CONSOLIDATED STATISTICAL REVIEW
The following table sets forth selected financial information for Borg-Warner
Security Corporation (the "Company"). Such information is derived from the
audited financial statements of the Company and treats Borg-Warner Automotive,
Inc. ("BW-Automotive"), which was spun off in January 1993 (the "Spin-Off"), as
discontinued operations. The selected financial data should be read in
connection with the 1994 consolidated financial statements and accompanying
notes.
STATEMENT OF OPERATIONS DATA
Year Ended December 31,
-------------------------------------------------------------------------------------------------------------------
(millions of dollars, except share data) 1990 1991 1992 1993 1994
-------------------------------------------------------------------------------------------------------------------
Net service revenues $1,413.8 $1,555.4 $1,620.6 $1,764.6 $1,792.9
Provision (benefit) for income taxes (1) 5.6 9.4 (19.7) 22.2 (3.0)
Earnings (loss) from continuing operations (2) 20.3 25.2 57.7 (215.1) 13.1
Earnings (loss) from continuing operations per share $1.02 $1.28 $2.94 ($9.41) $0.56
Average common shares outstanding in thousands (3) 19,940 19,698 19,647 22,858 23,170
BALANCE SHEET DATA
(at end of period)
-------------------------------------------------------------------------------------------------------------------
Net assets of discontinued BW-Automotive operations $ 742.2 $ 743.5 $ 728.2 $ -- $ --
Total assets 1,891.0 1,866.3 1,758.1 790.5 830.3
Total debt 897.3 872.9 746.6 457.5 468.5
Stockholders' equity 659.0 668.3 676.7 27.5 43.8
STOCK PRICES
1994 quarters First Second Third Fourth
-------------------------------------------------------------------------------------------------------------------
High $22 $16-7/8 $12-3/4 $11-1/8
Low $16-3/8 $10-3/4 $10-5/8 $8-1/4
1993 quarters First Second Third Fourth
-------------------------------------------------------------------------------------------------------------------
High $22-5/8 $22-1/4 $22-7/8 $20-1/2
Low $19-5/8 $19-5/8 $18 $18-1/4
(1) Effective January 1, 1991 the Company changed its method of accounting for
income taxes to conform to SFAS 109. Income taxes for the years ended
December 31, 1992 and 1994 reflect certain adjustments related to changes in
tax bases. See Note 11 to the Consolidated Financial Statements.
(2) Following the Spin-Off of BW-Automotive, $250 million of excess purchase
price over net assets acquired not directly attributed to the protective
services business was written off as a charge to earnings in the first
quarter of 1993.
(3) The average common shares outstanding include 3,795,000 shares sold through
an initial public offering on January 27, 1993.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview
The Company's protective services business is divided into four business units:
guard services, alarm services, armored services and courier services. The
Company's consolidated net service revenue increased 2% in 1994 and 9% in 1993.
The primary source of the 1994 increase was internal growth, while the primary
source of the 1993 revenue increase was acquisitions, principally in the guard
unit. Operating profit, which is pretax earnings before interest expense and
unallocated corporate expenses, decreased 30% in 1994 following a 4% increase
in 1993.
For several years competitive market conditions have limited the Company's
ability to increase prices. In 1994 each of the Company's units continued to
experience price pressure and higher direct costs, which has adversely affected
margins.
Historically, the Company has grown through acquisitions. In 1994 the price/
cost pressures facing the Company and the entire protective services industry
made acquisitions less attractive. While the Company will continue to pursue
acquisitions when attractive opportunities arise, each unit intends to focus on
internal growth through greater customer retention, expanded service offerings
and greater selling efforts. At the same time, each unit will continue its
efforts to reduce costs, including applying technology to improve customer
service.
Results of Operations
The following table sets forth the net service revenues and operating profit for
each unit for the three years ended December 31, 1994:
Year Ended December 31,
--------------------------------------------------------------------------------
(millions of dollars) 1992 1993 1994
--------------------------------------------------------------------------------
Net service revenues:
Guard $1,098.0 $1,198.0 $1,209.4
Alarm 203.5 213.2 206.2
Armored 156.4 180.9 211.2
Courier 162.7 172.5 166.1
--------------------------------------------------------------------------------
Total $1,620.6 $1,764.6 $1,792.9
================================================================================
Operating profit:
Guard $55.4 $58.5 $54.5
Alarm 29.7 31.1 14.9
Armored 10.6 13.3 6.7
Courier 10.3 7.4 1.1
--------------------------------------------------------------------------------
Total $106.0 $110.3 $77.2
================================================================================
Guard services
Guard service revenue increased slightly in 1994, following a 9% increase in
1993. The 1994 increase was due to internal growth and improved customer
retention. The primary source of revenue growth in 1993 was acquisitions,
particularly the acquisition of certain assets of Security Bureau, Inc. in
December 1992.
Operating profit for the guard unit declined slightly from 1992 to 1994
as competitive market conditions placed downward pressure on prices and margins.
In certain geographic areas the unit is experiencing a contraction of the labor
market, which has increased direct costs through higher wages and increased
amounts of unbilled overtime. Because the market has constrained price
increases, the Company has not been able to pass on such cost increases to
customers and margins have declined.
14
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The guard unit was reorganized in February 1994 by combining the
administrative functions and establishing nine regional offices. The Company
expects that the guard market will remain competitive in 1995. The unit will
seek to increase revenue through customer retention and expanded service
offerings. The Company will seek to improve gross margins by selected price
increases and controlling costs, including through improved guard recruitment,
retention and training to control unbilled overtime costs. The Company will
continue to focus on technological developments aimed at improving performance
and customer retention.
Alarm services
Alarm service revenue decreased 3% in 1994, following a 5% increase in 1993.
Revenues from key commercial, banking and defense industry customers have
declined due to consolidation occurring in those industries. In addition,
customer cancellation rates were above targeted levels during the period. In
1993 revenue included a one-time supplemental billing. There were no special
billings in 1994.
Operating profit for the alarm unit declined 52% in 1994, following a 5%
increase in 1993. The 1994 decline was due to reduced revenues over a largely
fixed cost base. In addition, the Company has invested in systems to improve
service quality and other costs are increasing. Intense price competition has
also applied downward pressure on operating margins in 1994 and 1993.
The alarm unit was reorganized in November 1994 by establishing nine regional
offices. The Company expects that the regional offices will manage most of the
administrative functions of the alarm unit, while branch offices devote full
attention to sales and service issues. Because the commercial market has
constrained price increases for monitoring services, the alarm unit intends to
focus on customer retention to increase revenue and improve margins. Programs to
improve customer retention include pursuing technological advancements and
providing consistent, high quality, responsive service. The unit will attempt to
diversify its largely commercial customer base by continuing its efforts to
penetrate the residential security market.
Armored services
Armored service revenue increased 17% in 1994, following a 16% increase in 1993.
The 1994 increase resulted primarily from acquisitions, including the
acquisition of the assets of Shields Business Machines, Inc., an ATM servicer in
January, and from increased volume in the ATM service and cash management
operations. The traditional armored transport business has been adversely
affected by consolidation in the banking industry. To counter this, the unit has
expanded into additional areas of service, including ATM and cash management
services.
Operating profit for the armored unit declined 50% in 1994, following a
25% increase in 1993. During 1994 an escalating rate of violent attacks against
armored car and ATM servicing personnel increased security costs and insurance
premiums. The rate of cargo losses attributable to external theft in 1994
increased substantially from historical levels. In addition, increases in
direct labor costs and administrative expenses have eroded margins.
To offset the impact of the increased security and insurance costs resulting
from the higher cargo losses, the armored unit has increased prices and expanded
its programs to reduce cargo losses. Such programs include lowering the profile
of the unit's vehicles, increasing security training, improving security
measures through technology and route structure and eliminating certain high-
risk services. The unit's risk management department coordinates efforts with
local and federal law enforcement authorities to investigate all cargo losses.
In addition, the unit is attempting to reduce costs by integrating the field
operations of the ATM cash replenishment business with the armored cash delivery
business.
15
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Courier services
Courier service revenue decreased 4% in 1994, following a
6% increase in 1993. The 1994 decrease resulted primarily from the work
stoppage initiated by the International Brotherhood of Teamsters during the
third quarter. The unit's traditional business of transporting non-negotiable
financial documents among financial institutions also has been adversely
affected by consolidation in the banking industry. Such business is subject to
severe competitive price pressure. The unit has increased emphasis on
time-sensitive delivery of small packages and commodities.
Operating profit for the courier unit declined significantly in 1994,
following a 28% decline in 1993. The 1994 decline was due principally to the
reduced revenues and increased costs associated with the labor unrest, while the
1993 decline was due primarily to competitive price pressure. The courier unit
will seek to improve operating margins in future periods through increased
operating efficiencies and increased market penetration in the package delivery
business.
