CONSOLIDATED STATISTICAL REVIEW
The following table sets forth selected financial information for Borg-Warner
Security Corporation. The information is derived from the audited financial
statements of the Company and treats Borg-Warner Automotive, Inc., which was
spun off in January 1993, as a discontinued operation. The selected financial
data should be read in connection with the 1995 consolidated financial
statements and accompanying notes.
STATEMENT OF OPERATIONS DATA
- ------------------------------------------------------------------------------------------------
Year Ended December 31,
(millions of dollars, except share data) 1991 1992 1993 1994 1995
- ------------------------------------------------------------------------------------------------
Net service revenues $1,555.4 $1,620.6 $1,764.6 $1,792.9 $1,862.5
Provision (benefit) for income taxes/(1)/ 9.4 (19.7) 22.2 (3.0) 5.9
Earnings (loss) from continuing
operations/(2)/ 25.2 57.7 (215.1) 13.1 5.9
Earnings (loss) from continuing
operations per share $1.28 $2.94 ($9.41) $0.56 $0.25
Average common shares and equivalents
outstanding in thousands/(3)/ 19,698 19,647 22,858 23,170 23,399
BALANCE SHEET DATA
- ------------------------------------------------------------------------------------------------
(at end of period)
- ------------------------------------------------------------------------------------------------
Total assets $1,866.3 $1,758.1 $ 790.5 $ 830.3 $ 851.4
Total debt 872.9 746.6 457.5 468.5 489.1
Stockholders' equity 668.3 676.7 27.5 43.8 49.7
Net assets of discontinued
Borg-Warner Automotive operations 743.5 728.2 -- -- --
STOCK PRICES
- ------------------------------------------------------------------------------------------------
1995 Quarters First Second Third Fourth
- ------------------------------------------------------------------------------------------------
High $9-7/8 $9-1/2 $9-3/8 $13
Low $5-1/2 $6-7/8 $8-3/8 $7-1/8
1994 Quarters
- ------------------------------------------------------------------------------------------------
High $22 $16-7/8 $12-3/4 $11-1/8
Low $16-3/8 $10-3/4 $10-5/8 $8-1/4
(1) Effective January 1, 1991, the Company changed its method of accounting for
income taxes to conform to Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." 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 Borg-Warner 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.
12
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 4%
in 1995 and 2% in 1994. All business units except
courier reported higher revenues in 1995, with the
largest gains due to higher volume at armored services
and recognition of alarm revenue under sales-type
leases. The 1994 increase resulted primarily from
higher volume and acquisitions by armored services.
Operating profit, which is pretax earnings before
interest expense and unallocated corporate expenses,
increased 9% in 1995 following a 30% decrease in 1994.
The increase in 1995 operating profit reflects
operating margin improvements in the guard and alarm
units throughout the year, and continued strong armored
performance. The higher operating margins primarily
resulted from improved pricing and cost control
programs. Margins declined at all units in 1994 as
selling price pressures continued despite rising direct
costs.
Results of Operations The following table sets forth the net service revenues
and operating profit by unit for the three years ended
December 31, 1995:
Year ended December 31,
.................................................................................
(millions of dollars) 1993 1994 1995
.................................................................................
Net service revenues:
Guard services $1,198.0 $1,209.4 $1,222.8
Alarm services 213.2 206.2 254.7
Armored services 180.9 211.2 231.0
Courier services 172.5 166.1 154.0
.................................................................................
Total net service revenues $1,764.6 $1,792.9 $1,862.5
=================================================================================
Operating profit:
Guard services $58.5 $54.5 $56.4
Alarm services 31.1 14.9 15.8
Armored services 13.3 6.7 13.7
Courier services 7.4 1.1 (1.6)
.................................................................................
Total operating profit $110.3 $77.2 $84.3
=================================================================================
Consolidated revenue for 1995 includes $38.5 million
related to recognition of certain alarm services
contracts as sales-type leases. There was no comparable
activity in 1994 or 1993. Excluding the impact of the
sales-type leases, consolidated revenue for 1995
increased 2% over 1994.
Guard Services Guard service revenue increased slightly in 1995 and
1994. Revenue growth was achieved despite competitive
pressures. The Company also experienced moderately
higher billing rates to offset higher labor costs. The
1994 revenue increase was due to internal growth and
improved customer retention.
14
Management's Discussion and Analysis of
Financial Condition and Results of Operations,
continued
Guard's operating profit increased 3% in 1995 after
declining 7% in 1994. Profit trailed 1994 in the first
half of the year. However, it exceeded 1994 during the
second half of 1995 due to stabilizing gross margins
and operations streamlining. During 1994 and continuing
into 1995, competitive market conditions had
constrained the Company's ability to increase prices in
response to cost increases. The guard unit was
reorganized in February 1994 by combining the corporate
administrative functions and establishing regional
offices. Operating margins also improved due to
continued consolidation of certain support staff and
field operations in 1995.
Alarm Services Alarm service revenue increased 24% in 1995 following a
3% decrease in 1994. Excluding the impact of leasing
commercial and residential alarm installations under
sales-type leases, revenue increased 5% in 1995,
primarily as a result of higher direct sales of
commercial alarm installations and higher service
revenue on residential operations. The increase in
revenue related to sales-type leases will be offset in
future periods by reduced rental revenue from equipment
under operating leases. In 1994 revenues from key
commercial, banking and defense industry customers
declined due to consolidation in those industries. This
also adversely impacted overall customer retention
rates in 1995 and 1994.
Alarm's 1995 operating profit increased 6%, due in
part to improved pricing and investment control
performance. Annual contract service-in-force at
December 31, 1995 was comparable to the prior year-end
despite the increase in cancellations. The operating
margin improved steadily in 1995 despite increased
commitments to selling and service capabilities.
Operating profit declined 52% in 1994 due to reduced
revenues over a largely fixed cost base. In addition,
the Company invested in resources to improve service
quality and other costs increased. Price competition
also applied downward pressure on operating margins in
1994.
Armored Services Armored service revenue increased 9% and 17% in 1995
and 1994, respectively. The 1995 increase resulted
primarily from improved pricing together with higher
volume in the Wells Fargo Armored Express and ATM
service operations. The 1994 increase resulted
primarily from acquisitions, including the acquisition
of the assets of Shields Business Machines, Inc., an
ATM servicer, and from increased volume in the ATM
service 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
Wells Fargo Armored Express and ATM service operations
in the retail sector. Wells Fargo Armored Express
specializes in deposit pick-up services in small- to
medium-sized markets for retailers who have not
traditionally utilized armored transport services.
15
Management's Discussion and Analysis of
Financial Condition and Results of Operations,
continued
Despite higher labor, vehicle and insurance costs,
operating profit increased by $7.0 million in 1995.
