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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended March 31, 1995
Commission file number: 33-15419
BORG-WARNER SECURITY CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3408028
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State or other jurisdiction of (I.R.S. Employer
Incorporation or organization Identification No.)
200 South Michigan Avenue, Chicago, Illinois 60604
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 322-8500
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
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On April 30, 1995 the registrant had 21,985,948 shares of Common Stock and
1,149,600 shares of Series 1 Non-Voting Common Stock outstanding.
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BORG-WARNER SECURITY CORPORATION AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
THREE MONTHS ENDED MARCH 31, 1995
INDEX
Page No.
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PART I. Financial Information
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Item 1. Financial Statements
Condensed Consolidated Balance Sheet
at March 31, 1995 and December 31, 1994 . . . . . . . . 2
Consolidated Statement of Earnings for
the three months ended March 31, 1995 and 1994. . . . . 3
Condensed Consolidated Statement of Cash Flows for
the three months ended March 31, 1995 and 1994 . . . . 4
Notes to the Consolidated
Financial Statements. . . . . . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . 10
PART II. Other Information
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Item 1. Legal Proceedings . . . . . . . . . . . . . . . . 14
Item 2. Changes in Securities . . . . . . . . . . . . . . 15
Item 3. Defaults Upon Senior Securities . . . . . . . . . 15
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . 15
Item 5. Other Information . . . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . 15
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . 16
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Part I. Financial Information
Item 1. Financial Statements
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BORG-WARNER SECURITY CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(MILLIONS OF DOLLARS)
March 31, December 31,
1995 1994
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ASSETS
------
Cash and cash equivalents $ 17.5 $ 15.8
Receivables, net 121.7 106.7
Inventories 12.9 12.2
Other current assets 28.2 24.8
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Total current assets 180.3 159.5
Property, plant and equipment at cost 529.3 537.7
Less accumulated depreciation 246.5 242.6
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Net property, plant and equipment 282.8 295.1
Net excess purchase price
over net assets acquired 283.5 286.5
Deferred tax asset 51.2 50.8
Other assets 51.0 38.4
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$848.8 $830.3
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LIABILITIES & STOCKHOLDERS' EQUITY
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Notes payable $ 9.8 $ 14.5
Accounts payable and accrued expenses 183.4 181.8
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Total current liabilities 193.2 196.3
Long-term debt 476.4 454.0
Other long-term liabilities 134.8 136.2
Capital stock:
Common stock 0.3 0.2
Series I non-voting common stock - -
Preferred stock - -
Other stockholders' equity 44.1 43.6
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Total stockholders' equity 44.4 43.8
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$848.8 $830.3
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(See accompanying notes to financial statements)
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BORG-WARNER SECURITY CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
Three Months Ended March 31,
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1995 1994
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Net service revenues $462.4 $439.1
Cost of services 372.4 349.6
Selling, general and
administrative expenses 57.7 52.7
Depreciation 14.9 14.3
Amortization of excess purchase
price over net assets acquired 3.8 4.1
Other income - (0.5)
Interest expense and finance charges 13.8 11.9
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Earnings(loss) before income taxes (0.2) 7.0
Provision (benefit)for income taxes (0.3) 2.8
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Net earnings $ 0.1 $ 4.2
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Net earnings per share $ - $ .18
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(See accompanying notes to financial statements)
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BORG-WARNER SECURITY CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(MILLIONS OF DOLLARS)
Three Months Ended
March 31,
1995 1994
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OPERATING:
Net earnings $ 0.1 $ 4.2
Adjustments to reconcile net earnings to net
cash flows provided by operating activities:
Non-cash charges to earnings:
Depreciation and amortization 18.7 18.4
Amortization of debt discounts 0.4 0.5
Changes in assets and liabilities:
Decrease in receivables 9.0 2.5
(Increase) in other current assets (4.1) (2.3)
Increase in accounts payable and accrued expenses 1.6 14.4
Net change in other long-term assets and liabilities (4.1) (1.9)
Cash used for discontinued Centaur operations (0.9) -
