UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 COMMISSION FILE NUMBER: 1-5529
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BORG-WARNER SECURITY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3408028
(State of incorporation) (I.R.S. Employer
Identification No.)
200 South Michigan Avenue
Chicago, Illinois 60604
(312) 322-8500
(Address and telephone number of principal executive offices)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, par value $.01 per share New York Stock Exchange
9-1/8% Senior Subordinated Notes due 2003 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock of the registrant held by
stockholders (not including voting stock held by directors and executive
officers of the registrant and affiliates of Merrill Lynch & Co., Inc. (the
exclusion of such stock shall not be deemed an admission by the registrant that
such person is an affiliate of the registrant)) on March 5, 1996 was
approximately $123.1 million. As of March 5, 1996, the registrant had 22,446,100
shares of Common Stock and 1,149,600 shares of Series I Non-Voting Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated herein by reference into
the Part of the Form 10-K indicated.
DOCUMENT PART OF FORM 10-K INTO WHICH INCORPORATED
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The Company's annual report to stockholders Parts I, II and IV
for the year ended December 31, 1995
The Company's proxy statement for the 1996 Part III
annual meeting of stockholders
BORG-WARNER SECURITY CORPORATION
FORM 10-K
YEAR ENDED DECEMBER 31, 1995
INDEX
PART I
Item Number Page
- ----------- ----
1. Business 3
2. Properties 11
3. Legal Proceedings 12
4. Submission of Matters to a Vote of Security Holders 14
PART II
5. Market for the Registrant's Common Stock
and Related Stockholder Matters 15
6. Selected Financial Data 15
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
8. Financial Statements and Supplementary Data 16
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 16
PART III
10. Directors and Executive Officers of the Registrant 16
11. Executive Compensation 16
12. Security Ownership of Certain Beneficial
Owners and Management 16
13. Certain Relationships and Related Transactions 17
PART IV
14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 17
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PART I
ITEM 1. BUSINESS
The Company provides a broad line of protective services for its customers,
including guard, alarm, armored and courier services. The Company believes that,
based on revenues and the variety of services offered, it is the largest and
broadest-based supplier in the protective services industry in the United
States.
COMPANY'S BUSINESS UNITS
The Company's protective services business is divided into four business
units: guard services, alarm services, armored services and courier services.
Information concerning the revenues, operating profit or loss and identifiable
assets attributable to each of the Company's business units is incorporated
herein by reference to Note 9 of the Notes to Consolidated Financial Statements.
GUARD SERVICES
The guard services unit provides a variety of guard and related security
services under the Wells Fargo(R), Burns(R), Globe(R) and other service marks to
approximately 14,000 government and business customers from approximately 281
locations throughout the United States, and in Canada, Colombia and the United
Kingdom. The Company believes that its guard services unit is the largest
contract guard services operation in the world, measured by revenues.
The Company's guard services unit supplies contract uniformed and
plainclothes security officers, who may or may not be armed, to perform a wide
variety of tasks. These security officers patrol and monitor commercial,
financial, industrial, residential and governmental facilities providing
deterrence against crime and breach of governmental security regulations and
detection of fire, accidents and other casualties. The security officers also
monitor electronic systems and control public and employee access to facilities.
Specialized assignments include nuclear and conventional electric power plant
security, pre-departure screening of passengers and luggage at airports,
mailroom services and investigative services, including background
investigations of prospective employees.
The guard services unit employs approximately 70,000 security officers.
Security officers undergo a standardized pre-employment screening program that
features mandatory drug screening, criminal record checks at the county and
municipal court level and verification of consumer credit reports, Social
Security information and drivers' license records. Security officers receive
classroom orientation and field training in safety, first aid and security
techniques and in the handling of specific problems applicable to particular
industries or situations.
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The guard services unit markets guard services through approximately 150
sales representatives nationwide and in Canada, Colombia and the United Kingdom.
Sales personnel operate out of local branch and sales offices. The guard
services unit also bids on contracts with governmental agencies.
Guard services contracts generally provide for such services on a continuing
basis and generally are terminable by either party upon 30 to 60 days notice.
Charges for guard services are negotiated with customers and are based upon
payment of a specified amount per guard hour. Typically, such charges are
adjusted for any change in any law, ruling or collective bargaining agreement
causing a change in work hours, wage rates, working conditions or other costs.
Investigative services are generally provided under specific arrangements, with
charges varying according to the nature of the assignment.
ALARM SERVICES
The alarm services unit provides electronic security services in the United
States and Canada under the Wells Fargo(R) service mark for its commercial
customers and under the Pony Express(R) service mark for its residential
customers. In addition, this unit provides an integrated guard, patrol and alarm
service to Bel Air, Beverly Hills and other suburbs of Los Angeles under the
trade name Bel-Air Patrol. The Company believes that its alarm services unit is
one of the largest electronic security service operations in the United States,
measured by revenues. The unit has approximately 2,440 employees.