Foreign
The percentage of the Company's revenues in 1994 derived from non-U.S.
operations, primarily guard services, was 6% in 1994 and 1993, compared with 7%
in 1992. The Company operates in Canada, the United Kingdom and Colombia.
Operating margins also declined slightly from 1992 to 1994.
Other Earnings Factors
General corporate expenses increased to $26.5 million in 1994 from $4.8 million
in 1993, and were $37.3 million in 1992. Corporate expenses for 1994 include an
increase of approximately $25 million over 1993 related to non-cash accruals for
self-insurance reserves and, to a lesser extent, other corporate allowances. The
decrease in operating expenses in 1993 from 1992 was due to lower amortization
of excess purchase price over net assets acquired, greater corporate
headquarters expense reimbursement received from BW-Automotive and a favorable
settlement of a corporate liability.
Amortization of excess purchase price over net assets acquired was $16.1
million and $16.5 million in 1994 and 1993, respectively, down from $21.4
million in 1992 due to the non-recurring elimination of excess purchase price of
$250 million. This was recorded in the first quarter of 1993 to eliminate excess
purchase price which was not directly related to the protective services
operations.
Other income in 1994 included a gain of $9.9 million related to the sale of
trademarks and other rights to BW-Automotive. Gains on the sale of various
assets in 1993 and 1992 were $1.9 million and $6.5 million, respectively. Other
income in 1992 also included a gain of $7.5 million related to the collection of
a partially reserved receivable.
Interest expense in 1994 was $50.4 million compared with $51.5 million and
$47.9 million in 1993 and 1992, respectively. The improved terms resulting from
the Company's 1993 restructuring were offset by higher interest rates. In 1992
interest expense was net of an allocation to BW-Automotive based on its relative
capital investment to the Company's total capital investment.
The Company's effective tax rates have varied significantly from the federal
tax rate. Despite reported income before taxes, the Company recorded a net
income tax benefit in 1992 and 1994 primarily because of adjustments to deferred
income taxes of $30.6 million and $7.0 million, respectively. These adjustments
resulted from changes in the tax bases of certain assets and liabilities as a
result of sales and settlements. In 1993 the Company had a $22.2 million
provision for income taxes despite a pre-tax loss of $192.9 million primarily
due to a $250
16
Management's Discussion and Analysis of
Financial Condition and Results of Operations
million non-deductible charge to eliminate excess purchase price. Excluding the
impact of the foregoing items, the Company's effective tax rate would have been
29%, 39% and 40% in 1992, 1993 and 1994, respectively.
Discontinued Operations
The loss from discontinued operations in 1992 and 1993 reflects the results of
BW-Automotive operations up to the time of the Spin-Off in January 1993. These
results include an allocation of corporate headquarters and interest expenses.
Results for 1992 also include a pre-tax charge of approximately $28 million
related to excess capacity at various BW-Automotive facilities.
Extraordinary Items
Earnings for 1993 reflect a loss of $9.1 million, net of tax, from the early
extinguishment of $216.7 million principal amount of 13% Junior Subordinated
Discount Debentures and $15.2 million principal amount of 12.75% Senior
Subordinated Debentures. Earnings for 1992 reflect a $7.1 million loss, net of
tax, from the early extinguishment of $155 million principal amount of the
Company's 13% Junior Subordinated Discount Debentures and $58 million principal
amount of the Company's 14% Senior Subordinated Discount Debentures.
Cumulative Effect of Initial Application of
New Accounting Standards
The Company adopted SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," effective January 1, 1993, and elected immediate
recognition of the $15 million obligation. The cumulative effect was a charge of
$8.3 million, net of tax.
In the fourth quarter of 1993, the Company changed the method of selecting
the rate used to discount the retained portion of insurance costs related to its
various deductible policies. The Company previously used a rate based on its
overall cost of capital. Consistent with the Securities and Exchange Commission
Staff Accounting Bulletin No. 92, the rate was changed to a rate based on risk-
free monetary asset yields for securities with similar maturities. This change
resulted in a reduction in the discount rate from 10% to 4%. The cumulative
effect of this change was a charge of $9.4 million, net of tax.
Neither of the above changes in accounting had a material impact on earnings
from continuing operations in the respective years of implementation.
Impact of Recapitalization on Operations
The impact of the 1993 restructuring on the results of operations for 1992 and
1993 is reflected on a pro forma basis in the Pro Forma Financial Information
(Unaudited) contained in the Notes to Consolidated Financial Statements. On a
pro forma basis, after making the adjustments for interest and amortization, as
well as the elimination of non-recurring gains and expenses, earnings before
taxes for 1992 would have been $46.9 million. Pro forma earnings before taxes
for 1993 were $57.1 million after removing the non-recurring elimination of
excess purchase price of $250.0 million.
17
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Financial Condition and Liquidity
Current liabilities exceeded current assets at December 31, 1994 and 1993 due to
the sale of receivables with the proceeds used to reduce long-term debt. The
outstanding balance of sold receivables was $112 million and $124 million at
December 31, 1994 and 1993, respectively. Receivables at December 31, 1993 also
included $10.7 million for refundable income taxes. The levels of receivables,
inventory and current liabilities are partly seasonal in nature and are
influenced by the timing of billings, collections and payrolls. The Company's
policy is to keep working capital at as low a level as is operationally feasible
to minimize related carrying costs.
During 1994, net cash provided by operating activities increased slightly to
$54.0 million from $52.3 million in 1993. The current year included a $3.2
million tax refund and a $22.0 million increase in receivables primarily due to
lower sales under the Company's receivable transfer facility. The prior year
reflected the settlement of certain liabilities (including an $8 million payment
relating to the Company's former Centaur operation) and costs associated with
the 1993 restructuring.
Historically, the Company's capital expenditures, principally for vehicles
and subscribers' installations, have been at a rate slightly in excess of
depreciation. Capital expenditures were $70.2 million, $68.8 million and $67.0
million in 1992, 1993 and 1994, respectively. Pursuant to the terms of the
Company's amended credit facilities, capital expenditures are limited to $55
million in 1995. The Company does not have any material commitments for capital
expenditures and believes that it will be able to continue to invest in its
business as required, within the limits set forth under its amended credit
facilities.
From time to time, the Company makes acquisitions of companies in the
protective services industry. Cash expenditures for businesses acquired (which
were not included in the Company's capital expenditures) were $34.7 million,
$4.8 million and $9.0 million in 1992, 1993 and 1994, respectively. While the
Company will continue to pursue acquisitions when attractive opportunities
arise, it intends to focus on internal growth through greater customer
retention, expanded service offerings and greater selling efforts.
The Company expects that continuing operations, together with existing credit
facilities and replacements thereof, will generate sufficient cash to fund
current operating requirements and capital expenditures.
To avoid potential non-compliance with the covenants contained in it
revolving credit and letter of credit facilities resulting from 1994 financial
performance, the Company has obtained waivers and amendments. In June 1994 the
Company amended such credit facilities, principally to reduce pricing and amend
covenants related to leverage, fixed charge coverage and net worth. In December
1994 the Company negotiated waivers to certain financial covenants under such
facilities. In March 1995 the Company again amended such facilities, principally
to change pricing and amend covenants related to earnings, leverage, fixed
charge coverage, net worth, capital expenditures and acquisitions.
18
Management's Discussion and Analysis of
Financial Condition and Results of Operations
In November 1994 the Company replaced its previous $150 million receivables
purchase facility with a $130 million receivables transfer facility. The new
facility provided more favorable pricing than the prior facility and altered,
among other things, eligibility and reserve requirements. In connection with the
renegotiation of financial covenants required to be maintained by such facility,
the Company has agreed to increase reserve requirements and certain other
changes. In addition, the maturity date of such facility has been changed to
September 30, 1995 from November 1997. The Company has begun discussions with
other financial institutions concerning the replacement of the existing accounts
receivable facility. Any amendment or replacement of such facility will require
the consent of the Company's lenders under its amended credit facilities.
The Company anticipates that the $100 million principal amount of 8% notes
due 1996 will require refinancing. The Company has conducted preliminary
discussions concerning borrowings under private or public debt facilities to
refinance such debt.
Although there can be no assurance, the Company expects that it will be able
to replace its accounts receivable facility and refinance its outstanding 8%
notes.
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.
Further information concerning such claims and litigation is contained in Note 6
of the Notes to Consolidated Financial Statements.