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Net cash provided by operating activities 20.7 35.8
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INVESTING:
Capital expenditures and investments in sales-type
leases (13.3) (17.0)
Payments related to businesses acquired - (9.5)
Proceeds from sales of other assets 0.7 0.4
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Net cash (used in) investing activities (12.6) (26.1)
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FINANCING:
Net increase (decrease) in notes payable (4.7) 3.4
Increases in long-term debt 51.4 8.1
Reductions in long-term debt (29.4) (20.9)
Net increase (decrease) in receivables sold (24.0) 2.0
Sales of treasury common stock 0.3 0.7
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Net cash (used in) financing activities (6.4) (6.7)
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NET INCREASE IN CASH AND CASH EQUIVALENTS 1.7 3.0
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 15.8 11.2
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17.5 $ 14.2
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(See accompanying notes to financial statements)
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) The financial statements of Borg-Warner Security Corporation and
Consolidated Subsidiaries ("Company") have been prepared in accordance with
the instructions to Form 10-Q. The statements are unaudited, but include all
adjustments, consisting of normal recurring items, which the Company considers
necessary for a fair presentation of the information set forth herein. The
results of operations for the three months ended March 31, 1995 are not
necessarily indicative of the results to be expected for the entire year.
(2) The allowance for doubtful accounts was $7.3 million at March 31, 1995 and
$7.7 million at December 31, 1994. The accumulated amortization on excess
purchase price over net assets acquired was $82.2 million at March 31, 1995
and $78.5 million at December 31, 1994. The outstanding balance of
receivables sold at March 31, 1995 was $88.0 million, compared with $112.0
million sold at December 31, 1994.
Net cash payments for interest and income taxes were as follows (in millions
of dollars):
Three Months Ended
March 31,
1995 1994
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Interest paid $ 9.4 $ 6.3
Income taxes refunded (2.4) (9.8)
(3) The Company's $(0.3)million and $2.8 million provision for income taxes
for the three months ended March 31, 1995 and 1994 reflect estimated annual
tax rates for the year applied to federal, state and foreign income.
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(4) The following tables summarize the capitalization of the Company at March
31, 1995 and December 31, 1994 (in millions of dollars):
March 31, 1995 December 31,1994
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DEBT Current Long-Term Current Long-Term
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Bank borrowings (at an average
rate of 7.5% in 1995 and 5.4%
in 1994; and 7.4% at March 31,
1995) $ - $ 60.0 $ - $ 88.0
Bank revolving commitment
loan due through 1999 (at
an average rate of 8.3% in
1995 and 7.6% in 1994; and
8.2% at March 31, 1995) - 156.6 - 105.2
8% notes (face amount of
$100 million due 1996) - 97.9 - 97.5
Unsecured notes (at an average
rate of 6.0% in 1995 and 5.9%
in 1994; and 7.2% at March 31,
1995) 0.7 1.2 5.3 1.3
Capital lease liability (at an
average rate of 8.3% in 1995 and
9.2% in 1994; and 7.8% at
March 31, 1995) 9.1 11.7 9.2 13.0
9-1/8% senior subordinated
notes due 2003 - 149.0 - 149.0
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Total notes payable and
long-term debt $9.8 $476.4 $14.5 $454.0
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STOCKHOLDERS' EQUITY March 31, December 31,
1995 1994
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Common stock:
Common stock $ 0.3 $ 0.2
Series I non-voting common stock - -
Preferred stock - -
Capital in excess of par value 30.9 30.9
Notes receivable - management stock
purchase (0.9) (1.0)
Retained earnings 29.8 29.7
Cumulative translation adjustment (0.4) (0.5)
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59.7 59.3
Less treasury common stock, 2,222,325
shares in 1995 and 2,237,344 shares
in 1994, at cost (15.3) (15.5)
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Total stockholders' equity $ 44.4 $ 43.8
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CAPITAL STOCK - NUMBER OF SHARES March 31, December 31,
(Thousands of shares) 1995 1994
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Common Stock, $.01 par value:
Authorized 50,000.0 50,000.0
Issued 22,446.1 22,435.7
Outstanding 21,794.2 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 1,149.6 1,160.0
Preferred stock, $.01 par value:
Authorized 5,000.0 5,000.0
Issued and outstanding - -
In March 1995, the Company amended its revolving and letter of credit
agreements with respect to covenants related to earnings, leverage, fixed
charge coverage, net worth, capital expenditures and acquisitions. In
connection with the renegotiation of financial covenants required to be
maintained under its receivables transfer facility, the Company has agreed to
increased reserve requirements and certain other changes. In addition, the
maturity date of this facility has been changed to September 30, 1995 from
November 1997.