Commercial. The alarm services unit designs, installs, monitors and services
electronic detection systems located at customers' premises. These systems are
tailored to customers' needs and may include intrusion and fire detection,
critical process and sprinkler monitoring, access control and closed-circuit
television monitoring systems. The Company's alarm systems and devices may be
monitored on the premises of the customer by the customer's own personnel or
linked through telephone lines or long range radio to one of 12 central stations
operated by the Company in the United States and Canada. The Company also
services its installed systems.
The alarm services unit services approximately 109,000 security systems in
financial institutions, industrial and commercial businesses and complexes,
warehouses, facilities of federal, state and local governments, defense
installations, and health care and educational facilities.
The majority of the Company's monitoring contracts are for an initial five-
year period with automatic renewal for additional one-year terms, unless
terminated by either party. Upon installation, a customer pays an installation
fee and agrees to pay an annual service charge for ordinary maintenance and
monitoring during the life of the contract. It has been the unit's experience
that its customers generally continue the service after expiration of the
initial term of the contract and enter into new five-year monitoring contracts.
4
The alarm services unit conducts its sales, installation and service
operations from 37 branch offices in the United States and Canada, some of which
are on the same premises as a monitoring station, and additional satellite
offices. The alarm services unit has a nationwide sales force that is separated
into broad-based commercial groups, as well as specialized sales teams that
address the specific needs of the financial community, engineered systems market
and other high growth segments of the industry. One group, for example, focuses
on multi-location companies such as national retail chains and fast food outlets
that require a single point of control for planning, servicing, monitoring and
reporting for all locations.
The alarm services unit also makes direct sales of security equipment to
government and commercial users (including other companies in the alarm
business) and designs, assembles and sells engineered systems for commercial
fire suppression.
Residential. The alarm services unit also installs fire and intrusion
protection systems for residential customers under the Pony Express(R) service
mark. Residential customer sales and service are generally performed from the
same facilities as for commercial accounts. Residential systems are installed by
the Company with monitoring agreements and often with maintenance agreements.
The majority of the residential monitoring contracts are for an initial period
of three to five years with automatic renewal for additional one-year terms,
unless terminated by either party. The unit services approximately 25,600
residential security systems.
Bel-Air Patrol. The Company also provides a complete protective package,
including central station alarm service and surveillance systems, security
guards and day and night patrols, to residents in Bel Air and Beverly Hills and
other nearby communities of Los Angeles. The Company provides these services to
approximately 12,000 customers under the trade name Bel-Air Patrol.
The alarm services unit purchases electronic equipment and component parts
for systems from a number of suppliers, and is not dependent upon any single
source for such equipment or parts.
ARMORED SERVICES
The armored services unit is a security-related cash services business that
provides traditional armored transport services, automatic teller machine
("ATM") services and cash management services in the United States under the
Wells Fargo(R) service mark. The unit employs approximately 6,100 employees at
approximately 136 facilities throughout the United States and Puerto Rico. The
Company's armored and ATM businesses use a fleet of approximately 1,770 vehicles
to transport approximately $5 billion of currency and securities each business
day. The Company believes it is the second largest armored transportation
operation in the United States, measured by revenues.
Armored Transport. The Company provides vault storage and specialized, secure
transportation services using armed guards in carrying currency, securities and
other valuables for banks and national and local retail customers.
5
The Company provides armored transport services for over 14,000 customers.
Most of the customer contracts are for a multi-year term with automatic renewal
for additional one-year terms, unless terminated by either party. It has been
the unit's experience that its customers generally continue the service after
the initial term of the contract.
The armored transport services operation has a sales force of approximately
40 people dedicated to the solicitation of transportation-related accounts and a
separate sales force that focuses solely on transportation-related accounts for
national retail customers. In recent years the Company has expanded its armored
express service, which offers deposit pick-up services in small to medium sized
markets for retailers who have not traditionally used armored transport
services.
Generally, the Company assumes responsibility for the safe arrival at the
destination of transported commodities. The armored transport unit maintains a
risk management department that is responsible for loss prevention, security
investigation, employee safety and training and coordination with local and
federal law enforcement personnel.
ATM Servicing. The armored transport unit also provides special services to
approximately 25,000 ATMs on a national basis. The Company believes it is the
leading servicer of ATMs in the United States, measured by both revenues and the
number of ATMs serviced.
The Company controls its ATM services through an automated national
dispatching center located in Columbia, Maryland. The dispatch center
coordinates all customer requests and directs field technicians throughout the
country. The automation system provides detailed service confirmation data both
internally and to the customer. ATM servicing is a time-critical business and
the Company guarantees a response time of 90 minutes or less to its major
accounts.
