Borg-Warner Security Corporation
Consolidated Statistical Review
The following table sets forth selected financial information for Borg-Warner
Security Corporation (the "Company"). The information is derived from the
audited financial statements of the Company and treats Borg-Warner Automotive,
which was spun-off in January 1993, the Company's courier unit, which was
discontinued in September 1996, as discontinued operations. Previously reported
results have been restated to reflect both transactions. The selected financial
data should be read in connection with the 1996 Consolidated Financial
Statements and accompanying notes.
Year Ended December 31,
Statement of Operation Data (millions of dollars, except per share)
- -----------------------------------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
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Net service revenues $1,457.9 $1,592.1 $1,626.8 $1,708.5 $1,711.2
Earnings before interest and taxes 75.7 (148.8) 59.4 71.2 80.0
Provision (benefit) for income taxes (1) (23.6) 19.5 (3.2) 6.9 9.5
Earnings (loss) from continuing operations (2) 52.9 (218.2) 13.8 8.4 13.9
Earnings (loss) from continuing operations per share $ 2.69 $ (9.54) $ 0.59 $ 0.36 $ 0.59
Average common shares and equivalents outstanding in
thousands (3) 19,647 22,858 23,170 23,399 23,517
Balance Sheet Data (at end of period)
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $1,742.7 $ 773.5 $ 811.6 $ 838.5 $ 760.8
Total debt 740.9 450.3 459.9 484.5 442.6
Stockholders' equity 676.7 27.5 43.8 49.7 41.2
Net assets of discontinued operations $ 766.9 $ 35.1 $ 32.5 $ 36.8 $ 12.6
Stock Prices
- -----------------------------------------------------------------------------------------------------------------------------
1996 Quarters First Second Third Fourth
- -----------------------------------------------------------------------------------------------------------------------------
High $12 3/4 $13 1/8 $9 7/8 $11 3/8
Low $10 1/4 $ 9 5/8 $8 1/4 $ 9 3/8
1995 Quarters
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High $ 9 7/8 $ 9 1/2 $9 3/8 $ 13
Low $ 5 1/2 $ 6 7/8 $8 3/8 $ 7 1/8
(1) 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 1996
Consolidated Financial Statements.
(2) $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.
Borg-Warner Security Corporation
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Net Revenues
Sales by business unit were:
1995 vs. 1996
(millions of dollars) 1994 1995 1996 Percent Change
- -----------------------------------------------------------------------------
Physical Security Services $1,209.4 $1,222.8 $1,223.8 0.1%
Electronic Security Services 206.2 254.7 241.1 (5.3%)
Armored Security Services 211.2 231.0 246.3 6.6%
- -----------------------------------------------------------------------------
Total Revenues $1,626.8 $1,708.5 $1,711.2 0.2%
=============================================================================
The Company's physical security services unit is the nation's largest provider
of contract security personnel with approximately 73,000 employees serving
14,000 customers in the United States, Canada, United Kingdom and South America.
Physical security business revenue was flat versus 1995 primarily due to
management's decision to prune low margin and higher risk business during the
year. Revenue growth in 1995 was principally due to higher billing rates and new
business growth.
The Company's electronic security services unit is a leading full service
provider of integrated electronic security systems, including intrusion and fire
detection, closed circuit television, and access control. The unit has
approximately 126,000 customers and 2,200 employees. In 1995 this unit began
recognizing certain long-term alarm service contracts as sales-type leases
rather than operating leases. Excluding the impact of sales-type lease
accounting, 1996 alarm revenues were up modestly from 1995. Revenue in 1995,
excluding the impact of sales-type leases, increased 5 percent primarily due to
higher direct sales of commercial installations and higher service revenue on
residential operations.
The Company's armored security services unit is a leading provider of
armored transportation, automated teller machine and cash handling services to
financial institutions and commercial businesses nationwide. Revenue in 1996
increased principally due to higher volume in ATM services. 1995 revenue
increased due to better pricing and higher volume in the Wells Fargo Armored
Express and ATM service operations.
In January, 1997, Wells Fargo Armored entered into a business combination
with Loomis Armored. The combined company, known as Loomis, Fargo & Co., is
owned 51 percent by the former Loomis shareholders and 49 percent by Borg-Warner
Security. The combination created a leading armored transportation and ATM
services company with broad geographic coverage. This transaction has allowed
Borg-Warner Security to reduce its debt by $105 million from the 1996 year-end
level.
As of September 30, 1996, the Company's Pony Express Courier unit has been
treated as a discontinued operation. In connection with this, a non-cash charge
of $25 million, an earnings per share equivalent of $1.06, was incurred to
recognize the future realizable value of this business.
These two events enable Borg-Warner Security to focus its resources on the
core electronic and physical security businesses.
The Company believes the security industry will experience significant
changes in the future. Increased outsourcing of security management needs,
customer demand for single point responsibility, improved quality and
reliability of services, and financial stability of security providers are
factors driving the trend toward "total security solutions."
Through its ability to offer both physical and electronic security
services, and its 49 percent ownership in Loomis, Fargo & Co., the Company is
uniquely positioned to effectively and profitably provide customers with the
total security solution they require.
Total Costs and Expenses
Cost of services as a percent of revenue was 79.5 percent, 79.6 percent and 79.3
percent in 1996, 1995 and 1994, respectively. Gross profit margins remained
consistent as a
result of the Company's commitment to improved contract profitability and
internal productivity improvement programs which offset increased labor costs.
Depreciation expenses were $47.0 million in 1996, down from $52.1 million
in 1995 and $52.8 million in 1994. Reduced electronic security equipment under
operating leases was the principal factor.
Selling, general and administrative (SG&A) expenses were $210.6 million,
$212.5 million and $220.2 million in 1996, 1995 and 1994, respectively. As a
percent of net sales, SG&A costs were 12.3 percent, 12.4 percent and 13.5
percent in 1996, 1995 and 1994, respectively. The decrease since 1994 is due
primarily to continued cost reduction efforts, partially offset by increased
investments in training and recruitment of employees and in information systems.