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(5) Earnings per common share are based on average outstanding common shares
and common share equivalents. Common share equivalents recognize the dilutive
effects of common shares which may be issued in the future upon exercise of
certain stock options. The number of shares used in the computation of
earnings per share were as follows (in thousands of shares):
Three Months Ended
March 31,
1995 1994
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Average common shares
outstanding 22,933 22,860
Common stock equivalents 174 448
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Total used for computation
of per share earnings 23,107 23,308
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(6) The Company's discontinued property and casualty insurance subsidiary
("Centaur") ceased writing insurance in 1984 and has been operating under
rehabilitation since September 1987. Rehabilitation is a process supervised
by the Illinois Director of Insurance to attempt to compromise claim
liabilities at an aggregate level that is not in excess of Centaur's assets.
In rehabilitation, Centaur's assets are currently being used to satisfy claim
liabilities under direct insurance policies written by Centaur. Any remaining
assets will be applied to Centaur's obligations to other insurance companies
under reinsurance contracts. If all of Centaur's obligations are not
satisfied through rehabilitation, it is possible that satisfaction could be
sought from the Company for Centaur's liabilities.
The foregoing has resulted in one pending lawsuit against the Company, certain
of its current and former subsidiaries, and directors and officers of certain
current and former subsidiaries for recovery of alleged damages incurred
because of Centaur's failure to satisfy its reinsurance obligations. The
lawsuit seeks in excess of $100 million for current losses, future losses and
other damages and also seeks punitive damages. The Company believes that any
damages for failure to satisfy reinsurance obligations are solely the
responsibility of Centaur and that the resolution of the lawsuit relating to
Centaur, including the Company's indemnification obligations to certain former
officers and directors, will not have a material adverse effect on its
financial position or future operating results; however, no assurance can be
given as to the ultimate outcome with respect to such lawsuit.
-9-
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 made provisions for indicated environmental
liabilities in the 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 plastic business and General Electric
Company has assumed all of such claims and has not contested its
indemnification obligations. There is no dollar limitation on the General
Electric Company's indemnification and there are no other material limitations
or exclusions with respect thereto. If any environmental liability claim
relating to the operations of the Company's discontinued automotive subsidiary
is made, the Company will be indemnified by such former subsidiary.
The Company believes that the various asserted claims and litigation in which
it is involved will not materially affect its financial position or future
operating results, although no assurance can be given with respect to the
ultimate outcome of any such claim or litigation.
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Item 2. Management's Discussion and Analysis of
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Financial Condition and Results of Operations
---------------------------------------------
RESULTS OF OPERATIONS
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Consolidated net service revenue increased 5% to $462.4 million in the first
quarter of 1995 from $439.1 million in the first quarter of 1994. The revenue
increase resulted from expanded service offerings, rate increase programs and
recognition of revenue under sales-type leases. Operating profit, which is
pretax earnings before interest expense and unallocated corporate expenses,
declined 21% between these periods primarily due to increased costs of
service. For several years competitive market conditions have limited the
Company's ability to increase prices while direct costs, primarily employee
costs, have been increasing.
The revenue contributed by each of the Company's business units was as
follows:
Three Months Ended
March 31
1995 1994
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Guard $302.0 $291.0
Alarm 65.1 52.6
Armored 56.7 52.1
Courier 38.6 43.4
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Total $462.4 $439.1
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Guard revenue increased 4% primarily from increased guard hours and prices.