The Company offers financial institutions a complete range of management and
maintenance services for ATM networks. The Company provides cash preparation and
replenishment, deposit collection and verification, on-site balancing of ATM
funds, preventive maintenance and first and second line maintenance services,
including necessary hardware maintenance. The Company also sells refurbished ATM
equipment.
The Company's ATM servicing unit has a sales force of approximately five
persons. Most of the customer contracts are for a multi-year term with automatic
renewal for additional one-year terms, unless terminated by either party.
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Cash Management Services. The armored transport unit also provides cash
management services to approximately 500 financial institutions and retail
customers. These highly automated services include currency storage and
preparation, micro-encoding of checks, deposit verification and consolidation,
coin wrapping and storage and food stamp processing. Most of the customer
contracts are for a multi-year term with automatic renewal for additional one-
year terms, unless terminated by either party.
COURIER SERVICES
The courier services unit transports time-sensitive packages for commercial
businesses and non-negotiable financial documents for Federal Reserve banks and
financial institutions through 34 branch and 82 satellite offices in 32 states
under the Pony Express(R) service mark. The unit provides ground courier
services through a fleet of approximately 3,300 vehicles and commercial and
charter air service for longer distance or extremely time-critical shipments.
Although the Pony Express service mark traces its roots to the Pony Express
of Old West fame, the present courier operation began as a financial commodity
courier transporting cancelled checks and other non-negotiable financial
documents among financial institutions as a part of the armored transportation
unit. While shipments of non-negotiable financial documents are still a
substantial part of the unit's business, the courier services unit also delivers
small packages, particularly business-to-business shipments of parts, extremely
urgent mail, film, medical and pharmaceutical supplies and other commodities.
The primary focus of the courier service unit is same-day or next-day service by
ground transportation in intrastate and regional interstate markets. The typical
customer ships multiple, time-critical, small shipments on a daily or weekly
basis from one or more locations to one or more other locations within a 500-
mile radius. The Company may design a customized distribution system initially
for one or two large customers and make available to smaller customers the
excess capacity on such system.
The courier services unit attempts to meet customer needs for secure
transportation through flexible and customized services. Shipments are picked up
and delivered by uniformed courier guards who are trained in security measures.
The unit has developed sophisticated information systems that provide automated
billing, computer-assisted routing and package tracking and other programs that
enhance customer service. The unit is expanding its use of PonyTrak/TM/, an
electronic tracking system that uses a hand-held scanner to record pickup and
delivery times, dates and locations by reading package bar codes. The Company
offers services outside of normal business hours that sometimes require couriers
to unlock and enter customer premises and secure premises when leaving.
The unit employs approximately 4,800 persons. The unit leases approximately
60 percent of its vehicles from its employees. The Company believes such lease
arrangements provide a competitive advantage because such employees tend to
provide
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better customer service, drive more safely and have a more vested interest in
the success of the business.
The courier services unit operates both as a common and contract carrier and
uses a combination of tariffs and shipping contracts to control the terms,
conditions and rates applicable to the transportation of shipments. Rates are
dependent upon many factors, including the weight and type of the shipped item,
the distance and urgency of the shipment and the geographical location.
COMPETITION
The guard services unit competes with major national firms and numerous
smaller regional and local companies providing similar services. Competition in
the security guard industry is based on price in relation to the quality of
service, the scope of services performed, the extent and quality of guard
supervision, recruiting and training and name recognition.
The alarm services unit competes with major national firms and numerous
smaller regional and local companies. Competition in the alarm services industry
is based on price in relation to the quality of service, the scope of alarm
installation and service, and the level of technological and engineering
sophistication.
The armored services unit competes with major national firms and numerous
smaller regional and local companies. Competition in the armored transport
industry is based primarily on price in relation to quality of service, the
scope of services performed, quality of cargo insurance and name recognition.
The courier services unit competes with numerous regional and local courier
companies. Competition in the courier industry is based primarily on price in
relation to quality of service and size and configuration of distribution
routes. Because of low barriers to entry in some areas, smaller local
competitors with substantially lower overhead expenses are often able to compete
effectively with the Company for local shipments.
REGULATION
Due to the nature of the Company's business, its operations are subject to a
variety of federal, state, county and municipal laws, regulations and licensing
requirements. The Company believes that its operations are in substantial
compliance with those laws, regulations and requirements.
The Company's guard services operations are subject to a variety of city,
county and state firearm and occupational licensing laws. In addition, many
states have laws requiring training and registration of security officers,
regulating the use of badges, identification cards and uniforms and imposing
minimum bond surety and insurance requirements.
8
Federal legislation has been introduced relating to security officer
qualification and training. Similar legislation is pending in several states.
The Company generally supports the creation of standards for the industry and
does not expect that the establishment of such standards will have a material
affect on its guard services operations.