Additionally, SG&A in 1994 included $14.0 million in non-recurring, non-cash
accruals for self-insurance reserves and other corporate allowances.
Operating profit increased to $93.1 million in 1996 from $85.9 million in
1995 and $76.1 million in 1994. Operating profit margin increased to 5.4 percent
in 1996 from 5.0 percent in 1995 and 4.0 percent in 1994. Physical security
services operating profit increased to $62.1 million in 1996 from $56.4 million
in 1995 and $54.5 million in 1994. Electronic security services operating profit
increased to $18.9 million in 1996 from $15.8 million in 1995 and $14.9 million
in 1994. Armored security services operating profit was $12.1 million in 1996
compared with $13.7 million in 1995 and $6.7 million in 1994.
Other income in 1994 included a gain of $9.9 million related to the sale of
trademarks and other rights to Borg-Warner Automotive.
Interest expense, including the amortization of financing costs, increased
to $56.6 million in 1996 from $55.9 million in 1995 as a result of higher costs
associated with the issuance and renegotiation of certain bank lines of credit
and borrowing facilities. This was partially offset by the benefits of lower
short-term market rates of interest and lower average debt levels outstanding.
The increase in 1995 from $48.8 million in 1994 was due to higher market
interest rates combined with increased rates under the 1995 credit agreement
amendments and refinancing.
Income taxes were $9.5 million and $6.9 million in 1996 and 1995,
respectively. The Company's effective tax rate in 1996 was 40.6 percent, down
from 45.1 percent in 1995. The effective tax rate generally exceeds the
statutory rate 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.
Earnings from continuing operations for 1996 were $13.9 million, up 65.5
percent from $8.4 million in 1995. Earnings from continuing operations were
$13.8 million in 1994. Including the impact of the discontinued Pony Express
Courier business, the Company incurred a net loss of $14.6 million in 1996,
compared with net earnings of $1.2 million in 1995, and $13.1 million in 1994.
Net earnings in 1995 included 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.
International Operations
Revenues for 1996 were $116.7 million compared with $109.4 million in 1995 and
$101.7 million in 1994. Operations are primarily in Canada, Columbia and the
United Kingdom and principally involve the employment of contract guard
personnel.
Financial Position, Capital Resources and Liquidity
The Company continues its strategy to become less capital intensive and to
produce steady cash flow from operations. In addition to internally generated
cash flow, the Company maintains financing resources that are sufficient to meet
working capital and other needs.
Cash Flow
The Company generated cash flow from operating activities of $86.9 million in
1996, compared to $52.4 million and
$68.0 million in 1995 and 1994, respectively. The improved cash flow in 1996 was
due primarily to better working capital management.
Capital expenditures of $40.7 million in 1996 were down from 1995 and 1994
levels of $47.8 million and $59.4 million, respectively. This reduction reflects
a more selective investment process, primarily within the electronic security
services segment.
The Company also implemented a program in 1995 to securitize certain lease
contracts within the electronic security services segment. This program reduced
the internal capital requirements necessary to maintain and grow this line of
business.
Leverage/Capitalization
Debt was $442.6 million at year-end 1996, a reduction of $41.9 million from the
1995 year-end level of $484.5 million. This reduction primarily resulted from
cash flow from operations exceeding investing activities.
In 1996, the Company repaid $100 million of 8% senior notes with $100 million
in proceeds from a bank term loan due December 31, 1998.
The Company uses selective financial derivative instruments to limit exposure
to fluctuations in short term interest rates.
At year-end 1996, the Company maintained bank lines of credit and borrowing
facilities totalling $332.2 million of which $283.6 million was utilized and
outstanding. Of the total, $41.6 million is available through June 1999 and $248
million matures at various dates through 1998, with the remainder maturing at
various dates in 1997. The bank credit lines and facilities provide for funds at
market rates of interest throughout the availability periods. The Company's term
loan facility requires partial prepayment if, at 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 has commitments, subject to certain customary conditions, from banks to
provide debt financing that would replace the existing term loan facility.
The Company also maintained a $155 million letter of credit facility that is
available through 1998. The Company utilizes letters of credit to secure certain
of its obligations under various casualty insurance programs. At year-end 1996,
letters of credit totalling $136.3 million were issued and outstanding.
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.
