLE 6
Covenants of Buyer
Buyer agrees that:
Section 6.01. Confidentiality. Prior to the Closing Date and after any
termination of this Agreement, Buyer and its Affiliates will hold, and will use
their best efforts to cause their respective officers, directors, employees,
accountants, counsel, consultants, advisors and agents to hold, in confidence,
unless compelled to disclose by judicial or administrative process or by other
requirements of law, all confidential documents and information concerning
Seller, any of its Affiliates, any Company or any Subsidiary furnished to Buyer
or its Affiliates in connection with the transactions contemplated by this
Agreement, except to the extent that such information can be shown to have been
(i) previously known on a nonconfidential basis by Buyer, (ii) in the public
domain through no fault of Buyer or (iii) later lawfully acquired by Buyer on a
non-confidential basis from sources other than Seller, any of its Affiliates,
any Company or any Subsidiary; provided that Buyer may disclose such information
to its officers, directors, employees, accountants, counsel, consultants,
advisors and agents in connection with the transactions contemplated by this
Agreement so long as such Persons are informed by Buyer of the confidential
nature of such information and are directed by Buyer to treat such information
confidentially. Buyer shall be responsible for any failure to treat such
information confidentially by such Persons. The obligation of Buyer and its
Affiliates to hold any such information in confidence shall be satisfied if they
exercise the same care with respect to such information as they would take to
preserve the confidentiality of their own similar information. If this Agreement
is terminated, Buyer and its Affiliates will, and will use their best efforts to
cause their respective officers, directors, employees, accountants, counsel,
consultants, advisors and agents to, destroy or deliver to Seller, upon request,
all documents and other materials, and all copies thereof, obtained by Buyer or
its Affiliates or on their behalf from Seller, any of its Affiliates, any
Company or any Subsidiary in connection with this Agreement that are subject to
such confidence.
Section 6.02. Access. Buyer will cause each Company and each Subsidiary, on
and after the Closing Date, to afford promptly to Seller and its agents
reasonable access to their properties, books, records, employees and auditors to
the extent necessary to permit Seller to determine any matter relating to its
rights and obligations hereunder or to any period ending on or before the
26
<PAGE>
Closing Date; provided that any such access by Seller shall not unreasonably
interfere with the conduct of the business of Buyer, any Company or any
Subsidiary. Seller will hold, and will use its best efforts to cause its
officers, directors, employees, accountants, counsel, consultants, advisors and
agents to hold, in confidence, unless compelled to disclose by judicial or
administrative process or by other requirements of law, all confidential
documents and information concerning any Company or any Subsidiary provided to
it pursuant to this Section.
Section 6.03. Trademarks; Tradenames. (a) After the Closing Date, Buyer
shall not permit any Company or any Subsidiary to use any of the marks or names
set forth in Schedule 6.03(a) (the "Seller Trademarks and Tradenames").
Notwithstanding the foregoing, the Companies and the Subsidiaries may phase out
any existing use of the Seller Trademarks and Tradenames that are identified in
Schedule 6.03 as "Transition Trademarks and Tradenames" (the "Transition
Trademarks and Tradenames") to the extent any printed materials containing or
bearing the Transition Trademarks and Tradenames may continue to be used for a
transition period of up to nine months following the Closing Date (the
"Transition Period"); provided that Buyer shall use its best efforts to phase
out such use as promptly as practicable following the Closing Date in a
commercially reasonable manner. It is understood between the parties that during
the Transition Period, Buyer may (i) use the Transition Trademarks and
Tradenames with the Buyer's trademarks and tradenames and (ii) make factual
statements regarding the business which include use of the Transition Trademarks
and Tradenames, e.g., "formerly known as Wells Fargo Alarm Services". Upon
expiration of the Transition Period, any and all use of the Transition
Trademarks and Tradenames by Buyer, any Company or any Subsidiary shall cease.
(b) Promptly following the Closing Date, Buyer shall cause each of the
Companies and the Subsidiaries, to the extent necessary, to file with the
applicable governmental body, agency or official an amendment to its
organizational documents to delete from its name any of the Seller Trademarks
and Tradenames or any marks and names derived therefrom and to do or cause to be
done all other acts, including the payment of any fees required in connection
therewith, to cause such amendment to become effective.
(c) At the Closing, Seller shall assign and transfer its right, title and
interest in the trademarks which are identified in Schedule 6.03(c) to Alarm or
Pyro, as the case may be, pursuant to trademark assignment agreements, in
substantially the form attached to Schedule 6.03(c).
Section 6.04. Notices of Certain Events. Buyer shall promptly notify Seller
of:
27
<PAGE>
(a) any notice or other communication from any Person alleging that
the consent of such Person is or may be required in connection with the
transactions contemplated by this Agreement;
(b) any notice or other communication from any governmental or
regulatory agency or authority in connection with the transactions
contemplated by this Agreement; and
(c) any actions, suits, claims, investigations or proceedings
commenced or, to its knowledge threatened against, relating to or involving
or otherwise affecting Buyer which, if pending on the date of this
Agreement, would have been required to have been disclosed pursuant to
Section 4.07.
Section 6.05. Agreements Guaranteed by Seller. Prior to the Closing Date,
Buyer agrees to use commercially reasonable efforts to assume, or otherwise
ensure that Seller is released from, effective as of the Closing Date, all
obligations of Seller relating to each of the agreements in which the
performance of a Company or a Subsidiary of certain obligations is guaranteed by
Seller. To Seller's knowledge, Schedule 6.05 sets forth a complete list of such
agreements; however, this covenant shall apply to all such agreements regardless
of whether they appear in such Schedule. If, as of the Closing Date, Buyer has
been unable to assume or otherwise ensure that Seller is released from such
obligations, Buyer agrees (i) to continue to use commercially reasonable efforts
to assume or otherwise ensure that Seller is released from such obligations,
(ii) to cause such Company or such Subsidiary to satisfy in a timely manner its
respective obligations that are guaranteed by Seller and (iii) to indemnify and
hold harmless Seller against any costs or expenses incurred by Seller in respect
of such agreements.
ARTICLE 7
Covenants of Buyer and Seller
Buyer and Seller agree that:
Section 7.01. Best Efforts; Further Assurances. (a) Subject to the terms
and conditions of this Agreement, Buyer and Seller will use their best efforts
to take, or cause to be taken, all actions and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate the transactions contemplated by this Agreement. In furtherance and
not in limitation of the foregoing, each party hereto agrees to make an
appropriate filing of a Notification and Report Form pursuant to the HSR Act
with respect to
28
<PAGE>
the transactions contemplated hereby as promptly as practicable and in any event
within ten business days of the date hereof and to supply as promptly as
practicable any additional information and documentary material that may be
requested pursuant to the HSR Act and to take all other actions necessary to
cause the expiration or termination of the applicable waiting periods under the
HSR Act as soon as possible.
(b) In connection with the efforts referenced in Section 7.01(a) to obtain
all requisite approvals and authorizations for the transactions contemplated by
this Agreement under the HSR Act or any other Antitrust Law, each of Buyer and
Seller shall use its best efforts to (i) cooperate in all respects with each
other in connection with any filing or submission and in connection with any
investigation or other inquiry, including any proceeding initiated by a private
party, (ii) keep the other party informed in all material respects of any
material communication received by such party from, or given by such party to,
the Federal Trade Commission (the "FTC"), the Antitrust Division of the
Department of Justice (the "DOJ") or any other Governmental Authority and of any
material communication received or given in connection with any proceeding by a
private party, in each case, regarding any of the transactions contemplated
hereby and (iii) permit the other party to review any material communication
given by it to, and consult with each other in advance of any meeting or
conference with, the FTC, the DOJ or any such other Governmental Authority or,
in connection with any proceeding by a private party, with any other Person, and
to the extent permitted by the FTC, the DOJ or such other applicable
Governmental Authority or other Person, give the other party the opportunity to
attend and participate in such meetings and conferences. For purposes of this
Agreement, (A) "Antitrust Law" means the Sherman Act, as amended, the Clayton
Act, as amended, the HSR Act, the Federal Trade Commission Act, as amended, and
all other federal, state and foreign, if any, statutes, rules, regulations,
orders, decrees, administrative and judicial doctrines and other laws that are
designed or intended to prohibit, restrict or regulate actions having the
purpose or effect of monopolization or restraint of trade or lessening of
competition and (B) "Governmental Authority" means any federal, state, or local
government or any court, administrative agency or commission or other
governmental agency or authority.
(c) In furtherance and not in limitation of the covenants of the parties
contained in Sections 7.01(a) and (b), each of Buyer and Seller shall use its
best efforts to resolve such objections, if any, as may be asserted with respect
to the transactions contemplated hereby under any Antitrust Law. In connection
with the foregoing, if any administrative or judicial action or proceeding,
including any proceeding by a private party, is instituted (or threatened to be
instituted) challenging any transaction contemplated by this Agreement as
violative of any Antitrust Law, each of Buyer and Seller shall cooperate in all
respects with each
29
<PAGE>
other and use its respective best efforts to contest and resist any such action
or proceeding and to have vacated, lifted, reversed or overturned any decree,
judgment, injunction or other order, whether temporary, preliminary or
permanent, that is in effect and that prohibits, prevents or restricts
consummation of the transactions contemplated by this Agreement.
(d) If any objections are asserted with respect to the transactions
contemplated hereby under any Antitrust Law or if any suit is instituted by any
Governmental Authority or any private party challenging any of the transactions
contemplated hereby as violative of any Antitrust Law, each of Buyer and Seller
shall use its best efforts to resolve any such objections or challenge as such
Governmental Authority or private party may have to such transactions under such
Antitrust Law so as to permit consummation of the transactions contemplated by
this Agreement. In furtherance and not in limitation of the foregoing, if it is
necessary in order to terminate the waiting period under the HSR Act or
otherwise to permit the Closing to take place, Buyer agrees to divest operations
or assets, to hold separate pending such divestiture, or to enter into a consent
decree requiring it to divest operations or assets, and to take such further
action in connection therewith as may be necessary to enable the Closing to take
place on or prior to October 31, 1998; provided that Buyer shall not be required
to enter into any consent decree or other agreement that requires it to divest
operations or assets that are material.
(e) Seller and Buyer agree, and Seller, prior to the Closing, and Buyer,
after the Closing, agree to cause each Company and each Subsidiary, to execute
and deliver such other documents, certificates, agreements and other writings
and to take such other actions as may be necessary or advisable in order to
consummate or implement expeditiously the transactions contemplated by this
Agreement.
Section 7.02. Certain Filings. Seller and Buyer shall cooperate with one
another (i) in determining whether any action by or in respect of, or filing
with, any governmental body, agency, official or authority is required, or any
actions, consents, approvals or waivers are required to be obtained from parties
to any material contracts, in connection with the consummation of the
transactions contemplated by this Agreement and (ii) in taking such actions or
making any such filings, furnishing information required in connection therewith
and seeking timely to obtain any such actions, consents, approvals or waivers.
Section 7.03. Public Announcements. Prior to the Closing Date, the parties
agree to consult with each other before issuing any press release or making any
public statement with respect to this Agreement or the transactions contemplated
hereby and, except as may be required by applicable law, court
30
<PAGE>
process or any listing agreement with any national securities exchange, will not
issue any such press release or make any such public statement prior to such
consultation and providing the other party with a reasonable opportunity to
comment thereon.
ARTICLE 8
Tax Matters
Section 8.01. Tax Definitions. The following terms, as used herein, have
the following meanings:
"Accounting Referee" means a nationally recognized accounting firm with no
material relationship with Buyer, Seller or their Affiliates, mutually
acceptable to both Buyer and Seller chosen within five days of the date on which
the need to choose the Accounting Referee arises.
"Combined Return" means any Return required to be filed on a consolidated,
combined or unitary basis with a member of the Seller Group.
"Pre-Closing Tax Period" means any Tax period ending on or before the
Closing Date.
"Seller Group" means, with respect to federal income Taxes, the affiliated
group of corporations (as defined in Section 1504(a) of the Code) of which
Seller is a member and, with respect to state income or franchise Taxes, the
consolidated, combined or unitary group of which Seller or any of its Affiliates
is a member.
"State Tax" means state and local income or franchise Taxes payable in
connection with separate Returns filed by any Company or any Subsidiary.
"Tax" means (i) any income tax or franchise tax based on net income
including any alternative or add-on minimum tax, or any payroll, sales or use,
personal property, real property, withholding, excise, value-added or other tax,
together with any interest, penalty, addition to tax or additional amount due
from, or in respect of, any Company or any Subsidiary imposed by any
governmental authority (domestic or foreign) responsible for the imposition of
any such tax (a "Taxing Authority") and (ii) any liability for the payment of
any amount of the type described in the immediately preceding clause (i) as a
result of any Company or any Subsidiary being a member of an affiliated,
consolidated or combined group with any other corporation at any time on or
prior to the Closing Date.
31
<PAGE>
Section 8.02. Tax Representations. Seller represents and warrants to Buyer
as of the date hereof and as of the Closing Date that to the best of Seller's
knowledge and except as set forth in the Balance Sheet (including the notes
thereto) or in Schedule 8.02, (i) all Tax returns, statements, reports and forms
(collectively, the "Returns") that are material and required to be filed with
any Taxing Authority on or before the Closing Date with respect to any Pre-
Closing Tax Period by, or with respect to, any Company or any Subsidiary have
been filed or will be filed on or before the Closing Date in accordance with all
applicable laws; (ii) the Companies and the Subsidiaries have timely paid all
Taxes shown as due and payable on the Returns that have been filed; (iii) the
Companies and the Subsidiaries have made or will on or before the Closing Date
make provision for all material Taxes payable by the Companies and the
Subsidiaries for any Pre-Closing Tax Period for which no Return has yet been
filed; (iv) the charges, accruals and reserves for material Taxes with respect
to the Companies and the Subsidiaries reflected on the Balance Sheet are
adequate to cover the material Tax liabilities accruing through the date
thereof; and (v) there is no action, suit, proceeding, investigation, audit or
claim now proposed or pending against or with respect to any Company or any
Subsidiary in respect of any material Tax.
Section 8.03. Tax Covenants. (a) Buyer covenants that it will not, and will
not cause or permit any Company, any Subsidiary or any Affiliate of Buyer to,
(i) take any action on the Closing Date other than in the ordinary course of
business, including but not limited to the distribution of any dividend or the
effectuation of any redemption that could give rise to any tax liability of the
Seller Group or reduce any tax asset of the Seller or the Seller Group or (ii)
make or change any tax election, amend any tax return or take any tax position
on any tax return, take any action, omit to take any action or enter into any
transaction that results in any increased tax liability or reduction of any tax
asset of Seller or the Seller Group in respect of any Pre-Closing Tax Period.
Buyer agrees that Seller and its Affiliates are to have no liability for any tax
resulting from any action referred to in the preceding sentence of any Company,
any Subsidiary, Buyer or any Affiliate of Buyer and agrees to indemnify and hold
harmless Seller and its Affiliates against any such tax (together with any
interest, penalty, addition to tax or additional amount) and any liabilities,
costs, expenses (including, without limitation, reasonable expenses of
investigation and attorney's fees and expenses), losses, damages, assessments,
settlements or judgments arising out of or incident to the imposition,
assessment or assertion of any such tax. Seller agrees to give prompt notice to
Buyer of the assertion of any claim, or the commencement of any action or
proceeding, in respect of which indemnity may be sought under this Section
8.03(A). Buyer may participate in any such suit, action or proceeding at its own
expense and the parties hereto shall cooperate in the defense or prosecution
thereof.
32
<PAGE>
(b) All Combined Returns required to be filed after the Closing Date with
respect to any Company or any Subsidiary with respect to any Pre-Closing Tax
Period will be filed by Seller when due (taking into account any extension of a
required filing date).
(c) Except to the extent recorded on the Closing Balance Sheet, Buyer
shall promptly pay or shall cause prompt payment to be made to Seller of all
refunds of taxes and interest thereon received by Buyer (net of any associated
costs), any Affiliate of Buyer, any Company or any Subsidiary, attributable to
taxes paid by Seller, any Company or any Subsidiary (or any predecessor or
Affiliate of Seller) with respect to any Pre-Closing Tax Period.
(d) Seller and Buyer agree to make a timely, effective and irrevocable
election under Section 338(h)(10) of the Code and under any comparable statutes
in any other jurisdiction with respect to any Company or any Subsidiary (the
"Section 338(h)(10) Election"), and to file such election in accordance with
applicable regulations. Within 90 days after the Closing Date, Seller shall
prepare and deliver to Buyer a schedule (the "Price Allocation Schedule")
allocating, with the consent of Buyer (which consent shall not be unreasonably
withheld), the modified ADSP (as such term is defined in Treasury Regulations
Section 1.338(h)(10)-1) among the assets of the relevant Company or Subsidiary
in accordance with the Treasury regulations promulgated under Section
338(h)(10). Any objections by Buyer to the Price Allocation Schedule prepared by
Seller (which shall be raised within 10 business days after the receipt by Buyer
of such Schedule) unresolved within 30 business days shall be resolved by the
Accounting Referee, and, if necessary, a revised Price Allocation Schedule
consistent with the determination made by the Accounting Referee shall be
prepared by Seller as soon as possible thereafter. The costs, fees and expenses
of the Accounting Referee shall be borne by Buyer. The Price Allocation Schedule
shall be binding on the parties hereto, and Seller and Buyer agree to act in
accordance with such Schedule in the preparation, filing and audit of any tax
return.
(e) All transfer, documentary, sales, use, stamp, registration and other
such taxes and fees (including any penalties and interest) incurred in
connection with transactions contemplated by this Agreement (including any real
property transfer tax and any similar tax) shall be borne and paid by Buyer, and
Buyer will, at its own expense, file all necessary tax returns and other
documentation with respect to all such taxes and fees, and, if required by
applicable law, Seller will, and will cause its Affiliates to, join in the
execution of any such tax returns and other documentation.
Section 8.04. Termination of Existing Tax Sharing Agreements. Any and all
existing Tax sharing agreements between any Company or any Subsidiary
33
<PAGE>
and any member of the Seller Group shall be terminated as of the Closing Date.
After such date neither any Company, any Subsidiary, Seller nor any Affiliate of
Seller shall have any further rights or liabilities thereunder.
Section 8.05. Cooperation on Tax Matters. (a) Buyer and Seller agree to
furnish or cause to be furnished to each other, upon request, as promptly as
practicable, such information (including access to books and records) and
assistance relating to the Companies and the Subsidiaries as is reasonably
necessary for the filing of any return, for the preparation for any audit, and
for the prosecution or defense of any claim, suit or proceeding relating to any
proposed adjustment. Buyer and Seller agree to retain or cause to be retained
all books and records pertinent to the Companies and the Subsidiaries until the
applicable period for assessment under applicable law (giving effect to any and
all extensions or waivers) has expired, and to abide by or cause the abidance
with all record retention agreements entered into with any Taxing Authority.
Each Company and each Subsidiary agree to give Seller reasonable notice prior to
transferring, discarding or destroying any such books and records relating to
tax matters and, if Seller so requests, such Company or such Subsidiary shall
allow Seller to take possession of such books and records. Buyer and Seller
shall cooperate with each other in the conduct of any audit or other proceedings
involving any Company or any Subsidiary for any tax purposes and each shall
execute and deliver such powers of attorney and other documents as are necessary
to carry out the intent of this subsection.
(b) Buyer and Seller further agree, upon request, to provide the other
party with all information that either party may be required to report pursuant
to Section 6043 of the Code and all Treasury Department Regulations promulgated
thereunder.
Section 8.06. Indemnification by Seller and Buyer. (a) Except as provided
in Section 8.06(g) hereof, Seller hereby indemnifies Buyer against and agrees to
hold it harmless from any (i) Tax of any Company or any Subsidiary related to a
Pre-Closing Tax Period and (ii) liabilities, costs, expenses (including, without
limitation, reasonable expenses of investigation and attorneys' fees and
expenses), arising out of or incident to the imposition, assessment or assertion
of any Tax, including those incurred in the contest in good faith in appropriate
proceedings relating to the imposition, assessment or assertion of any Tax, in
each case incurred or suffered by Buyer, any of its Affiliates or, effective
upon the Closing, any Company or any Subsidiary (the sum of 8.06(a)(i) and
8.06(a)(ii) being referred to as a "Loss"); provided, however, that Seller shall
have no liability for the payment of any Loss attributable to or resulting from
any action described in Section 8.03(a) hereof.
34
<PAGE>
(b) If Seller's indemnification obligation under this Section 8.06 arises
in respect of an adjustment which makes allowable to Buyer, any of its
Affiliates or, effective upon the Closing, any Company or any Subsidiary any
deduction, amortization, exclusion from income or other allowance with respect
to State Taxes (a "State Tax Benefit") which would not, but for such adjustment,
be allowable, then any payment by Seller to Buyer shall be an amount equal to
(x) the amount otherwise due but for this subsection 8.06(b), minus (y) the
State Tax Benefit multiplied (i) by the maximum state corporate tax rate in
effect at the time such State Tax Benefit becomes allowable to Buyer, any of its
Affiliates, any Company or any Subsidiary (as the case may be) or (ii) in the
case of a credit, by 100 percent ("Applicable Tax Rate").
(c) If as a result of an adjustment Seller makes a payment to any state
Taxing Authority in respect of a State Tax of any Company or any Subsidiary with
respect to any Pre-Closing Tax Period, then Buyer shall promptly pay to Seller
an amount equal to such payment made by Seller, provided, however, that any such
payment by Buyer shall not exceed an amount equal to the State Tax Benefit, if
any, attributable to the adjustment giving rise to such payment multiplied by
the Applicable Tax Rate.
(d) Any payment by Seller pursuant to this Section 8.06 shall be made not
later than 30 days after receipt by Seller of written notice from Buyer stating
that any Loss has been paid by Buyer, any of its Affiliates or, effective upon
the Closing, any Company or any Subsidiary and the amount thereof and of the
indemnity payment requested.
(e) If any claim or demand for Taxes in respect of which indemnity may be
sought pursuant to this Section 8.06 is asserted in writing against Buyer, any
of its Affiliates or, effective upon the Closing, any Company or any Subsidiary,
Buyer shall notify Seller of such claim or demand within 10 days of receipt
thereof, or such earlier time that would allow Seller to timely respond to such
claim or demand, and shall give Seller such information with respect thereto as
Seller may reasonably request. Seller may discharge, at any time, its
indemnification obligation under this Section 8.06 by paying to Buyer the amount
of the applicable Loss, calculated on the date of such payment. Seller may, at
its own expense, participate in and, upon notice to Buyer, assume the defense of
any such claim, suit, action, litigation or proceeding (including any Tax
audit). If Seller assumes such defense, Buyer shall have the right (but not the
duty) to participate in the defense thereof and to employ counsel, at its own
expense, separate from the counsel employed by Seller. Whether or not Seller
chooses to defend or prosecute any claim, all of the parties hereto shall
cooperate in the defense or prosecution thereof.