The Company's alarm services operations are subject to regulatory
requirements of federal, state and local authorities. In addition, this unit
relies upon the use of telephone lines to transmit signals, and the cost of such
lines and the type of equipment which may be used are currently regulated by
both federal and state governments. In some instances, the Company contracts
with the local government to permit it to link a customer's business or home
directly into the local police or fire department station for which it may pay a
fee to such local government. As a result of a high incidence of false alarms in
some communities, some local governments have imposed assessments, fines and
penalties on customers based on the number of false alarms reported, or have
restricted police response to systems producing excessive false alarms.
Federal legislation became effective in 1995 that abolished all intrastate
regulatory control over prices, routes and services to which the Company's
armored and courier units had previously been subject. Such operations are
subject to regulation by federal and state agencies with respect to safety of
employees, operations and equipment, vehicle emissions and underground fuel
storage tanks.
From time to time, in the ordinary course of business, the Company is
subjected to penalties or fines as the result of licensing irregularities or the
misconduct of one or more of its agents or employees. In addition, under
principles of common law, the Company can generally be held liable for acts or
omissions of its agents or employees performed in the course and scope of their
employment. In addition, some states have statutes that expressly impose on the
Company legal responsibility for the conduct of its employees.
RISK MANAGEMENT
The nature of the services provided by the Company potentially exposes it to
greater risks of liability for employee acts, injuries (including workers'
compensation claims) or omissions than may be posed by other service businesses.
The Company often obtains customer indemnification or liability limitations
in its contracts to mitigate this risk exposure. In addition to self-insurance
reserves, the Company carries insurance of various types, including general
liability coverage. The Company obtains such insurance at rates and upon terms
negotiated periodically with various underwriters. The loss experience of the
Company and, to some extent, other protective services companies affects premium
rates charged to the Company. The Company generally maintains insurance coverage
for punitive damages, although the laws of many states limit or prohibit
insurance coverage for liability for punitive damages. The Company does not
believe that limitations on, or the uncertainty of, insurance
9
coverage for punitive damages in certain states in which it operates is likely
to be material, based upon the Company's prior experience with punitive damages
claims. The Company also attempts to manage its risk liability through analysis
of customer facilities and transportation routes and employee screening,
training, supervision and evaluation.
EMPLOYEES
The Company's business is labor intensive and, accordingly, is affected by
the availability of qualified personnel and the cost of labor. Although the
protective services industry is characterized generally by high turnover, the
Company believes its experience compares favorably with that of the industry.
The Company has not experienced any material difficulty in employing suitable
numbers of qualified security guards and other employees. The Company considers
its relations with its employees to be generally satisfactory.
The Company is a party to collective bargaining agreements with various local
unions covering approximately 8,100 employees. The collective bargaining
agreements expire at various dates from 1996 to 1999 and relate, among other
things, to wages, hours and conditions of employment. Under section 9(b)(3) of
the National Labor Relations Act, if a union admits to membership, or is
affiliated directly or indirectly with a union that admits to membership,
employees other than guards, an employer of guards can refuse to bargain with
such union and such union cannot be certified as the representative of a unit of
guards. As a result, the Company has in many instances refused to recognize or
withdrawn recognition of labor organizations that admit as members employees
other than guards.
The NLRB has certified various locals of the International Brotherhood of
Teamsters, Chauffeurs, Warehousemen and Helpers of America as the exclusive
collective bargaining representative of certain of its courier services
employees. The unit is engaged in contract negotiations with such
representative.
TRADEMARKS AND PATENTS
The Wells Fargo(R), Pony Express(R) and Burns(R) service marks are especially
important to the Company's business. The Company believes that its rights in
these marks are adequately protected and of unlimited duration. While the
Company has patents it considers to be important to the overall conduct of its
business, it does not consider any particular patent, or group of related
patents, essential to its operations. The Company's 13 United States patents,
which generally relate to the Company's alarm services unit, expire between 1997
and 2008, and the Company's 18 foreign patents, which generally relate to the
Company's alarm services unit, expire between 1995 and 2009. For both the United
States and the foreign patents, their expiration, individually, and in the
aggregate, is not expected to have any material effect on the Company's
financial condition or results of operations.
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EXECUTIVE OFFICERS
Set forth below are the names, ages, positions and certain other information
concerning the executive officers of the Company as of March 1, 1996.
NAME AGE POSITION WITH COMPANY
J. Joe Adorjan.... 57 Chairman of the Board, Chief Executive
Officer and President; Director
John D. O'Brien.. 53 Senior Vice President
Timothy M. Wood.. 48 Vice President, Finance
Mr. Adorjan has been a director of the Company since 1993, Chairman of the
Board (since January 1996), Chief Executive Officer (since October 1995) and
President (since April 1995). Mr. Adorjan was President of Emerson Electric Co.
from 1992 to 1995 and Chairman and Chief Executive Officer of ESCO Electronics
Corporation from 1990 to 1992. Mr. Adorjan is also a director of California
Microwave, Inc. and ESCO Electronics Corporation.