19
Borg-Warner Security Corporation
Consolidated Statement of Operations
Year Ended December 31,
------------------------------------------------------------------------------------------------------------------------
(millions of dollars, except per share) 1992 1993 1994
------------------------------------------------------------------------------------------------------------------------
Net service revenues $1,620.6 $1,764.6 $1,792.9
Cost of services 1,258.9 1,390.3 1,437.3
Selling, general and administrative expenses 220.1 197.0 231.2
Depreciation 51.5 55.3 57.6
Amortization of excess purchase price over net assets acquired 21.4 16.5 16.1
Other income, net -- Note 10 (17.2) (3.1) (9.8)
Non-recurring elimination of excess purchase price over net assets acquired - 250.0 -
Interest expense and finance charges 47.9 51.5 50.4
------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before taxes 38.0 (192.9) 10.1
Provision (benefit) for income taxes -- Note 11 (19.7) 22.2 (3.0)
------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations 57.7 (215.1) 13.1
Loss from discontinued operations (12.1) (1.5) -
------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before extraordinary items and cumulative effect of accounting change 45.6 (216.6) 13.1
Extraordinary items:
Loss from early extinguishment of debt, net of tax effects ($4.2 million
benefit in 1992 and $5.3 million benefit in 1993) -- Note 5 (7.1) (9.1) -
Cumulative effect of initial application of new accounting standards -- Note 1 - (17.7) -
------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 38.5 ($243.4) $ 13.1
========================================================================================================================
Earnings (loss) per common share:
Continuing operations $ 2.94 $ (9.41) $ 0.56
Discontinued operations (0.61) (0.07) -
Extraordinary items (0.37) (0.40) -
Cumulative effect of initial application of new accounting standards - (0.77) -
------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) per share $ 1.96 ($10.65) $ 0.56
========================================================================================================================
(See accompanying notes to financial statements)
20
Borg-Warner Security Corporation
Consolidated Balance Sheet
December 31,
----------------------------------------------------------------------------------------------------------
(millions of dollars) 1993 1994
----------------------------------------------------------------------------------------------------------
Assets
----------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 11.2 $ 15.8
Receivables, net 82.7 106.7
Inventories 10.8 12.2
Other current assets 23.5 24.8
----------------------------------------------------------------------------------------------------------
Total current assets 128.2 159.5
Property, plant and equipment
Land and buildings 53.0 50.7
Machinery and equipment 98.3 79.3
Subscribers' installations 353.2 365.2
Capital leases 44.4 37.0
Construction in progress 3.4 5.5
----------------------------------------------------------------------------------------------------------
552.3 537.7
Less accumulated depreciation 261.0 242.6
----------------------------------------------------------------------------------------------------------
Net property, plant and equipment 291.3 295.1
Net excess purchase price over net assets acquired 288.8 286.5
Deferred tax asset, net 37.4 50.8
Other assets 44.8 38.4
----------------------------------------------------------------------------------------------------------
Total other assets 371.0 375.7
----------------------------------------------------------------------------------------------------------
$790.5 $830.3
==========================================================================================================
Liabilities and Stockholders' Equity
----------------------------------------------------------------------------------------------------------
Notes payable $ 10.7 $ 14.5
Accounts payable and accrued expenses 171.8 181.8
----------------------------------------------------------------------------------------------------------
Total current liabilities 182.5 196.3
Long-term debt 446.8 454.0
Other long-term liabilities 133.7 136.2
Capital stock:
Common stock, issued 22,235,700 shares in 1993 and 22,435,700 shares in 1994 0.2 0.2
Series I non-voting common stock, issued 2,720,000 shares - -
Capital in excess of par value 28.2 30.9
Retained earnings 15.9 29.7
Notes receivable -- management stock purchase (1.8) (1.0)
Cumulative translation adjustment 1.3 (0.5)
----------------------------------------------------------------------------------------------------------
43.8 59.3
Treasury common stock, at cost, 2,151,108 shares in 1993 and 2,237,344 shares in 1994 (16.3) (15.5)
----------------------------------------------------------------------------------------------------------
Total stockholders' equity 27.5 43.8
----------------------------------------------------------------------------------------------------------
$790.5 $830.3
==========================================================================================================
(See accompanying notes to financial statements)
21
Borg-Warner Security Corporation
Consolidated Statement of Cash Flows
Year Ended December 31,
-------------------------------------------------------------------------------------------------------------
(millions of dollars) 1992 1993 1994
-------------------------------------------------------------------------------------------------------------
Operating:
Continuing operations:
Net earnings (loss) $ 57.7 ($215.1) $ 13.1
Adjustments to reconcile net earnings (loss) to net cash flows
provided by continuing operations:
Non-cash charges to earnings:
Depreciation and amortization 72.9 71.8 73.7
Non-recurring elimination of excess purchase price over net assets acquired - 250.0 -
Amortization of debt discounts 31.8 2.0 2.1
Changes in assets and liabilities:
(Increase) in receivables (20.1) (4.7) (22.0)
(Increase) decrease in other current assets (4.6) 2.1 (1.1)
Increase (decrease) in accounts payable and accrued expenses 13.9 (0.4) 10.0
Net change in other long-term assets and liabilities (6.7) (38.9) (11.1)
Gain on sales of businesses and other assets (37.1) (1.8) (8.5)
-------------------------------------------------------------------------------------------------------------
Net cash flows provided by continuing operations 107.8 65.0 56.2
Discontinued operations:
Net loss (12.1) (1.5) -
Other cash flows related to discontinued operations 15.2 (11.2) (2.2)
-------------------------------------------------------------------------------------------------------------
Net cash flows provided by (used in) discontinued operations 3.1 (12.7) (2.2)
-------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 110.9 52.3 54.0
Investing:
Capital expenditures (70.2) (68.8) (67.0)
Payments related to businesses acquired (34.7) (4.8) (9.0)
Proceeds from sales of fixed and other assets 181.0 5.7 16.9
-------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 76.1 (67.9) (59.1)
Financing:
Net (decrease) increase in notes payable (16.0) (19.3) 3.8
Increases in long-term debt 102.6 149.5 77.7
Reductions in long-term debt (31.6) (189.3) (72.6)
Net proceeds from the issuance of common stock - 63.5 -
Cash outflows related to early extinguishment of debt (224.5) (246.4) -
BW-Automotive repayment/assumption of Company indebtedness - 249.9 -
Sales of treasury common stock 3.7 3.2 0.8
Purchases of treasury common stock (13.5) (0.1) -
-------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (179.3) 11.0 9.7
Effect of exchange rate changes on cash and cash equivalents (1.2) - -
-------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 6.5 (4.6) 4.6
Cash and cash equivalents at beginning of year 9.3 15.8 11.2
-------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 15.8 $ 11.2 $ 15.8
=============================================================================================================
Supplemental cash flow information:
Interest paid $ 48.9 $ 61.1 $ 46.0
Income taxes paid (refunded) 26.4 21.3 (3.2)
(See accompanying notes to financial statements)
22
Borg-Warner Security Corporation
Consolidated Statement of Stockholders' Equity
Years Ended December 31, 1992 1993 1994
-------------------------------------------------------------------------------------------------------------------
(millions of dollars, except share data) Shares Amount Shares Amount Shares Amount
-------------------------------------------------------------------------------------------------------------------
Common Stock
Beginning balance 20,000,700 $ 0.2 20,000,700 $ 0.2 24,955,700 $ 0.2
Shares issued in initial public offering - - 3,795,000 - - -
Conversion of Series I non-voting shares
to common shares - - 1,160,000 - 200,000 -
-------------------------------------------------------------------------------------------------------------------
Balance at December 31 20,000,700 0.2 24,955,700 0.2 25,155,700 0.2
===================================================================================================================
Capital in Excess of Par Value
Beginning balance 195.4 187.3 28.2
Shares issued in initial public offering - 63.5 -
Shares issued under stock option and
related plans (8.1) (2.1) 0.2
Spin-Off of BW-Automotive - (230.0) -
Tax benefit from trust distribution and
exercise of stock options - 9.5 2.5
-------------------------------------------------------------------------------------------------------------------
Balance at December 31 187.3 28.2 30.9
-------------------------------------------------------------------------------------------------------------------
Retained Earnings
Beginning balance 496.4 520.6 15.9
Net earnings (loss) 38.5 (243.4) 13.1
Spin-Off of BW-Automotive - (259.9) -
Adjustment for deferred pension experience loss (14.3) (1.4) 0.7
-------------------------------------------------------------------------------------------------------------------
Balance at December 31 520.6 15.9 29.7
-------------------------------------------------------------------------------------------------------------------
Notes receivable--management stock purchase
Beginning balance (2.2) (2.1) (1.8)
Net activity 0.1 0.3 0.8
-------------------------------------------------------------------------------------------------------------------
Balance at December 31 (2.1) (1.8) (1.0)
-------------------------------------------------------------------------------------------------------------------
Cumulative Translation Adjustment
Beginning balance 20.5 9.3 1.3
Spin-Off of BW-Automotive - (7.7) -
Cumulative translation adjustment (11.2) (0.3) (1.8)
-------------------------------------------------------------------------------------------------------------------
Balance at December 31 9.3 1.3 (0.5)
-------------------------------------------------------------------------------------------------------------------
Investment Valuation Allowance
Beginning balance (5.1) - -
Baker Hughes, Inc. investment value adjustment 5.1 - -
-------------------------------------------------------------------------------------------------------------------
Balance at December 31 0.0 0.0 0.0
-------------------------------------------------------------------------------------------------------------------
Treasury Stock
Beginning balance 1,164,400 (36.9) 1,188,316 (38.6) 2,151,108 (16.3)
Acquired shares 397,331 (13.5) 6,083 (0.1) - -
Shares issued under stock option and
related plans (373,415) 11.8 (203,291) 3.2 (113,764) 0.8
Conversion of Series I non-voting shares
to common shares - - 1,160,000 - 200,000 -
Spin-Off of BW-Automotive - - - 19.2 - -
-------------------------------------------------------------------------------------------------------------------
Balance at December 31 1,188,316 (38.6) 2,151,108 (16.3) 2,237,344 (15.5)
===================================================================================================================
Total Stockholders' Equity $676.7 $ 27.5 $ 43.8
===================================================================================================================
(See accompanying notes to financial statements)
23
Borg-Warner Security Corporation
Notes to Consolidated Financial Statments
Note 1 Summary of Accounting Policies
The following paragraphs briefly describe significant accounting policies.