35
<PAGE>
(f) Seller shall not be liable under this Section 806 for (i) any Tax the
payment of which was made without Seller's prior written consent or (ii) any
settlements effected without the consent of Seller, or resulting from any claim,
suit, action, litigation or proceeding in which Seller was not permitted an
opportunity to participate as provided in Section 8.06(e) hereof.
(g) Buyer agrees to indemnify Seller for the "Section 338 Cost". The
Section 338 Cost shall be equal to the excess, if any, on an after-tax basis, of
(a) the Tax in the case of Canada Alarm and the Subsidiaries, and the state and
local tax in the case of the other Companies, in each case, payable by Seller
taking into account any effects of the Section 338(h)(10) Election and giving
effect to the price allocation contained in the Price Allocation Schedule over
(b) the amount of Tax in the case of Canada Alarm and the Subsidiaries, and the
amount of state and local tax in the case of the other Companies, in each case,
that would be payable if Seller reported the sale of the Shares for the Purchase
Price hereunder on the Closing Date, such state and local tax for purposes of
(b) hereof being computed in each case using the maximum applicable statutory
rate. The amount of the Section 338 Cost shall be calculated by Seller. Any
objection by Buyer to the legal or factual basis for the calculation by Seller
of the Section 338 Cost (which shall be raised within 10 business days after the
receipt by Buyer of such calculation) unresolved within 30 business days shall
be resolved by the Accounting Referee whose costs, fees and expenses shall be
borne by Buyer.
ARTICLE 9
EMPLOYEE BENEFITS
Section 9.01. Employee Benefits. (a) Following the Closing, Buyer shall,
or shall cause each Company and each Subsidiary to (i) honor all obligations
under employment agreements of such Company or such Subsidiary and (ii) except
as expressly provided herein, pay all benefits accrued through the Closing Date
under employee benefit plans, programs, policies and arrangements of such
Company or such Subsidiary (including any rabbi trust agreement) in accordance
with the terms thereof. In furtherance and not in limitation of the foregoing,
Buyer agrees to provide, or cause the Companies and the Subsidiaries to provide,
employees of the Companies and the Subsidiaries who are employed by the
Companies and the Subsidiaries immediately prior to the Closing Date other than
any such employees who are in benefit payment status on the Closing Date under
Seller's Long-Term Disability Plan ("Continuing Employees") for a period of not
less than one year following the Closing Date with (A) annual compensation
substantially similar in the aggregate to the annual compensation which they
were receiving immediately prior to the Closing Date, and (B) benefits which, in
the
36
<PAGE>
aggregate, are substantially similar to the benefits provided to such employees
immediately prior to the Closing Date. Following such one-year period,
Continuing Employees shall be provided with compensation and benefits
substantially similar in the aggregate to the compensation and benefits provided
to similarly situated Buyer employees. In addition to the foregoing, for a
period of one year following the Closing Date, Buyer shall, or shall cause each
Company and each Subsidiary to, establish and maintain a plan to provide
severance and termination benefits to all non-union employees of such Company or
such Subsidiary which are substantially similar in the aggregate to the
severance and termination benefits provided under such Company's or such
Subsidiary's plans and arrangements in effect as of the date of this Agreement
as described in Schedule 3.19. Notwithstanding the foregoing, after the Closing
Date, Buyer shall have the right in the good faith exercise of its managerial
discretion to terminate or cause the termination of the employment of any
Continuing Employee; provided that Buyer shall not take, and shall cause the
Company and the Subsidiaries to refrain from, any action that could result in
any liability to Seller under the Worker Adjustment and Retraining Notification
Act of 1988. Furthermore, with respect to medical benefits provided to
Continuing Employees as of the Closing Date under Buyer's benefit plans, Buyer
agrees that it will, or it will cause each Company and each Subsidiary to, waive
waiting periods and pre-existing condition requirements under such plans, and
will give Continuing Employees credit for any copayments and deductibles
actually paid by such employees under such Company's or such Subsidiary's
medical plans during the plan year in which the Closing occurs. In addition,
service with the Companies and the Subsidiaries shall be recognized for purposes
of eligibility under Buyer's welfare plans as well as for purposes of Buyer's
programs or policies for vacation pay and sick pay. Without limiting the
generality of the foregoing, the Buyer shall honor all vacation, personal and
sick days accrued by Continuing Employees under any Company's or any
Subsidiary's plans, policies, programs and arrangements immediately prior to the
Closing.
(b) (i) Seller shall retain all assets and liabilities in respect of
current and former employees of the Companies and the Subsidiaries under the
Borg-Warner Security Corporation Retirement Plan (the "Retirement Plan"). Buyer
and its Affiliates shall have no liabilities arising out of or with respect to
the Retirement Plan.
(ii) Except as required by applicable law or any collective bargaining
agreement to which a Company or a Subsidiary is a party, neither any Company nor
any Subsidiary shall be obligated on or after the Closing Date to sponsor or
otherwise make available a defined benefit plan (within the meaning of Section
3(35) of ERISA).
(iii) As soon as practicable after the Closing Date, the account balances
as of the Closing Date of employees of the Companies and the Subsidiaries held
in the
37
<PAGE>
Borg-Warner Security Corporation Investment Plan and the Borg-Warner Security
Corporation 401(k) Plan (collectively, the "Seller 401(k) Plans"), as equitably
adjusted for earnings or losses thereon, additional contributions thereto with
respect to the period prior to the Closing Date and distributions therefrom
through the date of transfer, shall be transferred to a tax-qualified defined
contribution plan sponsored, maintained or contributed to by Buyer (the "Buyer
401(k) Plan"), which such Buyer 401(k) Plan shall recognize service of employees
with Seller, any of its Affiliates, any Company or any Subsidiary for purposes
of eligibility and vesting. Such transfer shall be effected in accordance with
applicable law and regulations. Buyer shall make or cause to be made, and Seller
shall make or cause to be made, any required filings in connection therewith.
Buyer and Seller may each require, as a condition to the making of any such
transfer, evidence reasonably satisfactory to it of the qualified status of the
Seller 401(k) Plans and the Buyer 401(k) Plan, including, without limitation, a
copy of a favorable determination letter from the Internal Revenue Service. In
consideration of and effective upon such transfer, the Buyer 401(k) Plan shall
assume all liabilities to employees of the Companies and the Subsidiaries under
the Seller 401(k) Plans to the extent of the amount of assets transferred by the
Seller 401(k) Plans to the Buyer 401(k) Plan. Each of the parties shall pay its
own expenses in connection with such transfer.
Section 9.02. Seller Welfare Plans. (a) Except as provided in Section
9.02(b), effective as of the Closing Date, the Companies and the Subsidiaries
and each Continuing Employee shall cease participation in Seller's health and
welfare benefit plans ("Seller Welfare Plans") and commence participation in the
benefit plans established or otherwise made available to Continuing Employees by
Buyer pursuant to Section 9.01(a). Seller agrees that each Seller Welfare Plan
shall be responsible for claims incurred for Continuing Employees under such
plans prior to the Closing Date. All claims for health and welfare benefits
incurred for Continuing Employees after the Closing Date shall be the
responsibility of Buyer.
(b) Subject to Buyer's execution not later than 20 business days prior to
the Closing Date of a Transition Services Agreement in substantially the form
attached hereto as Exhibit 9.02, Seller shall for the period beginning on the
Closing Date and ending not later than October 31, 1998 make available to
Continuing Employees coverage under the Transition Welfare Plans (as identified
as such in the Transition Services Agreement) on the terms and conditions set
forth in such Transition Services Agreement. Buyer shall be responsible for, and
shall reimburse Seller in respect of, all costs and Damages incurred by Seller
as provided in such Transition Services Agreement.
38
<PAGE>
ARTICLE 10
Conditions to Closing
Section 10.01. Conditions to Obligations of Buyer and Seller. The
obligations of Buyer and Seller to consummate the Closing are subject to the
satisfaction of the following conditions:
(a) Any applicable waiting period under the HSR Act relating to the
transactions contemplated hereby shall have expired or been terminated.
(b) No provision of any applicable law or regulation and no judgment,
injunction, order or decree shall prohibit the consummation of the Closing.
(c) All actions by or in respect of or filings with any governmental
body, agency, official or authority required to permit the consummation of
the Closing shall have been taken, made or obtained, except for any such
actions or filings the failure to take, make or obtain would not have a
Material Adverse Effect.
(d) All consents required to be obtained in connection with the
consummation of the Closing set forth in Schedule 10.01(d) shall have been
obtained.
Section 10.02. Conditions to Obligation of Buyer. The obligation of Buyer
to consummate the Closing is subject to the satisfaction of the following
further conditions:
(a) (i) Seller shall have performed in all material respects all of
its obligations hereunder required to be performed by it on or prior to the
Closing Date, (ii) the representations and warranties of Seller contained
in this Agreement and in any certificate or other writing delivered by
Seller pursuant hereto shall be true at and as of the Closing Date, as if
made at and as of such date, with only such exceptions as would not in the
aggregate have a Material Adverse Effect and (iii) Buyer shall have
received a certificate signed by an executive officer of Seller to the
foregoing effect.
(b) Buyer shall have received an opinion of the General Counsel of
Seller, dated the Closing Date to the effect specified in Sections 3.01,
3.02 and 3.03. In rendering such opinion, such counsel may rely upon
certificates of public officers, as to matters governed by the laws of
39
<PAGE>
jurisdictions other than New York law or the federal laws of the United
States of America, upon opinions of counsel reasonably satisfactory to
Buyer, and, as to matters of fact, upon certificates of officers of Seller
or any Company, copies of which opinions and certificates shall be
contemporaneously delivered to Buyer.
(c) Buyer shall have received all documents it may reasonably request
relating to the existence of Seller, the Companies and the Subsidiaries and
the authority of Seller for this Agreement, all in form and substance
reasonably satisfactory to Buyer.
Section 10.03. Conditions to Obligation of Seller. The obligation of Seller
to consummate the Closing is subject to the satisfaction of the following
further conditions:
(a) (i) Buyer shall have performed in all material respects all of
its obligations hereunder required to be performed by it at or prior to the
Closing Date, (ii) the representations and warranties of Buyer contained in
this Agreement and in any certificate or other writing delivered by Buyer
pursuant hereto shall be true in all material respects at and as of the
Closing Date, as if made at and as of such date and (iii) Seller shall have
received a certificate signed by an executive officer of Buyer to the
foregoing effect.
(b) Seller shall have received an opinion of the General Counsel of
Buyer, dated the Closing Date to the effect specified in Sections 4.01,
4.02 and 4.03. In rendering such opinion, such counsel may rely upon
certificates of public officers, as to matters governed by the laws of
jurisdictions other than New York law or the federal laws of the United
States of America, upon opinions of counsel reasonably satisfactory to
Seller, and, as to matters of fact, upon certificates of officers of Buyer,
copies of which opinions and certificates shall be contemporaneously
delivered to Seller.
(c) Seller shall have received all documents it may reasonably
request relating to the existence of Buyer and the authority of Buyer for
this Agreement, all in form and substance reasonably satisfactory to
Seller.
40
<PAGE>
ARTICLE 11
SURVIVAL; INDEMNIFICATION
Section 11.01. Survival. The covenants, agreements, representations and
warranties of the parties hereto contained in this Agreement or in any
certificate or other writing delivered pursuant hereto or in connection herewith
shall not survive the Closing; provided that
(i) the covenants, agreements, representations and warranties
contained in Articles 2, 9, 11 (other than Section 11.02(c)) and 13 and
Sections 3.06, 3.07(b) (but only as to the first sentence thereof), 4.09,
5.02(b), 5.07, 6.02, 6.03 and 6.05 shall survive indefinitely;
(ii) the covenants, agreements, representations and warranties
contained in Article 8 (other than Section 8.02) shall survive until
expiration of the statute of limitations applicable to the matters covered
thereby (giving effect to any waiver, mitigation or extension thereof), if
later;
(iii) the covenants and agreements set forth in Sections 5.05 and 5.06
shall survive for the period specified therein; and
(iv) the covenants and agreements set forth in Section 11.02(c) shall
survive until the third anniversary of the Closing Date.
Notwithstanding the preceding sentence, any covenant, agreement, representation
or warranty in respect of which indemnity may be sought under this Agreement
shall survive the time at which it would otherwise terminate pursuant to the
preceding sentence, if notice of the inaccuracy or breach thereof giving rise to
such right of indemnity shall have been given to the party against whom such
indemnity may be sought prior to such time.
Section 11.02. Indemnification. (a) Seller hereby indemnifies Buyer and its
Affiliates against and agrees to hold each of them harmless from any and all
damage, loss, liability and expense (including, without limitation, reasonable
expenses of investigation and reasonable attorneys' fees and expenses in
connection with any action, suit or proceeding) ("Damages") incurred or suffered
by Buyer or any of its Affiliates arising out of any misrepresentation or breach
of warranty, covenant or agreement made or to be performed by Seller pursuant to
this Agreement that survives the Closing in accordance with Section 11.01 (other
than pursuant to Article 8 and Sections 11.02(c) and (d)); provided that
Seller's maximum liability under this Section 11.02(a) shall not exceed 25% of
the Purchase Price in the aggregate.
41
<PAGE>
(b) Buyer hereby indemnifies Seller and its Affiliates against and agrees
to hold each of them harmless from any and all Damages incurred or suffered by
Seller or any of its Affiliates arising out of any misrepresentation or breach
of warranty, covenant or agreement made or to be performed by Buyer pursuant to
this Agreement that survives the Closing in accordance with Section 11.01 (other
than pursuant to Article 8); provided that Buyer's maximum liability under this
Section 11.02(b) shall not exceed 25% of the Purchase Price in the aggregate.
(c) Seller hereby indemnifies Buyer and its Affiliates against and agrees
to hold each of them harmless from any and all Damages incurred or suffered by
Buyer or any of its Affiliates arising out of (i) an obligation under any
Environmental Law to perform an investigation or remedial clean-up or post-
remedial action at or near the Pyro site located at Boonton, New Jersey (the
"Pyro Site") as a result of the disposal, release or emission of a hazardous or
toxic substance (as each such term is defined in or regulated by any
Environmental Law) by Pyro at the Pyro site prior to the Closing Date or (ii)
injury to human health as a result of any such disposal, release or emission;
provided that (x) Seller shall not be liable under this Section 11.02(c) unless
the aggregate amount of Damages with respect to all matters referred to in this
Section 11.02(c) exceeds $200,000 and then only to the extent of such excess and
(y) Seller shall not be liable under this Section 11.02(c) unless (A) the
Damages are required to be incurred under or are otherwise imposed by an
Environmental Law and (B) Buyer has fully complied with the terms of the next
paragraph.
Buyer agrees that it shall not perform (or permit to be performed) any
environmental audits at the Pyro Site and shall not initiate, encourage or aid
any action (or permit the initiation, encouragement or aid of any such action)
by any third party, including any governmental agency or authority, which audit
or action is reasonably likely to lead to a claim by a third party with respect
to the Pyro Site or to an obligation to take action at the Pyro Site under an
Environmental Law, except if and to the extent an Environmental Law requires
Buyer to perform such audit or take such action. Notwithstanding the foregoing,
Buyer may conduct or permit to be conducted reasonable, non-intrusive
environmental inspections and compliance audits and assessments of the Pyro Site
in the ordinary course as part of a compliance program so long as any inspection
or audit is performed in a manner consistent with the manner in which Buyer and
its Affiliates generally conduct such inspection or audits for their other
facilities.
(d) Seller hereby indemnifies Buyer and its Affiliates against and agrees
to hold each of them harmless from any and all Damages incurred or suffered by
Buyer or any of its Affiliates arising out of any Pre-Closing Uninsured Claims;
provided that Seller shall not be liable under this Section 11.02(d) unless the
aggregate amount of Damages with respect to all matters referred to in this
Section 11.02(d) exceeds $200,000 and then only to the extent of such excess.
<PAGE>
"Pre-Closing Uninsured Claims" means the claims listed on Schedule 11.02 and any
other similar claim asserted against any of the Companies or the Subsidiaries
with respect to acts or omissions prior to the Closing Date which is not covered
by Seller's primary casualty insurance policies (i.e., workers compensation,
employer's liability, automobile liability and general insurance policies) in
effect as of the date hereof, it being understood that Pre-Closing Uninsured
Claims do not include environmental claims.
Section 11.03. Procedures. (a) The party seeking indemnification under
Section 11.02 (the "Indemnified Party") agrees to give prompt notice to the
party against whom indemnity is sought (the "Indemnifying Party") of the
assertion of any claim, or the commencement of any suit, action or proceeding
("Claim") in respect of which indemnity may be sought under such Section and
will provide the Indemnifying Party such information with respect thereto that
the Indemnifying Party may reasonably request. The failure to so notify the
Indemnifying Party shall not relieve the Indemnifying Party of its obligations
hereunder, except to the extent such failure shall have adversely prejudiced the
Indemnifying Party.
(b) The Indemnifying Party shall be entitled to participate in the defense
of any Claim asserted by any third party ("Third Party Claim") and, subject to
the limitations set forth in this Section, shall be entitled to control and
appoint lead counsel for such defense, in each case at its expense.
(c) If the Indemnifying Party shall assume the control of the defense of
any Third Party Claim in accordance with the provisions of this Section 11.03,
(i) the Indemnifying Party shall obtain the prior written consent of the
Indemnified Party (which shall not be unreasonably withheld) before entering
into any settlement of such Third Party Claim, if the settlement does not
release the Indemnified Party from all liabilities and obligations with respect
to such Third Party Claim or the settlement imposes injunctive or other
equitable relief against the Indemnified Party and (ii) the Indemnified Party
shall be entitled to participate in the defense of such Third Party Claim and to
employ separate counsel of its choice for such purpose. The fees and expenses of
such separate counsel shall be paid by the Indemnified Party.
(d) Each party shall cooperate, and cause their respective Affiliates to
cooperate, in the defense or prosecution of any Third Party Claim and shall
furnish or cause to be furnished such records, information and testimony, and
attend such conferences, discovery proceedings, hearings, trials or appeals, as
may be reasonably requested in connection therewith.
Section 11.04. Calculation of Damages. (a) The amount of any Damages
payable under Section 11.02 by the Indemnifying Party shall be net of
43
<PAGE>
any (i) amounts recovered or recoverable by the Indemnified Party under
applicable insurance policies, (ii) Tax cost incurred by the Indemnified Party
arising from the receipt of indemnity payments and (iii) Tax benefit realized by
the Indemnified Party arising from the incurrence or payment of any such
Damages. In computing the amount of any such Tax cost or Tax benefit, the
Indemnified Party shall be deemed to fully utilize, at the highest marginal tax
rate then in effect, all Tax items arising from the receipt of any indemnity
payment hereunder or the incurrence or payment of any indemnified Damages.
(b) The Indemnifying Party shall not be liable under Section 11.02 for any
(i) Damages relating to any matter to the extent that (A) there is included in
the Closing Balance Sheet a specific liability or reserve relating to such
matter or (B) the Indemnified Party had otherwise been compensated for such
matter pursuant to the Purchase Price adjustment under Section 2.04, (ii)
consequential or punitive Damages or (iii) Damages for lost profits.
(c) Notwithstanding any other provision of this Agreement to the contrary,
if on the Closing Date the Indemnified Party knows of any information that would
cause one or more of the representations and warranties made by the Indemnifying
Party to be inaccurate as of the date made, the Indemnified Party shall have no
right or remedy after the Closing with respect to such inaccuracy and shall be
deemed to have waived its rights to indemnification in respect thereof.
Section 11.05. Assignment of Claims. If the Indemnified Party receives any
payment from an Indemnifying Party in respect of any Damages pursuant to Section
11.02 and the Indemnified Party could have recovered all or a part of such
Damages from a third party (a "Potential Contributor") based on the underlying
Claim asserted against the Indemnified Party, the Indemnified Party shall assign
such of its rights to proceed against the Potential Contributor as are necessary
to permit the Indemnifying Party to recover from the Potential Contributor the
amount of such payment.
Section 11.06. Exclusivity. Except as specifically set forth in this
Agreement, Buyer waives any rights and claims Buyer may have against Seller,
whether in law or in equity, relating to any Company or any Subsidiary or the
Shares or the transactions contemplated hereby. The rights and claims waived by
Buyer include, without limitation, claims for contribution or other rights of
recovery arising out of or relating to any Environmental Law, securities laws,
claims for breach of contract, breach of representation or warranty, negligent
misrepresentation and all other claims for breach of duty. After the Closing,
Sections 8.06 and 11.02 will provide the exclusive remedy for any
misrepresentation, breach of warranty, covenant or other agreement (other than
those contained in Sections 2.04, 5.02(b), 6.02 and 6.03) or other claim arising
out of this Agreement or the transactions contemplated hereby.
44
<PAGE>
ARTICLE 12
TERMINATION
Section 12.01. Grounds for Termination. This Agreement may be terminated at
any time prior to the Closing:
(a) by mutual written agreement of Seller and Buyer;
(b) by either Seller or Buyer if the Closing shall not have been
consummated on or before October 31, 1998, provided that either Seller or
Buyer shall have the right by written notice to the other to extend such
date to a date not later than November 30, 1998; or
(c) by either Seller or Buyer (so long as such party has complied in
all material respects with its obligations under Section 7.01), if
consummation of the transactions contemplated hereby would violate or be
prohibited by any law or regulation or if any injunction, judgment, order
or decree enjoining Seller or Buyer from consummating such transactions is
entered and such injunction, judgment, order or decree shall become final
and nonappealable.
The party desiring to terminate this Agreement pursuant to clauses 12.01(b) or
12.01(c) shall give notice of such termination to the other party.
Section 12.02. Effect of Termination. If this Agreement is terminated as
permitted by Section 12.01, such termination shall be without liability of
either party (or any stockholder, director, officer, employee, agent, consultant
or representative of such party) to the other party to this Agreement; provided
that if such termination shall result from the willful (i) failure of either
party to fulfill a condition to the performance of the obligations of the other
party, (ii) failure to perform a covenant of this Agreement or (iii) breach by
either party hereto of any representation or warranty or agreement contained
herein, such party shall be fully liable for any and all Damages incurred or
suffered by the other party as a result of such failure or breach. The
provisions of Sections 6.01, 13.04, 13.06, 13.07 and 13.08 shall survive any
termination hereof pursuant to Section 12.01.
45
<PAGE>
ARTICLE 13
Miscellaneous
Section 13.01. Notices. All notices, requests and other communications to
any party hereunder shall be in writing (including facsimile transmission) and
shall be given,
if to Buyer, to:
ADT Security Services, Inc.
1750 Clint Moore Road
Boca Raton, Florida 33431
Fax: 561-997-1375
Attention: President
with a copy to:
Tyco International (US) Inc.