Mr. O'Brien has been Senior Vice President of the Company since 1993 and was
Vice President of the Company from 1987 to 1993.
Mr. Wood has been Vice President, Finance of the Company since 1994 and was
Vice President and Controller of the Company from 1987 to 1994.
Each of the executive officers named above was elected by the Board of
Directors to serve in the office indicated until his successor is elected and
qualified.
ITEM 2. PROPERTIES
The Company and its subsidiaries maintain armored and courier terminals,
central alarm stations, plants and general offices in various cities in the
United States, Puerto Rico, Canada, the United Kingdom and Colombia. At December
31, 1995, the guard services unit occupied approximately 281 branch and
satellite offices, all but one of which were leased. At December 31, 1995, the
alarm services unit operated 12 central stations, of which 4 were leased and 37
additional branch and 15 separate satellite offices, all of which were leased.
At December 31, 1995, the armored services unit occupied 136 facilities, of
which 100 were leased, and 61 of which contained vaults. At December 31, 1995,
the courier services unit occupied approximately 116 branches and satellites, of
11
which all but three were leased. The Company leases approximately 57,000 square
feet of office space in Chicago, Illinois for its executive offices. The Company
believes that its properties are in good condition and are adequate to meet its
current and reasonably anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is presently, and is from time to time, subject to claims and
suits arising in the ordinary course of its business. In certain of such
actions, plaintiffs request punitive or other damages that may not be covered by
insurance. In addition, the Company has been subject to claims and suits
relating to certain discontinued operations. The most important of these legal
proceedings are discussed below. The Company believes that the various asserted
claims and litigation in which it is currently involved will not materially
affect its financial position or future operating results, although no assurance
can be given with respect to the ultimate outcome for any such claim or
litigation. The Company believes that it has established adequate provisions for
litigation liabilities in its financial statements in accordance with generally
accepted accounting principles. These provisions include both legal fees and
possible outcomes of legal proceedings (including the environmental matters
discussed below).
Centaur Litigation
Centaur Insurance Company ("Centaur"), a discontinued property and casualty
insurance subsidiary, ceased writing insurance in 1984 and has been operating
under rehabilitation since September 1987. Rehabilitation is a process
supervised by the Illinois Director of Insurance to attempt to compromise
liabilities at an aggregate level that is not in excess of Centaur's assets. In
rehabilitation, Centaur's assets are currently being used to satisfy claim
liabilities under direct insurance policies written by Centaur. Any remaining
assets will be applied to Centaur's obligations to other insurance companies
under reinsurance contracts. The foregoing has resulted in one pending lawsuit
against the Company for recovery of alleged damages from the failure of Centaur
to satisfy its reinsurance obligations. Certain former officers and directors of
the Company's current and former subsidiaries have been named as defendants in
such lawsuit and the Company has agreed to indemnify such individuals. Centaur
is not a defendant in this lawsuit against the Company. Although the Illinois
Director of Insurance has not made any claims against the Company for any of
Centaur's liabilities, the Illinois Director of Insurance has requested, and the
Company has agreed to, an extension of the statute of limitations for any such
claims.
As of December 31, 1993, Centaur's total liabilities were $135 million and
its deficit in net worth was $54.7 million, according to financial statements
submitted on behalf of the Illinois Director of Insurance. Such financial
statements were presented on a liquidating basis with assets carried at their
market value or estimated realizable value
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and liabilities carried at their present value through the provision of a
present value discount. Although Centaur is a subsidiary of the Company, the
Company does not operate Centaur and has no responsibility for, nor does it
participate in the preparation of, such financial statements. Centaur's
financial results, assets and liabilities are not reflected in the Company's
financial statements.
In June 1988, the Insurance Commissioner of the State of California as
trustee of Mission Insurance Trust and four other affiliated insurance companies
filed a complaint in the Superior Court of the State of California, County of
Los Angeles, against the Company and certain of its current and former
subsidiaries alleging damages resulting from the failure of Centaur to satisfy
its reinsurance obligations. This lawsuit alleges damages to plaintiff, as
Trustee of Mission Insurance Company, Mission National Insurance Company,
Enterprise Insurance Company, Holland-America Insurance Company and Mission
Reinsurance Corporation, based on (i) conduct justifying piercing the corporate
veil, (ii) fraud and (iii) negligent misrepresentation. Plaintiff seeks judgment
in the amount of the insurance companies' current losses, which allegedly total
approximately $14.2 million, plus a declaratory order that the Company pay
future losses alleged to exceed $66 million. 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
additional current losses totalling more than $9.8 million and to add a claim
for punitive damages in the amount of $270 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.