BORG-WARNER SECURITY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------
(millions of dollars, except per share) 1994 1995 1996
- --------------------------------------------------------------------------------------------------------------
Net service revenues $1,626.8 $1,708.5 $1,711.2
Cost of services 1,289.4 1,359.3 1,360.2
Selling, general and administrative expenses 220.2 212.5 210.6
Depreciation 52.8 52.1 47.0
Amortization of excess purchase price over net assets acquired 14.8 13.4 13.4
Other income, net-Note 10 (9.8) -- --
Interest expense and finance charges 48.8 55.9 56.6
- --------------------------------------------------------------------------------------------------------------
Earnings before income taxes 10.6 15.3 23.4
Provision (benefit) for income taxes-Note 11 (3.2) 6.9 9.5
- --------------------------------------------------------------------------------------------------------------
Earnings from continuing operations 13.8 8.4 13.9
Loss from discontinued operations, net of income taxes-Note 3 (0.7) (2.5) (28.5)
- --------------------------------------------------------------------------------------------------------------
Earnings (loss) before extraordinary item 13.1 5.9 (14.6)
Extraordinary item:
Loss from early extinguishment of debt, net of $3.2 tax benefit-Note 5 -- (4.7) --
- --------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 13.1 $ 1.2 $ (14.6)
==============================================================================================================
Earnings (loss) per common share:
Continuing operations $ 0.59 $ 0.36 $ 0.59
Discontinued operations (0.03) (0.11) (1.21)
Extraordinary item -- (0.20) --
- --------------------------------------------------------------------------------------------------------------
Net earnings (loss) per share $ 0.56 $ 0.05 $ (0.62)
==============================================================================================================
(See accompanying notes to consolidated financial statements)
Borg-Warner Security Corporation
Consolidated Balance Sheet
December 31,
- -------------------------------------------------------------------------------------------------------------
(millions of dollars) 1995 1996
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ASSETS
Cash and cash equivalents $ 19.4 $ 17.8
Receivables, net 90.7 100.4
Inventories 12.5 12.1
Other current assets 59.7 36.8
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Total current assets 182.3 167.1
Property, plant and equipment
Land and buildings 47.6 46.9
Machinery and equipment 72.8 5.8
Subscribers' installations 336.5 374.6
Capital leases 18.8 14.3
Construction in progress 2.7 1.0
- -------------------------------------------------------------------------------------------------------------
478.4 442.6
Less accumulated depreciation 240.5 239.5
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Net property, plant and equipment 237.9 203.1
Net excess purchase price over net assets acquired 250.2 237.2
Deferred tax asset, net 52.8 46.8
Net assets of discontinued operations 36.8 12.6
Other assets 78.5 94.0
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Total other assets 418.3 390.6
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$ 838.5 $ 760.8
=============================================================================================================
Liabilities and Stockholders' Equity
Notes payable $ 3.6 $ 4.4
Accounts payable and accrued expenses 185.6 173.7
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Total current liabilities 189.2 178.1
Long-term debt 480.9 438.2
Other long-term liabilities 118.7 103.3
Capital stock:
Common stock, issued 22,446,100 shares in 1995 and 1996 0.2 0.2
Series I non-voting common stock, issued 2,720,000 shares in 1995 and 1996 - -
Capital in excess of par value 28.1 29.0
Retained earnings 31.2 20.6
Notes receivable-management stock purchase (0.3) (0.3)
Cumulative translation adjustment (0.4) 0.5
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58.8 50.0
Treasury common stock, at cost, 1,928,861 shares in 1995 and 1,862,311 shares in 1996 (9.1) (8.8)
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 49.7 41.2
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$ 838.5 $ 760.8
=============================================================================================================
(See accompanying notes to consolidated financial statements)
Borg-Warner Security Corporation
Consolidated Statement of Cash Flows
Year ended December 31,
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(millions of dollars) 1994 1995 1996
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Operating:
Continuing operations:
Earnings from continuing operations $ 13.8 $ 8.4 $ 13.9
Adjustments to reconcile net earnings to net cash provided by
continuing operations:
Non-cash charges to earnings:
Depreciation and amortization 67.6 65.5 60.4
Provision for losses on receivables 5.5 4.4 2.7
Deferred income taxes (9.4) (5.5) (3.8)
Amortization of debt discount 2.1 2.1 0.6
Changes in assets and liabilities:
(Increase) in receivables (17.7) (6.1) (12.4)
(Increase) decrease in other current assets (2.8) (6.9) 32.6
Increase (decrease) in accounts payable and accrued expenses 19.2 19.3 (8.1)
Net change in other long-term assets and liabilities (3.7) (22.0) 5.3
Gain on sales of other assets (8.5) -- --
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operations 66.1 59.2 91.2
Discontinued operations:
Net loss (0.7) (2.5) (28.5)
Other cash related to discontinued operations 2.6 (4.3) 24.2
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Net cash provided by (used in) discontinued operations 1.9 (6.8) (4.3)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 68.0 52.4 86.9
Investing:
Capital expenditures and investments in sales-type leases (59.4) (47.8) (40.7)
Payments related to businesses acquired (9.0) -- --
Proceeds from sales of fixed and other assets 4.2 (1.1) 1.9
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (64.2) (48.9) (38.8)
Financing:
Net increase (decrease) in notes payable 2.9 (6.1) 0.8
Increase (decrease) in debt outstanding under revolving credit facility 40.2 19.4 (37.8)
Increases in long-term debt 17.5 100.0 100.0
Reductions in long-term debt (53.1) (90.8) (105.5)
Net decrease in receivables sold (12.0) (20.9) (9.3)
Sales of treasury common stock 0.8 1.0 0.3
Other 1.7 (2.0) 1.8
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Net cash provided by (used in) financing activities (2.0) 0.6 (49.7)
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1.8 4.1 (1.6)
Cash and cash equivalents at beginning of year 13.5 15.3 19.4
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 15.3 $ 19.4 $ 17.8
- ------------------------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Interest paid $ 46.0 $ 54.2 $ 57.7
Income taxes paid (refunded) (3.2) 0.7 2.8
(See accompanying notes to consolidated financial statements)
Borg-Warner Security Corporation
Consolidated Statement of Stockholders' Equity
Year Ended December 31, 1994 1995 1996
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(millions of dollars, except share data) Shares Amount Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock Issued
Beginning balance 24,955,700 $ 0.2 25,155,700 $ 0.2 25,166,100 $ 0.2
Conversion of Series I non-voting shares
to common shares 200,000 -- 10,400 -- -- --
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Balance at December 31 25,155,700 0.2 25,166,100 0.2 25,166,100 0.2
- -----------------------------------------------------------------------------------------------------------------------------------
Capital in Excess of Par Value
Beginning balance 28.2 30.9 28.1
Shares issued under stock option and
related plans 0.2 (5.4) 0.4
Tax benefit from trust distribution and exercise
of stock options 2.5 2.6 0.5
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Balance at December 31 30.9 28.1 29.0
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Retained Earnings
Beginning balance 15.9 29.7 31.2
Net earnings (loss) 13.1 1.2 (14.6)
Adjustment for deferred pension experience loss 0.7 0.3 4.0
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Balance at December 31 29.7 31.2 20.6
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Notes Receivable-Management Stock Purchase
Beginning balance (1.8) (1.0) (0.3)
Net activity 0.8 0.7 --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 (1.0) (0.3) (0.3)
- -----------------------------------------------------------------------------------------------------------------------------------
Cumulative Translation Adjustment
Beginning balance 1.3 (0.5) (0.4)
Current year adjustment (1.8) 0.1 0.9
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Balance at December 31 (0.5) (0.4) 0.5
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Treasury Stock
Beginning balance 2,151,108 (16.3) 2,237,344 (15.5) 1,928,861 (9.1)
Shares issued under stock option and
related plans (113,764) 0.8 (318,883) 6.4 (66,550) 0.3
Conversion of Series I non-voting shares
to common shares 200,000 -- 10,400 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 2,237,344 (15.5) 1,928,861 (9.1) 1,862,311 (8.8)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity $ 43.8 $ 49.7 $ 41.2
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(See accompanying notes to consolidated financial statements)
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements
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Note 1-Summary of Significant Accounting Policies
The following paragraphs briefly describe significant accounting policies.