One Tyco Park
Exeter, New Hampshire 03833
Fax: 603-778-7330
Attention: General Counsel
if to Tyco (US), to:
Tyco International (US) Inc.
One Tyco Park
Exeter, New Hampshire 03833
Fax: 603-778-7330
Attention: General Counsel
if to Seller, to:
Borg-Warner Security Corporation
200 South Michigan Avenue
Chicago, Illinois 60604
Fax: (312) 322-8629
Attention: Chief Financial Officer
46
<PAGE>
with a copy to:
Borg-Warner Security Corporation
200 South Michigan Avenue
Chicago, Illinois 60604
Fax: (312) 322-8509
Attention: General Counsel
and
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Fax: (212) 450-4800
Attention: Christopher Mayer
or such other address or facsimile number as such party may hereafter specify
for the purpose by notice to the other parties hereto. All such notices,
requests and other communications shall be deemed received on the date of
receipt by the recipient thereof if received prior to 5 p.m. in the place of
receipt and such day is a business day in the place of receipt. Otherwise, any
such notice, request or communication shall be deemed not to have been received
until the next succeeding business day in the place of receipt.
Section 13.02. Entire Agreement. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all agreements, understandings and negotiations, both written and
oral, prior to the date hereof between the parties with respect to such subject
matter.
Section 13.03. Amendments and Waivers. (a) Any provision of this Agreement
may be amended or waived if, but only if, such amendment or waiver is in writing
and is signed, in the case of an amendment, by each party to this Agreement, or
in the case of a waiver, by the party against whom the waiver is to be
effective.
(b) No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
Section 13.04. Expenses. All costs and expenses incurred in connection with
this Agreement and the transactions contemplated by this Agreement shall be paid
by the party incurring such cost or expense.
47
<PAGE>
Section 13.05. Successors and Assigns. The provisions of this Agreement
shall be binding upon and inure to the benefit of and be enforceable by the
parties hereto and their respective successors and assigns; provided that no
party may assign, delegate or otherwise transfer any of its rights or
obligations under this Agreement without the consent of the other party hereto,
except that Buyer may assign its rights to purchase the Shares to one or more of
its Affiliates so long as Buyer remains fully liable under this Agreement.
Section 13.06. Governing Law. This Agreement shall be governed by and
construed in accordance with the law of the State of New York, without regard to
the conflicts of law rules of such state.
Section 13.07. Jurisdiction. Except as otherwise expressly provided in this
Agreement, the parties hereto agree that any suit, action or proceeding seeking
to enforce any provision of, or based on any matter arising out of or in
connection with, this Agreement or the transactions contemplated hereby may only
be brought in the United States District Court for the Southern District of New
York or any other New York State court sitting in New York City, and each of the
parties hereby consents to the jurisdiction of such courts (and of the
appropriate appellate courts therefrom) in any such suit, action or proceeding
and irrevocably waives, to the fullest extent permitted by law, any objection
which it may now or hereafter have to the laying of the venue of any such suit,
action or proceeding in any such court or that any such suit, action or
proceeding which is brought in any such court has been brought in an
inconvenient forum. Process in any such suit, action or proceeding may be served
on any party anywhere in the world, whether within or without the jurisdiction
of any such court. Without limiting the generality of the foregoing, each party
hereto agrees that service of process upon such party as provided in Section
1301 shall be deemed effective service of process on such party.
Section 13.08. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY.
Section 13.09. Counterparts; Effectiveness; Third Party Beneficiaries. This
Agreement 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 Agreement shall become effective when each party
hereto shall have received a counterpart hereof signed by the other party
hereto. No provision of this Agreement is intended to confer upon any Person
other than the parties hereto any rights or remedies hereunder.
48
<PAGE>
Section 13.10. Interpretation. The table of contents and headings contained
in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement. When a reference is made in
this Agreement to a Section or a Schedule, such reference shall be to a Section
or a Schedule of this Agreement unless otherwise indicated. Whenever the words
"include", "includes" or "including" are used in this Agreement they shall be
deemed to be followed by the words "without limitation".
Section 13.11. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void, unenforceable or against its regulatory
policy, the remainder of the terms, provisions, covenants and restrictions of
this Agreement shall remain in full force and effect and shall in no way be
affected, impaired or invalidated. Upon such determination that any term,
provision, covenant or restriction of this Agreement is invalid, void,
unenforceable or against regulatory policy, the parties hereto shall negotiate
in good faith to modify this Agreement so as to effect the original intent of
the parties as closely as possible in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.
Section 13.12. Disclosure Schedules. The parties acknowledge and agree that
(i) the Schedules to this Agreement may include certain items and information
solely for informational purposes for the convenience of Buyer and (ii the
disclosure by Seller of any matter in the Schedules shall not be deemed to
constitute an acknowledgment by Seller that the matter is required to be
disclosed by the terms of this Agreement or that the matter is material. If any
Schedule discloses an item or information in such a way as to make its relevance
to the disclosure required by another Schedule readily apparent, the matter
shall be deemed to have been disclosed in such other Schedule, notwithstanding
the omission of an appropriate cross-reference to such other Schedule.
Section 13.13. Tyco (US) Guarantee. Tyco (US) hereby agrees to guarantee
the prompt payment and performance of all of the obligations of Buyer in
connection with this Agreement and the transactions contemplated hereby.
49
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
ADT SECURITY SERVICES, INC.
By: /s/ Bernard J. Dougherty
------------------------
Name: Bernard J. Dougherty
Title: Vice President
TYCO INTERNATIONAL (US) INC.
By: /s/ John J. Guarnieri
----------------------
Name: John J. Guarnieri
Title: Vice President -
Financial Operations
BORG-WARNER SECURITY
CORPORATION
By: /s/ J. Joe Adorjan
------------------
Name: J. Joe Adorjan
Title: Chairman and
Chief Executive Officer
<PAGE>
Exhibit 10.20
-------------
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (this "Agreement") is entered into as of April 22,
1998 by and between Borg-Warner Security Corporation, a Delaware corporation
("Seller"), and Mustang Holdings, Inc., a Kansas corporation ("Buyer").
Seller wishes to sell the Shares, as defined herein, to Buyer, and Buyer wishes
to purchase such Shares from Seller, on the terms and subject to the conditions
set forth in this Agreement.
Capitalized terms are generally defined in paragraph 8.
The parties agree as follows:
1. BASIC TRANSACTION. On the terms and subject to the conditions set forth in
-----------------
this Agreement:
(a) SALE OF SHARES; ASSUMPTION OF CASUALTY CLAIMS. Seller agrees to sell,
transfer and deliver to Buyer, and Buyer agrees to purchase, the Shares for the
purchase price set forth in paragraph 1(b). Seller agrees to assume the
liabilities and obligations of the Company for each Casualty Claim.
(b) PURCHASE PRICE. Buyer agrees to deliver to Seller at Closing a note in
the principal amount of $ 6.5 million substantially in the form of Exhibit A
("Buyer Note") and a note in the principal amount of $8.8 million substantially
in the form of Exhibit B ("Convertible Note").
(c) CLOSING BALANCE SHEET. Within 30 days after the Closing, Seller will
deliver to Buyer (i) a balance sheet of the Company as of the Closing Date (the
"Closing Balance Sheet") prepared in accordance with GAAP consistent with the
accounting policies and practices used in connection with the preparation of the
Financial Statements and reflecting the assumption by Seller at Closing of each
Casualty Claim and (ii) a certificate setting forth Seller's calculation of Net
Working Capital as of the Closing Date as determined from the Closing Balance
Sheet. If the amount of Net Working Capital shown on such certificate is greater
than $6,488,000, then the Buyer will deliver to Seller a note with substantially
the same terms as the Convertible Note (with a ratable adjustment in the
conversion ratio) in a principal amount equal to such excess within three
business days after the date such certificate is delivered to Buyer. If the
amount of Net Working Capital shown on such certificate is less than $6,488,000,
then the principal amount of the Convertible Note shall be reduced by an amount
equal to such deficiency. Any payment made pursuant to this paragraph shall be
treated for all purposes as an adjustment to the consideration paid or received
with respect to the Shares.
(d) CLOSING. The closing of the transaction contemplated by this Agreement
(the "Closing") will take place at the offices of Seller at 10:00 a.m. on the
second business day following satisfaction or waiver of all conditions to the
parties' obligations to consummate such transaction, or at such other date and
time and in such other place as mutually agreed upon by Seller and Buyer (the
"Closing
<PAGE>
Date"). Subject to the provisions of paragraph 6, failure to consummate the
purchase and sale provided for in this Agreement on the date and time and at the
place determined pursuant to this paragraph 1(d) will not result in the
termination of this Agreement and will not relieve any party of any obligation
under this Agreement.
2. REPRESENTATIONS AND WARRANTIES OF SELLER. Except as set forth on the
----------------------------------------
Disclosure Schedule attached hereto (by reference to the applicable paragraph
below), Seller represents and warrants to Buyer:
(a) ORGANIZATION; GOOD STANDING; NO SUBSIDIARIES. Each of Seller and the
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware, with all corporate power and authority
to own, lease and operate its assets and to carry on its business as presently
conducted. The Company is qualified to do business and is in good standing as a
foreign corporation in each jurisdiction where the conduct of its business
requires it to be so qualified. The Company does not have any Subsidiaries.
Seller has delivered to Buyer a complete copy of the Company's certificate of
incorporation and by-laws and such certificate of incorporation and by-laws are
in full force and effect as of the date hereof and as of the Closing.
(b) AUTHORIZATION. Seller has corporate power and authority to enter into
this Agreement and all other agreements, documents and instruments contemplated
hereby and to perform its obligations hereunder and thereunder and to consummate
the transactions contemplated hereby and thereby. The execution, delivery and
performance of this Agreement and the other agreements, documents and
instruments contemplated hereby and consummation of the transactions
contemplated hereby and thereby have been approved by all necessary corporate
action on the part of Seller.
(c) ENFORCEABILITY. This Agreement constitutes, and each of the other
agreements, documents and instruments contemplated hereby to be executed by
Seller (when executed and delivered) will constitute, the legal, valid and
binding agreement of Seller, enforceable in accordance with its terms.
(d) NO CONTRAVENTION. Neither the execution and delivery of this Agreement
and the other agreements, documents or instruments contemplated hereby, the
performance by Seller of its obligations hereunder or thereunder, nor the
consummation of the transactions contemplated hereby or thereby will directly or
indirectly (with or without notice or lapse of time) (i) contravene, conflict
with or result in a violation of any provision of Seller's or the Company's
charter or bylaws, (ii) violate any law, statute, regulation, order, decree or
other restriction of any government, governmental agency or court to which
Seller or the Company or any of their respective assets is subject, (iii) result
in the breach of, constitute a default under, accelerate or permit the
acceleration of the performance required by, or create in any party the right to
terminate any agreement, lease, license, instrument of indebtedness or other
obligation to which the Company or any of its assets is subject or (iv) result
in the creation of any Security Interest on any of the Company's assets. Neither
Seller nor the Company needs to give any notice to, make any filing with, or
obtain any authorization, consent or approval of any government or governmental
agency in order for the parties to consummate the transactions contemplated
hereby.
-2-
<PAGE>
(e) CAPITALIZATION. The authorized capital stock of the Company consists
of 100 shares of common stock, $.10 par value, all of which are issued and
outstanding. All of the issued and outstanding shares of capital stock of the
Company have been duly authorized, are validly issued, fully paid and
nonassessable and are owned by Seller. There are no outstanding or authorized
options, warrants, purchase rights, conversion or exchange rights or other
contracts or commitments that could require the Company to issue, sell or
otherwise cause to become outstanding any of its capital stock. There are no
outstanding stock appreciation, phantom stock, profit participation or other
similar rights with respect to the Company. There are no registration rights
with respect to any shares of capital stock of the Company. There are no voting
trusts, proxies or other agreements or understandings with respect to the voting
of the capital stock of the Company. Seller owns beneficially and of record all
of the Shares, free and clear of any Security Interest.
(f) FINANCIAL STATEMENTS. Attached hereto as the "Financial Statements
Schedule" is the unaudited balance sheet and statements of income and cash flow
of the Company as of and for the year ended December 31, 1997 and the quarter
ended March 31, 1998 (the "Financial Statements"). The Financial Statements have
been prepared in accordance with GAAP applied on a consistent basis and present
fairly in all material respects the financial condition and results of operation
of the Company as of such date and for such periods, except that such Financial
Statements lack footnotes and other presentation items.
(g) ABSENCE OF CERTAIN DEVELOPMENTS. Since December 31, 1997, the Company
has conducted its business in the ordinary and usual course, and there has not
been (a) any Material Adverse Effect or any change or circumstance that is
reasonably likely to have a Material Adverse Effect, (b) any transaction between
the Company on the one hand and Seller or any of its Affiliates (other than the
Company) on the other hand, other than intercompany loans and advances, (c) any
acquisition or disposition of businesses or assets, other than in the ordinary
course of business or as contemplated by this Agreement, (d) any creation,
incurrence, assumption or guarantee of any indebtedness for borrowed money or
capitalized lease obligations or (e) the incurrence of any material obligation
by the Company, other than in the ordinary course of business.
(h) TRANSACTIONS WITH AFFILIATES. Except with respect to the provision of
security services to the Company in the ordinary course of business, neither
Seller nor any of its Affiliates:
(i) is a party to any contract, lease, agreement, arrangement or
commitment with the Company;
(ii) owes any material amount to, or is owed a material amount by,
the Company; or
(iii) has any interest in any property or right used in the conduct of
the Company's business.
(i) REAL PROPERTY. The Company has good and marketable title in fee simple
to all real properties owned by it, free and clear of any Security Interest, and
valid and enforceable leaseholds
-3-
<PAGE>
in all real estate leased by it. The Disclosure Schedule lists the street
address of each parcel of real property owned or leased by the Company and, in
the case of leased property, identifies the lease term and base rent for each
such parcel.
(j) TANGIBLE ASSETS. The Company has good title to, or a valid leasehold
interest in, the tangible assets it uses regularly in the conduct of its
business, free and clear of all Security Interests. The Company's assets are in
operating condition sufficient for operation of the Company's business. The
Disclosure Schedule lists the identifying and serial number of vehicles leased
by the Company.
(k) ACCOUNTS RECEIVABLE. At the Closing, the Company will have good title
to all of its accounts receivable free and clear of any Security Interests. All
of the accounts receivable of the Company reflected on the Closing Balance Sheet
will be valid and enforceable claims against customers for services rendered in
the ordinary course of the Company's business and will be collectible in full
within 180 days after the Closing Date, subject to no defenses, offsets or
counterclaims, except to the extent of the bad debt reserve reflected on the
Closing Balance Sheet.
(l) INTELLECTUAL PROPERTY. The Disclosure Schedule lists all patents and
registered trademarks, service marks and trade names or rights for the foregoing
used in the conduct of the Company's business and identifies each such
proprietary right that any third party owns and that the Company uses pursuant
to license or agreement. The transactions contemplated by this Agreement will
have no adverse effect on any of the proprietary rights so listed. The conduct
of the Company's business has not infringed any proprietary rights of any other
person.
(m) CONTRACTS. The Disclosure Schedule lists all the contracts of the
following types to which the Company is a party or to which any of its
properties or assets are bound: (i) any collective bargaining agreement; (ii any
indenture, credit agreement, loan agreement, note, mortgage, security agreement,
loan commitment or other contract relating to the borrowing of funds or an
extension of credit to the Company; (ii any contract providing for a partnership
or joint venture of which the Company is a partner or joint venturer; (iv any
guarantee in respect of indebtedness of any Person; (v) any employment,
severance or consulting contract; (vi any technology license agreement (other
than licenses implied by the sale of a product and perpetual, paid-up licenses
for commonly available software programs under which any Company is the
licensee); (vi any agreement that contains a change of control provision or
provisions of similar effect relating to the Company; (vi any agreement that
involves more than $25,000 (other than service agreements with customers that
were not among the 25 customers from whom the Company derived the most revenue
during 1997) that is not terminable without penalty or payment on 30 days' or
less notice; or (ix any agreement that contains any restriction on the Company's
ability to compete with any other business. Each such contract is in full force
and effect, and there is no breach or default by the Company with respect to
each such contract. The Company has not received from any customer listed on the
Disclosure Schedule any notice that such customer intends to discontinue or
substantially curtail purchasing services from the Company.
-4-
<PAGE>
(n) COMPLIANCE WITH LAW. The Company is not in violation of any Law or any
judgment, award, rule, regulation, order, decree or writ. The Company holds all
licenses, franchises, permits and authorizations necessary for the lawful
conduct of its business.
(o) EMPLOYEE MATTERS AND BENEFIT PLANS.
(i) There is no unfair labor practice complaint against the Company
pending before the National Labor Relations Board or any state or local agency.
There is no pending labor strike, dispute, grievance, request for
representation, slowdown or stoppage.
(ii) The Disclosure Schedule lists all Benefit Plans that the Company
maintains or to which the Company contributes for the benefit of any current or
former employee. The Benefit Plans comply in form and in operation with all
requirements of law, including ERISA and the Code. No liability to the Pension
Benefit Guaranty Corporation, Internal Revenue Service or United States
Department of Labor exists or is expected to be incurred with respect to any
Benefit Plan. The Company does not contribute and is not required to contribute
to any "multiemployer plan" (as defined in Section 3(37) of ERISA). The Company
has not completely or partially withdrawn from any multiemployer plan so as to
result in any liability under Section 4201 of ERISA.
(iii) There are no actions, suits or claims pending or, to Seller's
Knowledge, threatened with respect to any Benefit Plan. There has been no
reportable event (within the meaning of Section 4043 of ERISA) or any event or
condition that represents a risk of termination of any Employee Pension Benefit
Plan by the Pension Benefit Guaranty Corporation under circumstances that could
reasonably result in a liability.
(iv) The Company is not party to any (A) severance agreement, or any
policy, program or guidelines obligating it to pay severance benefits, (B)
employment contract or consulting agreement obligating it to pay benefits to
individuals covered under such contract or agreement or (c) agreement,
understanding or policy obligating it to pay any amount or provided benefits to
any former employee. The transactions contemplated by this Agreement will not
create or result in any liability of the Company for severance, bonus or other
compensation.
(p) TAXES.
(i) All federal, state and local tax returns of the Company that are
required to be filed have been duly filed, all such tax returns are true and
correct and all amounts required to be paid with respect to such returns have
been paid. All deficiencies asserted or assessments made as a result of any
examinations of such tax returns have been paid in full, and no issues that have
been raised in connection with any such examinations are currently pending.
(ii) There are not now in force any waivers or agreements by the
Company for the extension of time for the assessment of any tax, nor has any
such waiver or agreement been requested by the Internal Revenue Service or any
other taxing authority.
-5-
<PAGE>
(iii) The federal income tax returns of the Company (including where
appropriate consolidated returns of affiliated groups which include the Company)
for the taxable periods ending December 31, 1993 and prior thereto have either
been examined by the Internal Revenue Service or the applicable statute of
limitations for the assessment of deficiencies with respect thereto has expired.
(iv) The Company is not required to file any tax returns or to pay
any Taxes in foreign countries. Seller is not a "foreign person" as that term is
defined in Section 1445(f)(3) of the Code.
(v) The Company's tax basis in its tangible assets is not less than
the amount of tangible assets shown on the Financial Statements.
(q) ENVIRONMENTAL MATTERS.
(i) The Company's operations have been and are in compliance with
all applicable Environmental Laws. There are no actions, suits, investigations
or claims pending or, to Seller's Knowledge, threatened against the Company
alleging the violation of or seeking to impose liability pursuant to any
Environmental Law. There are no facts or circumstances that will result in the
Company incurring liabilities arising under any Environmental Law.
(ii) There has been no past or present spill, discharge, disposal or
release of Hazardous Substances onto or from any facility owned, leased,
operated or used by the Company (a "Facility"), nor are any Hazardous Substances
presently deposited stored, or otherwise located on, under, in or about any
Facility (except in compliance with applicable laws), nor have any Hazardous
Substances migrated from any Facility upon or beneath other properties.
(iii) The Company has not received any notice or other communication
concerning any alleged violation of any applicable Environmental Law that has
not been corrected to the satisfaction of the appropriate authority.
(iv) The Company has not received any requests for information under
42 U.S.C. Section 9604(e) relating to any "Superfund" site, or any similar
requests under authority of state law, and Company has not otherwise been
identified as a "potentially responsible party" at any federal or state
Superfund site.
(v) There are no underground storage tanks for petroleum or any
other substance, or underground piping or conduits associated with such tanks,
located on any Facility.
(vi) There are no Hazardous Substances installed, contained in the
building material, contained in the transformers or other electrical equipment,
or otherwise present on any Facility.
(vii) Buyer has been provided with all environmental audits or
assessments or occupational health studies undertaken by or on behalf of the
Company or, to Seller's Knowledge, governmental agencies with respect to each
Facility.
-6-
<PAGE>
(r) LITIGATION. There are no lawsuits, arbitration proceedings, regulatory
proceedings, actions, investigations or other litigation pending or, to Seller's
Knowledge, threatened against the Company or relating to its assets. Neither the
Company nor any of its assets is subject to any judgment, decree, injunction or
other order of any Governmental Authority.
(s) INSURANCE. The Disclosure Schedule sets forth a correct and complete
list of all fire, theft, casualty, general liability, workers' compensation,
business interruption, environmental impairment, product liability, automobile
and other insurance policies maintained by the Company, specifying the type of
coverage, the amount of coverage, the insurer and the expiration date of each
such policy (the "Insurance Policies"), each of which is in full force and
effect.
(t) BANKING FACILITIES. The Disclosure Schedule sets forth a correct and
complete list of each bank, savings and loan or similar financial institution in
which the Company has an account or safety deposit box and the numbers of the
accounts or safety deposit boxes maintained by the Company thereat; and the
names of all persons authorized to draw on each such account or to have access
to any such safety deposit box facility.
(u) SOFTWARE. The Disclosure Schedule sets forth a correct and complete
list and summary description of all computer software programs and information
systems used by the Company (other than commonly available software programs
under which the Company is licensee) ("Software") and identifies Software that
is owned by the Company or licensed by the Company from third parties. The
Company is not in violation of any license, sublicense or agreement with respect
to the Software. All actions and modifications necessary for the continued
effective use of the Software after December 31, 1999 have been taken or made.
(v) BROKERS. Neither Buyer, any Affiliate of Buyer, nor the Company has or
shall have any liability for any brokerage or finder's fee or other commission
of any Person retained by Seller, the Company or any Affiliate of either of them
in connection with any of the transactions contemplated by this Agreement.