The Company believes that any damages for failure to satisfy reinsurance
obligations are solely the responsibility of Centaur and that the resolution of
the lawsuit relating to Centaur, including the Company's indemnification
obligations to former officers and directors, will not have a material adverse
effect on its financial position or future operating results; however, no
assurance can be given as to the ultimate outcome with respect to such lawsuit.
13
Environmental Proceedings
The Company and certain of its current and former subsidiaries have been
identified by the U.S. Environmental Protection Agency and certain state
environmental agencies as potentially responsible parties ("PRPs") at a number
of hazardous waste disposal sites under the Comprehensive Environmental
Response, Compensation and Liability Act ("Superfund") and equivalent state laws
and, as such, may be liable for the cost of cleanup and other remedial
activities at these sites. Responsibility for cleanup and other remedial
activities at a Superfund site is typically shared among PRPs based on an
allocation formula. The Company believes that none of these matters individually
or in the aggregate will have a material adverse affect on its financial
position or future operating results, generally either because the maximum
potential liability at a site is not large or because liability will be shared
with other PRPs, although no assurance can be given with respect to the ultimate
outcome of any such liability. Based on its estimate of allocations of liability
among PRPs, the probability that other PRPs, many of whom are large, solvent
public companies, will fully pay the costs allocated to them, currently
available information concerning the scope of contamination at such sites,
estimated remediation costs at such sites, estimated legal fees and other
factors, the Company has made provisions for indicated environmental liabilities
in its financial statements in the aggregate amount of approximately $10 million
(relating to environmental matters with respect to discontinued operations of
the Company). The Company believes that such provisions for indicated
environmental liabilities have been established on a basis consistent with
generally accepted accounting principles. 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
there are no other material limitations or exclusions with respect thereto. If
any environmental liability claim relating to the operations of Borg-Warner
Automotive, Inc. is made, the Company will be indemnified by Borg-Warner
Automotive. There is no dollar limitation on such indemnification obligations
and there are no other material limitations or exclusions with respect thereto.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the security holders of the Company during
the fourth quarter of 1995.
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
On January 20, 1993, the Company's Common Stock was listed for trading on the
New York Stock Exchange. Prior to that date, there was no established public
trading market for shares of Common Stock. As of March 5, 1996, there were
approximately 217 holders of record of Common Stock.
The Company has neither paid nor declared any cash dividends on its Common
Stock during the last two years. The payment of dividends by the Company
prohibited under the terms of the Company's indebtedness. The Company currently
intends to retain earnings for acquisitions, working capital, capital
expenditures, general corporate purposes and reduction of outstanding
indebtedness. Accordingly, the Company does not expect to be able to nor does it
expect to pay cash dividends in the foreseeable future.
High and low sales prices (as reported on the New York Stock Exchange
composite tape) for the Common Stock for each quarter during 1994 and 1995 were:
Quarter ended High Low
------------- ------- -------
1994 March 31 $22 $16-3/8
June 30 16-7/8 10-3/4
September 30 12-3/4 10-5/8
December 31 11-1/8 8-1/4
1995 March 31 $ 9-7/8 $ 5-1/2
June 30 9-1/2 6-7/8
September 30 9-3/8 8-3/8
December 31 13 7-1/8
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the five years ended December 31, 1995, with
respect to the following line items shown under the "Consolidated Statistical
Review" (set forth on page 12) in the Annual Report is incorporated herein by
reference and made a part of this report: Net service revenues; earnings (loss)
from continuing operations; earnings (loss) from continuing operations per
share; total assets and total debt.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Management's Discussion and Analysis of Results of Operations and
Financial
15
Condition (set forth on pages 14 through 19) in the Annual Report are
incorporated herein by reference and made a part of this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements (including the notes thereto) of the
Company (set forth on pages 20 through 38) in the Annual Report are incorporated
herein by reference and made a part of this report. Supplementary financial
information regarding quarterly results of operations (unaudited) for the years
ended December 31, 1995 and 1994 is set forth in Note 14 of the Notes to
Consolidated Financial Statements. For a list of financial statements and
schedules filed as part of this report, see the "Index to Financial Statements
and Financial Statement Schedules."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Inapplicable.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors and nominees for election as directors
of the Company is incorporated herein by reference to the information under the
caption "Election of Directors" on pages 1 through 3 of the Company's proxy
statement for the 1996 annual meeting of stockholders. Information with respect
to executive officers of the Company is set forth in part I of this report.