Operating margins improved primarily due to improved
pricing, profitability, and loss control programs. The
unit continues to invest in programs for improvements
in both safety and service quality. Operating profit
declined 50% in 1994 as the rate of cargo losses
attributable to external theft increased substantially
from historical levels. In addition, increases in
direct labor costs and administrative expenses reduced
operating margins.
Courier Services Courier service revenue declined 7% and 4% in 1995 and
1994, respectively. The lower revenue resulted
primarily from a reduced volume of traditional non-
negotiable financial document shipments and from
customer cost-reduction efforts. The lower volume
results, in part, from consolidations occurring within
the banking industry and from increased competition in
local markets due to deregulation within the industry.
This lost volume has been partially offset by increased
activity in package express business, which specializes
in next-day delivery of small packages and other time-
sensitive commodities.
Courier operations incurred a $1.6 million operating
loss in 1995, compared with operating profit of $1.1
million and $7.4 million in 1994 and 1993,
respectively. Operating profit declined due to the
reduced revenues against a fixed cost base in
established route structures. Additionally, 1994 and
1995 earnings also reflect adverse effects associated
with labor unrest in certain geographic regions.
Foreign The percentage of the Company's revenues derived from
non-U.S. operations, primarily guard services, was 6%
in 1995, 1994 and 1993. The Company operates in Canada,
the United Kingdom and Colombia.
Other Earnings Factors General corporate expenses were $14.7 million in 1995
compared to $26.5 million in 1994 and $4.8 million in
1993. The decline in 1995 was due to cost reduction
efforts and to the absence of non-recurring charges.
Corporate expenses in 1994 included $14 million in non-
recurring non-cash accruals for self-insurance reserves
and other corporate allowances. Expenses in 1993
benefitted from a $6 million higher headquarters
expense reimbursement from Borg-Warner Automotive.
Other income in 1994 included a gain of $9.9 million
related to the sale of trademarks and other rights to
Borg-Warner Automotive. Gains on the sale of various
assets in 1993 were $1.9 million.
Interest expense and finance charges increased 15% in
1995 to $57.8 million from $50.4 million in 1994, and
were $51.5 million in 1993. The increase in 1995 was
due to higher market interest rates combined with
increased rates under the 1995 credit agreement
amendments and refinancing.
16
Management's Discussion and Analysis of
Financial Condition and Results of Operations,
continued
The Company's effective tax rates have varied
significantly from the federal tax rate. The effective
tax rate of 50% in 1995 exceeded the statutory rate
primarily because of non-deductible excess purchase
price amortization. The Company recorded a net income
tax benefit in 1994 primarily because of adjustments to
deferred income taxes of $7.0 million related to
changes in the tax basis of certain 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 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
39% and 40% in 1993 and 1994, respectively.
Discontinued Operations The loss from discontinued operations in 1993 reflects
the results of Borg-Warner Automotive operations up to
the time of the spin-off in January. These results
include an allocation of corporate headquarters and
interest expenses.
Extraordinary Items Earnings for 1995 include a charge of $4.7 million, net
of tax, from the early extinguishment of debt in
connection with the amendment of the Company's credit
facilities. Earnings for 1993 reflect a loss of $9.1
million, net of tax, from the early extinguishment of
debt.
Cumulative Effect of The Company adopted SFAS No. 106, "Employers'
Initial Application of Accounting for Postretirement Benefits Other Than
New Accounting Pensions," effective January 1, 1993, and elected
Standards 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.
17
Management's Discussion and Analysis of
Financial Condition and Results of Operations,
continued
Financial Condition and Current liabilities exceeded current assets at
Liquidity December 31, 1995 and 1994 due to the sale of
receivables with the proceeds used to reduce long-term
debt. The outstanding balance of sold receivables was
$120.0 million and $112.0 million at December 31, 1995
and 1994, respectively. Other current assets at
December 31, 1995 included interest-bearing cash
deposits of $31.1 million held in trust under the terms
of the Company's accounts receivable facility. These
deposits represent proceeds of collections held back
based on the amount of eligible receivables in the
revolving receivables pool. 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. Other assets at December 31, 1995 included $35.3
million for the Company's 1995 investment in sales-type
leases related to alarm installations. Prior years'
investments in alarm service contracts were reflected
as operating leases and included in property, plant and
equipment.
Cash provided by operating activities was $58.1
million, $66.0 million and $34.3 million in 1995, 1994
and 1993, respectively. Cash used for investing
activities in 1995 was reduced by $9.9 million due to
improved alarm investment control, lower capital
expenditures and the absence of acquisitions. Capital
expenditures were $50.4 million, $67.0 million and
$68.8 million in 1995, 1994 and 1993, respectively.
Pursuant to the terms of the Company's credit
facilities, capital expenditures are limited to $64.6
million in 1996. 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. The Company expects that
continuing operations, together with existing credit
facilities and replacements thereof, will generate
sufficient cash to fund its operating requirements and
capital expenditures.
The Company amended its revolving and letter of
credit facilities in March 1995 with respect to
covenants related to earnings, leverage, fixed charge
coverage, net worth, capital expenditures and
acquisitions. On October 17, 1995, the Company entered
into a credit agreement with a group of banks,
providing for a $200 million term loan due December 31,
1998. The Company also amended its existing revolving
credit and letter of credit facilities, principally to
permit the term loan, change pricing, amend covenants
relating to interest coverage, leverage, net worth and
earnings, extend the maturity of the letter of credit
facility to December 31, 1998, and reduce the level of
commitments under the letter of credit facility to $155
million.
On November 14, 1995, the Company entered into a new
$120 million accounts receivable facility to replace
the previous facility which would have expired on
November 30, 1995. The new facility is available
through December 31, 1998. Under the terms of this
facility, BPS Financial Services, Inc., a wholly owned
special purpose subsidiary of the Company, purchases
customer receivables on a daily basis from
participating operating units and sells an undivided
interest in the revolving pool of receivables through
asset-backed certificates issued to investors.
18
Management's Discussion and Analysis of
Financial Condition and Results of Operations,
continued
The Company used the initial $100 million of proceeds
from the term loan to prepay an existing $50 million
term loan and for general corporate purposes. Subject
to customary borrowing conditions, the remaining $100
million of the term loan will be used to repay the $100
million principal amount of 8% notes due April 1, 1996.
The Company is required to prepay the term loan with
the proceeds from certain asset sales, certain
reversions of surplus pension plan assets, issuance of
debt or equity securities and excess cash flow. In the
event that, as of the end of each quarter beginning
with the quarter ended March 31, 1997, the Company has
not achieved required covenants for the four
consecutive quarters ending on such date, the Company
is required to prepay $150 million of the term loan not
later than 120 days after the end of such quarter. If
the Company is required to make such payment, it
expects to fund such amount through some combination of
transactions that may include the issuance of debt or
equity securities, the sale of assets or other
financing alternatives.