Certain 1994 and 1995 amounts have been reclassified to conform with the 1996
presentation.
Principles of Consolidation
The consolidated financial statements include all significant subsidiaries. As
of September 30, 1996, the Company's courier unit has been treated as a
discontinued operation. The assets, liabilities, results of operations and
adjustments to carrying values of net assets, and cash flows of the courier unit
have been segregated and reported as discontinued operations for all periods
presented, and previously reported results have been restated (see Note 3).
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and related disclosures. Actual
results may differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consists primarily of cash and 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 method.
Property, Plant and Equipment and Depreciation
Property, plant and equipment is carried at cost less accumulated depreciation.
Expenditures for maintenance, repairs and renewals of relatively minor items are
generally charged to expense as incurred. Renewals of significant items are
capitalized. Depreciation is computed generally on the straight-line method over
the following estimated useful lives:
Buildings and improvements 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 Benefit Plans
A number of eligible salaried and hourly employees participate in contributory
or noncontributory defined benefit or defined contribution plans. Funding policy
is based upon independent actuarial valuations and is within the limits required
by ERISA for U.S. defined benefit plans.
The benefits provided to certain salaried employees covered under various
defined benefit plans are based on years of service and final average pay and
utilize the projected unit credit method for cost allocation. The benefits
provided to certain hourly employees under various defined benefit plans are
based on years of service and utilize the unit credit method for cost
allocation.
Under the defined contribution plans, contributions by the Company or its
subsidiaries sponsoring the plans are based on the employees' salary, age, years
of service, and/or a fixed schedule. These contributions are charged to earnings
as they are made to the various plans.
Casualty Insurance Liabilities
The Company has accrued a discounted liability for the retained portion of
insurance costs related to its various
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
deductible policies. This insurance liability is determined by the Company based
on claims filed and an estimate of claims incurred but not yet reported. The
discount rate used to value the future obligation at December 31, 1995 and 1996
was 5.5%.
Amortization of Excess of Purchase Price Over
Net Assets Acquired
Excess of purchase price over net assets acquired is being amortized on a
straight-line basis over 5 to 40 years, with the majority being amortized over
40 years. The Company periodically reviews its operations to determine whether
there has been a diminution in value of its excess purchase price over net
assets acquired.
Transactions with Borg-Warner Automotive
Under a tax-sharing agreement with the Company, for periods prior to January
1993, Borg-Warner Automotive is required to pay the Company for any operating
loss carry-forward apportioned to it at such time as the benefits related to
such carry-forward are realized by Borg-Warner Automotive. Also, certain costs
incurred at corporate headquarters are charged to Borg-Warner Automotive based
on a service agreement with the Company.
Derivative Financial Instruments
The Company uses interest rate swap agreements to manage exposure to interest
rate fluctuations. The Company does not use derivative instruments for
speculative purposes. The differential paid or received on interest rate swap
agreements is recognized as an adjustment to interest expense in the period
incurred or earned.
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 1996, the Company adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and For Long-Lived
Assets to Be Disposed Of." The adoption of this standard did not have a material
effect on the financial statements.
In 1996, the Company also adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). This
statement defines a new "fair value" method of accounting for stock-based
compensation expense, and requires certain additional disclosures. 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" (APB 25). The Company has retained
the intrinsic value method and, therefore, the new standard had no effect on the
Company's net income or financial position (see Note 8).
In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position No. 96-1, "Environmental Remediation Liabilities,"
which is effective for calendar year 1997. The Company does not expect adoption
of this statement to have a material effect on the financial statements.
In June 1996, the Financial Accounting Standards Board issued Statement No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which the Company must adopt for transactions
occurring after December 31, 1996. The Company does not expect adoption of this
statement to have a material effect on the financial statements.
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
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Note 2--Balance Sheet Information
Detailed balance sheet data are as follows:
December 31,
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(millions of dollars) 1995 1996
- --------------------------------------------------------------------------------
Receivables
Customers $ 94.1 $102.8
Other 3.4 3.9
- --------------------------------------------------------------------------------
97.5 106.7
Less allowance for losses 6.8 6.3
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Net receivables $ 90.7 $100.4
================================================================================
Other assets
Net investment in sales-type leases $ 35.3 $ 54.4
Debt issuance costs 14.5 10.4
Deferred pension asset 7.5 9.1
Deferred subscribers' installation costs 7.2 5.4
Other 14.0 14.7
- --------------------------------------------------------------------------------
Total other assets $ 78.5 $ 94.0
================================================================================
Accounts payable and accrued expenses
Trade payables $ 24.4 $ 42.5
Payroll and related 58.2 41.6
Casualty insurance 45.2 44.4
Interest 8.5 5.2
Liabilities to former shareholders 10.9 8.7
Deferred income 10.8 10.3
Other 27.6 21.0
- --------------------------------------------------------------------------------
Total accounts payable and accrued expenses $185.6 $173.7
================================================================================
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, net" in the accompanying Consolidated Balance Sheet
at December 31, 1995 and 1996. The Company retains, on a subordinated basis, an
undivided interest in the pool of receivables. The Company's retained interest
of $15.3 million and $34.9 million at December 31, 1995 and 1996, respectively,
is included with "Receivables, net" on the balance sheet. While the courier unit
continues to participate in the receivables facility, its share of the
receivables pool has been segregated on the balance sheet with "Net assets of
discontinued operations." "Other current assets" at December 31, 1995 and 1996
included interest-bearing cash deposits of $28.9 million and $9.3 million,
respectively, 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.