The guard unit's operating profit declined 2% because of higher labor costs,
which were only partially offset by increased prices. In certain geographic
areas the unit has experienced 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. The Company expects that the guard market will remain price
competitive.
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Alarm revenue increased 24% primarily from treatment of commercial and
residential alarm installations as sales-type leases and increased
installations of residential alarm systems. The increase in revenue related
to the sales-type leases will be offset in future periods by reduced rental
revenue from equipment under operating leases. Alarm's operating profit
declined primarily because of lower margins on direct sales of commercial
installations and higher operating expenses, including maintenance costs and
selling, general and administrative expenses. Alarm's operating profit was
also adversely affected by higher depreciation and amortization charges
resulting from systems improvements implemented in 1994 to improve service
quality. Price competition has also applied downward pressure on operating
margins in 1995 and 1994. Because the commercial market continues to constrain
price increases for monitoring services, the unit will attempt to diversify
its largely commercial customer base by continuing its efforts to penetrate
the residential security market.
Armored revenue increased 9% primarily through increased prices, higher volume
in the ATM service operations and expanded services. Armored's operating
profit increased 17% primarily from improved price realization partially
offset by higher cargo insurance and labor costs. Although cargo loss payouts
for the first quarter of 1995 declined from the prior-year level, cargo
insurance provisions were increased. During subsequent periods in 1994 an
escalating rate of violent attacks against armored car and ATM servicing
personnel increased security costs and insurance premiums, and the Company is
maintaining its provision at a higher level.
The courier unit's business is generally subject to a mild level of
seasonality, with the first quarter traditionally reflecting a lower level of
activity because of weather-related problems associated with the
transportation industry. Courier revenue declined 11% primarily due to a
reduced volume of traditional financial document shipments. The lost volume
has been partially offset by new business acquired during the first quarter of
1995 and by improved pricing. New business includes the courier unit's
package express activities, which specialize in next-day delivery of small
packages and other time-sensitive commodities. Courier's operating profit
declined in 1995 as a result of the reduced revenues and a fixed cost base of
established route structures. The Company is reviewing its route structure
and branch organization in light of the reduced volume of business.
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Interest expense and finance charges increased 16% in 1995 over the comparable
1994 period because of the increased market interest rates experienced during
1994. The income tax benefit recorded in the first quarter of 1995 primarily
resulted from an adjustment to deferred income taxes of $.2 million. This
adjustment occurred from a change in the tax basis of certain liabilities as a
result of sales and settlements.
FINANCIAL CONDITION AND LIQUIDITY
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Current liabilities exceeded current assets at March 31, 1995 and December 31,
1994 due to the sale of receivables pursuant to a receivable transfer
facility. The outstanding balance of sold receivables was $88 million and
$112 million at March 31, 1995 and December 31, 1994, respectively. 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 as low as is
operationally feasible to minimize related carrying costs.
Net cash provided by operating activities was $20.7 million in the first
quarter of 1995 compared with $35.8 million in the 1994 first quarter. The
decrease is primarily the result of fluctuations in working capital
requirements, including payroll accruals. Long-term debt increased to $476.4
million at March 31, 1995 compared with $454.0 million at December 31, 1994
due primarily to the decrease in receivables sold under the receivables
transfer facility. Total debt (including receivables sold) declined slightly.
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 its
revolving and letter of credit agreements, the Company amended these
facilities in March 1995 with respect to covenants related to earnings,
leverage, fixed charge coverage, net worth, capital expenditures and
acquisitions. In connection with the renegotiation of financial covenants
required to be maintained under its receivables transfer facility, the Company
has agreed to increased reserve requirements and certain other changes. In
addition, the maturity date of this facility has been changed to September 30,
1995 from November 1997.
The Company is currently arranging $680 million in financing through a
syndicate of banks and other financial institutions. The new financing will
replace existing debt facilities, including the $100 million principal amount
of 8% notes due 1996 and the Company's existing revolving credit, letter of
credit and receivable transfer facilities. The new financing facility is
subject to certain conditions, including successful syndication and other
customary closing matters. It is expected to be in place by mid-1995.