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. 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.
19
Borg-Warner Security Corporation
Consolidated Statement of Operations
Year Ended December 31,
........................................................................................................................
(millions of dollars, except per share) 1993 1994 1995
........................................................................................................................
Net service revenues $1,764.6 $1,792.9 $1,862.5
Cost of services 1,390.3 1,437.3 1,500.7
Selling, general and administrative expenses 197.0 231.2 220.6
Depreciation 55.3 57.6 57.1
Amortization of excess purchase price over net assets acquired 16.5 16.1 14.5
Other income, net -- Note 10 (3.1) (9.8) -
Non-recurring elimination of excess purchase price over net assets acquired 250.0 - -
Interest expense and finance charges 51.5 50.4 57.8
........................................................................................................................
Earnings (loss) before taxes (192.9) 10.1 11.8
Provision (benefit) for income taxes - Note 11 22.2 (3.0) 5.9
........................................................................................................................
Earnings (loss) from continuing operations (215.1) 13.1 5.9
Loss from discontinued operations (1.5) - -
........................................................................................................................
Earnings (loss) before extraordinary items and cumulative effect of accounting change (216.6) 13.1 5.9
Extraordinary items:
Loss from early extinguishment of debt, net of tax effects ($5.3 million
benefit in 1993 and $3.2 million benefit in 1995) - Note 5 (9.1) - (4.7)
Cumulative effect of initial application of new accounting standards - Note 1 (17.7) - -
........................................................................................................................
Net earnings (loss) ($243.4) $13.1 $1.2
========================================================================================================================
Earnings (loss) per common share:
Continuing operations ($9.41) $0.56 $0.25
Discontinued operations (0.07) - -
Extraordinary items (0.40) - (0.20)
Cumulative effect of initial application of new accounting standards (0.77) - -
........................................................................................................................
Net earnings (loss) per share ($10.65) $0.56 $0.05
========================================================================================================================
(See accompanying notes to consolidated financial statements)
20
Borg-Warner Security Corporation
Consolidated Balance Sheet
December 31,
- ------------------------------------------------------------------------------------------------------------------------
(millions of dollars) 1994 1995
- ------------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 15.8 $ 21.1
Receivables, net 106.7 102.7
Inventories 12.2 12.5
Other current assets 24.8 59.5
- ------------------------------------------------------------------------------------------------------------------------
Total current assets 159.5 195.8
Property, plant and equipment
Land and buildings 50.7 51.0
Machinery and equipment 79.3 77.0
Subscribers' installations 365.2 336.5
Capital leases 37.0 32.4
Construction in progress 5.5 3.8
- ------------------------------------------------------------------------------------------------------------------------
537.7 500.7
Less accumulated depreciation 242.6 249.8
- ------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 295.1 250.9
Net excess purchase price over net assets acquired 286.5 273.0
Deferred tax asset, net 50.8 52.8
Other assets 38.4 78.9
- ------------------------------------------------------------------------------------------------------------------------
Total other assets 375.7 404.7
- ------------------------------------------------------------------------------------------------------------------------
$ 830.3 $ 851.4
========================================================================================================================
Liabilities and Stockholders' Equity
Notes payable $ 14.5 $ 7.0
Accounts payable and accrued expenses 181.8 193.9
- ------------------------------------------------------------------------------------------------------------------------
Total current liabilities 196.3 200.9
Long-term debt 454.0 482.1
Other long-term liabilities 136.2 118.7
Capital stock:
Common stock, issued 22,435,700 shares in 1994 and 22,446,100 shares in 1995 0.2 0.2
Series I non-voting common stock, issued 2,720,000 shares - -
Capital in excess of par value 30.9 28.1
Retained earnings 29.7 31.2
Notes receivable - management stock purchase (1.0) (0.3)
Cumulative translation adjustment (0.5) (0.4)
- ------------------------------------------------------------------------------------------------------------------------
59.3 58.8
Treasury common stock, at cost, 2,237,344 shares in 1994 and 1,928,861 shares in 1995 (15.5) (9.1)
- ------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 43.8 49.7
- ------------------------------------------------------------------------------------------------------------------------
$ 830.3 $ 851.4
========================================================================================================================
(See accompanying notes to consolidated financial statements)
21
Borg-Warner Security Corporation
Consolidated Statement of Cash Flows
Year Ended December 31,
- ------------------------------------------------------------------------------------------
(millions of dollars) 1993 1994 1995
- ------------------------------------------------------------------------------------------
Operating:
Continuing operations:
Earnings (loss) from continuing operations ($215.1) $ 13.1 $ 5.9
Adjustments to reconcile net earnings (loss) to
net cash flows provided by continuing operations:
Non-cash charges to earnings:
Depreciation and amortization 71.8 73.7 71.6
Provision for losses on receivables 3.7 5.5 4.4
Deferred income taxes 13.5 (9.4) (5.5)
Amortization of debt discount 2.0 2.1 2.1
Non-recurring elimination of excess purchase
price over net assets acquired 250.0 - -
Changes in assets and liabilities:
(Increase) in receivables (23.3) (10.9) (3.6)
(Increase) decrease in other current assets 1.8 (2.7) (3.9)
Increase (decrease) in accounts payable and
accrued expenses (5.4) 10.0 12.1
Net change in other long-term assets and
liabilities (50.2) (4.7) (19.8)
Gain on sales of businesses and other assets (1.8) (8.5) -
- ------------------------------------------------------------------------------------------
Net cash provided by continuing operations 47.0 68.2 63.3
Discontinued operations:
Net loss (1.5) - -
Other cash related to discontinued operations (11.2) (2.2) (5.2)
- ------------------------------------------------------------------------------------------
Net cash used in discontinued operations (12.7) (2.2) (5.2)
- ------------------------------------------------------------------------------------------
Net cash provided by operating activities 34.3 66.0 58.1
Investing:
Capital expenditures and investments in sales-type
leases (68.8) (67.0) (50.4)
Payments related to businesses acquired (4.8) (9.0) -
Proceeds from sales of fixed and other assets 5.7 16.9 1.2
- ------------------------------------------------------------------------------------------
Net cash used in investing activities (67.9) (59.1) (49.2)
Financing:
Net (decrease) increase in notes payable (19.3) 3.8 (7.5)
Increase (decrease) in debt outstanding
under revolving credit facility (95.0) 40.2 19.4
Increases in long-term debt 149.5 37.5 100.0
Reductions in long-term debt (94.3) (72.6) (93.4)
Net increase (decrease) in receivables sold 18.0 (12.0) (23.1)
Net proceeds from the issuance of common stock 63.5 - -
Cash outflows related to early extinguishment of
debt (246.4) - -
Borg-Warner Automotive repayment/assumption of
Company indebtedness 249.9 - -
Sales of treasury common stock 3.2 0.8 1.0