Certain 1992 and 1993 amounts have been reclassified to conform with the 1994
presentation. Prior to an initial public offering in January 1993, the name of
the Company was changed from Borg-Warner Corporation to Borg-Warner Security
Corporation.
Principles of consolidation
The consolidated financial statements include all significant subsidiaries. In
January 1993 the Company distributed to its shareholders ("Spin-Off") all of the
stock of Borg-Warner Automotive, Inc. ("BW-Automotive"). Therefore, BW-
Automotive is treated as a discontinued operation for all periods presented.
(See Note 3).
Cash and cash equivalents
Cash and cash equivalents consists primarily of cash and certificates of deposit
with original maturities of three months or less.
Inventories
Inventories are valued at the lower of cost or market. Cost of substantially all
inventories is determined by the first-in, first-out (FIFO) method.
Property, plant and equipment and depreciation
Property, plant and equipment is valued 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 a straight-line basis over the
estimated useful lives of related assets. The costs of alarm subscribers'
installations are capitalized and depreciated over useful lives ranging from
8-15 years.
Income taxes
Income taxes are determined using the liability method, under which deferred tax
assets and liabilities are determined based on the differences between the
financial accounting and tax 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 11).
Retirement benefit plans
A number of eligible salaried and hourly employees participate in contributory
or noncontributory defined benefit or defined contribution plans. Funding policy
is based upon independent actuarial valuations and is within the limits required
by ERISA for U.S. defined benefit plans.
The benefits provided to certain salaried employees covered under various
defined benefit plans are based on years of service and final average pay and
utilize the projected unit credit method for cost allocation. The benefits
provided to certain hourly employees under various defined benefit plans are
based on years of service and utilize the unit credit method for cost
allocation.
A number of employees in the U.S. participate in defined contribution
plans. Depending on the plan, 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.
Postretirement benefits
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" ("SFAS 106") and elected immediate recognition of the $15.0 million
obligation and recorded a charge of $8.3 million (net of the related income tax
benefit of $5.1 million) or $0.37 per share to reflect the cumulative effect of
the change in accounting for periods prior to 1993. This new standard requires
that the expected cost of retiree health benefits be charged to expense during
the years that the employees render service rather than the Company's past
practice of recognizing these costs on a cash basis.
24
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
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. Consistent with Securities and Exchange
Commission Staff Accounting Bulletin Number 92, in 1993 the Company changed the
method of selecting the discount rate from an overall cost of capital based rate
to a rate based on risk-free monetary asset yields for securities with similar
maturities. This change resulted in a reduction in the discount rate from 10% to
4% and a change in method of estimating the future cash flows related to this
obligation. The cumulative effect was a charge to earnings of $9.4 million (net
of applicable taxes of $6.0 million) or $0.40 per share. This amount, included
in "Cumulative effect of initial application of new accounting standards" in the
Statement of Operations, was recorded in the fourth quarter of 1993. This
accounting change did not have a material impact on earnings from continuing
operations. In 1994 the discount rate used to value the future obligation was
increased to 7%.
Amortization of excess purchase price over net assets acquired
Excess purchase price over net assets acquired is being amortized on a straight-
line basis over five to forty years, with the majority being amortized over
forty 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. If the review indicates a decline in the carrying value,
the Company would adjust the amortization accordingly.
Intercompany allocations and transactions with BW-Automotive
Interest expense through the Spin-Off date has been allocated to the
discontinued BW-Automotive operations on the basis of BW-Automotive's relative
capital investment. Interest and taxes paid as shown on the Consolidated
Statement of Cash Flows include the amounts related to both the continuing
operations and discontinued BW-Automotive operations. Costs incurred at
corporate headquarters in 1992 have been charged to BW-Automotive on the basis
of a calculation of the estimated cost incurred related solely to the BW-
Automotive operations. Such cost was charged to BW-Automotive in 1993 and 1994
based on a service agreement with the Company. Income taxes have been allocated
to the BW-Automotive operations based on a calculation of the BW-Automotive
operations' relative share of the combined operations' income taxes. To the
extent the BW-Automotive operations operated at a loss, the tax benefit of such
a loss was limited to the amount offset by the profits for the rest of the
Company for that year. In those taxing jurisdictions in which the BW-Automotive
operations operate independent of the Company's other units, taxes have been
calculated independently on such operations. The Company and BW-Automotive have
entered into a tax sharing agreement which calls for BW-Automotive to pay the
Company for any operating loss carryforward apportioned to it as part of the
Spin-Off at such time as the benefits related to such carryforward are realized
by BW-Automotive.
Revenue recognition
Revenue is recognized at the time services are provided. In certain
circumstances this can result in revenue recognition prior to customer billing
and revenue deferral from advance billings.
Earnings per common share
Earnings per common share are based on average outstanding common shares and
common share equivalents. Common share equivalents recognize the dilutive
effects of common shares that may be issued in the future upon exercise of
certain stock options.
25
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
Note 2-Balance Sheet Information
Detailed balance sheet data are as follows:
December 31,
---------------------------------------------------------------
(millions of dollars) 1993 1994
---------------------------------------------------------------
Receivables:
Customers $78.4 $111.6
Refundable income taxes 10.7 -
Other 2.4 2.8
--------------------------------------------------------------
91.5 114.4
Less allowance for losses 8.8 7.7
--------------------------------------------------------------
Net receivables $82.7 $106.7
==============================================================
Accounts payable and accrued expenses:
Trade payables $23.1 $29.8
Payroll and related 53.2 57.7
Casualty insurance 40.5 43.9
Interest 8.3 7.6
Liabilities to former shareholders 11.5 10.5
Deferred income 11.3 11.2
Other 23.9 21.1
--------------------------------------------------------------
Total accounts payable and accrued expenses $171.8 $181.8
==============================================================
In November 1994, the Company replaced its previous $150 million receivables
purchase facility with a $130 million receivables transfer facility expiring
September 1995. The outstanding balance of receivables sold to the transfer
facility at December 31, 1994 was $112 million, compared with $124 million sold
at December 31, 1993. Receivables are sold without recourse to the Company.
Selling, general and administrative expenses include provisions for losses on
receivables of $4.4 million in 1992, $3.7 million in 1993, and $5.5 million in
1994. Receivables are recorded at expected realizable value, net of allowances.
Accumulated amortization related to capital leases amounted to $23.5 million
at December 31, 1993 and $15.6 million at December 31, 1994. Accumulated
amortization related to excess of purchase price over net assets acquired
amounted to $75.3 million at December 31, 1993 and $78.5 million at December 31,
1994.
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 $3.8 million at December 31, 1993 and $18.3 million at December
31, 1994.
The non-current portion of the casualty insurance liability, included in other
long-term liabilities, was $32.8 million and $44.2 million at December 31, 1993
and 1994, respectively. The total discounted insurance accrual, including the
portion reflected in accounts payable and accrued liabilities, was $73.3 million
and $88.1 million at December 31, 1993 and 1994, respectively. The estimated
aggregate undiscounted insurance liability was $81.0 million and $99.6 million
at December 31, 1993 and 1994, respectively.
26
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
Note 3-Discontinued Operations
On January 27, 1993 all of the outstanding common stock of BW-Automotive was
distributed to the Company's stockholders. Following the distribution, the
Company does not have any operations apart from the protective services
business. Therefore, the remaining $250 million of excess of purchase price over
net assets acquired not directly attributed to the protective services business
was written off as a charge to earnings in the first quarter of 1993.