Selling, general and administrative expenses include provisions for losses on
receivables of $5.5 million, $4.4 million and $2.7 million in 1994, 1995 and
1996, respectively.
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
Accumulated depreciation related to capital leases amounted to $11.0
million and $8.8 million at December 31, 1995 and 1996, respectively.
Accumulated amortization related to excess purchase price over net assets
acquired amounted to $77.8 million and $74.2 million at December 31, 1995 and
1996, 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 $16.1 million and $32.7 million at December 31, 1995 and 1996,
respectively.
The non-current portion of the casualty insurance liability, included in
other long-term liabilities, was $44.2 million at December 31, 1995 and 1996.
The total discounted insurance accrual, including the portion reflected in
accounts payable and accrued liabilities, was $89.4 million and $88.6 million at
December 31, 1995 and 1996, respectively. The estimated aggregate undiscounted
insurance liability was $101.6 million and $101.9 million at December 31, 1995
and 1996, respectively.
- --------------------------------------------------------------------------------
Note 3-Discontinued Operations
As of September 30, 1996, the Company's courier unit has been treated as a
discontinued operation. The assets, liabilities, results of operations and
adjustments to carrying values of net assets, and cash flows of the courier unit
have been segregated and reported as discontinued operations for all periods
presented, and previously reported results have been restated. As of December
31, 1996, the net assets of the discontinued operation consists mainly of
customer receivables, property, plant and equipment and accounts payable.
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------
(millions of dollars, except per share) 1994 1995 1996
- -----------------------------------------------------------------------------------------------------
Net service revenues $166.1 $154.0 $140.0
=====================================================================================================
Loss from operations before income taxes $ (0.5) $ (3.5) $ (5.4)
Income tax benefit (paid) (0.2) 1.0 1.9
- ------------------------------------------------------------------------------------------------------
Loss from operations (0.7) (2.5) (3.5)
Adjustment of assets to estimated realizable value and other provisions -- -- (27.0)
Income tax benefit -- -- 2.0
- -----------------------------------------------------------------------------------------------------
Net adjustment and provisions -- -- (25.0)
- -----------------------------------------------------------------------------------------------------
Net loss from discontinued operations $ (0.7) $ (2.5) $(28.5)
=====================================================================================================
Loss per common share:
Loss from operations $(0.03) $(0.11) $(0.15)
Net adjustment and provisions -- -- (1.06)
- -----------------------------------------------------------------------------------------------------
Loss per common share $(0.03) $(0.11) $(1.21)
=====================================================================================================
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
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, 1996 as follows:
Fiscal year (millions of dollars)
- -------------------------------------------------
1997 $19.4
1998 16.3
1999 9.9
2000 6.4
2001 4.3
2002 and after 8.9
- -------------------------------------------------
Total $65.2
- -------------------------------------------------
Total rental expense amounted to $21.5 million, $26.1 million and $26.7 million
in 1994, 1995 and 1996, respectively.
Note 5--Notes Payable and Long-Term Debt
The following is a summary of notes payable and long-term debt which reflects
all borrowings of the Company and its consolidated subsidiaries:
December 31, 1995 December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------
(millions of dollars) Current Long-Term Current Long-Term
- -----------------------------------------------------------------------------------------------------------------------
Bank term loan due 1998 (at an average of 8.3% in 1995 and 8.9% in 1996) $ -- $100.0 $ -- $196.8
Bank revolving credit loan due through 1999
(at an average rate of 7.3% in 1995 and 8.5% in 1996) -- 124.6 -- 86.8
8% notes (face amount $100 million due 1996) -- 99.5 -- --
Unsecured notes (at an average rate of 7.0% in 1995 and 7.3% in 1996) 0.4 0.6 2.0 0.1
Capital lease liability (at an average rate of 8.4% in 1995 and 10.2% in 1996) 3.2 7.1 2.4 5.3
9 1/8% senior subordinated notes (face amount $150 million due 2003) -- 149.1 -- 149.2
- -----------------------------------------------------------------------------------------------------------------------
Total notes payable and long-term debt $3.6 $480.9 $4.4 $438.2
- -----------------------------------------------------------------------------------------------------------------------
Maturities of long-term debt, including unamortized discount of $0.8 million,
are as follows: 1998, $243.4 million; 1999, $42.2 million; 2000, $1.0 million;
2001, $1.0 million; and after 2001, $151.4 million.
Included in long-term debt at December 31, 1995 and 1996 were obligations of
$255.7 million and $154.5 million, respectively, with fixed interest rates and
$225.2 million and $283.7 million, respectively, with variable interest rates
(generally based on LIBOR or prime rate). Interest rate swap agreements with a
notional amount of $125 million at December 31, 1996 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
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
reduces semi-annually during the remaining commitment period. Available future
commitments at December 31 are as follows: 1997, $92.4 million; and 1998, $41.6
million. Unused commitments at December 31, 1996 under the revolving credit
facility were $48.6 million.
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. To secure its
obligations under these facilities, the Company pledged the stock of certain of
its subsidiaries.
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.
- --------------------------------------------------------------------------------
Note 6--Contingent Liabilities
The Company's discontinued property and casualty insurance subsidiary
("Centaur") ceased writing insurance in 1984 and has been operating under
rehabilitation since September 1987. Rehabilitation is a process supervised by
the Illinois Director of Insurance to attempt to compromise claim liabilities at
an aggregate level that is not in excess of Centaur's assets. In rehabilitation,
Centaur's assets are being used to satisfy claim liabilities under direct
insurance policies written by Centaur. Any remaining assets will be applied to
Centaur's obligations to other insurance companies under reinsurance contracts.