Purchases of treasury common stock (0.1) - -
- ------------------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities 29.0 (2.3) (3.6)
- ------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (4.6) 4.6 5.3
Cash and cash equivalents at beginning of year 15.8 11.2 15.8
- ------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 11.2 $ 15.8 $ 21.1
==========================================================================================
Supplemental cash flow information:
Interest paid $ 61.1 $ 46.0 $ 54.2
Income taxes paid (refunded) 21.3 (3.2) 0.7
(See accompanying notes to consolidated financial statements)
22
Borg-Warner Security Corporation
Consolidated Statement of Stockholders' Equity
Years Ended December 31, 1993 1994 1995
- ----------------------------------------------------------------------------------------------------------------------------------
(millions of dollars, except share data) Shares Amount Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock Issued
Beginning balance 20,000,700 $ 0.2 24,955,700 $ 0.2 25,155,700 $ 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 - 10,400 -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 24,955,700 0.2 25,155,700 0.2 25,166,100 0.2
- ----------------------------------------------------------------------------------------------------------------------------------
Capital In Excess of Par Value
Beginning balance 187.3 28.2 30.9
Shares issued in initial public offering 63.5 - -
Shares issued under stock option and
related plans (2.1) 0.2 (5.4)
Spin-off of Borg-Warner Automotive (230.0) - -
Tax benefit from trust distribution and
exercise of stock options 9.5 2.5 2.6
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 28.2 30.9 28.1
- ----------------------------------------------------------------------------------------------------------------------------------
Retained Earnings
Beginning balance 520.6 15.9 29.7
Net earnings (loss) (243.4) 13.1 1.2
Spin-off of Borg-Warner Automotive (259.9) - -
Adjustment for deferred pension experience loss (1.4) 0.7 0.3
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 15.9 29.7 31.2
- ----------------------------------------------------------------------------------------------------------------------------------
Notes Receivable - Management Stock Purchase
Beginning balance (2.1) (1.8) (1.0)
Net activity 0.3 0.8 0.7
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 (1.8) (1.0) (0.3)
- ----------------------------------------------------------------------------------------------------------------------------------
Cumulative Translation Adjustment
Beginning balance 9.3 1.3 (0.5)
Spin-off of Borg-Warner Automotive (7.7) - -
Current year adjustment (0.3) (1.8) 0.1
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 1.3 (0.5) (0.4)
- ----------------------------------------------------------------------------------------------------------------------------------
Treasury Stock
Beginning balance 1,188,316 (38.6) 2,151,108 (16.3) 2,237,344 (15.5)
Acquired shares 6,083 (0.1) - - - -
Shares issued under stock option and
related plans (203,291) 3.2 (113,764) 0.8 (318,883) 6.4
Conversion of Series I non-voting shares
to common shares 1,160,000 - 200,000 - 10,400 -
Spin-off of Borg-Warner Automotive - 19.2 - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 2,151,108 (16.3) 2,237,344 (15.5) 1,928,861 (9.1)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity $ 27.5 $ 43.8 $ 49.7
==================================================================================================================================
(See accompanying notes to consolidated financial statements)
23
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements
Note 1--Summary The following paragraphs briefly describe significant
of Significant accounting policies. Certain 1993 and 1994 amounts have
Accounting Policies been reclassified to conform with the 1995
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 The consolidated financial statements include all
Consolidation significant subsidiaries. In January 1993 the Company
distributed to its shareholders all of the stock of
Borg-Warner Automotive, Inc. Therefore, Borg-Warner
Automotive is treated as a discontinued operation for
all periods presented. (See Note 3.)
Use of Estimates The preparation of the consolidated financial
statements in conformity with generally accepted
accounting principles requires management to make
estimates and assumptions that affect the measurement
of assets and liabilities and of revenues and expenses,
and the disclosure of contingent assets and liabilities
during the reported period.
Cash and Cash Cash and cash equivalents consists primarily of cash
Equivalents 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 Property, plant and equipment is carried at cost less
Equipment and accumulated depreciation. Expenditures for maintenance,
Depreciation repairs and renewals of relatively minor items are
generally charged to expense as incurred. Renewals of
significant items are capitalized. Depreciation is
computed generally on the straight-line method over the
following estimated useful lives:
* Buildings and improvements 15 to 50 years
* Machinery and equipment 3 to 12 years
* Subscribers' installations 8 to 15 years
* Property under capital leases 3 to 7 years
Income Taxes Income taxes are determined using the liability method,
under which deferred tax assets and liabilities are
determined based on the differences between the
financial accounting and tax bases of assets and
liabilities. Deferred tax assets or liabilities at the
end of each period are determined using the currently
enacted tax rate expected to apply to taxable income in
the periods in which the deferred tax asset or
liability is expected to be settled or realized. (See
Note 11.)
Retirement A number of eligible salaried and hourly employees
Benefit Plans 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.
24
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
Under the defined contribution plans, contributions by
the Company or its subsidiaries sponsoring the plans
are based on the employees' salary, age, years of
service, and/or a fixed schedule. These contributions
are charged to earnings as they are made to the various
plans.
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
standard requires that the expected cost of retiree
health benefits be charged to expense during the years
that the employees render service rather than
recognizing these costs on a cash basis.
Casualty Insurance The Company has accrued a discounted liability for the
Liabilities 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. The discount rate used to value the
future obligation at December 31, 1994 and 1995 was 7%
and 5.5%, respectively. The change in discount rate in
1993, 1994 and 1995 did not have a material impact on
earnings from continuing operations in the respective
years of change.
Amortization of Excess Excess of purchase price over net assets acquired is
of Purchase Price Over being amortized on a straight-line basis over 5 to 40
Net Assets Acquired years, with the majority being amortized over 40 years.
The Company periodically reviews its operations to
determine whether there has been a diminution in value
of its excess purchase price over net assets acquired.
If the review indicates a decline in the carrying
value, the Company adjusts the amortization
accordingly.
Intercompany Income taxes for periods prior to the spin--off have
Allocations and been allocated to the Borg-Warner Automotive operations
Transactions with based on Borg-Warner Automotive's relative share of the
Borg-Warner Automotive combined operations' income taxes after consideration
of intercompany charges. The Company and Borg-Warner
Automotive have entered into a tax-sharing agreement
after the spin-off, which calls for Borg-Warner
Automotive to pay the Company for any operating loss
carry-forward apportioned to it as part of the spin-off
at such time as the benefits related to such carry-
forward are realized by Borg-Warner Automotive. Also,
certain costs incurred at corporate headquarters are
charged to Borg-Warner Automotive based on a service
agreement with the Company.