Information concerning compliance with Section 16(a) of the Exchange Act is
incorporated by reference to the information under the caption "Section 16(a)
Compliance" on page 6 of the Company's proxy statement for the 1996 annual
meeting of stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to compensation of executive officers and directors
of the Company is incorporated herein by reference to the information under the
captions "Executive Compensation" on pages 6 through 9, and "Compensation of
Directors" on page 4, of the Company's proxy statement for the 1996 annual
meeting of stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership by persons known to the
Company to
16
beneficially own more than five percent of the Company's common stock, by
directors and nominees for director of the Company and by all directors and
executive officers of the Company as a group is incorporated herein by reference
to the information under the caption "Stock Ownership" on pages 5 and 6 of the
Company's proxy statement for the 1996 annual meeting of stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions is
incorporated herein by reference to the information under the caption "Certain
Relationships and Related Transactions" on pages 13 and 14 of the Company's
proxy statement for the 1996 annual meeting of stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of the registrant and
its consolidated subsidiaries, set forth on pages 20 through 38 of the Annual
Report, and the report of Deloitte & Touche set forth on page 39 of the Annual
Report, are incorporated herein by reference:
Consolidated Balance Sheet--December 31, 1995 and 1994
Consolidated Statement of Operations--three years ended December 31,
1995
Consolidated Statement of Cash Flows--three years ended December 31,
1995
Consolidated Statement of Stockholders' Equity--three years ended
December 31, 1995
Notes to Consolidated Financial Statements
17
(a)(2) The following report of independent auditors and financial statement
schedule of the registrant and its consolidated subsidiaries are included
herein:
Report of Deloitte & Touche LLP, independent auditors
II Valuation and Qualifying Accounts
Certain schedules for which provisions are made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
(a)(3) The exhibits listed in the "Exhibit Index."
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the
three-month period ended December 31, 1995.
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BORG-WARNER SECURITY CORPORATION
By /s/ J. Joe Adorjan
--------------------
J. Joe Adorjan
Chairman of the Board, Chief Executive Officer
and President
Date: March 18, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on this day of March 18, 1996.
Signature Title
- --------- ------
/s/ J. Joe Adorjan Chairman of the Board, Chief
- ------------------------------- Executive Officer and President and
J. Joe Adorjan Director (Principal Executive
Officer)
/s/ Timothy M. Wood Vice President, Finance
- ------------------------------- (Principal Financial and Accounting
Timothy M. Wood Officer)
/s/ James J. Burke, Jr. Director
- -------------------------------
James J. Burke, Jr.
/s/ Albert J. Fitzgibbons, III Director
- -------------------------------
Albert J. Fitzgibbons, III
Director
- -------------------------------
Arthur F. Golden
/s/ Dale W. Lang Director
- -------------------------------
Dale W. Lang
Director
- -------------------------------
Robert A. McCabe
- -------------------------------
Andrew McNally IV Director
/s/ Alexis P. Michas Director
- -------------------------------
Alexis P. Michas
/s/ H. Norman Schwarzkopf Director
- -------------------------------
H. Norman Schwarzkopf
/s/ Donald C. Trauscht Director
- -------------------------------
Donald C. Trauscht
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Borg-Warner Security Corporation
We have audited the consolidated financial statements of Borg-Warner Security
Corporation as of December 31, 1995 and 1994, and for each of the three years in
the period ended December 31, 1995, and have issued our report thereon dated
February 5, 1996; such consolidated financial statements and report are included
in your 1995 Annual Report to Stockholders and are incorporated herein by
reference. Our audits also included the financial statement schedule of Borg-
Warner Security Corporation listed in Item 14 of this Annual Report on Form 10-
K. This financial statement schedule is the responsibility of the Corporation's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 5, 1996
SCHEDULE II
BORG-WARNER SECURITY CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(dollars in millions)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ----------- ---------------------------- ----------- -----------
Additions
---------
Years Ended December 31, (1) (2)
Balance At Charged to Charged to Balance
Beginning Costs and Other at Close
Description of Period Expenses Accounts Deductions of Period
----------- ----------- ----------- ----------- ----------- -----------
1993
Allowance for Doubtful Accounts $ 8.2 $ 4.2 $ 0.5 $ 4.1 $ 8.8
=========== =========== =========== =========== ===========
1994
Allowance for Doubtful Accounts $ 8.8 $ 5.5 $ 1.5 $ 8.1 $ 7.7
=========== =========== =========== =========== ===========
1995
Allowance for Doubtful Accounts $ 7.7 $ 4.4 $ 2.4 $ 7.2 $ 7.3
=========== =========== =========== =========== ===========
EXHIBIT INDEX
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
*3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992).
*3.2 Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1992).
*4.1 Credit Agreement dated as of January 27, 1993 ("Credit Agreement")
among the Company, the lenders party thereto and the administrative
agent named therein (incorporated by reference to Exhibit 4.3 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1992), as amended by the First Amendment thereto (incorporated by
reference to Exhibit 4.1 to the Company's Quarterly Report on Form
10-Q for the quarterly period ending June 30, 1994), as amended by
the Second Amendment and Consent to Credit Agreement dated as of
March 15, 1995 (incorporated by reference to Exhibit 4.8 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1994), and as amended by the Third Amendment to Credit Agreement and
Consent dated as of October 16, 1995 (incorporated by reference to
Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995).