If all of Centaur's obligations are not satisfied through rehabilitation, it is
possible that satisfaction could be sought from the Company for Centaur's
liabilities.
The foregoing has resulted in one pending lawsuit against the Company, certain
of its current and former subsidiaries, and directors and officers of certain
current and former subsidiaries for recovery of alleged damages incurred because
of Centaur's failure to satisfy its reinsurance obligations. The lawsuit seeks
in excess of $100 million for current losses, future losses and other damages
and also seeks punitive damages. The Company believes that any damages for
failure to satisfy reinsurance obligations are solely the responsibility of
Centaur and that the resolution of the lawsuit relating to Centaur, including
the Company's indemnification obligations to certain former officers and
directors, will not have a material adverse effect on its financial position or
future operating results; however, no assurance can be given as to the ultimate
outcome with respect to such lawsuit.
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
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
the scope of contamination at such sites, estimated remediation costs at such
sites, indemnification obligations in favor of the Company from the current
owners of certain sold or discontinued operations, estimated legal fees and
other factors, the Company has made provisions for indicated environmental
liabilities in the aggregate amount of approximately $9 million (relating to
environmental matters with respect to discontinued operations of the Company).
The Company has requested that its discontinued automotive subsidiary, Borg-
Warner Automotive, indemnify it against certain past and future costs relating
to environmental and financing liabilities associated with certain former
automotive operations. At December 31, 1996 such past costs were approximately
$2.3 million. Borg-Warner Automotive has contested its indemnification
obligation with respect to such liabilities.
The Company believes that the various asserted claims and litigation in which
it is involved will not materially affect its financial position, future
operating results or cash flows, although no assurance can be given with respect
to the ultimate outcome of any such claim or litigation.
Note 7--Retirement Benefits
The Company has various defined benefit and contribution plans which cover
eligible employees.
Retirement benefit expense amounted to $5.8 million, $4.7 million and $4.5
million in 1994, 1995 and 1996, respectively. This expense includes post-
retirement life insurance and medical benefits of $0.2 million, $0.3 million and
$0.3 million for 1994, 1995 and 1996, respectively, as well as defined
contribution plan expenses of $1.6 million, $1.7 million and $1.5 million in
1994, 1995 and 1996, respectively.
The following table sets forth the funded status of the defined benefit plans:
Funded Status December 31, 1995 December 31, 1996
- --------------------------------------------------------------------------------------------------------
(millions of dollars) Over Under Over Under
- --------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefits $45.6 $ 44.1 $60.6 $25.7
Non-vested benefits 1.4 2.0 2.6 0.1
- --------------------------------------------------------------------------------------------------------
Accumulated benefit obligations 47.0 46.1 63.2 25.8
Effect of projected future compensation levels 5.3 -- 5.0 --
- --------------------------------------------------------------------------------------------------------
Projected benefit obligation 52.3 46.1 68.2 25.8
Plan assets at fair value 55.9 34.4 81.4 20.5
- --------------------------------------------------------------------------------------------------------
Assets in excess of (less than) projected benefit obligation 3.6 (11.7) 13.2 (5.3)
Unrecognized net loss (gain) 2.9 9.7 (4.9) 3.1
Unrecognized prior service cost (benefit) (1.7) 2.7 0.8 --
- --------------------------------------------------------------------------------------------------------
Net asset (liability) before minimum liability 4.8 0.7 9.1 (2.2)
Adjustment required to recognize minimum liability -- (12.4) -- (3.1)
- --------------------------------------------------------------------------------------------------------
Net asset (liability) on balance sheet $ 4.8 $(11.7) $ 9.1 $(5.3)
- --------------------------------------------------------------------------------------------------------
BORG-WARNER SECURITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Assets held in trust for the defined benefit plans are comprised primarily 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) 1994 1995 1996
- -----------------------------------------------------------------
Service cost $ 3.0 $ 2.4 $ 3.3
Interest cost 6.7 6.9 7.0
Actual return on assets 1.1 (20.4) (12.5)
Net amortization and deferrals (6.9) 13.8 4.9
- -----------------------------------------------------------------
Net periodic pension cost $ 3.9 $ 2.7 $ 2.7
=================================================================
The Company's assumptions used as of December 31, 1994, 1995 and 1996 in
determining the pension cost and pension liability shown above were as follows:
(percent) 1994 1995 1996
- ----------------------------------------------
Discount rate 8.5 7.5 8.0
Rate of salary progression 4.0 4.0 4.0
Long-term rate of
return on assets 9.5 9.5 10.0
- ----------------------------------------------
The Company also has post-employment benefits covering certain existing and
former employees, including employees of certain businesses which have been
divested by the Company. The liabilities on the Company's balance sheet for
these benefits as of December 31, 1995 and 1996 were $12.4 million and $11.5
million, respectively, and are included in "Other Long-Term Liabilities." The
discount rate used in determining this liability was 7.5% in 1995 and 8.0% in
1996. Medical expense increases are projected to be 7.25% in 1997 grading to
5.25% in 1999.
- --------------------------------------------------------------------------------
NOTE 8-STOCK OPTIONS AND NOTES RECEIVABLE-
MANAGEMENT STOCK PURCHASE
Stock Option Plan
The Company has two plans which authorize the grant of options to purchase
3,900,000 shares of the Company's common stock. All options granted to date
carry exercise prices ranging from $5.00 to $20.75 per share. These prices
correspond to the fair market value (as defined in the plans) of the Company's
common stock at the time of grant with a graded vesting schedule between two to
three years.
In 1994, 1995 and 1996 there were no options canceled or converted.