25
Borg-Warner Security Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
CONTINUED
DERIVATIVE FINANCIAL INSTRUMENTS The Company uses interest rate swap
agreements to manage exposure to interest
rate derivative instruments for speculative
purposes. The differential paid or received
on interest rate swap agreements is
recognized as an adjustment to interest
expense in the period.
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 which may be issued in the future upon
exercise of certain stock options.
NEW ACCOUNTING PRONOUNCEMENTS In October 1995 the Financial Accounting
Standards Board issued Statement No. 123,
"Accounting for Stock-Based Compensation,"
which the Company must adopt in fiscal year
1996. This statement defines a new "fair
value" method of accounting for stock-based
compensation expense, and requires certain
additional disclosures for these plans. The
statement also allows the retention of the
previous "intrinsic value" method of
accounting for expense recognition under
Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees."
The Company intends to retain the intrinsic
value method and, therefore, the new standard
will have no effect on the Company's net
income or financial position.
Note 2--Balance Sheet Information Detailed balance sheet data are as follows:
December 31,
------------------------------------------------------------------------------------------------
(millions of dollars) 1994 1995
------------------------------------------------------------------------------------------------
Receivables
Customers $ 111.6 $ 105.8
Other 2.8 4.2
------------------------------------------------------------------------------------------------
114.4 110.0
Less allowance for losses 7.7 7.3
------------------------------------------------------------------------------------------------
Net receivables $ 106.7 $ 102.7
================================================================================================
Other assets
Net investment in sales-type leases $ -- $ 35.3
Debt issuance costs 10.8 14.5
Deferred pension asset 8.0 7.5
Deferred subscribers' installation costs 8.9 7.2
Other 10.7 14.4
------------------------------------------------------------------------------------------------
Total other assets $ 38.4 $ 78.9
================================================================================================
Accounts payable and accrued expenses
Trade payables $ 29.8 $ 30.3
Payroll and related 57.7 60.4
Casualty insurance 43.9 45.2
Interest 7.6 8.5
Liabilities to former shareholders 10.5 9.6
Deferred income 11.2 10.8
Other 21.1 29.1
------------------------------------------------------------------------------------------------
Total accounts payable and accrued expenses $ 181.8 $ 193.9
================================================================================================
26
Borg-Warner Security Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
In November 1995 the Company replaced its previous $100
million accounts receivable facility with an agreement
to sell a $120 million undivided interest in a
revolving pool of customer receivables. This sold
interest is reflected as a reduction of "Receivables"
in the accompanying Consolidated Balance Sheet at
December 31, 1995. The Company retains, on a
subordinated basis, an undivided interest in the pool
of receivables. The Company's retained interest of
$17.0 million at December 31, 1995 is included with
"Receivables" on the balance sheet. "Other current
assets" at December 31, 1995 included interest-bearing
cash deposits of $31.1 million held in trust under the
terms of the accounts receivable facility. These
deposits represent proceeds of collections held back
based on the amount of eligible receivables in the
revolving receivables pool. The Company's retained
interest in the receivables and cash deposits is
generally restricted. The full amount of the allowance
for losses has been retained because the Company has
retained substantially the same risk of credit loss as
if the receivables had not been sold. The discount
related to the sale of receivables is included with
"Interest expense and finance charges" in the
Consolidated Statement of Operations. At December 31,
1994, $112 million of receivables was sold under the
prior receivables facility.
Selling, general and administrative expenses
include provisions for losses on receivables of $3.7
million, $5.5 million and $4.4 million in 1993, 1994,
and 1995, respectively.
Accumulated depreciation related to capital leases
amounted to $15.6 million and $18.0 million at December
31, 1994 and 1995, respectively. Accumulated
amortization related to excess purchase price over net
assets acquired amounted to $78.5 million and $93.0
million at December 31, 1994 and 1995, respectively.
Trade payables include checks outstanding in
excess of bank deposits in the Company's central
disbursement accounts, since arrangements with the
banks do not call for reimbursement until checks are
presented for payment. Such amounts were $18.3 million
and $19.3 million at December 31, 1994 and 1995,
respectively.
The non-current portion of the casualty insurance
liability, included in other long-term liabilities, was
$44.2 million at December 31, 1994 and 1995. The total
discounted insurance accrual, including the portion
reflected in accounts payable and accrued liabilities,
was $88.1 million and $89.4 million at December 31,
1994 and 1995, respectively. The estimated aggregate
undiscounted insurance liability was $99.6 million and
$101.6 million at December 31, 1994 and 1995,
respectively.
Note 3--Discontinued On January 27, 1993 all of the outstanding common
Operations stock of Borg-Warner 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 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.
Borg-Warner Automotive has been treated as
discontinued in the consolidated financial statements
for all periods presented, and previously reported
results have been restated. Net revenues and net losses
for previously consolidated Borg-Warner Automotive
operations were $66.5 million and $1.5 million,
respectively, for the period from January 1 to January
27, 1993. Borg-Warner Automotive earnings reflect
allocated interest of $3.1 million in 1993.
27
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
The Company and Borg-Warner Automotive have entered
into agreements to provide for the allocation of
certain corporate overhead expenses subsequent to the
spin-off. Borg-Warner Automotive paid the Company $8.6
million, $2.8 million and $1.1 million in 1993, 1994
and 1995, respectively, for office space and services
rendered under the agreements. Borg-Warner Automotive
also paid the Company $1 million in 1993 under a
Trademark and Trade Name License Agreement. In 1994
Borg-Warner Automotive paid $9.9 million to the Company
for the purchase of certain trademarks and other
rights. In 1993 the Company paid Borg-Warner 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 operating leases with terms exceeding one
year. Rental amounts committed in future years are
summarized at December 31, 1995 as follows:
(millions of dollars)
--------------------------------------------------------------------------------------------
Fiscal year
--------------------------------------------------------------------------------------------
1996 $22.6
1997 19.2
1998 13.5
1999 7.0
2000 4.9
2001 and after 15.1
--------------------------------------------------------------------------------------------
Total $82.3
============================================================================================
Total rental expense amounted to $25.3 million, $25.6
million and $31.7 million in 1993, 1994 and 1995,
respectively.