BW-Automotive has been treated as discontinued in the consolidated financial
statements for all periods presented, and previously reported results have been
restated. Net revenues for previously consolidated BW-Automotive operations were
$926.0 million and $66.5 million for 1992 and 1993, respectively. Net losses
from the discontinued BW-Automotive operations were $12.1 million and $1.5
million, for 1992 and 1993, respectively. The revenues and net loss for 1993 are
for the period from January 1 to January 27, 1993.
BW-Automotive earnings reflect allocated interest of $44.8 million and $3.1
million in 1992 and 1993, respectively. BW-Automotive income tax expense of $2.7
million for 1992 and a $0.4 million benefit in 1993 have been calculated based
on BW-Automotive's share of combined operations and participation in
consolidated returns. BW-Automotive earnings also reflect a charge for costs
incurred at corporate headquarters of $4.2 million in 1992. This charge was
based on the estimated costs incurred related solely to the BW-Automotive
operations.
The Company and BW-Automotive have entered into agreements to provide for the
allocation of certain corporate overhead expenses. During 1993 and 1994, BW-
Automotive paid the Company $8.6 million and $2.8 million, respectively, for
office space and services rendered under the agreements. BW-Automotive also paid
the Company $1 million in 1993 under a Trademark and Trade Name License
Agreement. In 1994 BW-Automotive paid $10 million to the Company for the
purchase of certain trademarks and other rights. In 1993 the Company paid BW-
Automotive $1.2 million under a tax sharing agreement related to settlement of
1992 federal income tax liabilities.
Note 4-Commitments
The Company is committed to pay rents on non-cancelable leases with terms
exceeding one year. Rental amounts committed in future years are summarized at
December 31, 1994 as follows:
(millions of dollars)
------------------------------------------------------------------------------
Fiscal Operating Leases Capital Leases Total
------------------------------------------------------------------------------
1995 $20.0 $11.3 $31.3
1996 16.8 7.6 24.4
1997 12.6 2.7 15.3
1998 8.6 0.8 9.4
1999 5.5 0.6 6.1
2000 and after 5.7 4.4 10.1
------------------------------------------------------------------------------
Total $69.2 $27.4 $96.6
==============================================================================
Total rental expense amounted to $20.4 million in 1992, $25.3 million in 1993
and $25.6 million in 1994. Future capital lease rental payments include
executory costs of $1.0 million, interest expense of $4.2 million and principal
payments of $22.2 million. The 1995 principal payments of $9.2 million are
included in notes payable.
27
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
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.
Debt December 31, 1993 December 31, 1994
----------------------------------------------------------------------------------------------------
(millions of dollars) Current Long-Term Current Long-Term
----------------------------------------------------------------------------------------------------
Bank borrowings (at an average rate of
4.4% in 1993 and 5.4% in 1994) $ -- $119.7 $ -- $88.0
Bank revolving commitment loan
due through 1999 (at an average rate of
6.9% in 1993 and 7.6% in 1994) -- 65.0 -- 105.2
8% notes (face amount of $100 million
due 1996) -- 95.5 -- 97.5
Unsecured notes (at an average rate of
10.4% in 1993 and 5.9% in 1994) 1.8 0.9 5.3 1.3
Capital lease liability (at an average rate
of 9.5% in 1993 and 9.2% in 1994) 8.9 16.8 9.2 13.0
91/8% senior subordinated notes (face
amount of $150 million due 2003) -- 148.9 -- 149.0
----------------------------------------------------------------------------------------------------
Total notes payable and long-term debt $10.7 $446.8 $14.5 $454.0
====================================================================================================
Maturities of long-term debt, including unamortized discount of $3.5 million,
are as follows: 1996, $118.1 million; 1997, $55.3 million; 1998, $87.6 million;
1999, $43.0 million; and after 1999, $153.5 million.
At December 31, 1994, the Company had a $190 million bank revolving credit
facility, available until 1999. The committed amount under this facility reduces
semi-annually during the remaining commitment period. Available future
commitments at December 31 are as follows: 1995, $166 million; 1996, $138
million; 1997, $95 million; and 1998, $43 million. Unused commitments at
December 31, 1994 were $84.8 million. Included in long-term debt at December 31,
1994 is $38.0 million of borrowings under short-term bank lines which are
supported by the unutilized portion of the revolving credit facility and are
therefore classified as long-term debt.
Interest under the revolving credit facility is charged at various prime-and
LIBOR-based interest rate options. Compensating cash balances are not required
but facility fees and commitment fees are paid under the revolving credit
agreement.
The revolving credit facility contains numerous financial and operating
covenants including, among others, covenants requiring the Company to maintain
certain financial ratios and restricting its ability to incur additional
indebtedness, to create or permit to exist certain liens or to pay dividends. In
addition, the Company pledged the stock of certain of its subsidiaries under
this agreement.
In June 1994, the Company amended its revolving credit and letter of credit
facilities, principally to reduce pricing and amend covenants related to
leverage, fixed charge coverage and net worth tests. In December 1994, the
Company negotiated waivers to certain financial covenants under its credit
facilities. There was no impact to the Company's liquidity as a result of the
revised covenant limits, and the Company was in compliance with all applicable
covenants at December 31, 1994. In March 1995, the Company amended its credit
facilities principally to change pricing and to amend covenants related to
earnings, leverage, fixed charge coverage, net worth, capital expenditures and
acquisitions.
In May 1993, the Company issued $150 million principal amount of 91/8% senior
subordinated debentures due 2003, discounted to yield 91/4%. Interest is payable
semi-annually. These notes are unsecured and subordinated as to right of payment
to other borrowings. The notes may be redeemed on or after May 1, 1998 at
various premiums.
28
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
In 1993, a net of tax loss of $9.1 million was realized as an extraordinary
item. This loss related to the redemption of $216.7 million principal amount of
13% Junior Subordinated Discount Debentures and $15.2 million principal amount
of 12-3/4% Senior Subordinated Debentures.
A net of tax loss of $7.1 million was realized as an extraordinary item in
1992 related to the redemption of $155.0 million principal amount of 13% Junior
Subordinated Discount Debentures and $58.2 million principal amount of 14%
Senior Subordinated Discount Debentures.
Note 6-Contingent Liabilities
The Company's discontinued property and casualty insurance subsidiary
("Centaur") ceased writing insurance in 1984 and has been operating under
rehabilitation since September 1987. Rehabilitation is a process supervised by
the Illinois Director of Insurance to attempt to compromise claim liabilities at
an aggregate level that is not in excess of Centaur's assets. In rehabilitation,
Centaur's assets are currently being used to satisfy claim liabilities under
direct insurance policies written by Centaur. Any remaining assets will be
applied to Centaur's obligations to other insurance companies under reinsurance
contracts. If all of Centaur's obligations are not satisfied through
rehabilitation, it is possible that satisfaction could be sought from the
Company for Centaur's liabilities.
The foregoing has resulted in one pending lawsuit against the Company, certain
of its current and former subsidiaries, and directors and officers of certain
current and former subsidiaries for recovery of alleged damages incurred because
of Centaur's failure to satisfy its reinsurance obligations. The lawsuit seeks
an aggregate of $24 million for current losses, $66 million for future losses
and $270 million for punitive damages. The Company believes that any damages for
failure to satisfy reinsurance obligations are solely the responsibility of
Centaur and that the resolution of the lawsuit relating to Centaur, including
the Company's indemnification obligations to certain former officers and
directors, will not have a material adverse effect on its financial position or
future operating results; however, no assurance can be given as to the ultimate
outcome with respect to such lawsuit.
The Company and certain of its current and former subsidiaries have been
identified by the U.S. Environmental Protection Agency and certain state
environmental agencies as potentially responsible parties ("PRPs") at several
hazardous waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act ("Superfund") and equivalent state laws and, as
such, may be liable for the cost of cleanup and other remedial activities at
these sites. Responsibility for cleanup and other remedial activities at a
Superfund site is typically shared among PRPs based on an allocation formula.
The Company believes that none of these matters individually or in the
aggregate will have a material adverse effect on its financial position or
future operating results, generally either because the maximum potential
liability at a site is not large or because liability will be shared with other
PRPs, although no assurance can be given with respect to the ultimate outcome
of any such liability. Based on its estimate of allocations of liability among
PRPs, the probability that other PRPs, many of whom are large, solvent public
companies, will fully pay the costs allocated to them, currently available
information concerning the scope of contamination at such sites, estimated
remediation costs at such sites, estimated legal fees and other factors, the
Company has aggregate amount of approximately $11 million (relating to
environmental matters with respect to discontinued operations of the Company).