(w) PURCHASE FOR INVESTMENT. The Buyer Note and Convertible Note are being
acquired by Seller solely for its own account, with no view to any distribution
thereof in violation of the Securities Act or the applicable securities laws of
any state. Seller understands that the Buyer Note and Convertible Note have not
been registered under the Securities Act or the securities laws of any state and
may not be sold or otherwise transferred unless they are registered under the
Securities Act and any applicable state securities laws or unless an exemption
from such registration is available. Seller acknowledges that, in connection
with its acquisition of the Buyer Note and Convertible Note, it has been given
the opportunity to make inquiries of officers of Buyer and to obtain such
additional information from Buyer as Seller deemed relevant to its investment
decision.
-7-
<PAGE>
3. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer represents and warrants to
---------------------------------------
Seller:
(a) ORGANIZATION. Buyer is a corporation duly organized, validly existing
and in good standing under the laws of the State of Kansas. Buyer has delivered
to Seller a complete copy of its certificate of incorporation and by-laws, and
such certificate of incorporation and by-laws are in full force and effect as of
the date hereof and the Closing Date.
(b) AUTHORIZATION. Buyer has corporate power and authority to enter into
this Agreement and the other agreements, documents and instruments contemplated
hereby and to perform its obligations hereunder and thereunder and to consummate
the transactions contemplated hereby and thereby. Buyer has taken all necessary
corporate action to authorize and approve the execution, delivery and
performance of this Agreement and the other agreements, documents and
instruments contemplated hereby, and the consummation of the transactions
contemplated hereby and thereby.
(c) ENFORCEABILITY. This Agreement constitutes, and each of the other
agreements, documents and instruments contemplated hereby to be executed by
Buyer (when executed and delivered) will constitute, the legal, valid and
binding agreement of Buyer enforceable in accordance with its terms.
(d) NO CONTRAVENTION. Neither the execution and delivery of this Agreement
and the other agreements, documents or instruments contemplated hereby, the
performance by Buyer of its obligations hereunder or thereunder, nor the
consummation of the transactions contemplated hereby or thereby will directly or
indirectly (with or without notice or lapse of time) (i) contravene, conflict
with or result in a violation of any provision of Buyer's charter or bylaws,
(ii) violate any law, statute, regulation, order, decree or other restriction of
any government, governmental agency or court to which Buyer or any of its assets
is subject, (iii) result in the breach of, constitute a default under,
accelerate or permit the acceleration of the performance required by, or create
in any party the right to terminate any agreement, lease, license, instrument of
indebtedness or other obligation to which Buyer or any of its assets is subject
or (iv) result in the creation of any Security Interest on any of Buyer's
assets. Buyer does not need to give any notice to, make any filing with, or
obtain any authorization, consent or approval of any government or governmental
agency in order for the parties to consummate the transactions contemplated
hereby.
(e) CAPITALIZATION. The authorized capital stock of Buyer consists of 10
million shares of Common Stock, par value $1 per share, 10 shares of which are
issued and outstanding. All of the issued and outstanding shares of Buyer's
capital stock have been duly authorized, are validly issued, fully paid and
nonassessable. At or prior to Closing, Buyer will deliver to Seller an accurate
and complete list of persons that own beneficially or of record shares of
Buyer's capital stock. There are no outstanding or authorized options, warrants,
purchase rights, conversion or exchange rights or other contracts or commitments
that could require Buyer to issue, sell or otherwise cause to become outstanding
any of its capital stock. There are no outstanding stock appreciation, phantom
stock, profit participation or other similar rights with respect to Buyer. There
are no registration rights with respect to any shares of Buyer's capital stock.
There are no voting trusts, proxies or other agreements
-8-
<PAGE>
or understandings with respect to the voting of Buyer's capital stock, except
for a shareholder agreement that Buyer delivered to Seller at or prior to
Closing.
(f) PURCHASE FOR INVESTMENT. The Shares are being acquired by Buyer solely
for its own account, with no view to any distribution thereof in violation of
the Securities Act or the applicable securities laws of any state. Buyer
understands that the Shares have not been registered under the Securities Act or
the securities laws of any state and may not be sold or otherwise transferred
unless they are registered under the Securities Act and any applicable state
securities laws or unless an exemption from such registration is available.
Buyer acknowledges that, in connection with its purchase of the Shares, it has
been given the opportunity to make inquiries of officers of the Company and to
obtain such additional information from the Company as Buyer deemed relevant to
its investment decision.
(g) BROKERS. Neither Seller, the Company nor any Affiliate of Seller has
or shall have any liability for any brokerage or finder's fee or other
commission of any Person retained by Buyer or any Affiliate of Buyer in
connection with any of the transactions contemplated by this Agreement.
4. COVENANTS.
---------
(a) GENERAL. Each of Buyer and Seller will use its best efforts to
take all action and to do all things necessary or advisable to consummate the
transactions contemplated by this Agreement.
(b) NOTICES AND CONSENTS. Seller will cause the Company to give any
notices to third parties, and the Company will use commercially reasonable
efforts to obtain any third party consent that Buyer may reasonably request in
connection with matters disclosed or required to be disclosed on the Disclosure
Schedule. Buyer and Seller will promptly obtain all governmental consents and
authorizations and promptly will make all filings with and give all notices to
governmental agencies necessary or reasonably required to effect the
transactions contemplated by this Agreement.
(c) OPERATION OF BUSINESS. Seller will cause the Company to: operate its
business in the ordinary course in accordance with all laws, rules and
regulations applicable to the Company; collect all its accounts receivable in
the ordinary course using the collection procedures customarily used by it in
past practice; keep its business and properties intact; not sell or otherwise
dispose of any assets or properties of the Company except through the use of
supplies in the ordinary course of business; take all such actions and forebear
from taking such actions as may be necessary in order that the representations
and warranties contained herein shall continue to be true and accurate at all
times between the date hereof and the Closing, except to the extent that any
changes shall occur as a result of the conduct of business in the ordinary
course.
(d) ACCESS. The Company will give Buyer and its counsel, accountants and
other representatives full access to all of its properties, books, tax returns,
contracts, commitments and records relating to its business; and will furnish to
Buyer all such financial, operating and other data, documents and information
with respect to its affairs as Buyer may reasonably request.
-9-
<PAGE>
(e) NOTICE OF DEVELOPMENTS. Prior to Closing, Seller will promptly notify
Buyer of the occurrence of any event that would reasonably be expected to have a
Material Adverse Effect. From the date of this Agreement until Closing, Seller
may deliver to Buyer written modification to the Disclosure Schedule to reflect
events or changes after the date of this Agreement, provided that delivery of
any such modification shall not affect Buyer's rights pursuant to the provisions
of paragraph 5(a)(v).
(f) EXCLUSIVITY. Seller will not (and will not cause the Company to)
solicit, initiate or encourage the submission of any proposal or offer from any
Person relating to any (A) liquidation, dissolution or recapitalization, (B)
merger or consolidation, (C) acquisition or purchase of securities or assets or
(D) similar transaction or business combination involving the Company; provided
that Seller, the Company and their directors and officers will remain free to
participate in any discussions or negotiations regarding, furnish any
information with respect to, assist or participate in, or facilitate in any
other manner any effort or attempt by any Person to do or seek any of the
foregoing to the extent their fiduciary duties may require.
(g) DIRECTOR AND OFFICER RESIGNATIONS. Seller will cause the Company's
President and each of the directors and officers of the Company who will be
officers, directors or employees of Seller or any of its Affiliates after
Closing to submit their written resignation effective as of the Closing Date.
(h) TAX MATTERS.
(i) Seller will include the Company on Seller's consolidated federal
income tax returns for the period through and including the Closing Date. The
Company will furnish Tax information to Seller for inclusion in Seller's federal
consolidated income tax return for the period that includes the Closing Date in
accordance with the Company's past custom and practice. The Company's income
will be apportioned to the period up to and including the Closing Date and the
period after the Closing Date by closing the books of the Company as of the
Closing Date, except that exemptions, allowances, deductions, property taxes or
other items that are calculated on an annual basis shall be apportioned on a per
diem basis.
(ii) Seller shall be liable for and indemnify Buyer for all Taxes
(including any obligation to contribute to the payment of a tax determined on a
consolidated, combined or unitary basis with respect to a group of corporations
that includes or included the Company) (i) imposed on Seller's Group (other than
the Company) for any taxable year, or (ii) imposed on the Company or for which
the Company may otherwise be liable for any pre-Closing period and any deemed
short taxable year ending on and including the Closing Date. Seller shall be
entitled to any refund of Taxes of the Company received for such periods. Buyer
shall be liable for and shall indemnify Seller for any Taxes of the Company for
any taxable year or period (including any deemed short taxable year) that begins
after the Closing Date.
(iii) Buyer agrees to give to Seller prompt written notice of any
claim, demand, action, suit, proceeding, audit or assessment (a "Tax Claim")
raised, brought, threatened, made or
-10-
<PAGE>
commenced against the Company that relates to any matter to which the foregoing
indemnity by Seller may apply and agrees further not to make any admission or
effect any settlement with respect to any such Tax Claim without the prior
written consent of Seller (which consent shall not be unreasonably withheld).
Each party shall cooperate with the other in connection with any Tax
investigation, audit or other proceeding.
(iv) If any Tax Claim shall be made or commenced against Buyer or the
Company in respect of any liability, obligation or claim to which the foregoing
indemnity by Seller relates, Seller shall have the right, at its own expense, to
undertake the defense of such Tax Claim by written notice given to Buyer at any
time before the final determination thereof, and if Seller does undertake the
defense of such Tax Claim, Seller shall have the authority to litigate, settle
or compromise such Tax Claim; provided, however, that in the case of any Tax
Claim relating to any deemed short taxable year ending on and including the
Closing Date, or beginning after the Closing Date, Seller's rights herein shall
be limited to that portion of the Tax Claim to which Seller's indemnification
liability relates. Notwithstanding the foregoing, Seller shall not be entitled
to settle, either administratively or after the commencement of litigation, any
Tax Claim that would adversely affect the liability for Taxes of Buyer or the
Company for any taxable year or period ending after the Closing Date (including
any deemed short taxable year beginning after the Closing Date) to any extent
(including the imposition of income tax deficiencies, the reduction of asset
basis or cost adjustments, the lengthening of any amortization or depreciation
periods, the denial of amortization or depreciation deductions, or the reduction
of loss or credit carryforwards) without the prior written consent of Buyer.
Such consent shall not be unreasonably withheld and shall not be necessary to
the extent that Seller has indemnified Buyer against the effects of any such
settlement.
(v) Any Tax allocation or sharing agreement or arrangement, whether
or not written, that may have been entered into by Seller or any member of
Seller's Group and the Company is terminated as of the Closing Date, and will
have no further effect for any taxable year.
(vi) Seller will join with Buyer in making an election under Section
338(h)(10) of the Code (and any corresponding elections under state, local or
foreign tax law) with respect to the purchase and sale of the Shares.
(i) ALLOCATION OF PURCHASE PRICE. The purchase price for the Shares and
the liabilities of the Company will be allocated to the Company's assets for all
purposes (including tax and financial accounting purposes) in a manner
consistent with the fair market values therefor agreed upon by Buyer and Seller
after good faith discussions. Buyer, Seller and the Company will file all tax
returns (including amended returns and claims for refund) and information
reports in a manner consistent with such values.
(j) INSURANCE. The Seller and Company will maintain insurance policies on
the Company's properties and business consistent with past practice until the
Closing Date, except as such policies may be acquired, canceled, amended or
otherwise modified in the ordinary course of business.
-11-
<PAGE>
(k) INTERCOMPANY ACCOUNTS; MANAGEMENT AGREEMENTS. All intercompany
indebtedness between the Company, on the one hand, and Seller or any of its
Affiliate (not including the Company), on the other hand, shall be settled in
full on or prior to the Closing Date and any balance contributed to the equity
of the Company. Effective as of the Closing, all management, services or
advisory agreements between Seller and any of its Affiliates, on the one hand,
and the Company, on the other hand, shall be terminated, except as otherwise
provided in paragraph 4(o).
(l) RETENTION OF CORPORATE RECORDS. Buyer shall cause the Company to
retain the books, records and accounts of the Company for a period of not less
than six years from the Closing Date. Seller and its Affiliates shall have
reasonable access to, and the right to obtain copies of, such books, records and
accounts at all reasonable times.
(m) COOPERATION IN GENERAL. In case at any time after the Closing any
further action is necessary or desirable to carry out the purposes of this
Agreement, each of the parties will take such further action (including the
execution and delivery of documents and instruments) as any other party may
request.
(n) PRESS RELEASES. No party shall issue any press release or make any
public announcement relating to the subject matter of this Agreement without the
prior approval of the other party; provided that any party may make any public
disclosure it believes in good faith is required by applicable Law or any
listing or trading agreement concerning its publicly-traded securities, in which
case the disclosing party shall advise the other party prior to making the
disclosure.
(o) EMPLOYEE BENEFIT MATTERS.
(i) Buyer, the Company and Seller shall each promptly and reasonably
cooperate in good faith with each other to ensure that their respective
obligations with respect to employee benefit plans are timely and properly
satisfied, including sharing information regarding employees and coordinating
communications with employees.
(ii) Seller hereby notifies buyer of the existence of the collective
bargaining agreements listed in section 2(m) of the Disclosure Schedule. To the
extent required by law, Buyer shall assume such agreements as part of the
transactions contemplated by this Agreement. Seller will notify the collective
bargaining agents of the transactions contemplated hereby within two business
days of the execution and delivery of this Agreement, and will provide such
agents with Buyer's name and address and the provisions reflecting Buyer's
assumption, to the extent required by law, of such agreements. Seller will
cooperate with Buyer in establishing meetings with such agents.
(iii) (A) Effective upon Closing, without objection from the
collective bargaining units including the Company's employees ("CBUs"), the
Company will have established a new pension plan for its employees covered by
collective bargaining agreements ("CBA Employees"), providing "future service
only" benefits on a basis substantially similar to those provided under the
Seller Plan. All benefits accrued by employees and former employees of the
Company before the Closing Date will
-12-
<PAGE>
remain the responsibility of the Seller Plan. Seller and Buyer will use all
reasonable efforts to obtain the consent of the CBUs to the plan contemplated by
this subparagraph (A).
(B) If one or more CBUs object to the Company's establishment of a
new plan as described in paragraph 4(o)(iii)(A), the Company will establish such
a new plan to cover only present and future employees of the Company who are not
participants in the Seller Plan as of the Closing Date (a "New Employee Plan").
Seller will cause the Seller Plan to continue to accrue and provide benefits to
CBA Employees who are participants in the Seller Plan as of the Closing Date and
to recognize service to the Company after the Closing Date for all purposes
until the earlier of (i) the CBA Employee's termination of employment with the
Company, (ii) the CBA Employee is no longer eligible to participate in the
Seller Plan or (iii) the expiration of the collective bargaining agreements
listed on section 2(m) of the Disclosure Schedule relating to such CBA Employee
(the "Expiration Date"). The Company will not become an adopting employer under
the Seller Plan. Seller will not terminate or modify (other than as required by
law) the Seller Plan with respect to CBA Employees prior to the Expiration Date.
(C) If one or more CBUs object to the treatment described in
paragraph 4(o)(iii)(B), the Seller will cause the Seller Plan to accrue service
and provide benefits to CBA Employees and future employees of the Company who
are members of the CBU and are eligible to participate in the Seller Plan and to
recognize service to the Company after the Closing Date for all purposes until
the earlier of (i) the termination of such employees employment with the
Company, (ii) the ineligibility of such employee to participate in the Seller
Plan or (iii) the Expiration Date. The Company will not become an adopting
employer under the Seller Plan. Seller will not terminate the Seller Plan with
respect to such employees prior to the Expiration Date.
(D) All contributions required under the Seller Plan in the event
that paragraph 4(o)(iii)(B) or (C) is applicable will be paid by the Seller. The
Company will reimburse Seller annually for actuarially-determined costs of
benefits accrued during such year for Company participants under the Seller Plan
for periods after the Closing Date. In the case of (B) or (C) above, the Company
will notify Seller from time to time of the employment status, or termination of
employment, of its employees covered under the Seller Plan. The parties intend
that the Company not be treated as an employer under a multiple employer pension
plan or any other pension plan. To the extent that the Company is treated for
any purpose as an adopting employer under the Seller Plan, then to the extent of
any Loss incurred by the Company for such liability, Seller will indemnify the
Company for any Loss from the operation, administration or termination of the
Seller Plan, unless such Loss results from the Company's action or failure to
act after the Closing Date.
(p) FINANCING. As of the Closing Date, Buyer will have at least $2 million
in common equity capital.
(q) NONDISCLOSURE. After the Closing, except as required by Law or court
order, Seller shall not disclose, or use directly or indirectly, to or for the
benefit of any person or entity other than the
-13-
<PAGE>
Company, and Seller will use all reasonable efforts to prevent any affiliate
from disclosing, any confidential or proprietary information, data or materials
of or related to the Company.
(r) NONCOMPETITION. For a period of five years from and after the Closing
Date, Seller will not (a) engage directly or indirectly in any business that the
Company conducts as of the Closing Date, except that Seller may (i) own not more
than five percent of the outstanding stock of any publicly-traded corporation,
(ii) retain its interest in Loomis, Fargo & Co., and (iii) own and operate for a
period not more than 12 months a business that derives less than 25 percent of
its revenues from activities in competition with the business that the Company
conducts as of the Closing Date other than any business owned or operated by
Seller or any of its Affiliates (other than the Company) as of the Closing Date
or for which Seller or any of its Affiliates (other than the Company) has
entered into a definitive agreement to acquire as of the Closing Date or (b)
solicit any employee of the Company to terminate such employment.
(s) ACCOUNTS RECEIVABLE. After the Closing the Company will pursue the
collection of accounts receivable existing at the Closing ("Closing
Receivables") generally in the same manner and at the same level of diligence as
the Company shall pursue the collection of its other accounts receivable. Not
later than 200 days after the Closing Date, Buyer shall give notice, certified
by its chief financial officer, to Seller setting forth the collection of
Closing Receivables through the 180th day after Closing and Buyer's calculation
of the excess, if any, of the uncollected Closing Receivables over the bad debt
reserve reflected on the Closing Balance Sheet. Seller shall have 30 days
following the date of such notice to object to such calculation. If Seller fails
to deliver such notice of objection within such period, Seller shall be
conclusively presumed to agree to the calculation delivered by Buyer. If Seller
delivers such notice of objection, Buyer and Seller shall negotiate in good
faith to resolve any dispute and if they are unable to resolve such dispute
within 20 days after Seller's notice of objection, the dispute shall be settled
by submitting such dispute to an accounting firm of national standing. The
decision of such firm shall be final and binding on the parties. The expenses of
such firm will be borne by the non-prevailing party. Any such excess will be
satisfied through an offset by Buyer against the principal amount of the
Convertible Note.
(t) SUFFICIENCY OF OPERATIONS. If the sum of (i) EBITDA less (ii) not more
than $3 million of Capital Expenditures for the 12-month period ending each
March 31 (or such shorter period ending March 31, 1999) prior to April 30, 2000
("Adjusted EBITDA") is less than Interest Expense for such 12 month (or shorter)
period, then within five business days after the anniversary date of Closing,
Seller shall pay Buyer an amount not to exceed the lesser of (i) the difference
between Adjusted EBITDA and Interest Expense or (ii) the cash amount, if any,
actually paid as interest to the holder(s) of the Convertible Note in the 30
days up to and including the date Seller is obligated to make payment hereunder.
Prior to April 30 of each year, Buyer shall deliver to Seller a certificate
setting forth in reasonable detail Buyer's calculation of EBITDA, Capital
Expenditures, Interest Expense and the calculation of any payment due hereunder.
-14-
<PAGE>
5. CONDITIONS TO CLOSING.
---------------------
(a) CONDITIONS TO BUYER'S OBLIGATION. The obligations of Buyer to
consummate the transactions contemplated by this Agreement are subject to the
following conditions precedent (any of which may be waived by Buyer, in whole or
in part):
(i) All of Seller's representations and warranties in this
Agreement shall be true and correct in all material respects on and as of the
Closing Date as if made on the Closing Date.
(ii) Seller shall have performed in all material respects all of the
covenants and agreements contained in this Agreement to be performed by it
before or at Closing.
(iii) No action or proceeding before any court or governmental body
will be pending or threatened wherein an order, decree or judgment would prevent
any of the transactions contemplated hereby or cause such transactions to be
declared unlawful or rescinded.
(iv) Seller shall have received from its lenders the consents and
approvals required to consummate the transactions contemplated in this
Agreement, to release any pledge of the Shares and to release any guarantees by
the Company of Seller's indebtedness. Seller shall have tendered transfer of the
Shares free and clear of any Security Interest.
(v) Any modifications to the Disclosure Schedule delivered by
Seller in accordance with paragraph 4(e) shall not reflect any Material Adverse
Effect.
(vi) Buyer shall have obtained on terms and conditions reasonably
satisfactory to it financing for $10 million of working capital, of which at
least $2 million shall be common equity capital; provided that this condition
will be deemed satisfied as of May 11, 1998.
(vi) Seller shall have delivered to Buyer the following documents:
(1) certificates representing the Shares, duly endorsed (or
accompanied by duly executed stock powers) for transfer to Buyer;
(2) a certificate executed by an officer of Seller certifying
that each of Seller's representations and warranties in this Agreement are true
and correct as of the Closing Date (giving full effect to any supplement to the
Disclosure Schedule delivered by Seller prior to the Closing Date in accordance
with paragraph 4(e) hereof);
(3) an assumption agreement dated the Closing Date in form and
substance reasonably acceptable to Buyer and Seller providing for the assumption
by Seller of the Casualty Claims;
-15-
<PAGE>
(4) an assignment and coexistence agreement relating to
certain trademarks dated the Closing Date substantially in the form of Exhibit
C; and
(5) a transition services agreement relating to assistance in
the administration of certain Company medical insurance plans.
(b) CONDITIONS TO SELLER'S OBLIGATION. The obligations of Seller to
consummate the transactions contemplated by this Agreement are subject to the
satisfaction of the following conditions precedent (any of which may be waived
by Seller, in whole or in part):
(i) All of Buyer's representations and warranties in this Agreement
shall be true and correct in all material respects on and as of the Closing Date
as if made on the Closing Date.
(ii) Buyer shall have performed in all material respects all of the
covenants and agreements contained in this Agreement to be performed by it
before or at Closing.
(ii) No action or proceeding before any court or governmental body
will be pending or threatened wherein an order, decree or judgment would prevent
any of the transactions contemplated hereby or cause such transactions to be
declared unlawful or rescinded.
(iv) Buyer shall have delivered to Seller (or subject to the
satisfaction of the conditions set forth in paragraph 5(a) tendered delivery
thereof) the Buyer Note and Convertible Note.
(v) Buyer shall have delivered to Seller a certified copy of the
resolutions of the board of directors of the Buyer, authorizing the execution,
delivery and performance of this Agreement and all documents to be executed and
payments to be delivered to Seller at Closing.