Note 5--Notes Payable The following is a summary of notes payable and long-
and Long-Term Debt term debt which reflects all borrowings of the Company
and its consolidated subsidiaries:
December 31, 1994 December 31, 1995
--------------------------------------------------------------------------------------------
(millions of dollars) Current Long-Term Current Long-Term
--------------------------------------------------------------------------------------------
Bank borrowings (at an average of 5.4%
in 1994 and 8.3% in 1995) $ -- $ 88.0 $ -- $100.0
Bank revolving commitment loan due through
1999 (at an average rate of 7.6% in 1994 and
7.3% in 1995) -- 105.2 -- 124.6
8% notes (face amount $100 million due 1996) -- 97.5 -- 99.5
Unsecured notes (at an average rate of 5.9% in
1994 and 7.0% in 1995) 5.3 1.3 0.4 0.6
Capital lease liability (at an average rate of 9.2%
in 1994 and 8.4% in 1995) 9.2 13.0 6.6 8.3
9 1/8% senior subordinated notes (face amount
$150 million due 2003) -- 149.0 -- 149.1
--------------------------------------------------------------------------------------------
Total notes payable and long-term debt $14.5 $454.0 $7.0 $482.1
============================================================================================
28
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
Maturities of long-term debt, including unamortized
discount of $1.4 million, are as follows: 1996, $100.0
million; 1997, $33.8 million; 1998, $152.9 million;
1999, $43.2 million; and after 1999, $153.6 million.
Future capital lease rental payments include executory
costs of $0.8 million, interest expense of $3.5 million
and principal payments of $14.9 million. The 1996
principal payments of $6.6 million are included in
notes payable.
Included in long-term debt at December 31, 1994
and 1995 were obligations of $259.5 million and $256.9
million, respectively, with fixed interest rates and
$194.5 million and $225.2 million, respectively, with
variable interest rates (generally based on LIBOR or
prime rate). Interest rate swap agreements with a
notional amount of $100 million at December 31, 1995
were utilized to manage exposure to interest rate
fluctuations. Under these agreements, the Company has
exchanged variable rate payments based on LIBOR for
fixed-rate payments.
In 1995 the Company completed a financing which
updated more than $600 million of existing bank
facilities. The financing included a $200 million
intermediate term loan, a $120 million accounts
receivable facility, an extension of the maturity of an
existing letter of credit facility of $155 million, and
amendments to an existing $166 million revolving credit
facility. The term loan and the receivables facility
are available through December 31, 1998 while the
revolving credit facility is available through June 30,
1999.
The committed amount under the revolving credit
facility reduces semi-annually during the remaining
commitment period. Available future commitments at
December 31 are as follows: 1996, $137.7 million; 1997,
$95.0 million; and 1998, $42.7 million. Unused
commitments at December 31, 1995 under the term loan
and revolving credit facility were $100 million and $42
million, respectively. The Company intends to use the
remaining $100 million of the term loan to repay the
$100 million principal amount of the 8% notes due April
1, 1996. Included in long-term debt at December 31,
1995 was $99.5 million, representing the $100 million
principal amount, net of related discount, of the 8%
notes due April 1, 1996.
The credit facilities contain numerous financial
and operating covenants including, among others,
covenants requiring the Company to maintain certain
financial ratios and restricting its ability to incur
additional indebtedness, to create or permit to exist
certain liens or to pay dividends. In addition, the
Company pledged the stock of certain of its
subsidiaries under this agreement.
In 1995, an extraordinary loss of $4.7 million,
net of tax, was realized related to the extinguishment
of debt in connection with the amendment of the
Company's credit facilities. In 1993, a net of tax loss
of $9.1 million was realized as an extraordinary item
based on the early redemption of debt.
Note 6--Contingent The Company's discontinued property and casualty
Liabilities 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.
29
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
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.
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 $10 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 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.
30
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
Note 7--Retirement
Benefits The Company has various defined benefit and defined contribution plans which cover eligible employees.
Retirement benefit expense amounted to $4.8 million, $5.8 million, and $4.7 million in 1993, 1994, and
1995, respectively. This expense includes postretirement life insurance and medical benefits of $0.4
million, $0.2 million and $0.3 million for 1993, 1994, and 1995, respectively. Also included are defined
contribution plan expenses of $1.4 million, $1.6 million, and $1.7 million in 1993, 1994, and 1995,
respectively.
The following table sets forth the funded status of the defined benefit plans:
Funded Status December 31, 1994 December 31, 1995
----------------------------------------------------------------------------------------------------------
(millions of dollars) Over Under Over Under
----------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefits $37.8 $ 39.5 $ 45.6 $ 44.1
Non-vested benefits 1.1 1.9 1.4 2.0
----------------------------------------------------------------------------------------------------------
Accumulated benefit obligations 38.9 41.4 47.0 46.1
Effect of projected future compensation levels 5.1 -- 5.3 --
----------------------------------------------------------------------------------------------------------
Projected benefit obligation 44.0 41.4 52.3 46.1
Plan assets at fair value 44.4 27.9 55.9 34.4
----------------------------------------------------------------------------------------------------------
Assets in excess of (less than) projected
benefit obligation 0.4 (13.5) 3.6 (11.7)
Unrecognized net loss 6.4 10.2 2.9 9.7
Unrecognized prior service cost (1.9) 3.0 (1.7) 2.7
----------------------------------------------------------------------------------------------------------
Net asset (liability) before minimum liability 4.9 (0.3) 4.8 0.7
Adjustment required to recognize minimum
liability -- (13.2) -- (12.4)
----------------------------------------------------------------------------------------------------------
Net asset (liability) on balance sheet $ 4.9 ($13.5) $ 4.8 ($11.7)
----------------------------------------------------------------------------------------------------------
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) 1993 1994 1995
----------------------------------------------------------------------------------------------------------
Service cost $ 2.2 $ 3.0 $ 2.4
Interest cost 6.7 6.7 6.9
Actual return on assets (8.5) 1.1 (20.4)
Net amortization and deferrals 2.6 (6.9) 13.8
----------------------------------------------------------------------------------------------------------
Net periodic pension cost $ 3.0 $ 3.9 $ 2.7
----------------------------------------------------------------------------------------------------------
31
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
The Company's assumptions used as of December 31,
1993, 1994 and 1995 in determining the pension cost and
pension liability shown above were as follows:
(percent) 1993 1994 1995
-------------------------------------------------------
Discount rate 7.5 8.5 7.5
Rate of salary progression 4.0 4.0 4.0
Long-term rate of return on
assets 9.5-10 9.5 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 liabilities for these
benefits as of December 31, 1994 and 1995 were $12.9
million and $12.4 million, respectively, and are
included in "Other long-term liabilities." The discount
rate used in determining this liability was 7.5% and
medical expense increases are projected to be 8.25% in
1996 grading to 5.25% in 1999.
Note 8--Stock Options The Company has two plans which authorize the grant of
and Management options to purchase 3,000,000 shares of the Company's
Stock Purchases common stock. All options granted to date carry
STOCK OPTION PLAN 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 1993, 1994 and 1995 there were no options canceled
or converted.