If any environmental liability claim relating to the Company's former chemical
and plastics business is made, the Company is indemnified by the purchaser of
such business, General Electric Company. Since the disposition, the Company has
notified General Electric Company of various claims made with respect to the
Company's former chemical and plastics business and General Electric Company has
assumed all of such claims and has not contested its indemnification
obligations. There is no dollar limitation on the General Electric Company's
indemnification obligations and
29
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
there are no other material limitations or exclusions with respect thereto. If
any environmental liability claim relating to the operations of the Company's
discontinued automotive subsidiary is made, the Company will be indemnified by
such former subsidiary.
The Company believes that the various asserted claims and litigation in which
it is involved will not materially affect its financial position or future
operating results, although no assurance can be given with respect to the
ultimate outcome of any such claim or litigation.
The Company has guaranteed borrowings of $2.0 million of affiliates and
discontinued operations as of December 31, 1994.
Note 7-Retirement Benefits
The Company has various defined benefit and defined contribution plans which
cover eligible employees.
Retirement benefit expense amounted to $4.0 million, $4.8 million and $5.8
million in 1992, 1993 and 1994, respectively. This expense includes
postretirement life insurance and medical benefits of $1.0 million, $0.4 million
and $0.2 million for 1992, 1993 and 1994, respectively. Also included are
defined contribution plan expenses of $1.6 million, $1.4 million and $1.6
million in 1992, 1993 and 1994, respectively.
The following table sets forth the funded status of the defined benefit plans:
Funded Status December 31, 1993 December 31, 1994
--------------------------------------------------------------------------------------
(millions of dollars) Over Under Over Under
--------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefits $40.1 $44.4 $37.8 $39.5
Non-vested benefits 0.9 1.8 1.1 1.9
--------------------------------------------------------------------------------------
Accumulated benefit obligations 41.0 46.2 38.9 41.4
Effect of projected future compensation levels 7.5 - 5.1 -
--------------------------------------------------------------------------------------
Projected benefit obligation 48.5 46.2 44.0 41.4
Plan assets at fair value 45.0 30.9 44.4 27.9
--------------------------------------------------------------------------------------
Assets in excess of (less than) projected benefit
obligation (3.5) (15.3) 0.4 (13.5)
Unrecognized net loss 11.5 11.6 6.4 10.2
Unrecognized prior service cost (2.0) 3.4 (1.9) 3.0
--------------------------------------------------------------------------------------
Net asset (liability) before minimum liability 6.0 (0.3) 4.9 (0.3)
Adjustment required to recognize
minimum liability - (15.0) - (13.2)
--------------------------------------------------------------------------------------
Net asset (liability) on balance sheet $6.0 ($15.3) $4.9 ($13.5)
======================================================================================
Assets held in trust for the defined benefit plans are comprised of marketable
equity and fixed income securities.
Net periodic pension expense for the defined benefit plans was comprised as
follows:
Year Ended December 31,
----------------------------------------------------------------------------
(millions of dollars) 1992 1993 1994
----------------------------------------------------------------------------
Service cost $2.0 $2.2 $3.0
Interest cost 4.2 6.7 6.7
Actual return on assets (4.3) (8.5) 1.1
Net amortization and deferrals (0.5) 2.6 (6.9)
----------------------------------------------------------------------------
Net periodic pension cost $1.4 $3.0 $3.9
============================================================================
30
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
The Company's assumptions used as of December 31, 1992, 1993 and 1994 in
determining the pension cost and pension liability shown above were as
follows:
(percent) 1992 1993 1994
--------------------------------------------------------------------
Discount rate 8.5 7.5 8.5
Rate of salary progression 4.5 4.0 4.0
Long-term rate of return on assets 9.5-10 9.5-10 9.5
The Company also has postretirement benefits covering certain existing and
former employees, including employees of certain businesses which have been
divested by the Company. The Company adopted SFAS 106 on January 1, 1993, which
resulted in an after-tax charge of $8.3 million and is included on the
Statement of Operations under the caption "Cumulative effect of initial
application of new accounting standards." In 1993, SFAS 106 did not have a
material impact on the Company's results from continuing operations. The
liabilities for these benefits as of December 31, 1994 and 1993 are $12.9
million and $14.7 million, respectively, and are included in "Other long-term
liabilities." The discount rate used in determining this liability was 8.5% and
assumed medical expense increases of 9.5% per year for 1995 grading to 5.5% per
year by 1999.
Note 8--Stock Options and Management
Stock Purchases
Stock Option Plan
The Company has two plans which authorize the grant of options to purchase
3,000,000 shares of the Company's common stock. All options granted to date
carry exercise prices ranging from $5.00 to $21.19 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.
In 1992, 1993 and 1994 there were no options canceled or converted.
Common shares under option for the years ended December 31, 1992, 1993 and
1994 are summarized as follows:
Number of Shares Aggregate Option Price
-----------------------------------------------------------------------------------------------
(shares in thousands, dollars in millions) 1992 1993 1994 1992 1993 1994
-----------------------------------------------------------------------------------------------
Shares under option at January 1 1,541 1,339 1,472 $12.6 $13.9 $19.9
Granted 251 385 593 4.1 8.0 9.7
Exercised (372) (203) (114) (1.9) (1.3) (1.1)
Forfeited (81) (49) (108) (0.9) (0.7) (1.8)
-----------------------------------------------------------------------------------------------
Shares under option at end
of period 1,339 1,472 1,843 $13.9 $19.9 $26.7
===============================================================================================
Options exercisable 954 907 881
=====================================================================
Shares available for future grants 8 172 186
=====================================================================
Of the 1,843,465 options outstanding at December 31, 1994, 880,989 are presently
exercisable and the remaining 962,476 will vest over the next three-year period
based upon periods of employment.
In connection with the Spin-Off, each outstanding option was exchanged for (i)
an adjusted option to purchase the same number of post-Spin-Off shares of common
stock at a price equal to 50% of the pre-Spin-Off exercise price, and (ii) an
option to purchase the same number of shares of common stock of BW-Automotive at
a price equal to 50% of the pre-Spin-Off exercise price. Thus, the exercise
price of an option held prior to the Spin-Off equals the sum of the exercise
prices of the two options for which it was exchanged.
Notes Receivable--Management
Stock Purchase
Included among the Company's equity holders are members of management. Purchases
of shares by management have been funded in part by loans from the Company.
These loans, which totalled approximately $1.8 million at December 31, 1993 and
$1.0 million at December 31, 1994, bear interest of approximately 6% and are
offset against stockholders' equity in the Consolidated Balance Sheets at such
dates.
31
Borg--Warner Security Corporation
Notes to Consolidated Financial Statements, continued
Note 9-Business Segment Information
The Company's operations have been classified into four business segments:
guard, alarm, armored and courier services. The guard segment provides contract
security officers to patrol client facilities, monitor electronic systems and
control public and employee access. The alarm segment primarily designs,
installs, monitors and services sophisticated electronic security systems and
fire and intrusion detection systems. The armored segment transports currency,
securities and other valuables. Additionally, this segment provides full-service
automated teller machine operations and cash management services such as deposit
verification and currency processing. The courier segment provides
transportation of time-sensitive, non-negotiable financial documents and small
packages.
Intersegment sales are not significant. Operating profit by business segment
represents total revenues less operating expenses, depreciation and
amortization, and excludes interest income, interest expense, income taxes and
net unallocated corporate expenses.
Identifiable assets are those assets employed in each segment's operation,
including an allocated value to each segment of cost in excess of net assets
acquired. Corporate assets consist principally of cash and cash equivalents,
certain corporate receivables and other assets.