(vi) Buyer shall have delivered to Seller evidence in such form
reasonably satisfactory to Seller that Buyer has at least $10 million in working
capital, of which at least $2 million shall be common equity capital, all of
which has been funded at or before the Closing or supported by financial
institutions reasonably acceptable to Seller.
6. TERMINATION. This Agreement may be terminated at any time prior to Closing
-----------
as follows:
(a) by mutual consent of Seller and Buyer;
(b) by Buyer or Seller (A) in the event the other party has breached in
any material respect any representation, warranty or covenant contained herein,
the non-breaching party has notified the other of such breach and the breach has
continued without cure for a period of 30 days after notice of breach or (B) if
the Closing shall not have occurred on or before May 30, 1998 by reason of the
failure of any condition precedent under paragraph 6 hereof (unless the failure
results primarily from such party itself breaching any representation, warranty
or covenant contained herein);
-16-
<PAGE>
If this Agreement is terminated, all rights and obligations of the parties
hereunder shall terminate without any liability of any party to any other party,
other than any liability of any party then in breach, except that if Seller
terminates this Agreement for any reason other than breach by Buyer, Seller
shall pay to Buyer a fee of $300,000.
7. INDEMNIFICATION.
---------------
(a) SURVIVAL OF REPRESENTATIONS AND WARRANTIES; COVENANTS. All
representations and warranties set forth in this Agreement will survive the
Closing (and any investigation by Buyer) and continue in full force and effect
for a period of three years thereafter; provided, however, that the
representations and warranties contained in paragraph 2(e) will survive the
Closing and continue in full force and effect forever, the representations and
warranties contained in paragraph 2(p) will survive the Closing and continue in
full force and effect until the applicable statute of limitations shall have run
and the representations and warranties contained in paragraph 2(q) will survive
the Closing and continue in full force and effect for a period of five years
thereafter. Such representations and warranties shall thereafter expire, in each
case except with respect to breaches and violations specified in a written claim
for indemnification under this paragraph 7 prior to such expiration date. All
covenants set forth in this Agreement will survive the Closing and continue in
full force and effect until the applicable statute of limitations shall have
run.
(b) CASUALTY CLAIM AND ASSUMED LIABILITY INDEMNIFICATION. Seller agrees to
indemnify and hold Buyer harmless from and against, and to defend against any
Loss resulting from, relating to or caused by any Casualty Claim or Assumed
Liability.
(c) ENVIRONMENTAL INDEMNIFICATION. Subject to the provisions of paragraph
7(g) and to the extent such representations and warranties survive as set forth
in paragraph 7(a), Seller agrees to indemnify and hold Buyer harmless from and
against, and to defend against any Loss resulting from, relating to or caused by
(i) any breach of any representation or warranty contained in paragraph 2(q)
other than representations or warranties relating to any underground storage
tank (as defined in 42 U.S.C. Section 6991 et seq.) ("UST") and (ii) any
investigation, monitoring, remediation or other clean up of Hazardous Substances
released on or before the Closing from any UST located on any parcel of property
owned, leased or used by the Company or under the ownership, operation or
control of the Company or the removal, improvement, replacement or repair of any
such UST; provided, however, that Seller shall have no obligation to make any
payment pursuant to this paragraph 7(c) with respect to any individual UST
unless and until the aggregate amount of all Losses relating to such UST exceeds
$50,000 and then only for the amount of such excess. Any investigation,
monitoring, remediation, clean up, removal, improvement, replacement or repair
undertaken pursuant to this paragraph shall be performed in a reasonable and
cost-effective manner, taking into account the current use of the site, and
shall be limited to those actions reasonably necessary to comply with those
federal and state requirements relating to USTs and, as applicable, to obtain a
"no further action" letter from the Governmental Authority having jurisdiction
over a UST or other reasonably satisfactory proof of closure of a UST under or
pursuant to Environmental Laws. Buyer agrees to (and after the Closing to cause
the Company to) use reasonable efforts to perform
-17-
<PAGE>
any investigatory, remedial or other actions in a manner that will permit Buyer
or the Company to recover the maximum available funds under any applicable state
UST funds and any applicable insurance policies and apply for any reimbursements
or payments from such funds or policies on a timely basis.
(d) GENERAL INDEMNIFICATION BY SELLER. Subject to the provisions of
paragraph 7(g), Seller agrees to indemnify and hold Buyer (and after the Closing
the Company) harmless from and against, and to defend against, any Loss
resulting from, relating to or caused by (i) the breach of any representation or
warranty contained in paragraph 2 to the extent such representation and warranty
survives as set forth in paragraph (a) above (except for paragraph 2(k), which
will be governed exclusively by paragraph 4(s), paragraph 2(p), which will be
governed exclusively by the provisions thereof and paragraph 2(q), which will be
governed exclusively by paragraph 7(c)), (ii) any Indemnified Liability, (iii)
the breach of any covenant or agreement of Seller contained herein, or (iv) any
claim or cost incurred with respect to any obligations to pay any broker's or
finder's fee or any other fee or commission incurred by Seller or any of its
Affiliates.
(e) GENERAL INDEMNIFICATION BY BUYER. Subject to the provisions of
paragraph 7(g), Buyer agrees to indemnify and hold Seller and each of its
Affiliates (excluding after the Closing the Company) harmless from and against,
and to defend against, any Loss resulting from, relating to or caused by (i) the
breach of any representation or warranty contained in paragraph 3 to the extent
such representation and warranty survives as set forth in paragraph (a) above,
(ii) the breach of any covenant or agreement of Buyer contained herein, (iii)
any claim or cost incurred with respect to any obligations to pay any broker's
or finder's fee or any other fee or commission incurred by Buyer or any of its
Affiliates; or (iv) any claim made arising out of acts or omissions by the
Company after the Closing.
(f) EXCLUSIVE REMEDY. In the absence of fraud that has a Material Adverse
Effect and notwithstanding any Law to the contrary and any rights that would
otherwise be available thereunder, the indemnification provisions of this
Agreement set forth the sole and exclusive remedy of Buyer and each of its
Affiliates (including the Company) following the Closing against Seller and its
Affiliates, and of Seller and each of its Affiliates following the Closing
against Buyer and its Affiliates, with respect to any claim for relief based
upon, arising out of or otherwise in respect of this Agreement and the
transactions contemplated hereby.
(g) LIMITATION OF LIABILITY.
(i) No Person shall be liable under this paragraph 7 for (A) any Loss
that is contingent, unless and until such Loss becomes an actual liability and
is due and payable; provided, however, that this paragraph 7(g)(A) shall not
operate to avoid a claim for indemnification with respect to which timely notice
is given where the Loss is contingent at the time such claim is made; (B) any
Loss if and to the extent a reserve or provision for such Loss was included on
the Closing Balance Sheet; (C) any Loss if and to the extent such Loss would not
have occurred but for any voluntary act or omission after the date hereof by
Buyer or after Closing by any Affiliate of Buyer (including the Company);
-18-
<PAGE>
(D) any Loss if and to the extent covered by a policy of insurance covering the
Company and payment is due under such policy by the insurer or would have been
due had the insurance policies coverage amounts maintained by the Company prior
to the Closing been maintained by the Company after the Closing; (E) any Loss if
and to the extent the Person seeking indemnification has already recovered such
Loss pursuant to this Agreement or from any third party; or (F) any punitive,
special, indirect, incidental or consequential damages or lost profits payable
to Buyer.
(ii) The liability of Seller under paragraph 7(c)(i), 7(d)(i) and
7(d)(ii) shall be further limited in that Seller shall have no liability under
such paragraphs unless and until the aggregate amount of all Losses arising out
of the matters set forth in such paragraphs in the aggregate exceed $200,000 and
then only for the amount of such excess. Seller's liability for Losses under
paragraph 7(d)(i) shall not exceed an aggregate of $4 million. Seller liability
for Losses under paragraph 7(c) shall not exceed an aggregate of $10 million.
(h) DEFENSE AND PAYMENT OF CLAIMS.
(i) If any third party shall notify any party under this Agreement
(the "Indemnified Party") with respect to any matter which may give rise to a
claim for indemnification against the other party (the "Indemnifying Party")
under this paragraph 7, then the Indemnified Party will give reasonably prompt
notice to the Indemnifying Party; provided that no delay on the part of the
Indemnified Party in notifying the Indemnifying Party shall relieve the
Indemnifying Party from any obligation hereunder unless the Indemnifying Party
is prejudiced. Such notice will describe the claim in reasonable detail, include
copies of all material written evidence thereof and indicate the estimated
amount, if reasonably practicable, of the Loss that has been or may be sustained
as a result of such third party claim. The Indemnifying Party has the right to
participate in, or by giving notice to the Indemnified Party, to assume and
control the defense of such claim at such Indemnifying Party's own expense. If
the Indemnifying Party does not assume the defense of such claim or shall not
diligently defend such claim so assumed, the Indemnified Party may defend
against the matter in any manner it reasonably may deem appropriate at the
Indemnifying Party's expense and the Indemnifying Party will reimburse the
Indemnified Party periodically for the reasonable costs of defending such
matter, including attorneys' fees and expenses. At the Indemnifying Party's
reasonable request, the Indemnified Party will cooperate with the Indemnifying
Party in the preparation of any such defense, and the Indemnifying Party will
reimburse the Indemnified Party for any expenses incurred in connection with
such request. Within 30 days after any notice to the Indemnifying Party that a
third party claim has been settled or final judgment in respect of such claim
has been issued, the Indemnifying Party shall deliver cash payment to the
Indemnified Party in the amount set forth in such notice.
(ii) The Indemnified Party will give reasonably prompt notice to the
Indemnifying Party of the incurrence of any Loss that does not result from a
third party claim. Any such notice will describe the claim of Loss in reasonable
detail, include copies of all material written evidence thereof and indicate the
estimated amount, if reasonably practicable, of the Loss that has been or may be
sustained by the Indemnified Party as a result. Within 30 days of the notice of
such claim, the Indemnifying Party shall deliver cash payment to the Indemnified
Party in the amount set forth in such
-19-
<PAGE>
notice, unless the procedures for arbitration set forth in paragraph 7(h)(iii)
below are elected within such 30 day period.
(iii) If the Indemnifying Party disagrees as to the amount of any
Loss that arises out of a direct claim made pursuant to paragraph 7(h)(ii)
above, at the request of the Indemnifying Party the matter shall be settled
exclusively by arbitration held in such place as is determined by the
arbitrators, pursuant to the Commercial Arbitration Rules of the American
Arbitration Association. The arbitration shall be heard before one arbitrator,
experienced in the matters at issue, to be selected by the Indemnified Party and
the Indemnifying Party. The arbitrator shall apply the law of the State of
Illinois applicable to contracts made and to be performed entirely in such state
(without giving regard to the conflicts of law provisions thereof) in resolving
such dispute. The arbitrator shall not have power or authority to alter, modify,
amend, add to or subtract from any term or provision of this Agreement, nor to
grant injunctive relief of any nature. In all other respects, the Commercial
Arbitration Rules of the American Arbitration Association shall govern the
arbitration. The parties agree that the decision of the arbitrator pursuant to
this paragraph 7(h)(iii) shall be final and nonappealable and may be enforced by
the Indemnifying Party or the Indemnified Party in any court of record having
jurisdiction over the subject matter or over any of the parties to this
Agreement. Any amount awarded by the arbitrator pursuant to this paragraph
7(h)(iii) shall be paid promptly to the appropriate party by wire transfer to an
account designated by such party. The expenses of such arbitration will be borne
by the non-prevailing party.
8. DEFINITIONS. The following terms shall have the following meanings for
-----------
purposes of this Agreement:
"Affiliate" of any particular person or entity means any other person or
entity controlling, controlled by or under common control with such particular
person or entity. "Control" means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of a
person or entity, whether through ownership of voting securities, by agreement
or otherwise.
"Assumed Liability" means any liability or obligation of the Company that
relates to:
(i) the lease for real estate located in Charlotte, N.C.
constituting the Company's former headquarters on the terms existing as of the
Closing Date;
(ii) the lease for real estate located in Atlanta, GA constituting
the Company's current headquarters on the terms existing as of the Closing Date
beginning on the date that the Company vacates such real estate;
(iii) the payment due in May 1998 to certain employees of the Company
pursuant to the collective bargaining agreements listed in section 2(m) of the
Disclosure Schedule;
-20-
<PAGE>
(iv) an amount not to exceed $20,000 in any month under the
agreements listed on section 2(m)(vi) of the Disclosure Schedule on the terms
existing as of the Closing Date; and
(v) any Loss associated with the termination by Seller of the
employment of the Company's President.
"Benefit Plans" means any (A) nonqualified deferred compensation or
retirement plan or arrangement that is an Employee Pension Benefit Plan, (B)
qualified defined contribution retirement plan or arrangement that is an
Employee Pension Benefit Plan, (C) qualified defined benefit retirement plan or
arrangement that is an Employee Pension Benefit Plan (including any
multiemployer plan), or (D) Employee Welfare Benefit Plan.
"Capital Expenditures" means the aggregate of all expenditures (whether in
cash or accrued as liabilities) by Buyer and its consolidated subsidiaries that,
in conformity with GAAP, are included or required to be included in the
property, plant or equipment or capitalized software account reflected in the
consolidated balance sheet of Buyer and its consolidated subsidiaries.
"Casualty Claim" means any claim, action, suit or other proceeding asserted
against the Company with respect to events, circumstances or activities
occurring prior to the Closing Date (i) for worker's compensation, (ii) arising
out of or relating to the use of motor vehicles in connection with or related to
its business or operations, or (iii) arising out of or relating to acts or
omissions of the Company's drivers, courier guards or their supervisors relating
to their employment, in each case that is an act or omission that otherwise is
of a type generally covered under typical general liability insurance policies.
"Closing" has the meaning specified in paragraph 1(e).
"Closing Balance Sheet" has the meaning specified in paragraph 1(c).
"Closing Date" has the meaning specified in paragraph 1(e).
"Closing Receivables" has the meaning specified in paragraph 4(s).
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means Pony Express Delivery Services, Inc., a Delaware
corporation.
"Debt" means, with respect to any Person, (i) all indebtedness of such
Person for borrowed money or for the deferred purchase price of property or
services, (ii) all obligations of such Person evidenced by bonds, notes,
debentures or other similar instruments, (iii) all indebtedness created or
arising under any conditional sale or other title retention agreement with
respect to property acquired by such Person, but excluding trade accounts
payable arising in the ordinary course of business, (iv) all obligations of such
Person under any capital lease of real or personal property that in accordance
-21-
<PAGE>
with GAAP has been recorded as a capitalized lease obligation and (v) all
indebtedness of another Person guaranteed directly or indirectly in any manner
by such Person, provided that the term "guarantee" shall not include
endorsements for collection or deposit, in either case in the ordinary course of
business, or any obligation or liability of such Person in respect of leasehold
interests assigned by such Person to any other Person.
"EBITDA" means the sum, without duplication, of (i) the net income (or
loss) of Buyer and its consolidated subsidiaries as determined in accordance
with GAAP, (ii) provisions for taxes based on income, (iii) Interest Expense,
(iv) to the extent that net income has been reduced thereby, amortization
expense, depreciation expense and other non-cash expenses.
"Employee Pension Benefit Plan" has the meaning set forth in ERISA Section
3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in ERISA Section
3(1).
"Environmental Law" means any federal, state or local law, legislation,
ordinance, rule, code, common law, license, permit, authorization, judicial or
administrative decision, order, injunction or agreement between the Company and
any Governmental Authority, (a) relating to the protection, preservation or
restoration of the environment (including air, water vapor, surface water,
ground water, drinking water supply, surface land, subsurface land, plant and
animal life or any other natural resource), or to human health or safety, or (b)
the exposure to, or the use, storage, recycling, treatment, generation,
transportation, processing, handling, labeling, production, release or disposal
of Hazardous Substances. The term includes the Comprehensive Environmental
Response Compensation and Liability Act (42 U.S.C. Section 9601 et seq.)
("CERCLA"), the Resource Conservation and Recovery Act (42 U.S.C. Section 6901
et seq.) ("RCRA"). The Clean Water Act, (33 U.S.C. Section 1251 et seq.), the
Clean Air Act (42 U.S.C. Section 7401 et seq.), the Toxic Substance Control Act
(15 U.S.C. Section 2601 et seq.), Federal Insecticide Fungicide Rodenticide Act
(7 U.S.C. Section 136 et seq.), Occupational Safety and Health Act (29 U.S.C.
Section 651 et seq.), and all applicable judicial, administrative, and
regulatory decrees, judgments, orders and regulations.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Expiration Date" has the meaning specified in paragraph 4(o).
"Financial Statement" has the meaning specified in paragraph 2(f).
"GAAP" means generally accepted United States accounting principles,
consistently applied.
"Governmental Authority" means any federal, territorial, state or local
governmental authority, supra-governmental authority, instrumentality, court,
governmental or self-regulatory organization, commission or tribunal or any
regulatory, administrative or other agency, or any political or other
-22-
<PAGE>
subdivision, department or branch of any of the foregoing whether within or
outside the United States.
"Hazardous Substance" means any substance presently listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous, under
any Environmental Law applicable in the jurisdiction in which the substance is
present. Hazardous Substance includes any toxic waste, "pollutant or
contaminant," toxic substance, "hazardous waste," "solid waste," special waste,
"hazardous substance" or petroleum or any derivative or by-product thereof,
radon, radioactive material, asbestos containing material, urea formaldehyde
foam insulation, lead and polychlorinated biphenyl.
"Indemnified Liability" means any liability or obligation of the Company
that relates to any period prior to the Closing, whether known (including items
listed on the Disclosure Schedule) or unknown, fixed or contingent, other than:
(i) accounts payable and accrued expenses that were accrued as current
liabilities on the Closing Balance Sheet;
(ii) obligations to furnish services after the Closing under sales
contracts and customer orders;
(iii) obligations to pay for goods and services that will be furnished to
the Company after the Closing that arose out of transactions in the ordinary
course of business of the Company; and
(iv) obligations to be performed after the Closing under leases, licenses
and agreements existing as of the Closing arising from the operation of the
business of the Company in the ordinary course.
"Interest Expense" means for any period the total interest expense with
respect to all Debt for such period on a consolidated basis determined in
accordance with GAAP.
"Knowledge" means actual knowledge after reasonable investigation of facts,
circumstances, practices, actions or transactions of the executive officers of
Seller and the Company.
"Law" means any law, statute, regulation, ordinance, order, decree or
judgment imposed by any Governmental Authority.
"Loss" means any loss, liability, damage, claim or expense (including
reasonable legal fees, expenses and costs).
"Material Adverse Effect" means a material adverse effect on the assets,
business, financial condition or results of operations of the Company, taken as
a whole.
-23-
<PAGE>
"Net Working Capital" means (i) the sum of cash, cash equivalents, accounts
receivable, prepaid expenses and other current assets, less (ii) outstanding
checks, accounts and notes payable, accrued expenses and accrued Taxes payable
(other than for income Taxes).
"Person" means any individual, corporation, partnership, limited
partnership, trust, association or other entity.
"Security Interest" means any mortgage, pledge, security interest,
encumbrance, charge or other lien, other than (i) mechanic's and similar liens,
(ii) liens for Taxes not yet due and payable, (iii) liens arising under worker's
compensation, unemployment insurance, social security, retirement and similar
legislation, (iv) liens on goods in transit incurred pursuant to documentary
letters of credit, (v) purchase money liens and liens securing rental payments
under capital lease arrangements and (vi) other liens arising in the ordinary
course of business and not incurred in connection with the borrowing of money.
"Seller's Group" means for the purposes only of matters relating to Taxes
any "affiliated group" (as defined in Section 1504(a) of the Code without the
limitations contained in Section 1504(b) of the Code) that includes the Seller
or any predecessor of or successor to Seller (or another such predecessor or
successor).
"Seller Plan" means the Borg-Warner Security Corporation Retirement Plan.
"Senior Debt" means the principal of (and premium, if any, on) and interest
on and other amounts de on or in connection with any Debt of Buyer, whether
outstanding on the date hereof or hereafter created, incurred or assumed unless,
in the case of any particular Debt, the instrument creating or evidencing the
same or pursuant to which the same is outstanding expressly provides that such
Debt shall not be senior in right of payment to the Convertible Note. Senior
Debt shall not include (i) Debt evidenced by the Buyer Note or the Convertible
Note, (ii) Debt of Buyer that by operation of law is subordinate to any general
unsecured obligations of Buyer, (iii) Debt of Buyer to any of its subsidiaries,
(iv) to the extent it might constitute Debt, any liability for federal, foreign,
state or local taxes owed or owing by Buyer and (v) to the extent it might
constitute Debt, trade account payables owed or owing by Buyer.
"Shares" means all of the issued and outstanding shares of capital stock of
the Company.
"Subsidiary"means any corporation with respect to which another specified
corporation has the power to vote or direct the voting of sufficient securities
to elect a majority of the directors.
"Tax Claim" has the meaning specified in paragraph 4(h)(iii).
"Tax" means any tax, charge, fee, duty, levy or other assessment, including
any income, gross receipts, net proceeds, ad valorem, turnover, stamp, lease,
fuel, interest equalization, license, payroll, employment, excise, severance,
stamp, occupation, premium, windfall profits, environmental, customs
-24-
<PAGE>
duties, franchise, profits, withholding, social security, unemployment,
disability, real property, personal property, sales, use, transfer,
registration, value added, alternative or add-on minimum, estimated or other tax
of any kind, including any interest, penalty or addition thereto, whether
disputed or not, imposed by any government of the United States or any foreign
country, or any state or political subdivision thereof, or any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government or quasi-governmental agencies.
"Tax Return" means any return, declaration, report, claim for refund or
information return or statement relating to Taxes, including any schedule or
attachment thereto and any amendment thereof.
9. MISCELLANEOUS.
-------------
(a) EXPENSES. Each party agrees that unless otherwise expressly provided
herein, it shall be responsible for its own costs and expenses, including all
legal, consulting, financial services and accounting costs and expenses;
provided, however, that Buyer shall pay all sales, use, stamp, transfer,
service, recording, real estate and like taxes or fees imposed by any
Governmental Authority in connection with this Agreement.
(b) NOTICES. All notices and other communications by either party will be
in writing to the other party and will be deemed duly given when delivered by
United States certified mail or by Airborne Express, Federal Express or other
reliable courier service or by telecopy addressed as follows:
if to Seller, to: if to Buyer, to:
200 South Michigan Avenue Mustang Holdings, Inc.
Chicago, Illinois 60604 4200 Somerset, Suite 209
Attention: Chief Financial Officer Prairie Village, KS 66208
Facsimile No.: 312/322-8629 Facsimile No.: 913/385-5577
or to such other individual or address as a party hereto may designate for
itself by notice given as herein provided.