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
Common shares under option for the years ended December 31, 1994, 1995 and 1996
are summarized as follows:
Number of Shares Aggregate Option Price
- -----------------------------------------------------------------------------------------------------------------------------------
(shares in thousands, dollars in millions) 1994 1995 1996 1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Shares under option at January 1 1,472 1,843 1,810 $ 19.9 $26.7 $ 24.2
Granted 593 390 159 9.7 3.3 1.7
Exercised (114) (141) (66) (1.1) (0.7) (0.3)
Forfeited (108) (282) (358) (1.8) (5.1) (6.7)
- -----------------------------------------------------------------------------------------------------------------------------------
Shares under option at end of period 1,843 1,810 1,545 $ 26.7 $24.2 $ 18.9
===================================================================================================================================
Options exercisable 881 800 985
==========================================================================================
Shares available for future grant 186 78 1,177
==========================================================================================
Weighted-average fair value of options
granted during the year $ 3.57 $ 4.00
==========================================================================================
Additional information regarding options outstanding as of December 31, 1996 is
as follows (thousands of shares):
Options Outstanding Options Exercisable
-------------------------------------- ----------------------
Weighted Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (yrs) Price Exercisable Price
- ------------------------------------------------------------------------------------------------------
$5.00-8.75 668 5.3 $ 7.04 378 $ 5.92
10.94-15.94 548 7.2 14.75 294 15.84
16.03-18.83 263 4.3 17.99 263 17.99
19.63-20.75 66 6.6 20.14 50 20.21
- ------------------------------------------------------------------------------------------------------
5.00-20.75 1,545 5.9 12.20 985 12.84
======================================================================================================
The 560 thousand options outstanding at December 31, 1996 that are not presently
exercisable will vest according to various schedules between two to three years.
The Company has retained the "intrinsic value" method of accounting for stock-
based compensation expense under APB 25. Had compensation cost been determined
based on the "fair value" method under SFAS 123, the Company's pro forma net
income and earnings per share would have been as follows:
Year Ended December 31,
- --------------------------------------------------------------------------------
(millions of dollars, except per share) 1995 1996
- --------------------------------------------------------------------------------
Net income (loss) As reported $ 1.2 $(14.6)
Pro forma 1.1 (14.9)
Earnings (loss) per share As reported $0.05 $(0.62)
Pro forma 0.04 (0.63)
- --------------------------------------------------------------------------------
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996, respectively: expected volatility
of 43% and 41%; risk-free interest rates of 6.00-6.81% and 6.15-6.22%; and
expected lives of 4 and 3-4 years.
Notes Receivable-Management Stock Purchase
Included among the Company's equity holders are members of management. Purchases
of shares by management have been funded in part by loans from the Company.
These loans, which totaled approximately $0.3 million at December 31, 1995 and
1996, bear interest at approximately 6% and are offset against stockholders'
equity in the Consolidated Balance Sheet.
- --------------------------------------------------------------------------------
Note 9--Business Segment Information
The Company's continuing operations have been classified into three business
segments: guard, alarm and armored 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.
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.
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
Summarized financial information by business segment for 1994, 1995 and 1996 is
as follows:
Year Ended December 31,
- ------------------------------------------------------------------------------------------------
(millions of dollars) 1994 1995 1996
- ------------------------------------------------------------------------------------------------
NET SERVICE REVENUES:
Guard services $1,209.4 $1,222.8 $1,223.8
Alarm services 206.2 254.7 241.1
Armored services 211.2 231.0 246.3
- ------------------------------------------------------------------------------------------------
Total net service revenues $1,626.8 $1,708.5 $1,711.2
================================================================================================
OPERATING PROFIT:
Guard services $ 54.5 $ 56.4 $ 62.1
Alarm services 14.9 15.8 18.9
Armored services 6.7 13.7 12.1
- ------------------------------------------------------------------------------------------------
Total operating profit 76.1 85.9 93.1
- ------------------------------------------------------------------------------------------------
Corporate expenses 26.5 14.7 13.1
Other income (9.8) - -
Interest expense 48.8 55.9 56.6
- ------------------------------------------------------------------------------------------------
Earnings before taxes 10.6 15.3 23.4
Provision (benefit) for income taxes (3.2) 6.9 9.5
- ------------------------------------------------------------------------------------------------
Earnings from continuing operations $ 13.8 $ 8.4 $ 13.9
================================================================================================
DEPRECIATION:
Guard services $ 7.4 $ 7.3 $ 5.7
Alarm services 38.0 37.4 34.2
Armored services 7.0 7.1 7.0
Corporate 0.4 0.3 0.1
- ------------------------------------------------------------------------------------------------
Total depreciation $ 52.8 $ 52.1 $ 47.0
================================================================================================
AMORTIZATION OF EXCESS PURCHASE PRICE OVER NET ASSETS ACQUIRED:
Guard services $ 11.1 $ 8.9 $ 8.9
Alarm services 2.3 2.8 2.9
Armored services 1.3 1.5 1.4
Corporate 0.1 0.2 0.2
- ------------------------------------------------------------------------------------------------
Total amortization $ 14.8 $ 13.4 $ 13.4
================================================================================================
CAPITAL EXPENDITURES:
Guard services $ 8.6 $ 3.6 $ 3.1
Alarm services 44.6 40.5 29.5
Armored services 6.2 3.7 8.1
- ------------------------------------------------------------------------------------------------
Total capital expenditures $ 59.4 $ 47.8 $ 40.7
================================================================================================
IDENTIFIABLE ASSETS:
Guard services $ 259.2 $ 231.1
Alarm services 364.6 348.2
Armored services 89.1 87.4
Discontinued operations 36.8 12.6
Corporate 88.8 81.5
- ------------------------------------------------------------------------------------------------
Total identifiable assets $ 838.5 $ 760.8
================================================================================================
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
Note 10--Other Income, Net
Other income in 1994 included a $9.9 million gain on the sale of certain
trademarks and other rights to Borg-Warner Automotive.