Summarized financial information by business segment for 1992, 1993 and 1994
is as follows:
Year Ended December 31,
-----------------------------------------------------------------------------
(millions of dollars) 1992 1993 1994
-----------------------------------------------------------------------------
Net sales:
Guard services $1,098.0 $1,198.0 $1,209.4
Alarm services 203.5 213.2 206.2
Armored services 156.4 180.9 211.2
Courier services 162.7 172.5 166.1
-----------------------------------------------------------------------------
Total net sales $1,620.6 $1,764.6 $1,792.9
=============================================================================
Operating profit:
Guard services $55.4 $58.5 $54.5
Alarm services 29.7 31.1 14.9
Armored services 10.6 13.3 6.7
Courier services 10.3 7.4 1.1
-----------------------------------------------------------------------------
Total operating profit 106.0 110.3 77.2
-----------------------------------------------------------------------------
Corporate expenses (37.3) (4.8) (26.5)
Other income 17.2 3.1 9.8
Interest expense (47.9) (51.5) (50.4)
Non-recurring elimination of excess purchase
price over net assets acquired - (250.0) -
-----------------------------------------------------------------------------
Earnings (loss) before taxes 38.0 (192.9) 10.1
Tax (provision) benefit 19.7 (22.2) 3.0
-----------------------------------------------------------------------------
Earnings (loss) from continuing operations $57.7 ($215.1) $13.1
=============================================================================
Depreciation:
Guard services $6.5 $7.0 $7.4
Alarm services 33.6 36.5 38.0
Armored services 6.0 6.7 7.0
Courier services 4.8 4.7 4.8
Corporate 0.6 0.4 0.4
-----------------------------------------------------------------------------
Total depreciation $51.5 $55.3 $57.6
=============================================================================
32
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
Year Ended December 31,
----------------------------------------------------------------
(millions of dollars) 1992 1993 1994
----------------------------------------------------------------
Amortization of excess purchase price
over net assets acquired:
Guard services $9.0 $11.5 $11.1
Alarm services 2.6 2.2 2.3
Armored services 1.0 1.3 1.3
Courier services 1.4 1.3 1.3
Corporate 7.4 0.2 0.1
----------------------------------------------------------------
Total amortization $21.4 $16.5 $16.1
================================================================
Capital expenditures:
Guard services $7.5 $6.8 $8.6
Alarm services 46.1 49.8 44.6
Armored services 12.0 5.7 6.2
Courier services 4.6 6.5 7.6
----------------------------------------------------------------
Total capital expenditures $70.2 $68.8 $67.0
================================================================
Identifiable assets:
Guard services $228.4 $235.0
Alarm services 340.0 361.2
Armored services 76.1 90.4
Courier services 39.4 46.3
Corporate 106.6 97.4
----------------------------------------------------------------
Total identifiable assets $790.5 $830.3
================================================================
Note 10--Other Income, Net
Items included in other income consist of:
Year Ended December 31,
----------------------------------------------------------------
(millions of dollars) 1992 1993 1994
----------------------------------------------------------------
Interest income $1.3 $0.2 $0.1
Gain on sales of assets, net 6.5 1.9 8.5
Other, including dividend income 9.4 1.0 1.2
----------------------------------------------------------------
Total $17.2 $3.1 $9.8
================================================================
In 1992, other income includes a $7.5 million gain on the settlement of a note
related to a prior divestiture. In 1994, gain on sales of assets includes a $9.9
million gain on the sale of certain trademarks and other rights to BW-
Automotive.
33
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
Note 11-Income Taxes
Earnings (loss) before income taxes from continuing operations and provision
(benefit) for income taxes consist of:
1992 1993 1994
-----------------------------------------------------------------------------------------------------------
(millions of dollars) U.S. Non-U.S. Total U.S. Non-U.S. Total U.S. Non-U.S. Total
-----------------------------------------------------------------------------------------------------------
Earnings (loss) before
income taxes $32.2 $5.8 $38.0 ($197.4) $ 4.5 ($192.9) $7.4 $2.7 $10.1
===========================================================================================================
Income taxes:
Current:
Federal/Foreign $0.6 $3.7 $4.3 $4.1 $1.6 $5.7 $3.8 $1.7 $5.5
State 5.0 - 5.0 3.0 - 3.0 0.9 - 0.9
-----------------------------------------------------------------------------------------------------------
5.6 3.7 9.3 7.1 1.6 8.7 4.7 1.7 6.4
Deferred (21.0) - (21.0) 13.5 - 13. 5 (9.4) - (9.4)
-----------------------------------------------------------------------------------------------------------
(15.4) 3.7 (11.7) 20.6 1.6 22.2 (4.7) 1.7 (3.0)
Business tax credits (8.0) - (8.0) - - - - - -
-----------------------------------------------------------------------------------------------------------
Provision (benefit) for
income taxes ($23.4) $3.7 ($19.7) $20.6 $1.6 $22.2 ($4.7) $1.7 ($3.0)
===========================================================================================================
The analysis of the variance of income taxes as reported from income taxes
computed at the U.S. statutory federal income tax rate for continuing operations
is as follows:
(millions of dollars) 1992 1993 1994
------------------------------------------------------------------------------
Income taxes at U.S. statutory rate of 34%
in 1992, and 35% in 1993 and 1994 $12.9 ($67.5) $3.5
Increases (decreases) resulting from:
Non-recurring elimination of excess
purchase price over net assets acquired - 87.5 -
Change in tax basis (30.6) - (7.0)
State income taxes 4.1 2.0 0.6
Business tax credits, net (8.0) - -
Impact of AMT generated tax liability 2.7 - -
Non-temporary differences (2.1) 0.2 1.0
Net operating loss carryforward benefit (0.8) - -
Other, net 2.1 - (1.1)
------------------------------------------------------------------------------
Income taxes reported ($19.7) $22.2 ($3.0)
==============================================================================
Following are the gross components of the deferred tax (asset) liability as of
December 31, 1993 and 1994:
(millions of dollars) 1993 1994
-----------------------------------------------------------------------
Deferred tax liabilities $96.8 $88.0
Deferred tax assets $76.9 $73.9
Net operating loss carryforward 18.5 20.9
Tax credit carryforwards 55.0 55.8
Valuation allowance (16.2) (11.8)
-----------------------------------------------------------------------
$134.2 $138.8
-----------------------------------------------------------------------
($37.4) ($50.8)
=======================================================================
34
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
Significant elements of the gross deferred tax liability at December 31, 1993
and 1994 were as follows:
(millions of dollars) 1993 1994
--------------------------------------------------------------------------------
Excess of financial accounting basis over tax basis:
Fixed assets $52.8 $54.6
Investments 12.8 13.1
Significant elements of the gross deferred tax asset at December 31, 1993 and
1994 were as follows:
(millions of dollars) 1993 1994
--------------------------------------------------------------------------------
Pension liabilities $8.0 $5.4
Liabilities for casualty insurance 28.6 34.9
Liabilities related to discontinued operations 13.0 13.2
Deferred tax assets for future benefits of tax credit carryforwards at
December 31, 1993 and 1994 were as follows:
(millions of dollars) 1993 1994
--------------------------------------------------------------------------------
General business credit $21.5 $26.5
Minimum tax credit 26.8 27.0
Foreign tax credit 6.7 2.3
The foreign tax credit carryforward has been fully considered in the
valuation allowance at both December 31, 1993 and 1994 while an additional
allowance of $9.5 million at both December 31, 1993 and 1994 has been
established against the other credits.
The general business credit carryforward will expire in years 2004-2009,
the net operating loss carryforward will expire in 2009, while the minimum tax
credit can be carried forward indefinitely.
Note 12--Capital Stock
The following table summarizes the Company's capital stock at December 31,
1993 and 1994:
December 31,
-----------------------------------------------------------------------------
(thousands of shares) 1993 1994
-----------------------------------------------------------------------------
Common stock, $.01 par value:
Authorized 50,000.0 50,000.0
Issued 22,235.7 22,435.7
Outstanding 21,444.6 21,758.4
Series I non-voting common stock, $.01 par value:
Authorized 25,000.0 25,000.0
Issued 2,720.0 2,720.0
Outstanding 1,360.0 1,160.0
Preferred stock, $.01 par value:
Authorized 5,000.0 5,000.0
Issued and outstanding - -
35
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
Note 13--Fair Value of Financial Instruments
The methods and assumptions used to estimate the fair value of each class of
financial instrument are as follows:
Cash and cash equivalents, receivables, notes payable and accounts payable
The carrying amounts approximate fair value because of the short maturity of
these instruments.
Long-term debt
The carrying amounts of the Company's bank borrowings under its short-term bank
lines and revolving credit agreement approximate fair value because the interest
rates are reset periodically to reflect current market rates. The fair values of
the Company's other long-term debt either approximate carrying value or are
estimated based on quoted market prices for the same or similar issues or on the
current rates offered to the Company for debt of the same remaining maturities.
The carrying amounts and fair values of long-term debt at December 31, 1993
and 1994 are as follows:
December 31,
---------------------------------------------------------------
(millions of dollars) 1993 1994
---------------------------------------------------------------
Carrying amount $430.0 $441.0
Fair value 440.1 419.3
Letters of credit
The Company utilizes third-party letters of credit to guarantee certain self-
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, 1993 and 1994 was $144.1 million and $130.7 million, respectively. To
monitor the counterparties' ability to perform, these letters of credit are only
executed with major financial institutions, and full performance is anticipated.
36
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
Note 14--Interim Financial Information (Unaudited)
The following information includes all adjustments, consisting only of normal
recurring items, which the Company considers necessary for a fair presentation
of 1993 and 1994 interim results of operations.