(c) ASSIGNMENT. Neither party shall assign this Agreement or any part
hereof without the written consent of the other party. Except as otherwise
provided, this Agreement will bind and inure to the benefit of the parties and
their respective successors and assigns.
(d) AMENDMENTS AND WAIVERS. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by Buyer
and Seller. No waiver by any party of any default, misrepresentation or breach
of warranty or covenant hereunder, whether intentional or not, shall be deemed
to extend to any prior or subsequent default, misrepresentation or breach of
warranty or covenant hereunder or affect in any way any rights arising by virtue
of any prior or subsequent such occurrence.
-25-
<PAGE>
(e) COUNTERPARTS. This Agreement may be executed in counterparts, and any
number of counterparts signed in the aggregate by the parties will constitute a
single, original instrument.
(f) DISCLOSURE SCHEDULE. Neither the specification of any dollar amount in
or relating to any representation or warranty contained in this Agreement nor
the inclusion of any specific item in the Disclosure Schedule is intended to
imply that such amount, or higher or lower amounts, or the item so included or
other items, are or are not material, and no party shall use the fact of the
setting forth of any such amount or the inclusion of any such item in any
dispute or controversy between the parties as to whether any obligation, item or
matter not described herein or included in the Disclosure Schedule is or is not
material for purposes of this Agreement. Unless this Agreement specifically
provides otherwise, neither the specification of any item or matter in any
representation or warranty contained in this Agreement nor the inclusion of any
specific item in the Disclosure Schedule is intended to imply that such item or
matter, or other items or matters, are or are not in the ordinary course of
business, and no party shall use the fact of the setting forth or the inclusion
of any such item or matter in any dispute or controversy between the parties as
to whether any obligation, item or matter not described herein or included in
the Disclosure Schedule is or is not in the ordinary course of business for
purposes of this Agreement. Disclosure of any fact or item in any part of the
Disclosure Schedule shall, should the existence of the fact or item or its
contents be relevant to any other part of the Disclosure Schedule, be deemed to
be disclosed with respect to that other part of the Disclosure Schedule, whether
or not an explicit reference appears.
(g) ENTIRE AGREEMENT. Except for the Confidentiality Agreement, dated
November 24, 1997 (the "Confidentiality Agreement"), between Seller and Buyer,
which Confidentiality Agreement shall remain in full force and effect pursuant
to the respective terms of such agreement, this Agreement (including the
documents referred to herein) constitutes the entire agreement between the
parties and supersedes any prior understandings and agreements between the
parties relating to its subject matter. The Exhibits and Schedules identified in
this Agreement are incorporated herein by reference and made a part hereof. This
Agreement shall not confer any rights or remedies upon any Person other than the
parties and their respective successors and permitted assigns.
(h) CHOICE OF LAW. This Agreement will be governed by and construed in
accordance with the internal law (and not the law of conflicts) of the State of
Illinois.
(i) CONSTRUCTION. No party or parties will be deemed the drafter of this
Agreement and if this Agreement is construed by a court of law, such court will
not construe this Agreement or any provision against any party as its drafter.
Whenever possible, each provision of this Agreement will be interpreted in such
manner as to be effective and valid under applicable law, but if any provision
of this Agreement is held to be prohibited by or invalid under applicable law,
such provision will be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of this Agreement. The
descriptive headings of the sections and paragraphs of this Agreement are
inserted for convenience only and do not constitute a part of this Agreement.
Where appropriate in the context the singular will be deemed to include the
plural, the plural to include the singular, the masculine or neuter genders
shall include all genders and the past, present and future tenses to include
-26-
<PAGE>
the others. The word "including" shall mean including without limitation. The
terms "material," "materiality" and like terms when used with respect to the
Company shall be interpreted in the context of the assets, business, financial
position or results of operations of the Company, taken as a whole.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of
the date first above written.
SELLER:
BORG-WARNER SECURITY CORPORATION
/s/ Brian S. Cooper
By: _______________________________
Name Printed: Brian S. Cooper
Title: Treasurer
BUYER:
MUSTANG HOLDINGS, INC.
/s/ Terry Matlack
By:_______________________________
Name Printed:Terry Matlack
Title: President
-27-
<PAGE>
Consolidated Statistical Review
The following table sets forth selected financial information for Borg-Warner
Security Corporation ("the Company"). The information is derived from the
audited consolidated financial statements of the Company. Previously reported
results have been restated to reflect the May 29, 1998 sale of the Company's
electronic security division and the Company's courier services division. As a
result, Wells Fargo Alarm Services Company and Pony Express Delivery Services
are reflected in discontinued operations for all years presented. 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., is accounted for under the equity method. The armored security
services unit was included in the Company's results of operations for 23 days in
1997 and full years 1996, 1995 and 1994. The selected financial data should be
read in connection with the 1998 Consolidated Financial Statements and
accompanying notes.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA Year Ended December 31,
(millions of dollars, except per share) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net service revenues $ 1,323.4 $ 1,304.6 $ 1,470.1 $ 1,453.8 $ 1,420.6
Earnings before interest and taxes 40.4 57.6 61.0 55.4 44.5
Earnings before taxes 24.9 40.9 33.8 29.1 20.7
Provision for income taxes/(1)/ 9.8 15.1 13.6 13.1 0.4
Earnings from continuing operations 15.1 25.8 20.2 16.0 20.3
Earnings from continuing operations
per share - basic $ 0.64 $ 1.10 $ 0.87 $ 0.69 $ 0.88
Earnings from continuing operations
per share - diluted $ 0.64 $ 1.07 $ 0.86 $ 0.68 $ 0.87
Average common shares outstanding - basic
(in thousands) 23,575 23,475 23,266 23,097 22,893
Average common shares and equivalents
outstanding - diluted (in thousands) 23,958 24,075 23,517 23,399 23,170
BALANCE SHEET DATA (at end of year)
- -----------------------------------------------------------------------------------------------------------
Total assets $ 431.9 $ 625.9 $ 728.9 $ 808.6 $ 780.2
Balance sheet debt 126.7 338.7 437.1 479.0 455.0
Cash and cash equivalents available (105.7) (8.0) (15.4) (17.3) (13.3)
- -----------------------------------------------------------------------------------------------------------
Net balance sheet debt 21.0 330.7 421.7 461.7 441.7
Accounts receivable sold, net 82.4 102.4 110.2 88.9 112.0
Shareholders' equity 96.9 65.0 41.2 49.7 43.8
Net assets of discontinued operations -- $ 327.0 $ 327.5 $ 369.7 $ 360.4
</TABLE>
<TABLE>
<CAPTION>
STOCK PRICES FIRST Second Third Fourth
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 Quarters
High $ 19 7/16 $ 24 3/4 $ 23 1/16 $ 20 1/16
Low $ 15 5/16 $ 17 7/8 $ 13 1/4 $ 13 1/16
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
</TABLE>
(/1)/ Income taxes for the year ended December 31, 1994 reflect certain
adjustments related to changes in tax basis.
18
<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, 1998, 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 /s/ Timothy M. Wood
J. Joe Adorjan Timothy M. Wood
Chairman, President and Vice President and Chief
Chief Executive Officer Financial Officer
19
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
SIGNIFICANT EVENTS
On January 24, 1997, the Company's armored services unit entered into a business
combination with Loomis Armored, which is now known as Loomis, Fargo & Co.
("Loomis, Fargo"). The Company, which retains a 49% ownership interest in
Loomis, Fargo, accounts for its investment under the equity method. The business
combination impacts the comparison of the Company's 1998 results to prior
periods because the armored unit was included in the Company's results of
operations for 23 days in 1997 and full year 1996.
On May 29, 1998, the Company sold its electronic security services business to
ADT Security Services, a subsidiary of Tyco International, Ltd., for
approximately $425 million plus the assumption of $6 million of debt by the
buyer. As a result of this transaction, the Company recorded a net after-tax
gain of $42.5 million.
On May 29, 1998, the Company sold its courier services unit. The Company
recorded a $15.9 million after-tax charge in the first quarter of 1998 to reduce
the Company's investment in this business and to provide for costs associated
with its disposition. The Company did not record a gain or loss as a result of
completing the sale of the unit.
On June 3, 1998, the Company irrevocably called for redemption its $150
million principal amount of 9 1/8% senior subordinated notes due 2003. The notes
were fully redeemed on July 3, 1998. This resulted in an extraordinary charge of
$6.3 million in the second quarter.
The Company entered into an agreement with Borg-Warner Automotive, Inc.
("Automotive") effective July 31, 1998 whereby the Company sold its rights to
the "Borg-Warner" name and mark in the security field for $3.6 million.
Automotive granted the Company an exclusive, royalty-free license to use the
"Borg-Warner" name and mark in the security field for a four-year period.
On August 10, 1998, the Company, the California Insurance Commissioner as
trustee of the Mission Insurance Companies Trust ("Mission Trust") and the
Illinois Director of Insurance as rehabilitator of Centaur Insurance Company
agreed to settle the pending lawsuit between the Mission Trust and the Company,
subject to court approval. As part of such settlement, the Company agreed to pay
the Mission Trust $4 million and one-third of any dividend or other distribution
that may be paid to the Company after rehabilitation of Centaur. The payments
will not have an effect on Company earnings. Separately, the Mission Trust and
Centaur agreed to an uncontested liquidated claim in the Centaur estate of $48
million, for which the Company is not liable. Additionally, the Illinois
Director of Insurance, on behalf of the Centaur estate, and the Company agreed
to exchange mutual releases of any remaining liability of the Company to the
Centaur estate. The parties have finalized and executed the settlement and
release agreements. The required court approvals of the settlement are being
sought by the parties with final approval and dismissal of the lawsuit
anticipated by the end of the first half of 1999.
BUSINESS DESCRIPTION
The Company is North America'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.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
REVENUES 1998 vs. 1997
Percent
(millions of dollars) 1998 1997 1996 Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Physical Security
Services $ 1,323.4 $ 1,289.3 $ 1,223.8 2.6%
Armored Security
Services -- 15.3 246.3 NM
- --------------------------------------------------------------------------------
Total Revenues $ 1,323.4 $ 1,304.6 $ 1,470.1 1.4%
</TABLE>
Revenue increased in 1998 and 1997 principally due to new business growth,
acquisitions, higher billing rates and improved customer retention which offset
the impact of withdrawal from certain low-margin businesses. Excluding the
effect of acquisitions, 1998 revenue was $1,310.9 million.
INTERNATIONAL OPERATIONS Revenues for 1998 were $121.1 million compared with
$116.9 million in 1997 and $110.3 million in 1996. Operations are primarily in
Canada, the United Kingdom and Colombia.
COSTS AND EXPENSES Cost of services, as a percentage of revenues, were 84.4%,
84.4% and 83.8% in 1998, 1997, and 1996 respectively. Gross profit margins were
15.6%, 15.6% and 16.2% over the same three year period. Gross margins in 1998
remained stable despite higher labor costs resulting from continued tight labor
markets. Wage increases have principally been offset by better pricing and
improved employee retention which results in generally lower recruiting and
training expenses. The decreased 1997 gross margins are primarily a result of
the Loomis, Fargo combination.
Selling, general and administrative expenses, as a percentage of revenues,
were 11.8%, 10.3%, and 10.5% for the years 1998, 1997, and 1996, respectively.
The 1998 increase reflects a $14.4 million pretax provision recorded in the
second quarter 1998. The 1998 provision was comprised of the following:
. Severance and lease termination costs totaling $2.1 million resulting from
the reorganization of administrative operations subsequent to the sale of
the electronic security services business and the closure and consolidation
of certain offices;
. $5.5 million resulting from a review of the recoverability of certain
intangible assets;
. $2.3 million related to the final settlement of matters resulting from
prior dispositions; and
. $4.5 million related to certain other asset valuation allowances and
provisions.
20
<PAGE>
Borg-Warner Security Corporation
Excluding this charge, selling, general and administrative expenses were
10.7% for 1998 versus 10.3% in 1997. The remaining increase is primarily related
to increased investment to strengthen the Company's marketing capabilities and
addressing Year 2000 issues.
Depreciation expense was $4.2 million, $5.0 million, and $12.8 million for
the years 1998, 1997, and 1996 respectively. The 1998 and 1997 decreases are
primarily due to the Loomis, Fargo combination.
Other net expense includes the results from the Company's share of the
Loomis, Fargo joint venture. The Company recorded $0.1 million of earnings for
its share of Loomis, Fargo in 1998 compared with net earnings of $1.1 million in
1997 (which included an after-tax gain of $2.2 million relating to the business
combination). Excluding Loomis, Fargo, other expense was $6.5 million, $8.1
million, and $10.5 million in 1998, 1997, and 1996 respectively. The 1998 and
1997 decrease is principally a result of reduced amortization expenses in
connection with the Loomis, Fargo combination in 1997 and the revaluation of
certain intangible assets in 1998.
NET INTEREST EXPENSE AND FINANCE CHARGES Interest expense attributed to
continuing operations, including the amortization of financing costs, decreased
to $15.5 million in 1998 from $16.7 million in 1997 and $27.2 million in 1996.
The 1998 decrease is primarily related to lower average debt levels and
decreased borrowing costs on the Company's variable rate debt. The 1997 decrease
is principally due to proceeds received from the Loomis, Fargo combination and
improved terms under the subsequent refinancing of bank borrowings.
EARNINGS FROM DISCONTINUED OPERATIONS Refer to footnote 4 for a detailed
explanation.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS The following Pro Forma
Statements of Operations give effect to the armored services business
combination in 1997, the sale of the courier services and electronic security
services businesses, the related debt reduction, as well as certain related
actions taken in 1998 as if they had been consummated on January 1, 1997. They
also assume the aforementioned $14.4 million pretax provision had been recorded
as of that date.
The Pro Forma Statements of Operations are intended for informational
purposes only and are not necessarily indicative of the future results of
operations of the Company had the transactions occurred on the indicated dates
or been in effect for the periods presented. The Pro Forma Statements of
Operations should be read in conjunction with the historical Consolidated
Financial Statements of the Company, including the related notes.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS For Year Ended December 31, 1998
<TABLE>
<CAPTION>
Pro Forma
(millions of dollars, except per share) Historical Adjustments Pro Forma
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net service revenues $ 1,323.4 $ 1,323.4
Cost of services 1,116.7 1,116.7
Selling, general and administrative expenses 155.7 $ (15.4)/(a)//(b)/ 140.3
Depreciation 4.2 4.2
Other expense, net 6.4 (1.4)/(b)//(c)/ 5.0
Interest expense and finance charges 15.5 (3.5)/(d)/ 12.0
- ----------------------------------------------------------------------------------------------------------------
Earnings before income taxes 24.9 20.3 45.2
Provision for income taxes 9.8 8.3/(h)/ 18.1
- ----------------------------------------------------------------------------------------------------------------
Earnings from continuing operations $ 15.1 $ 12.0 $ 27.1
- ----------------------------------------------------------------------------------------------------------------
Earnings per common share (fully diluted):
Continuing operations $ 0.64 $ 0.49 $ 1.13
Average fully diluted shares outstanding (in thousands) 23,958 23,958
</TABLE>
21
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS For Year Ended December 31, 1997
<TABLE>
<CAPTION> Pro Forma
(millions of dollars, except per share) Historical Adjustments Pro Forma
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net service revenues $1,304.6 $ (15.3)/(e)/ $ 1,289.3
Cost of services 1,100.7 (12.9)/(e)/ 1,087.8
Selling, general and administrative expenses 134.3 0.1/(b)//(e)//(f)/ 134.4
Depreciation 5.0 (0.5)/(e)/ 4.5
Other expense, net 7.0 (0.6)/(c)//(g)/ 6.4
Interest expense and finance charges 16.7 (3.8)/(d)/ 12.9
- --------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 40.9 2.4 43.3
Provision for income taxes 15.1 2.3/(h)/ 17.4
- --------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations $ 25.8 $ 0.1 $ 25.9
- --------------------------------------------------------------------------------------------------------------------
Earnings per common share (fully diluted):
Continuing operations $ 1.07 -- $ 1.07
Average fully diluted shares outstanding (in thousands) 24,075 24,075
</TABLE>
Notes to Pro Forma Consolidated Statement of Operations:
(a) Eliminates the $14,4 million ($8.6 million net of tax) charge in the
1998 second quarter resulting from the reorganization of administrative
support operations following the sale of the electronic security services
business, the reduction of certain intangible assets and other provisions.
(b) Eliminates expenses relating to restructuring activities and other
provisions.
(c) Reflects reduction in the carrying value of certain intangible assets.
(d) Reflects the interest expense reduction as if the sale of Wells Fargo Alarm
had occurred on January 1,1997 with the proceeds applied to eliminate $150
million principal amount of 9 1/8% notes, borrowings under the Company's
bank credit line and the remainder used to reduce usage of the accounts
receivable facility.
(e) Elimination of revenues and expenses associated with the armored security
services operation.
(f) Eliminates a $1.9 million ($1.1 million net of tax) pension curtailment gain
recorded in the third quarter of 1997.
(g) Eliminates the $2.2 million gain recorded in the first quarter of 1997
for the sale of the armored security services operation.
(h) Reflects the tax effect of pro forma adjustments by applying an estimated
federal, state and foreign tax rate of 40% for all periods presented.
EXTRAORDINARY ITEM The Company recorded a $6.3 million extraordinary charge (net
of $4.1 million tax benefit) in the second quarter of 1998 associated with early
redemption of $150 million principal amount of 9 1/8% senior subordinated notes
due 2003 and the write-off of certain deferred financing fees.
CASH FLOW The Company reduced its balance sheet debt by $212.0 million and the
balance of its receivables sold by $20.0 million, while increasing cash and
short-term investments by $97.7 million in 1998. The principle underlying source
was the sale of Wells Fargo Alarm Services Company to ADT for $425.0 million
plus assumptions of $6.0 million debt by the buyer. After taxes this transaction
generated approximately $369 million.
1998 cash provided from continuing operations was $30.7 million, reflecting
earnings of $15.1 million and $16.6 million in non-cash charges. Offsetting this
were outlays aggregating approximately $30 million for corporate insurance,
escheat and other commitments. Further, discontinued operations required
approximately $24 million prior to their sale.
In 1997, balance sheet debt declined $98.4 million, and accounts receivable
sold declined $7.8 million, while cash and short-term investments declined $7.4
million. The combination of Wells Fargo Armored with Loomis Armored generated
approximately $92.9 million inflow. Cash flow from continuing operations was
$13.0 million while $7.1 million was absorbed by discontinued operations.
LIQUIDITY The Company maintained a $225 million bank line of credit at December
31, 1998 which matures on March 31, 2002. Of this, a maximum of $125 million is
available for issuance of letters of credit. At December 31, 1998, there were no
borrowings under the bank facility. Letters of credit totaled $93.2 million.
The Company maintained an accounts receivable facility allowing for
aggregate sales of $120 million at December 31, 1998. Net sales at that date
were $82.4 million. In January 1999, this facility was replaced by a new $120
million facility which concludes on December 31, 2003.
Cash and equivalents were $105.7 million at December 31, 1998. Of this,
$50 million was restricted under the terms of the bank credit line.
The Company believes that cash flow from operations, together with existing
cash and borrowing capacity, is adequate to meet its capital needs.
22
<PAGE>
Borg-Warner Security Corporation
DISCLOSURES ABOUT MARKET RISK The Company has minimal market risk exposures
which are primarily related to changes in interest rates. The Company's policy
is to manage interest rate exposures with a blend of fixed and floating rate
borrowings and, from time to time, with interest rate swap agreements that hedge
outstanding borrowings. The Company entered into no interest rate swap
agreements during 1998. As of December 31, 1998, the Company's long-term
indebtedness consists of fixed rate debt of $124.4 million. The Company also
maintains a revolving bank credit facility with a total commitment of $225
million, which carries variable interest rates (based on LIBOR or the prime
rate). At December 31,1998, there were no borrowings under the bank facility. In
addition, the Company sells up to $120 million of accounts receivable on a
revolving basis under an accounts receivable securitization arrangement. The
funding costs associated with proceeds received from sales of receivables under
this arrangement, which is accounted for under SFAS No. 125, are based on a mix
of fixed and floating rates. As of December 31,1998, the Company has arranged a
replacement facility, and future sales will be based on short-term commercial
paper rates. Currently, the Company does not use foreign currency forward
contracts and does not have any material foreign currency exposure.
YEAR 2000
GENERAL Since the inception of computers, software applications were programmed
to identify a year as a two-digit data field. In the new millennium, computer
applications and software may recognize the year 2000 as two zeros (00) or 1900.
This incorrect date recognition could cause systems and software malfunctions
that could have a material effect on business operations.
COMPANY'S READINESS To ensure minimal business interruption due to computer
failure, the Company has performed a review of all software and computer
applications for the Year 2000 entry. Both "IT systems" and "non-IT systems"
were reviewed. IT systems refer to all purchased and internally developed
software applications and programs. Non-IT systems refer to various business
machines that have "embedded" computer language, examples of which are computer
integrated circuits ("chips") and telephone switches. The review was completed
using company technologists as well as external consulting firms.
System date remediation is being conducted in phases. First, all relevant
computer systems were assessed as to functionality and to determine the Year
2000 impact. Second, for those systems and software found to be non-compliant or
in need of upgrading, corrective steps have been, and will be taken, such as the
reprogramming or purchasing of replacement system software. Finally, all systems
and software modifications will be tested and then implemented at all necessary
levels. The Company has completed the initial corrective phase and approximately
80% of all systems are deemed to be Year 2000 compliant. Systems are in the
process of being installed and production tested .
COMPANY RISKS AND CONTINGENCY PLANS Systems crucial to the operations of the
Company such as payroll and client billing and logistical security guard
scheduling are Year 2000 compliant. The remaining systems identified as non-
compliant are being upgraded or replaced. The Company expects that all upgrades,
replacements and installments will be completed in all material aspects by
December 1, 1999.
Operationally, the worst case scenario, the failure of the payroll, client
billing or guard scheduling systems is backed up by an on-line, time-entry
system that will prevent any material business interruption.
The likely financial and non-financial impact of non-compliant third party
computer systems on the Company has not been quantified, as the Company cannot
predict other businesses' Year 2000 efforts. However, no single customer or
third party vendor of the Company could likely generate a material adverse
impact on Company operations. The Company will continue to assess its exposure
to any potential risks.
COSTS OF COMPLIANCE To date, the Company has spent approximately $0.5 million
toward remediation of its Year 2000 problems, which includes computer consultant
costs. Estimates of the remaining cost of compliance are deemed not material by
the Company. Independent of the Year 2000 issue, the Company has been in the
process of both upgrading and replacing certain systems and obsolete hardware to
enhance their functionality.