Common shares under option for the years ended
December 31, 1993, 1994 and 1995 are summarized as
follows:
Aggregate
Number of Shares Option Price
------------------------------------------------------------------------------
(shares in thousands,
dollars in millions) 1993 1994 1995 1993 1994 1995
------------------------------------------------------------------------------
Shares under option at January 1 1,339 1,472 1,843 $13.9 $19.9 $26.7
Granted 385 593 390 8.0 9.7 3.3
Exercised (203) (114) (141) (1.3) (1.1) (0.7)
Forfeited (49) (108) (282) (0.7) (1.8) (5.1)
------------------------------------------------------------------------------
Shares under option at end
of period 1,472 1,843 1,810 $19.9 $26.7 $24.2
------------------------------------------------------------------------------
Options exercisable 907 881 800
-----------------------------------------------------------
Shares available for future grants 172 186 78
-----------------------------------------------------------
The 1,010,341 options outstanding at December 31,
1995 that are not presently exercisable will vest over
the next three-year period based upon periods of
employment.
32
Borg-Warner Security Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTES RECEIVABLE-- Included among the Company's equity holders are members
MANAGEMENT STOCK of management. Purchases of shares by management have
PURCHASE been funded in part by loans from the Company. These
loans, which totaled approximately $1.0 million and
$0.3 million at December 31, 1994, and 1995,
respectively, bear interest of approximately 6% and are
offset against stockholders' equity in the Consolidated
Balance Sheet.
Note 9--Business The Company's operations have been classified into four
Segment Information 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 operations, including an allocated value
to each segment of cost in excess of net assets
acquired. Corporate assets consist principally of cash
and cash equivalents, certain corporate receivables and
other assets.
Summarized financial information by business
segment for 1993, 1994, and 1995 is as follows:
Year ended December 31,
------------------------------------------------------------------------------
(millions of dollars) 1993 1994 1995
------------------------------------------------------------------------------
NET SERVICE REVENUES:
Guard services $1,198.0 $1,209.4 $1,222.8
Alarm services 213.2 206.2 254.7
Armored services 180.9 211.2 231.0
Courier services 172.5 166.1 154.0
------------------------------------------------------------------------------
Total net service revenues $1,764.6 $1,792.9 $1,862.5
------------------------------------------------------------------------------
OPERATING PROFIT:
Guard services $ 58.5 $ 54.5 $ 56.4
Alarm services 31.1 14.9 15.8
Armored services 13.3 6.7 13.7
Courier services 7.4 1.1 (1.6)
------------------------------------------------------------------------------
Total operating profit 110.3 77.2 84.3
------------------------------------------------------------------------------
Corporate expenses 4.8 26.5 14.7
Other income (3.1) (9.8) -
Interest expense 51.5 50.4 57.8
Non-recurring elimination of excess
purchase price over net assets acquired 250.0 - -
------------------------------------------------------------------------------
Earnings (loss) before taxes (192.9) 10.1 11.8
Provision (benefit) for income taxes 22.2 (3.0) 5.9
------------------------------------------------------------------------------
Earnings (loss) from continuing operations ($215.1) $ 13.1 $ 5.9
33
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
Year ended December 31,
...................................................................
(millions of dollars) 1993 1994 1995
...................................................................
Depreciation:
Guard services $7.0 $7.4 $7.3
Alarm services 36.5 38.0 37.4
Armored services 6.7 7.0 7.1
Courier services 4.7 4.8 5.0
Corporate 0.4 0.4 0.3
...................................................................
Total depreciation $55.3 $57.6 $57.1
===================================================================
Amortization of excess purchase price over
net assets acquired:
Guard services $11.5 $11.1 $8.9
Alarm services 2.2 2.3 2.8
Armored services 1.3 1.3 1.5
Courier services 1.3 1.3 1.1
Corporate 0.2 0.1 0.2
...................................................................
Total amortization $16.5 $16.1 $14.5
===================================================================
Capital expenditures:
Guard services $6.8 $8.6 $3.6
Alarm services 49.8 44.6 40.5
Armored services 5.7 6.2 3.7
Courier services 6.5 7.6 2.6
...................................................................
Total capital expenditures $68.8 $67.0 $50.4
===================================================================
Identifiable assets:
Guard services $235.0 $259.2
Alarm services 361.2 364.6
Armored services 90.4 89.1
Courier services 46.3 43.6
Corporate 97.4 94.9
...................................................................
Total identifiable assets $830.3 $851.4
===================================================================
Note 10--Other Income, Other income in 1994 included a $9.9 million gain
Net on the sale of certain trademarks and other rights to
Borg-Warner Automotive.
34
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:
1993 1994 1995
(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 $(197.4) $4.5 $(192.9) $ 7.4 $ 2.7 $10.1 $ 8.4 $ 3.4 $11.8
---------------------------------------------------------------------------------------------------------
Income taxes:
Current
Federal/Foreign $ 4.1 $1.6 $ 5.7 $ 3.8 $ 1.7 $ 5.5 $ 8.9 $ 1.5 $10.4
State 3.0 -- 3.0 0.9 -- 0.9 1.0 -- 1.0
---------------------------------------------------------------------------------------------------------
7.1 1.6 8.7 4.7 1.7 6.4 9.9 1.5 11.4
Deferred 13.5 -- 13.5 (9.4) -- (9.4) (5.5) -- (5.5)
---------------------------------------------------------------------------------------------------------
Provision (benefit)
for income taxes $ 20.6 $1.6 $ 22.2 $(4.7) $ 1.7 $(3.0) $ 4.4 $ 1.5 $ 5.9
---------------------------------------------------------------------------------------------------------
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) 1993 1994 1995
-----------------------------------------------------------------------
Income taxes at U.S. statutory rate of 35% $(67.5) $ 3.5 $ 4.1
Increases (decreases) resulting from:
Non-recurring elimination of excess purchase
price over net assets acquired 87.5 -- --
Change in tax basis -- (7.0) --
State income taxes 2.0 0.6 0.6
Non-temporary differences 0.2 1.0 1.1
Other, net -- (1.1) 0.1
-----------------------------------------------------------------------
Income taxes reported $ 22.2 $(3.0) $ 5.9
-----------------------------------------------------------------------
The components of the deferred tax asset at December 31, 1994 and 1995 were as follows:
December 31,
-----------------------------------------------------------------
(millions of dollars) 1994 1995
-----------------------------------------------------------------
Deferred tax assets:
Liabilities for casualty insurance $ 34.9 $ 35.8
Liabilities related to discontinued operations 13.2 9.8
Liabilities for pension benefits 5.4 4.4
Liabilities for other postretirement benefits 5.1 5.1
Other, net 4.1 8.0
Net operating loss carry-forward 20.9 16.7
General business credit 26.5 25.5
Minimum tax credit 27.0 27.0
Foreign tax credit 2.3 2.3
------------------------------------------------------------------
Total deferred tax assets 139.4 134.6
Valuation allowance (11.8) (10.6)
------------------------------------------------------------------
127.6 124.0
35
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
December 31,
----------------------------------------------------------------------
(millions of dollars) 1994 1995
----------------------------------------------------------------------
Deferred tax liabilities:
Fixed assets (54.6) (49.5)
Investments (13.1) (13.1)
Net excess purchase price over net assets acquired (9.1) (8.6)
----------------------------------------------------------------------
Total deferred tax liabilities (76.8) (71.2)
----------------------------------------------------------------------
Net deferred tax asset $ 50.8 $ 52.8
----------------------------------------------------------------------
The foreign tax credit carry-forward has been fully considered in the
valuation allowance at both December 31, 1994 and 1995, while an additional
allowance of $9.5 million and $8.3 million at December 31, 1994 and 1995,
respectively, has been established against the other credits.