1993 Quarter Ended 1994 Quarter Ended
-----------------------------------------------------------------------------------------------------------------------------------
(millions of dollars, except per share) March 31 June 30 Sept. 30 Dec. 31 Year 1993 March 31 June 30 Sept. 30 Dec. 31 Year 1994
-----------------------------------------------------------------------------------------------------------------------------------
Net service revenues $425.5 $431.6 $437.6 $469.9 $1,764.6 $439.1 $444.1 $450.7 $459.0 $1,792.9
Cost of services 334.3 338.9 341.5 375.6 1,390.3 349.6 354.6 361.0 372.1 1,437.3
Selling, general and
administrative expenses 51.8 48.1 50.1 47.0 197.0 52.7 51.4 52.8 74.3 231.2
Depreciation 13.3 13.7 14.1 14.2 55.3 14.3 14.3 14.4 14.6 57.6
Amortization of excess purchase
price over net assets acquired 4.0 4.1 4.2 4.2 16.5 4.1 4.2 4.0 3.8 16.1
Other income (0.8) (0.1) (1.0) (1.2) (3.1) (0.5) (0.4) (0.2) (8.7) (9.8)
Non-recurring elimination of
excess purchase price over
net assets acquired 250.0 - - - 250.0 - - - - -
Interest expense and finance
charges 12.4 14.1 12.9 12.1 51.5 11.9 12.3 13.0 13.2 50.4
-----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before taxes (239.5) 12.8 15.8 18.0 (192.9) 7.0 7.7 5.7 (10.3) 10.1
Provision (benefit) for income taxes 4.0 4.9 6.4 6.9 22.2 2.8 3.1 2.3 (11.2) (3.0)
-----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from
continuing operations (243.5) 7.9 9.4 11.1 (215.1) 4.2 4.6 3.4 0.9 13.1
Loss from discontinued operations (1.5) - - - (1.5) - - - - -
-----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before extra-
ordinary items and cumulative
effect of accounting change (245.0) 7.9 9.4 11.1 (216.6) 4.2 4.6 3.4 0.9 13.1
Extraordinary items:
Loss from early extinguishment
of debt (6.6) - (2.5) - (9.1) - - - - -
Cumulative effect of initial
application of new
accounting standards (8.3) - - (9.4) (17.7) - - - - -
-----------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) ($259.9) $7.9 $6.9 $1.7 ($243.4) $4.2 $4.6 $3.4 $0.9 $13.1
===================================================================================================================================
Earnings (loss) per common share:
Continuing operations ($11.06) $0.34 $0.40 $0.48 ($9.41) $0.18 $0.20 $0.15 $0.03 $0.56
Discontinued operations (0.07) - - - (0.07) - - - - -
Extraordinary items (0.30) - (0.10) - (0.40) - - - - -
Cumulative effect of initial
application of new
accounting standards (0.37) - - (0.40) (0.77) - - - - -
-----------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) per share ($11.80) $0.34 $0.30 $0.08 ($10.65) $0.18 $0.20 $0.15 $0.03 $0.56
===================================================================================================================================
37
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
Note 15-Pro Forma Financial Information (Unaudited)
The following pro forma financial information of the Company consists of Pro
Forma Consolidated Statements of Operations for the years ended December 31,
1993 and 1992. There is no Pro Forma Condensed Consolidated Balance Sheet
because the Consolidated Balance Sheet already reflects all transactions for
which pro forma adjustments have been made. The Pro Forma Consolidated Statement
of Operations for the year ended December 31, 1993 was prepared to illustrate
the results of operations in the absence of the non-recurring elimination of
excess purchase price. There is no adjustment to interest expense because the
additional interest paid for the period prior to the Spin-Off was offset by the
allocation of interest to the discontinued automotive operations. There is no
tax impact because the elimination of excess purchase price was not deductible
for federal income tax purposes. The Pro Forma Consolidated Statement of
Operations for the year ended December 31, 1992 was prepared to illustrate the
estimated effects of (a) the Spin-Off and resulting elimination of amortization
of excess purchase price not directly attributed to the protective services
business, (b) the adjustment to interest expense and finance charges for the
repayment of debt from the proceeds of the Baker Hughes transaction, the effect
of the Spin-Off, the public offering and the refinancing of bank indebtedness,
(c) adjustment of corporate expenses to reflect the Company on a stand-alone
basis, (d) elimination of certain non-recurring transactions, principally
related to asset dispositions, and (e) the tax effect of the foregoing. Average
shares outstanding for both periods were adjusted as if the shares had been
issued at the beginning of the periods. The Pro Forma Consolidated Statements of
Operations for the years ended December 31, 1993 and 1992 were prepared as if
such transactions had occurred at the beginning of the periods presented. The
historical information contained in such statements reflects the treatment of
BW-Automotive as a discontinued operation. The adjustments are based upon
currently available information and upon certain assumptions that the Company
believes are reasonable in the circumstances. The pro forma information does not
purport to represent what the Company's results of operations would actually
have been if such transactions had occurred on such date or at the beginning of
periods indicated or to project the Company's results of operations at any
future date or for any future period.
The Pro Forma Consolidated Statements of Operations and accompanying notes
should be read in conjunction with the historical Consolidated Financial
Statements appearing elsewhere in this report.
38
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
Pro Forma Consolidated Statement of Operations (Unaudited)
Year Ended December 31, 1993
---------------------------------------------------------------------------------------
(millions of dollars, except per share) Historical Adjustments Pro Forma
---------------------------------------------------------------------------------------
Net service revenues $1,764.6 $1,764.6
Cost of services 1,390.3 1,390.3
Selling, general and administrative expenses 197.0 197.0
Depreciation 55.3 55.3
Amortization of excess purchase price over net
assets acquired 16.5 16.5
Other income (3.1) (3.1)
Non-recurring elimination of excess purchase price 250.0 $(250.0)(a) --
Interest expense and finance charges 51.5 51.5
---------------------------------------------------------------------------------------
Earnings (loss) before income taxes (192.9) 250.0 57.1
Provision for income taxes 22.2 22.2
---------------------------------------------------------------------------------------
Earnings (loss) from continuing operations $ (215.1) $ 250.0 $ 34.9
=======================================================================================
Earnings (loss) per share from continuing operations $ (9.41) $ 10.91 $ 1.50
=======================================================================================
Average shares outstanding (in millions) 22.9 0.4 23.3
=======================================================================================
Pro Forma Consolidated Statement of Operations (Unaudited)
Year Ended December 31, 1992
---------------------------------------------------------------------------------------
(millions of dollars, except per share) Historical Adjustments Pro Forma
---------------------------------------------------------------------------------------
Net service revenues $1,620.6 $1,620.6
Cost of services 1,258.9 1,258.9
Selling, general and administrative expenses 220.1 $(19.1)(c) 201.0
Depreciation 51.5 51.5
Amortization of excess purchase price over net
assets acquired 21.4 (7.3)(a) 14.1
Other income (17.2) 16.2 (d) (1.0)
Interest expense and finance charges 47.9 1.3 (b) 49.2
---------------------------------------------------------------------------------------
Earnings before income taxes 38.0 8.9 46.9
Provision (benefit) for income taxes (19.7) 36.1 (e) 16.4
---------------------------------------------------------------------------------------
Earnings (loss) from continuing operations $ 57.7 $(27.2) 30.5
=======================================================================================
Earnings (loss) per share from continuing operations $ 2.94 $(1.64) $ 1.30
=======================================================================================
Average shares outstanding (in millions) 19.6 3.8 23.4
=======================================================================================
39
Borg-Warner Security Corportion
Notes to Consolidated Financial Statements, continued
The following table sets forth the Statement of Operations adjustments by period
individually and summarizes the totals shown in the adjustment column on the Pro
Forma Consolidated Statements of Operations:
Year Ended December 31,
----------------------------------------------------------------------------------------------
1992 1993
----------------------------------------------------------------------------------------------
(millions of dollars) Amount Letter Amount Letter
----------------------------------------------------------------------------------------------
Selling, general and administrative expenses:
Eliminate non-recurring expenses including
headquarters cost ($19.1) (c)
Amortization of excess purchase price (7.3) (a)
Eliminate non-recurring elimination of excess
purchase price ($250.0) (a)
Other income:
Eliminate non-recurring gains on sales 14.3 (d)
Eliminate BHI dividend 1.9 (d)
----------------------------------------------------------------------------------------------
16.2
Interest expense and finance charges 1.3 (b)
Provision for income taxes 36.1 (e)
40
Independent Auditors' Report
The Board of Directors and Stockholders
Borg-Warner Security Corporation
We have audited the consolidated balance sheets of Borg-Warner Security
Corporation and subsidiaries as of December 31, 1993 and 1994 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1994. 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, 1993 and 1994 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994 in conformity with generally accepted accounting principles.
As discussed in Note 1, the Company changed its method of accounting for
postretirement benefits other than pensions and the method of selecting the
discount rate to discount its casualty insurance liabilities in 1993.
Sig. of Deloitte & Touche LLP
Deloitte & Touche LLP
Chicago, Illinois
February 10, 1995, except as to the fourth sentence of the fifth paragraph of
Note 5, for which the date is March 15, 1995.
41