The Company's Year 2000 analysis and disclosure contains "forward looking"
statements about matters that are inherently difficult to predict. Such
statements include statements regarding the intent, opinion and current
expectations of the Company and its management. Such "forward looking"
statements involve risks and uncertainties that may affect future developments,
such as, the inability to deal with a Year 2000 issue due to a problem arising
on the part of a third party or vendor. While the Company believes that it has
implemented methodologies to address the Year 2000 issue so that it should not
materially affect its financial position, future operating results or cash
flows, no assurance can be given with respect to the ultimate outcome.
23
<PAGE>
Consolidated Statement of Operations and Comprehensive Income
<TABLE>
<CAPTION>
Year Ended December 31,
(millions of dollars, except per share) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net service revenues $ 1,323.4 $ 1,304.6 $ 1,470.1
Cost of services 1,116.7 1,100.7 1,231.4
Selling, general and administrative expenses 155.7 134.3 154.4
Depreciation 4.2 5.0 12.8
Other expense, net 6.4 7.0 10.5
Interest expense and finance charges 15.5 16.7 27.2
- ---------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 24.9 40.9 33.8
Provision for income taxes -- Note 12 9.8 15.1 13.6
- ---------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations 15.1 25.8 20.2
Gain (loss) from discontinued operations, net of income taxes -- Note 4 20.3 (6.8) (34.8)
- ---------------------------------------------------------------------------------------------------------------------
Earnings (loss) before extraordinary item 35.4 19.0 (14.6)
Extraordinary item:
Loss from early extinguishment of debt, net of $4.1 tax benefit (6.3) -- --
- ---------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 29.1 $ 19.0 $ (14.6)
=====================================================================================================================
Earnings (loss) per common share -- basic:
Continuing operations $ 0.64 $ 1.10 $ 0.87
Discontinued operations 0.87 (0.29) (1.50)
Extraordinary item (0.27) -- --
- ---------------------------------------------------------------------------------------------------------------------
Net earnings (loss) per share $ 1.24 $ 0.81 $ (0.63)
=====================================================================================================================
Earnings (loss) per common share -- diluted:
Continuing operations $ 0.64 $ 1.07 $ 0.86
Discontinued operations 0.83 (0.28) (1.48)
Extraordinary item (0.26) -- --
- ---------------------------------------------------------------------------------------------------------------------
Net earnings (loss) per share $ 1.21 $ 0.79 $ (0.62)
=====================================================================================================================
Comprehensive income:
Net earnings (loss) $ 29.1 $ 19.0 $ (14.6)
Other comprehensive income (loss):
Currency translation adjustment, net of tax ($1.0 benefit
in 1998, $0.3 benefit in 1997, $0.5 expense in 1996) (1.5) (0.5) 0.8
Minimum pension liability adjustment, net of tax ($1.0 benefit
in 1997, $2.7 benefit in 1996) -- 2.1 4.0
- ---------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ 27.6 $ 20.6 $ (9.8)
=====================================================================================================================
</TABLE>
(See accompanying notes to consolidated financial statements)
24
<PAGE>
Consolidated Balance Sheet Borg-Warner Security Corporation
<TABLE>
<CAPTION>
December 31,
(millions of dollars, except share data) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 105.7 $ 8.0
Receivables, net 55.9 18.5
Other current assets 68.9 67.3
- ---------------------------------------------------------------------------------------------------------------------
Total current assets 230.5 93.8
Property, plant and equipment
Land and buildings 18.5 18.0
Machinery and equipment 25.2 20.2
- ---------------------------------------------------------------------------------------------------------------------
43.7 38.2
Less accumulated depreciation 25.6 23.1
- ---------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 18.1 15.1
Net excess purchase price over net assets acquired 111.1 114.6
Deferred tax asset, net 42.4 40.5
Net assets of discontinued operations -- 327.0
Other assets 29.8 34.9
- ---------------------------------------------------------------------------------------------------------------------
Total other assets 183.3 517.0
- ---------------------------------------------------------------------------------------------------------------------
$ 431.9 $ 625.9
=====================================================================================================================
Liabilities and Shareholders' Equity
Notes payable $ 2.3 $ 1.2
Accounts payable and accrued expenses 130.5 119.6
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 132.8 120.8
Long-term debt 124.4 337.5
Other long-term liabilities 77.8 102.6
Capital stock:
Common stock, issued 23,879,092 shares in 1998
and 23,362,806 shares in 1997 0.2 0.2
Series I non-voting common stock, issued 2,720,000 shares
in 1998 and 1997 -- --
Capital in excess of par value 35.2 30.8
Retained earnings 70.8 41.7
Accumulated other comprehensive income:
Currency translation adjustment (1.5) --
- ---------------------------------------------------------------------------------------------------------------------
104.7 72.7
Treasury common stock, at cost, 2,768,339 shares
in 1998 and 2,506,400 shares in 1997 (7.8) (7.7)
- ---------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 96.9 65.0
- ---------------------------------------------------------------------------------------------------------------------
$ 431.9 $ 625.9
=====================================================================================================================
</TABLE>
(See accompanying notes to consolidated financial statements)
25
<PAGE>
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31,
(millions of dollars) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating:
Continuing operations:
Earnings from continuing operations $ 15.1 $ 25.8 $ 20.2
Adjustments to reconcile net earnings to net cash
provided by continuing operations:
Non-cash charges to earnings:
Depreciation and amortization 10.7 13.1 23.3
Provision for losses on receivables 5.1 3.1 2.9
Deferred income taxes (5.5) 77 6.3
Adjustment to excess purchase price 5.5 -- --
Amortization of debt discount 0.8 -- 0.6
Changes in assets and liabilities:
Increase in receivables (32.0) (17.0) (5.0)
Decrease (increase) in other current assets 18.4 6.5 (3.5)
Increase (decrease) in accounts payable and accrued expenses 42.6 (23.1) (12.3)
Net change in other long-term assets and liabilities (30.0) (0.9) (13.3)
Gain on sale of assets of armored services unit -- (2.2) --
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operations 30.7 13.0 19.2
Discontinued operations:
Net loss, excluding gain on alarm sale (22.2) (6.8) (34.8)
Other cash related to discontinued operations (17.5) (0.3) 42.2
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by discontinued operations (39.7) (7.1) 7.4
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (9.0) 5.9 26.6
Investing:
Capital expenditures (6.9) (4.3) (11.2)
Proceeds from sale of subsidiaries, net of tax paid ($58.5 million in 1998) 362.9 92.9 --
Proceeds from land sale 6.7 -- --
Net cash paid for acquisitions (11.5) -- --
Other, net 0.2 0.1 1.8
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 351.4 88.7 (9.4)
Financing:
Increase (decrease) in notes payable 1.1 (1.5) 0.7
Decrease in debt outstanding under revolving credit facility (63.9) (22.9) (37.8)
(Decrease) increase in receivables sold (20.0) (7.8) 21.3
Issuance of long-term debt -- 125.0 100.0
Retirement of long-term debt (150.0) (197.8) (103.7)
Treasury shares (acquired) sold (0.1) 1.1 0.3
Repurchase of old BW Corporation shares (7.9) -- --
Premium on extinguishment of debt (6.8) -- --
Other, net 2.9 1.9 0.1
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (244.7) (102.0) (19.1)
- ---------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 97.7 (7.4) (1.9)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8.0 15.4 17.3
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 105.7 $ 8.0 $ 15.4
===========================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 34.6 $ 40.8 $ 57.7
Income taxes paid 60.4 9.4 2.8
</TABLE>
(See accompanying notes to consolidated financial statements)
26
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Shareholders' Equity Borg-Warner Security Corporation
Year Ended December 31, 1998 1997 1996
(millions of dollars, except per share) SHARES AMOUNT Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Common Stock Issued
Beginning balance 26,082,806 $ 0.2 25,166,100 $ 0.2 25,166,100 $ 0.2
Shares issued under stock option
and related plans 266,686 -- 16,706 -- -- --
Conversion of Series I non-voting shares
to common shares 249,600 -- 900,000 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 26,599,092 0.2 26,082,806 0.2 25,166,100 0.2
- ------------------------------------------------------------------------------------------------------------------------------
Capital in Excess of Par Value
Beginning balance 30.8 29.0 28.1
Shares issued under stock option
and related plans 3.2 1.0 0.4
Tax benefit from trust distribution and
exercise of stock options 1.2 0.8 0.5
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 35.2 30.8 29.0
- ------------------------------------------------------------------------------------------------------------------------------
Retained Earnings
Beginning balance 41.7 20.6 31.2
Net earnings (loss) 29.1 19.0 (14.6)
Adjustment for deferred pension experience loss -- 2.1 4.0
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 70.8 41.7 20.6
- ------------------------------------------------------------------------------------------------------------------------------
Notes Receivable - Management Stock Purchase
Beginning balance -- (0.3) (0.3)
Net activity -- 0.3 --
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 -- -- (0.3)
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated Other Comprehensive Income -
Currency Translation Adjustment
Beginning balance -- 0.5 (0.4)
Current year adjustment (1.5) (0.5) 0.9
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 (1.5) -- 0.5
- ------------------------------------------------------------------------------------------------------------------------------
Treasury Stock
Beginning balance 2,506,400 (7.7) 1,862,311 (8.8) 1,928,861 (9.1)
Shares issued under stock option
and related plans -- -- (255,911) 1.1 (66,550) 0.3
Shares acquired 12,339 (0.1) -- -- -- --
Conversion of Series I non-voting shares
to common shares 249,600 -- 900,000 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 2,768,339 (7.8) 2,506,400 (7.7) 1,862,311 (8.8)
- ------------------------------------------------------------------------------------------------------------------------------
Total Shareholder's Equity $ 96.9 $ 65.0 $ 41.2
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(See accompanying notes to consolidated financial statements)
27
<PAGE>
Notes to Consolidated Financial Statements
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following paragraphs
briefly describe significant accounting policies. Certain 1997 and 1996 amounts
have been reclassified to conform with the 1998 presentation.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include all
significant subsidiaries. Due to the May 29, 1998 sale of the electronic
security and courier services units, the assets, liabilities, results of
operations and cash flows of such units have been segregated and reported as
discontinued operations for all periods presented. Previously reported results
have been restated (see Note 4). The Company's 49% investment in Loomis, Fargo
is accounted for under the equity method (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 short-term money market funds.
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 40 years
Machinery and equipment 3 to 5 years
Capitalized software 5 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. As
a result of such a review, based on anticipated future cash flows in 1998 the
Company adjusted the carrying value of such excess purchase price related to
certain security services acquisitions by $5.5 million. The charge is included
in selling, general and administrative expenses in the Consolidated Statement of
Operations and Comprehensive Income.
DERIVATIVE FINANCIAL INSTRUMENTS Prior to 1998, the Company used 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. At December 31, 1998 and
1997, there were no interest rate swaps outstanding.
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.
TRANSACTIONS WITH BORG-WARNER AUTOMOTIVE Under a tax-sharing agreement with the
Company, for periods prior to January 1993, Borg-Warner Automotive is required
to pay the Company for any operating loss carry forward apportioned to it at
such time as the benefits related to such carry-forward are realized by
Borg-Warner Automotive. Also, certain costs incurred at corporate headquarters
are charged to Borg-Warner Automotive based on a service agreement with the
Company.
RETIREMENT BENEFIT PLANS A number of eligible salaried and hourly employees
participate in contributory or noncontributory defined benefit or defined
contribution plans. Funding policy is based upon independent actuarial
valuations and is within the limits required by ERISA for U.S. defined benefit
plans.
The benefits provided to certain salaried employees covered under various
defined benefit plans are based on years of service and final average pay and
utilize the projected unit credit method for cost allocation. The benefits
provided to certain hourly employees under various defined benefit plans are
based on years of service and utilize the unit credit method for cost
allocation.
Under the defined contribution plans, contributions by the Company or its
subsidiaries sponsoring the plans are based on the employees' salary, age, years
of service, and/or a fixed schedule. These contributions are charged to earnings
as they are made to the various plans (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).
28
<PAGE>
Borg-Warner Security Corporation
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 basis 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) Earnings per share is presented on a basic and a
fully diluted basis in 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 (see Note 14).
NEW ACCOUNTING PRONOUNCEMENTS In 1998, the Company adopted Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income." The
Company's comprehensive earnings included adjustments for foreign currency
translation and minimum pension liability costs.
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
(SFAS 131). This statement modifies segment disclosure requirements and has no
impact upon the consolidated financial position, results of operations or cash
flows of the Company (see Note 11).
In February 1998, Statement of Financial Accounting Standards No. 132
"Employer's Disclosures about Pensions and Other Retirement Benefits" was
issued. This statement revises disclosures on retirement benefit plans but does
not change their measurement or timing of recognition (see Note 9).
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133),
which is effective for the year ending December 31, 2000. SFAS 133 will require
the Company, to the extent that it makes use of derivative financial
instruments, to record them on the balance sheet at fair value. Given the
Company's current and anticipated usage of derivative financial instruments, the
impact of adopting this standard will not be material to its financial position
or results of operations.
In 1998, the Company adopted AICPA SOP No. 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use" (SOP 98-1). SOP
98-1 requires the cost of purchased software and certain costs incurred in
developing computer software for internal use to be capitalized and amortized
over future periods, During the year ended December 31, 1998, the Company
capitalized $1.6 million of such costs that would have been charged to expense
under its previous accounting policy.
NOTE 2 -- BALANCE SHEET INFORMATION
Detailed balance sheet data are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(millions of dollars) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Receivables
Customers $ 53.5 $ 21.2
Other 9.4 1.3
- --------------------------------------------------------------------------------
62.9 22.5
Less allowance for losses 7.0 4.0
- --------------------------------------------------------------------------------
Net receivables $ 55.9 $ 18.5
- --------------------------------------------------------------------------------
Other current assets
Retained interest in receivables $ 15.7 $ 30.8
Restricted interest-bearing cash deposits 37.6 17.6
Uniforms 6.4 6.2
Other 9.2 12.7
- --------------------------------------------------------------------------------
Total other current assets $ 68.9 $ 67.3
- --------------------------------------------------------------------------------
Other assets
Debt issuance costs $ 3.5 $ 8.0
Deferred pension asset 15.9 12.1
Other 10.4 14.8
- --------------------------------------------------------------------------------
Total other assets $ 29.8 $ 34.9
- --------------------------------------------------------------------------------
Accounts payable and accrued expenses
Trade payables $ 21.8 $ 24.9
Payroll and related 36.4 36.1
Casualty insurance and claims 36.2 28.5
Interest 3.5 6.7
Liabilities to former shareholders 0.1 7.4
Other 32.5 16.0
- --------------------------------------------------------------------------------
Total accounts payable and accrued expenses $130.5 $119.6
- --------------------------------------------------------------------------------
</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 31,1998 and 1997, the subsidiary had purchased $135.7 million and
$150.8 million of such accounts receivable, respectively. 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 due to
the short-term nature of the receivables. Also included in "Other current
assets" is $37.6 million and $17.6 million at December 31, 1998 and
1997 respectively, representing interest-bearing cash
29
<PAGE>
Notes to Consolidated Financial Statements, continued
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 is generally restricted.
Selling, general and administrative expenses include provisions for losses
on receivables of $5.1 million, $3.1 million and $2.9 million in 1998, 1997 and
1996, respectively.
Accumulated amortization related to excess purchase price over net assets
acquired amounted to $53.7 million and $48.9 million at December 31, 1998 and
1997, 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 $21.1 million and $24.1 million at December 31, 1998 and 1997,
respectively.
The non-current portion of the casualty insurance liability, included in
other long-term liabilities, was $47.9 million and $58.6 million at December 31,
1998 and 1997, respectively. The total discounted insurance accrual, including
the portion reflected in accounts payable and accrued liabilities, was $79.1
million and $86.2 million at December 31, 1998 and 1997, respectively. The
estimated aggregate undiscounted insurance liability was $85.4 million and
$101.1 million at December 31, 1998 and 1997, respectively. The discount rate
used to value the future obligation at December 31, 1998 and 1997 was 4.5
percent and 6.0 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.
The business combination impacts the comparison of the Company's 1998
results to prior periods because the armored services unit was included in the
Company's results of consolidated operations for only 23 days in 1997 and the
full year 1996. Armored security revenues were $15.3 million and $246.3 million
in 1997 and 1996, respectively. Armored security operating profit was $0.9
million in 1997, compared with $12.1 million in 1996.
The Company accounts for its interest in Loomis, Fargo as an equity
investment. The Company recorded net income related to Loomis, Fargo of $0.1
million in 1998 and $1.1 million in 1997, including a $2.2 million gain
recognized in the combination. The Company does not guarantee the indebtedness
of Loomis, Fargo nor is it required to fund Loomis, Fargo's future operations.
30
<PAGE>
Borg-Warner Security Corporation
NOTE 4 - DISCONTINUED OPERATIONS
On May 29, 1998, the Company sold its electronic security services business to
ADT Security Services, a subsidiary of Tyco International, Ltd. for
approximately $425 million plus the assumption of approximately $6 million of
debt by the buyer. The Company recorded a net after-tax gain of $42.5 million in
the second quarter.
On May 29, 1998, the Company sold its courier services business. In the
first quarter of 1998, the Company recorded a $15.9 million after-tax charge
(net of $11.0 million tax benefit) to reduce its investment in this business, to
provide for costs associated with its disposition, and for anticipated further
losses prior to sale. The Company did not record a gain or loss as a result of
completing the sale. The courier services operation has been carried as a
discontinued operation since September 1996.
The assets, liabilities, results of operations and cash flows have been
segregated and reported as discontinued operations for all periods presented.
Previously reported discontinued operations have been restated to reflect the
discontinued presentation of both businesses.
<TABLE>
<CAPTION>
Year ended December 31,
(millions of dollars, except per share) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net service revenues:
Electronic security services business $ 81.2 $ 243.4 $ 241.1
Courier services business 56.0 142.2 140.0
- -----------------------------------------------------------------------------------------------------------------
Total net service revenue $ 137.2 $ 385.6 $ 381.1
- -----------------------------------------------------------------------------------------------------------------
Loss from operations before income taxes:
Electronic security services business $ (10.3) $ (10.8) $ (10.6)
Courier services business -- -- (5.4)
- -----------------------------------------------------------------------------------------------------------------
Total loss from operations before income taxes (10.3) (10.8) (16.0)
Income tax benefit 4.0 4.0 6.2
- -----------------------------------------------------------------------------------------------------------------
Loss from operations (6.3) (6.8) (9.8)
Adjustment of courier assets to realizable value and provision for
future losses (net of $11.0 million tax benefit in 1998 and $2.0
million tax benefit in 1996) (15.9) -- (25.0)
Gain on sale of electronic security services business (net of $59.8
million tax expense) 42.5 -- --
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) from discontinued operations $ 20.3 $ (6.8) $ (34.8)
- -----------------------------------------------------------------------------------------------------------------
Income (loss) per common share (fully diluted):
Loss from operations $ (0.27) $ (0.28) $ (0.42)
Gain (loss) on sale and net asset adjustment 1.10 -- (1.06)
- -----------------------------------------------------------------------------------------------------------------
Income (loss) per common share $ 0.83 $ (0.28) $ (1.48)
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
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, 1998 December 31, 1997
- -----------------------------------------------------------------------------------------------------------------
(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
9 5/8% senior subordinated notes (face amount $125 million
due 2007) -- 124.4 -- 124.2
Bank revolving credit loan due through 1999 (at an average rate
of 7.9% in 1997) -- -- -- 63.9
Unsecured notes (at an average rate of 8.8% in 1998
and 7.6% in 1997) 2.3 -- 1.2 0.2
- -----------------------------------------------------------------------------------------------------------------
Total notes payable and long-term debt $ 2.3 $ 124.4 $ 1.2 $ 337.5
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
Notes to Consolidated Financial Statements, continued
Included in long-term debt at December 31, 1998 and 1997 were obligations
of $124.4 million and $273.6 million, respectively, with fixed interest rates.
At December 31, 1997 there was $63.9 million of long-term debt with variable
interest rates (generally based on LIBOR or prime rate).
In 1998, the Company amended its bank facility and called the entire $150
million principal amount of its 9 1/8% senior subordinated notes for early
redemption. The Company recorded a $6.3 million extraordinary charge (net of
$4.1 million tax benefit) in the second quarter of 1998 associated with its
early redemption and the write-off of certain deferred financing fees. The bank
facility was reduced from $285 million to $225 million to reflect lower
requirements after the disposal of the courier and electronic segments. Up to
$125 million of the bank facility is available for letters of credit. The
revolving credit commitment is reduced by the total dollar amount of letters of
credit issued and outstanding, $93.2 million at December 31, 1998. The entire
bank facility is available through March 31, 2002.
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, to pay dividends or to make certain
other restricted payments. To secure its obligations under these facilities, the
Company pledged the stock of certain of its subsidiaries.
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 fair values of the Company's long-term debt are estimated
based on quoted market prices of 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, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
December 31,
(millions of dollars) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Carrying amount $ 124.4 $337.5
Fair value 134.0 342.1
</TABLE>
INTEREST RATE SWAPS The Company uses interest rate swap agreements from time to
time 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. There were no interest rate
swap agreements outstanding at December 31, 1998 or 1997.
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, 1998 and 1997 was $93.2 million and $110.8
million, respectively. To assure 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, 1998 as follows:
<TABLE>
<CAPTION>
Fiscal year (millions of dollars)
- --------------------------------------------------------------------------------
<S> <C>
1999 $10.9
2000 8.2
2001 5.1
2002 2.6
2003 1.7
2004 and after 5.4
- --------------------------------------------------------------------------------
Total $33.9
- --------------------------------------------------------------------------------
</TABLE>
Total rental expense amounted to $14.3 million, $12.3 million and $21.0 million
in 1998, 1997 and 1996, respectively.
32
<PAGE>
Borg-Warner Security Corporation
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.
The foregoing has resulted in a pending lawsuit against the Company for recovery
of alleged damages incurred in excess of $100 million as a result of the failure
of Centaur to satisfy its reinsurance obligations. On August 10, 1998 the
Company, the California Insurance Commissioner as trustee of the Mission
Insurance Companies Trust ("Mission Trust") and the Illinois Director of
Insurance as rehabilitator of Centaur agreed to settle such lawsuit, subject to
court approval. As part of such settlement, the Company agreed to pay the
Mission Trust $4 million and one-third of any dividend or other distribution
that may be paid to the Company after rehabilitation of Centaur. The payments
will not have an effect on Company earnings. Separately, the Mission Trust and
Centaur agreed to an uncontested liquidated claim in the Centaur estate of $48
million, for which the Company is not liable. Additionally, the Illinois
Director of Insurance, on behalf of the Centaur estate, and the Company agreed
to exchange mutual releases of any remaining liability of the Company to the
Centaur estate. The parties have finalized and executed the settlement and
release agreements. The required court approvals of the settlement are being
sought by the parties with final approval and dismissal of the lawsuit
anticipated in the first half of 1999.
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 mailers 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 $5 million. Additionally,
the Company will be indemnified by its former subsidiary, Borg-Warner
Automotive, against certain future costs relating to environmental liabilities
associated with certain former automotive operations.