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As discussed more fully in Note 6 of the Notes to Consolidated Financial
Statements, various complaints seeking substantial dollar amounts have been
filed against the Company. In each of these cases, the Company believes that
it has a defendable position or has adequate reserves to protect the Company
from material losses. The Company believes that it has established adequate
provisions for litigation liabilities in its financial statements in
accordance with generally accepted accounting principles. The Company
believes that none of these matters individually or in the aggregate will have
a material adverse effect on its financial position or future operating
results, although no assurance can be given with respect to the ultimate
outcome of any such proceeding.
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Part II. Other Information
Item 1. Legal Proceedings
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As previously reported in the Company's Annual Report on Form 10-K for the
year ended December 31, 1994, Centaur Insurance Company ("Centaur"), the
Company's discontinued property and casualty insurance subsidiary, has been
operating under rehabilitation since September 1987. Rehabilitation is a
process supervised by the Illinois Director of Insurance to attempt to
compromise Centaur's liabilities at an aggregate level that is not in excess
of its assets. The foregoing has resulted in one pending lawsuit against the
Company for recovery of alleged damages incurred as a result of Centaur's
failure to satisfy its reinsurance obligations.
In June 1988, the Insurance Commissioner of the State of California as trustee
of Mission Insurance Trust and four other affiliated insurance companies filed
a complaint in the Superior Court of the State of California, County of Los
Angeles, against the Company and certain of its current and former
subsidiaries alleging damages resulting from the failure of Centaur to satisfy
its reinsurance obligations. This lawsuit alleges damages to plaintiff, as
Trustee of Mission Insurance Company, Mission National Insurance Company,
Enterprise Insurance Company, Holland-America Insurance Company and Mission
Reinsurance Corporation, based on (i) conduct justifying piercing the
corporate veil, (ii) fraud and (iii) negligent misrepresentation. The
complaint was amended in 1989 to add 11 former officers and directors of the
Company's current and former subsidiaries as defendants and to allege
additional causes of action based on (i) breach of fiduciary duty and
imposition of personal liability, (ii) fraudulent conveyance, (iii)
constructive trust and (iv) conspiracy and to add a claim for punitive
damages. The complaint was further amended in February 1995 to allege
additional causes of action based on negligence and breach of the covenant of
good faith and fair dealing. The second amended complaint seeks judgment for
current losses, future losses and other damages in an amount alleged to exceed
$100 million.
In 1989, the Company filed a motion to dismiss or stay the action, pending
resolution of Centaur's rehabilitation in Illinois. The court declined to
dismiss the action, but entered an order staying the action until the
rehabilitation proceeding is resolved, except that the parties may pursue
discovery to preserve evidence. In 1992, the Centaur rehabilitator filed a
motion to intervene and dismiss the complaint on the grounds that the
plaintiff lacked standing and that its claims were not ripe for adjudication.
The motion is pending. In 1993, six of the 11 individual defendants were
dismissed from the lawsuit. In September 1994, the court effectively lifted
its stay. Active discovery is now being pursued. The Company intends to
defend this lawsuit vigorously.
-15-
Item 2. Changes in Securities
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Inapplicable
Item 3. Defaults Upon Senior Securities
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Inapplicable
Item 4. Submission of Matters to a Vote of Security Holders
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None
Item 5. Other Information
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None
Item 6. Exhibits and Reports on Form 8-K
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(A) Exhibits:
10.1 - Employment Agreement dated as of March 28, 1995 for
J. Joe Adorjan
10.2 - Agreement dated as of March 28, 1995 with Donald C.
Trauscht
27 - Financial Data Schedule
(b) Reports on Form 8-K:
None
-16-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Borg-Warner Security Corporation
--------------------------------
(Registrant)
By /s/ Timothy M. Wood
------------------------
(Signature)
Timothy M. Wood
Vice President, Finance
(Principal Financial and Accounting Officer)
Date: May 12, 1995