The general business credit carry-forward will expire in years 2004-2009,
the net operating loss carry-forward 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,
1994 and 1995:
December 31,
----------------------------------------------------------------------
(thousands of shares) 1994 1995
-----------------------------------------------------------------------
Common stock, $.01 par value:
Authorized 50,000.0 50,000.0
Issued 22,435.7 22,446.1
Outstanding 21,758.4 22,087.6
Series I non-voting common stock, $.01 par value:
Authorized 25,000.0 25,000.0
Issued 2,720.0 2,720.0
Outstanding 1,160.0 1,149.6
Preferred stock, $.01 par value:
Authorized 5,000.0 5,000.0
Issued and Outstanding - -
Note 13--Fair Value of The methods and assumptions used to estimate the fair value of each
Financial Instruments class of financial instrument are as follows:
Cash and Cash The carrying amounts approximate fair value because of the short
Equivalents, maturity of these instruments.
Receivables, Notes
Payable and Accounts
Payable
36
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
Long-Term Debt The carrying amounts of the Company's
bank borrowings under its short-term bank lines and
revolving credit agreement approximate fair value
because the interest rates are based on floating rates
identified by reference to market rates. The fair
values of the Company's other long-term debt either
approximate carrying value or are estimated based on
quoted market prices for the same or similar issues or
on the current rates offered to the Company for debt of
the same remaining maturities.
The carrying amounts and fair values of long-term
debt at December 31, 1994 and 1995 were as follows:
December 31,
-------------------------------------------------------
(millions of dollars) 1994 1995
-------------------------------------------------------
Carrying amount $441.0 $473.8
Fair value 419.3 463.6
Interest Rate Swaps The Company uses interest rate swap agreements to
manage exposure to fluctuations in interest rates.
Interest rate swap agreements involve the exchange of
interest obligations on fixed and floating interest
rate debt without the exchange of the underlying
principal amounts. The differential paid or received on
interest rate swap agreements is recognized as an
adjustment to interest expense over the term of the
underlying debt agreement. The book value of the
interest rate swap agreements represents the
differential receivable or payable with a swap
counterparty since the last settlement date.
The fair value of interest rate swaps is the
estimated amount the Company would receive or pay to
terminate the agreement. The fair value is calculated
using current market rates and the remaining terms of
the agreements. The fair value of interest rate swaps
at December 31, 1995 is not significant. In the
unlikely event that a counterparty fails to meet the
terms of an interest rate swap, the Company's exposure
is limited to the interest rate differential. The
underlying notional amounts on which the Company has
interest rate swap agreements outstanding was $100
million at December 31, 1995. There were no interest
rate swap agreements at December 31, 1994.
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, 1994 and 1995 were $130.7 million and
$150.3 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.
37
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
Note 14--Interim The following information includes all adjustments,
Financial Information consisting only of normal recurring items, which the
(Unaudited) Company considers necessary for a fair presentation
of 1994 and 1995 interim results of operations.
1994 Quarter Ended 1995 Quarter Ended
..................................................................................................................................
(millions of dollars,
except per share) Mar. 31 June 30 Sept. 30 Dec. 31 Year 1994 Mar. 31 June 30 Sept. 30 Dec. 31 Year 1995
..................................................................................................................................
Net service revenues $439.1 $444.1 $450.7 $459.0 $1,792.9 $462.4 $467.3 $466.5 $ 466.3 $1,862.5
Cost of services 349.6 354.6 361.0 372.1 1,437.3 372.4 377.0 375.8 375.5 1,500.7
Selling, general and
administrative expense 52.7 51.4 52.8 74.3 231.2 57.7 57.0 54.2 51.7 220.6
Depreciation 14.3 14.3 14.4 14.6 57.6 14.9 14.3 14.2 13.7 57.1
Amortization of excess
purchase price
over net assets acquired 4.1 4.2 4.0 3.8 16.1 3.8 3.6 3.5 3.6 14.5
Other income (0.5) (0.4) (0.2) (8.7) (9.8) - - - - -
Interest expense and
finance charges 11.9 12.3 13.0 13.2 50.4 13.8 14.4 14.1 15.5 57.8
Earnings (loss) before
income taxes 7.0 7.7 5.7 (10.3) 10.1 (0.2) 1.0 4.7 6.3 11.8
Provision (benefit) for
income taxes 2.8 3.1 2.3 (11.2) (3.0) (0.3) 0.4 2.3 3.5 5.9
Earnings before
extraordinary item 4.2 4.6 3.4 0.9 13.1 0.1 0.6 2.4 2.8 5.9
Extraordinary item:
Loss from early
extinguishment of debt - - - - - - - - (4.7) (4.7)
..................................................................................................................................
Net earnings (loss) $4.2 $4.6 $3.4 $0.9 $13.1 $0.1 $0.6 $2.4 ($1.9) $1.2
==================================================================================================================================
Earnings (loss) per common
share:
Earnings before
extraordinary item $0.18 $0.20 $0.15 $0.03 $0.56 - $0.03 $0.10 $0.12 $0.25
Extraordinary item - - - - - - - - (0.20) (0.20)
..................................................................................................................................
Net earnings (loss) per
share $0.18 $0.20 $0.15 $0.03 $0.56 - $0.03 $0.10 ($0.08) $0.05
==================================================================================================================================
38
Independent Auditors' Report
The Board of Directors We have audited the consolidated balance sheets of
and Stockholders Borg-Warner Security Corporation and subsidiaries as of
Borg-Warner December 31, 1995 and 1994, and the related
Security Corporation consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in
the period ended December 31, 1995. 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, 1995 and
1994, and the results of their operations and their
cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in Note 1, the Company changed its
methods of accounting for postretirement benefits other
than pensions and the method of selecting the discount
rate to discount its casualty insurance liabilities in
1993.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Chicago, Illinois . February 5, 1996
39