*4.2 Credit Agreement dated as of January 27, 1993 ("L/C Agreement")
among the Company, the banks party thereto and the agent named
therein (incorporated by reference to Exhibit 4.4 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1992), as
amended by the First Amendment thereto (incorporated by reference to
Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ending June 30, 1994), as amended by the Fifth
Amendment to L/C Agreement dated as of March 15, 1995 (incorporated
by reference to Exhibit 4.9 to the Company's Annual Report on Form
10-K for the year ended December 31, 1994), and as amended by
Amendment No. 6 dated as of October 16, 1995 (incorporated by
reference to Exhibit 4.3 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995).
B-1
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
*4.3 Credit Agreement dated as of October 16, 1995 ("Term Loan
Agreement") among the Company, various lenders and Bankers Trust
Company, as agent (incorporated by reference to Exhibit 4.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995).
*4.4 Indenture dated as of January 15, 1983 by and between Borg-Warner
and Harris Trust & Savings Bank, Trustee, entered into in connection
with the registration of up to $150 million of debt securities and
under which Borg-Warner issued 8% Notes due April 1, 1996
(incorporated by reference to Exhibit 9(d) to Registration Statement
No. 2-81437).
*4.5 Supplemental Indenture dated as of December 31, 1987 to the
Indenture dated as of January 15, 1983 by and between the Company
and Harris Trust and Savings Bank (incorporated by reference to
Exhibit 4.7 to the Company's Annual Report on Form 10-K for the Ten
Months ended October 31, 1987).
*4.6 Form of Security for 8% Notes due April 1, 1996 (incorporated by
reference to Exhibit 4.8 to Registration Statement No. 33-53480).
*4.7 Indenture dated as of April 1, 1986 by and between Borg-Warner and
Harris Trust and Savings Bank, entered into in connection with the
registration of up to $150,000,000 of Debt Securities and Warrants
to Purchase Debt Securities for issuance under a shelf registration
on Form S-3 (incorporated by reference to Registration Statement No.
33-4670).
*4.8 Indenture dated as of May 3, 1993 by and between the Company and The
First National Bank of Chicago (incorporated by reference to Exhibit
4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1993).
+*10.1 Borg-Warner Security Corporation Directors Stock Appreciation Rights
Plan (incorporated by reference to Exhibit 10.5 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1988).
+*10.2 Borg-Warner Corporation Management Stock Option Plan, as amended
through January 19, 1993 (incorporated by reference to Exhibit 10.7
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1992).
+*10.3 Borg-Warner Security Corporation 1993 Stock Incentive Plan
B-2
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
(incorporated by reference to Exhibit 10.19 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992).
+*10.4 Employment Agreement dated as of March 28, 1995 for J.J. Adorjan
(incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995).
+*10.5 Form of Employment Agreement for Messrs. O'Brien and Wood
(incorporated by reference to Exhibit 10.26 to Registration
Statement No. 33-15419), as amended by Form of Amendment of
Employment Agreement dated January 19, 1989 (incorporated by
reference to Exhibit 10.11 to the Company's Annual Report on Form
10-K for the year ended December 31, 1988).
*10.6 Form of Indemnification Agreement dated September 23, 1986 between
the Company and Messrs. O'Brien and Wood (incorporated by reference
to Exhibit 10.17 to Borg-Warner's Annual Report on Form 10-K for the
year ended December 31, 1986).
+*10.7 Agreement dated as of March 28, 1995 with D.C. Trauscht (incorporated
by reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1995).
+*10.8 Borg-Warner Retirement Savings Plan, as amended through January 1,
1995 (incorporated by reference to Exhibit 10.9 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994).
+*10.9 Borg-Warner Security Corporation Retirement Savings Excess Benefit
Plan, as amended and restated through January 1, 1995 (incorporated
by reference to Exhibit 10.21 to the Company's Annual Report on Form
10-K for the year ended December 31, 1994).
+*10.10 Borg-Warner Security Corporation Supplemental Benefits Compensation
Program (incorporated by reference to Exhibit 10.10 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994).
*10.11 Consulting Agreement dated as of September 1, 1993 between the
Company and H. Norman Schwarzkopf (incorporated by reference to
Exhibit 10.20 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1993).
B-3
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
10.12 Consulting Agreement dated as of January 1, 1996 between the Company
and D.C. Trauscht.
11 Computation of earnings per share.
13 1995 Annual Report to Stockholders.
21 Subsidiaries of the Company.
23 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule.
- --------------------
* Incorporated by reference.
+ Indicates a management contract or compensatory plan or arrangement
required to be filed pursuant to Item 14(c).
B-4