In November and December, 1998, Loomis, Fargo & Company made various claims
against the Company for indemnification under the Contribution Agreement dated
November 28, 1996 for certain cargo losses and environmental losses. The Company
has objected to the claims. If the parties are unable to resolve their dispute,
it will be referred to arbitration as provided for under the Contribution
Agreement.
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.
33
<PAGE>
Notes to Consolidated Financial Statements, continued
NOTE 9 - RETIREMENT BENEFITS
The Company provides various defined benefit and contribution plans as well as
other postretirement benefit plans to employees. The following provides a
reconciliation of benefit obligations, plan assets, and funded status of plans.
<TABLE>
<CAPTION>
(millions of dollars) Pension Benefits Other Postretirement Benefits
- -----------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1 $ 106.6 $ 94.0 $ 10.8 $ 8.8
Service cost 1.4 2.4 -- --
Interest cost 7.5 7.6 0.3 0.3
Actuarial loss 3.3 12.6 1.2 2.7
Curtailment gain (0.9) (3.6) -- --
Benefits paid from plan assets (9.3) (6.4) (1.1) (1.1)
- -----------------------------------------------------------------------------------------------------------------------
Benefit obligation at December 31 $ 108.6 $ 106.6 $ 11.2 $ 10.7
- -----------------------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1 $ 124.4 $ 101.8
Actual return on plan assets 24.3 26.4
Company contributions -- 2.6
Benefits paid from plan assets (9.3) (6.4)
- -------------------------------------------------------------------------------------
Fair value of plan assets at December 31 $ 139.4 $ 124.4
- --------------------------------------------------------------------------------------
Funded status of the plans $ 30.8 $ 17.8 $ (11.2) $ (10.7)
Unrecognized actuarial gain (15.2) (6.5) (0.3) --
Unrecognized prior service cost 0.2 0.8 -- --
- -----------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 15.8 $ 12.1 $ (11.5) $ (10.7)
- -----------------------------------------------------------------------------------------------------------------------
ASSUMPTIONS AS OF DECEMBER 31
Discount rate 7.00% 7.50% 7.00% 750%
Expected return on plan assets 10.00% 10.00% N/A N/A
Rate of compensation increase 4.00% 4.00% N/A N/A
Medical trend-valuation year N/A N/A 7.00% 6.25%
Medical trend-ultimate N/A N/A 5.25% 5.25%
</TABLE>
Net periodic pension and other postretirement benefit costs include the
following components:
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
- -----------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 1.4 $ 2.4 $ 3.3 -- -- --
Interest cost 7.5 7.6 7.0 $ 0.3 $ 0.3 $ 0.3
Return on plan assets (expected) (10.8) (9.4) (8.4) -- -- --
Amortization and deferrals 0.1 0.5 0.8 -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Subtotal (1.8) 1.1 2.7 0.3 0.3 0.3
Curtailment Gain (0.5) (3.7) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Net periodic (benefit) cost $ (2.3) $ (2.6) $ 2.7 $ 0.3 $ 0.3 $ 0.3
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Defined contribution plan expenses were $1.2 million, $1.5 million, and $1.5
million in 1998,1997, and 1996, 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 gains in 1998 and 1997. These gains resulted from the net decrease in the
Company's benefit obligation for employees affected by the armored unit
combination with Loomis Armored Inc. and other benefit freezes. Assets held in
trust for the defined benefit plans are comprised primarily of marketable equity
and fixed income securities.
34
<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. Outstanding options carry
exercise prices ranging from $8.43 to $21.59 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.
Common shares under option for the years ended December 31, 1998, 1997, and
1996 are summarized as follows:
<TABLE>
<CAPTION>
Number of Shares (thousands of shares) Weighted-Average Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares under option at January 1 1,972 1,545 1,810 $ 12.38 $ 12.20 $ 13.34
Granted 39 843 159 18.90 11.30 10.98
Exercised (267) (273) (66) 11.04 6.12 5.00
Cancelled (104) -- -- 14.83 -- --
Forfeited (93) (143) (358) 14.29 16.03 18.76
- -----------------------------------------------------------------------------------------------------------------------------------
Shares under option at end of year 1,547 1,972 1,545 $ 12.49 $ 12.38 $ 12.20
==================================================================================================================================
Options exercisable 820 917 985
========================================================================
Shares available for future grant 713 664 1,177
========================================================================
Weighted-average fair value of
options granted during the year $ 7.12 $ 4.39 $ 4.00
========================================================================
</TABLE>
Additional information regarding options outstanding as of December 31,
1998 is as follows (thousands of shares):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------ --------------------------------------
Weighted-Average
Range of Remaining Weighted-Average Weighted-Average
Exercise Prices Number Outstanding Contractual Life (yrs) Exercise Price Number Exercisable Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 8.43 - 8.75 300 6.4 $ 8.49 300 $ 8.49
10.56 - 15.94 958 7.6 11.94 263 13.72
16.03 - 18.83 219 3.1 17.89 203 17.89
19.06 - 21.59 70 6.3 20.31 54 19.89
- ----------------------------------------------------------------------------------------------------------------------------------
$ 8.43 - 21.59 1,547 6.6 $ 12.49 820 $ 13.24
==================================================================================================================================
</TABLE>
The 727,000 options outstanding at December 31, 1998 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
proforma net income and earnings per share would have been as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
(millions of dollars, except per share) 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income As reported $ 29.1 $ 19.0
Pro forma 28.5 18.2
Earnings per share-basic As reported $ 1.24 $ 0.81
Pro forma 1.21 0.78
Earnings per share-diluted As reported $ 1.21 $ 0.79
Pro forma 1.18 0.76
</TABLE>
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998 and 1997, respectively: expected volatility
of 40% and 41%; risk-free interest rates of 4.54-4.72% and 5.28-5.30%; and
expected lives of four years.
35
<PAGE>
Notes to Consolidated Financial Statements, continued
NOTE 11 - BUSINESS SEGMENT INFORMATION
GENERAL INFORMATION Due to the similarity of their services and economic
characteristics, the Company's four service-based and three geographic-based
operating segments have been aggregated for reporting purposes as allowed by
SFAS 131. Segment operating performance as reviewed by the Company's Chief
operating decision maker is measured on a basis consistent with the information
presented in the financial statements. Such performance measurement consists of
earnings from continuing operations before interest expense and finance charges
and the provision for income taxes. The Company does not allocate assets to the
individual operating segments for purposes of measuring operating performance.
ENTERPRISE-WIDE DISCLOSURES:
INFORMATION ABOUT SERVICES The Company derives its revenues from various
security services offered to clients. The Company provides security officers to
deter crime, monitor electronic security systems, control public and private
access to facilities, perform general investigative services and background
screening of potential employees.
GEOGRAPHIC INFORMATION The Company operates in the United States, Canada, Europe
and South America. No revenues attributed to an individual foreign country
represents ten percent or more of consolidated revenues. The following revenues
are disclosed by geographical area:
<TABLE>
<CAPTION>
(millions of dollars) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $ 1,202.3 $ 1,187.7 $ 1,359.8
Foreign 121.1 116.9 110.3
- --------------------------------------------------------------------------------
Total Revenue $ 1,323.4 $ 1,304.6 $ 1,470.1
================================================================================
</TABLE>
INFORMATION ABOUT MAJOR CUSTOMERS The Company has no individual customer from
whom it derives ten percent or more of its revenues.
INFORMATION ON LONG-LIVED ASSETS The long-lived assets listed below include
plant, property and equipment, capital leases and intangibles. No assets
attributed to an individual foreign country exceeds ten percent or more of
consolidated assets.
<TABLE>
<CAPTION>
(millions of dollars) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
United States $ 119.0 $ 126.9
Foreign 10.2 2.8
- --------------------------------------------------------------------------------
Total long lived assets $ 129.2 $ 129.7
================================================================================
</TABLE>
NOTE 12 - INCOME TAXES
Earnings before income taxes from continuing operations and provision for income
taxes consist of:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
(millions of dollars) U.S. NON-U.S. TOTAL U.S. Non-U.S. Total U.S. Non-U.S. Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings before income taxes $ 22.6 $ 2.3 $ 24.9 $ 37.5 $ 3.4 $ 40.9 $ 29.2 $ 4.6 $ 33.8
===============================================================================================================================
Income taxes:
Current:
Federal/Foreign $ 9.0 $ 1.2 $ 10.2 $ 4.9 $ 1.0 $ 5.9 $ 4.1 $ 2.0 $ 6.1
State 1.5 -- 1.5 1.5 -- 1.5 1.5 -- 1.5
- -------------------------------------------------------------------------------------------------------------------------------
10.5 1.2 11.7 6.4 1.0 7.4 5.6 2.0 7.6
Deferred (1.9) -- (1.9) 7.7 -- 7.7 6.0 -- 6.0
- -------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes $ 8.6 $ 1.2 $ 9.8 $ 14.1 $ 1.0 $ 15.1 $ 11.6 $ 2.0 $ 13.6
===============================================================================================================================
</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) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes at U.S. statutory rate of 35% $ 8.7 $ 14.3 $ 11.9
Increases (decreases) resulting from:
State income taxes 1.0 1.0 0.8
Non-temporary differences 0.2 0.1 0.7
Other, net (0.1) (0.3) 0.2
- ---------------------------------------------------------------------------------------------------------------------------------
Income taxes reported $ 9.8 $ 15.1 $ 13.6
=================================================================================================================================
</TABLE>
36
<PAGE>
Borg-Warner Security Corporation
Following are the components of the deferred tax asset as of December 31,
1998 and 1997:
<TABLE>
<CAPTION>
(millions of dollars) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Liabilities for casualty insurance $ 32.0 $ 35.9
Liabilities related to discontinued operations 5.1 7.9
Liabilities for other postretirement benefits 5.1 4.2
Other, net 3.4 1.1
General business credit 5.5 24.8
Minimum tax credit -- 26.6
Foreign tax credit -- 0.4
- ------------------------------------------------------------------------------------------------------------------------
Subtotal deferred tax assets 51.1 100.9
Valuation allowance -- (5.3)
- ------------------------------------------------------------------------------------------------------------------------
51.1 95.6
Deferred tax liabilities:
Fixed assets -- (36.3)
Investments (7.0) (13.1)
Net excess purchase price over net assets acquired (1.7) (5.7)
- ------------------------------------------------------------------------------------------------------------------------
Subtotal deferred tax liabilities (8.7) (55.1)
- ------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 42.4 $ 40.5
========================================================================================================================
</TABLE>
NOTE 13 - CAPITAL STOCK
The following table summarizes the Company's capital stock at December 31,
1998 and 1997:
<TABLE>
<CAPTION>
December 31,
(thousands of shares) 1998 1997
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock, $.01 par value: Authorized 50,000.0 50,000.0
Issued 23,879.1 23,362.8
Outstanding 23,830.8 23,326.8
Series 1 non-voting common stock, $.01 par value: Authorized 25,000.0 25,000.o
Issued 2,720.0 2,720.0
Outstanding - 249.6
Preferred stock, $.01 par value Authorized 5,000.0 5,000.0
Issued and Outstanding - -
</TABLE>
NOTE 14- EARNINGS PER SHARE:
<TABLE>
<CAPTION>
1998 1997 1996
PER SHARE Per Share Per Share
(millions of dollars, except per share) EARNINGS SHARES AMOUNT Earnings Shares Amount Earnings Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings from continuing operations $ 15.1 $ 25.8 $20.2
BASIC EPS
Earnings available to
commom shareholders 15.1 23.6 $ 0.64 25.8 23.5 $ 1.10 20.2 23.3 $0.87
==================================================================================================================================
EFFECT OF DILUTIVE SECURITIES
Outstanding stock options - 0.4 - 0.6 - 0.2
DILUTED EPS
Earnings available to common shareholders
+assumed conversions $15.1 24.0 $ 0.64 $ 25.8 24.1 $ 1.07 $20.2 23.5 $0.86
==================================================================================================================================
</TABLE>
37
<PAGE>
Notes to Consolidated Financial Statements, continued
NOTE 15-INTERIM FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1998 Quarter Ended 1997 Quarter Ended
--------------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(millions of dollars, except per share) MAR. 31 JUNE 30 SEPT. 30 DEC. 31 YEAR 1998 Mar. 31 June 30 Sept. 30 Dec. 31 Year 1997
Net service revenues $318.6 $323.9 $336.6 $344.3 $1,323.4 $326.4 $317.1 $330.5 $330.6 $1,304.6
Cost of services 269.1 273.0 284.2 290.4 1,116.7 275.0 267.0 279.9 278.8 1,100.7
Selling, general and
administrative expenses 35.7 50.0 35.5 34.5 155.7 37.2 33.7 32.6 30.8 134.3
Depreciation 1.0 1.0 1.0 1.2 4.2 1.6 1.2 1.1 1.1 5.0
Other expense (income), net 2.4 2.1 1.2 0.7 6.4 (0.1) 1.8 2.6 2.7 7.0
Interest expense and
finance charges 4.2 4.2 3.4 3.7 15.5 5.3 3.7 3.7 4.0 16.7
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before
income taxes 6.2 (6.4) 11.3 13.8 24.9 7.4 9.7 10.6 13.2 40.9
Provision (benefit) for income taxes 2.3 (2.4) 4.5 5.4 9.8 1.7 4.0 3.9 5.5 15.1
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing
operations 3.9 (4.0) 6.8 8.4 15.1 5.7 5.7 6.7 7.7 25.8
Gain (loss) from discontinued
operations, net of
income taxes (19.1) 39.4 -- -- 20.3 (1.7) (1.6) (2.0) (1.5) (6.8)
Extraordinary loss, early
extinguishment of debt -- (6.3) -- -- (6.3) -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $(15.2) $ 29.1 $ 6.8 $ 8.4 $ 29.1 $ 4.0 $ 4.1 $ 4.7 $ 6.2 $ 19.0
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share - basic:
Continuing operations $ 0.17 $(0.17) $ 0.29 $ 0.35 $ 0.64 $ 0.24 $ 0.24 $ 0.29 $ 0.33 $ 1.10
Discontinued operations (0.81) 1.68 -- -- 0.87 (0.07) (0.07) (0.09) (0.06) (0.29)
Extraordinary loss, early
extinguishment of debt -- (0.27) -- -- (0.27) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss)
per share $(0.64) $ 1.24 $ 0.29 $ 0.35 $ 1.24 $ 0.17 $ 0.17 $ 0.20 $ 0.27 $ 0.81
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share - diluted:
Continuing operations $ 0.16 $(0.16) $ 0.29 $ 0.35 $ 0.64 $ 0.24 $ 0.24 $ 0.28 $ 0.31 $ 1.07
Discontinued operations (0.79) 1.62 -- -- 0.83 (0.07) (0.07) (0.09) (0.05) (0.28)
Extraordinary loss, early
extinguishment of debt -- (0.26) -- -- (0.26) -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss)
per share $(0.63) $ 1.20 $ 0.29 $ 0.35 $ 1.21 $ 0.17 $ 0.17 $ 0.19 $ 0.26 $ 0.79
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 16-ACQUISITION OF BUSINESSES
During 1998, the Company purchased three security service businesses, two in the
United States and one with operations in the United Kingdom and Ireland for an
aggregate purchase price of $11.5 million. The results of operations of these
acquired businesses are included as of the date of acquisition. The acquisitions
were accounted for under the purchase method. Substantially all of the purchase
price represents excess of purchase price over net assets acquired which is
being amortized on a straight-line basis over 5 to 10 years. None of the
acquisitions individually, or in aggregate, had a significant effect on revenues
or the results of operations in 1998.
38
<PAGE>
Independent Auditors' Report Borg-Warner Security Corporation
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, 1998 and 1997, and the related
consolidated statements of operations and comprehensive income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Chicago, Illinois
February 2, 1999
39
<PAGE>
Directors, Officers and Shareholder Information Borg-Warner Security Corporation
<TABLE>
<CAPTION>
Officers
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
J. Joe Adorjan Robert E.T. Lackey John D. O'Brien Timothy M. Wood
Chairman, President Vice President, General Counsel Senior Vice President Vice President
and Chief Executive Officer and Corporate Secretary and Chief Financial Officer
Craig J. Bollinger Brian S. Cooper Nancy E. Kittle
Vice President, Risk Treasurer Vice President,
Management Human Resources
Directors
- ---------------------------------------------------------------------------------------------------------------------------------
J. Joe Adorjan James J. Burke, Jr. Albert J. Fitzgibbons, III Arthur F. Golden
Chairman, President Partner Partner Partner
and Chief Executive Officer Stonington Partners Inc. Stonington Partners Inc. Davis Polk & Wardwell
Borg-Warner Security Corporation
Dale W. Lang Robert A. McCabe Andrew McNally IV Alexis P. Michas
President Chairman Retired Chairman Managing Partner
KX Acquisition Corporation Pilot Capital Corporation and Chief Executive Officer Stonington Partners Inc.
Rand McNally & Company
H. Norman Schwarzkopf Donald C. Trauscht
General Retired Chairman
U.S. Army, Retired and Chief Executive Officer
Borg-Warner Security Corporation
Committees of the Board
- ---------------------------------------------------------------------------------------------------------------------------------
EXECUTIVE COMMITTEE FINANCE AND AUDIT COMMITTEE COMPENSATION COMMITTEE NOMINATING COMMITTEE
J. Joe Adorjan, Chairman Alexis P. Michas, Chairman Robert A. McCabe, Chairman H. Norman Schwarzkopf,
Arthur F. Golden James J. Burke, Jr. Albert J. Fitzgibbons, III Chairman
Alexis P. Michas Arthur F. Golden Dale W. Lang Albert J. Fitzgibbons, III
Donald C. Trauscht H. Norman Schwarzkopf Andrew McNally IV Dale W. Lang
Donald C. Trauscht Alexis P. Michas Robert A. McCabe
Andrew McNally IV
- ---------------------------------------------------------------------------------------------------------------------------------
Company Headquarters Investor Contact Securities Information Shareholder inquiries to:
Borg-Warner Jeffrey S. Cartwright The common stock of Shareholder Relations
Security Corporation Director of Investor Relations Borg-Warner Security Department - 11E
200 South Michigan Avenue 312-322-8836 Corporation is listed on the P.O. Box 11258
Chicago, IL 60604 New York Stock Exchange. Church Street Station
Form 10-K Report The ticker symbol is BOR. New York, NY 10286-1258
www.Borg-WarnerSecurity.com A copy of the Company's Annual
Report on Form 10-K is available Independent Accountants Send certificates for transfer
Shareholder Information to shareholders without charge Deloitte & Touche LLP and address changes to:
The 1999 annual meeting of upon request to the Investor 180 North Stetson Receive and Deliver
shareholders will be held on Relations Department Chicago, IL 60601 Department - 11W
Tuesday, April 20, at 10 a.m. P.O. Box 11002
at the Company headquarters, Transfer Agent Church Street Station
200 South Michigan Avenue, The Bank of New York New York, NY 10286-1002
Chicago, IL. 1-800-524-4458
</TABLE>
40
<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 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%
Hall Security Services, Inc. Maine 100%
Oak Ridge Security Associates, LLC Delaware 51%
Wells Fargo Guard Services, Inc. Delaware 100%
Wells Fargo Guard Services, Inc. of Florida Florida 100%
Wells Fargo Special Services, Inc. Delaware 100%
Burns International Liability Management Company Delaware 100%
BPS Financial Services, Inc. Delaware 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%
BW-Chemicals Corporation Delaware 100%
Wells Fargo Armored Service Corporation Delaware 100%
</TABLE>
<PAGE>
Exhibit 23
----------
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Borg-Warner Security
Corporation's 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 2, 1999 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, 1998.
DELOITTE & TOUCHE LLP
Chicago, Illinois
March 30, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 106
<SECURITIES> 0
<RECEIVABLES> 63
<ALLOWANCES> 7
<INVENTORY> 0
<CURRENT-ASSETS> 231
<PP&E> 44
<DEPRECIATION> 26
<TOTAL-ASSETS> 432
<CURRENT-LIABILITIES> 133
<BONDS> 124
0
0
<COMMON> 0
<OTHER-SE> 97
<TOTAL-LIABILITY-AND-EQUITY> 432
<SALES> 0
<TOTAL-REVENUES> 1,323
<CGS> 0
<TOTAL-COSTS> 1,117
<OTHER-EXPENSES> 11
<LOSS-PROVISION> 5
<INTEREST-EXPENSE> 16
<INCOME-PRETAX> 25
<INCOME-TAX> 10
<INCOME-CONTINUING> 15
<DISCONTINUED> 20
<EXTRAORDINARY> (6)
<CHANGES> 0
<NET-INCOME> 29
<EPS-PRIMARY> 1.24
<EPS-DILUTED> 1.21
</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 is affected by the
availability of qualified personnel and the cost of labor. United States
labor market contractions caused by high economic growth or 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, the Company's customer agreements
typically allow for billing rate adjustments based on law changes, rulings
or collective bargaining agreements that increase the Company's wage rates.
However, competitive pricing conditions in the industry may constrain the
Company's ability to increase its billing rates to cover such increased
costs.
2. The Company continues to remain responsible for certain liabilities of
businesses that the Company has discontinued or disposed of in prior years.
These liabilities consist primarily of environmental liabilities and
indemnity obligations under contracts for sale of businesses. Although the
Company believes that any liabilities with respect to the 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.
3. Due to the nature of the Company's security services business, its
operations are subject to a variety of federal, state, county and municipal
laws, regulations and licensing requirements. Changes in such laws,
regulations and licensing requirements may constrain the Company's ability
to provide services to customers or increase the costs of such services.
Competitive pricing conditions in the industry may constrain the Company's
ability to adjust its billing rates to reflect such increased costs.
4. The nature of the Company's services potentially exposes it to greater
risks of liability for employee acts, injuries (including worker's
compensation claims) or omissions that may be imposed by other service
businesses. The Company carries insurance of various types, including
worker's 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 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 at
acceptable costs. A successful claim brought against the Company for which
the 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.
<PAGE>
5. 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 fully 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 the
business.
6. The protective services industry generally is highly fragmented and very
competitive. The Company competes in a business environment with low
barriers to entry. Consequently, the Company's business is subject to
additional competition. Some of the Company's competitors are materially
larger than the Company and have greater financial and other resources
available to them.
7. The Company's Year 2000 analysis and disclosure contains "forward looking"
statements about matters that are inherently difficult to predict. Such
statements include statements regarding the intent, opinion and current
expectations of the Company and its management. Such "forward looking"
statements involve risks and uncertainties that may affect future
developments, such as, the inability to deal with a Year 2000 issue due to
a problem arising on the part of a third party or vendor. While the Company
believes it has implemented methodologies to address the Year 2000 issue so
that it should not materially affect its financial position, future
operating results or cash flows, no assurance can be given with respect to
the ultimate outcome.