- --------------------------------------------------------------------------------
Note 11--Income Taxes
Earnings before income taxes from continuing operations and provision (benefit)
for income taxes consist of:
1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------
(millions of dollars) U.S. Non-U.S. Total U.S. Non-U.S. Total U.S. Non-U.S. Total
- -----------------------------------------------------------------------------------------------------------------------
Earnings before income taxes $ 7.9 $ 2.7 $10.6 $11.9 $ 3.4 $15.3 $19.1 $ 4.3 $23.4
- -----------------------------------------------------------------------------------------------------------------------
Income taxes:
Current:
Federal/Foreign $ 3.6 $1.7 $ 5.3 $ 9.9 $ 1.5 $11.4 $10.5 $ 1.3 $11.8
State 0.9 -- 0.9 1.0 -- 1.0 1.5 -- 1.5
- -----------------------------------------------------------------------------------------------------------------------
4.5 1.7 6.2 10.9 1.5 12.4 12.0 1.3 13.3
Deferred (9.4) -- (9.4) (5.5) -- (5.5) (3.8) -- (3.8)
- -----------------------------------------------------------------------------------------------------------------------
Provision (benefit) for income taxes $(4.9) $ 1.7 $(3.2) $ 5.4 $ 1.5 $ 6.9 $ 8.2 $ 1.3 $ 9.5
- -----------------------------------------------------------------------------------------------------------------------
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) 1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------
Income taxes at U.S. statutory rate of 35% $ 3.7 $ 5.3 $ 8.2
Increases (decreases) resulting from:
Change in tax basis (7.0) -- --
State income taxes 0.6 0.8 0.8
Non-temporary differences 0.6 0.7 0.7
Other, net (1.1) 0.1 (0.2)
- -----------------------------------------------------------------------------------------------------------------------
Income taxes reported $(3.2) $ 6.9 $ 9.5
- -----------------------------------------------------------------------------------------------------------------------
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
Following are the components of the net deferred tax asset as of December 31,
1995 and 1996:
(millions of dollars) 1995 1996
- -----------------------------------------------------------------------------------
Deferred tax assets:
Liabilities for casualty insurance $ 35.8 $ 35.6
Liabilities related to discontinued operations 9.8 9.6
Liabilities for pension benefits 4.4 0.4
Liabilities for other post-retirement benefits 5.1 4.6
Other, net 8.0 2.8
Net operating loss carry-forward 16.7 10.9
General business credit 25.5 26.3
Minimum tax credit 27.0 26.6
Foreign tax credit 2.3 1.3
- -----------------------------------------------------------------------------------
Total deferred tax assets 134.6 118.1
Valuation allowance (10.6) (6.8)
- -----------------------------------------------------------------------------------
124.0 111.3
Deferred tax liabilities:
Fixed assets (49.5) (43.9)
Investments (13.1) (13.1)
Net excess purchase price over net assets acquired (8.6) (7.5)
- -----------------------------------------------------------------------------------
Total deferred tax liabilities (71.2) (64.5)
- -----------------------------------------------------------------------------------
Net deferred tax asset $ 52.8 $ 46.8
===================================================================================
The foreign tax credit carry-forward has been fully considered in the valuation
allowance at both December 31, 1995 and 1996 while an additional allowance of
$8.3 million and $5.5 million at December 31, 1995 and 1996, 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, 1995
and 1996:
- --------------------------------------------------------------------------------
December 31,
- -----------------------------------------------------------------------------------
(thousands of shares) 1995 1996
- --------------------------------------------------------------------------------
Common stock, $.01 par value:
Authorized 50,000.0 50,000.0
Issued 22,446.1 22,446.1
Outstanding 22,087.6 22,154.2
Series I non-voting common stock, $.01 par value:
Authorized 25,000.0 25,000.0
Issued 2,720.0 2,720.0
Outstanding 1,149.6 1,149.6
Preferred stock, $.01 par value:
Authorized 5,000.0 5,000.0
Issued and Outstanding - -
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Note 13--Fair Value of Financial Instruments
The methods and assumptions used to estimate the fair value of each class of
financial instrument are as follows:
Cash and cash equivalents, receivables, notes payable and accounts payable
The carrying amounts approximate fair value because of the short maturity of
these instruments.
Long-term debt
The carrying amounts of the Company's bank borrowings under its short-term bank
lines and revolving credit agreement approximate fair value because the interest
rates are 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, 1995
and 1996 were as follows:
December 31,
- --------------------------------------------------------------------------------
(millions of dollars) 1995 1996
- --------------------------------------------------------------------------------
Carrying amount $473.8 $432.9
Fair value 463.6 432.4
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, 1996 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 and $125 million at
December 31, 1996.
Letters of credit
The Company utilizes third-party letters of credit to guarantee certain casualty
insurance activities. The letters of credit reflect fair value as a condition of
their underlying purpose and are subject to fees competitively determined in the
marketplace. The contract value/fair value of the letters of credit at December
31, 1995 and 1996 were $150.3 million and $136.3 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.
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
- ------------------------------------------------------------------------------------------------------------------------------------
Note 14--Interim Financial Information (Unaudited)
1995 Quarter Ended 1996 Quarter Ended
- ------------------------------------------------------------------------------------------------------------------------------------
(millions of dollars,
except per share) Mar. 31 June 30 Sept. 30 Dec. 31 Year 1995 Mar. 31 June 30 Sept. 30 Dec. 31 Year 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Net service revenues $423.8 $427.6 $427.8 $429.3 $1,708.5 $414.1 $418.3 $434.9 $443.9 $1,711.2
Cost of services 336.0 341.5 341.0 340.8 1,359.3 329.6 332.2 348.2 350.2 1,360.2
Selling, general and
administrative expenses 56.8 54.6 51.7 49.4 212.5 52.7 52.2 51.8 53.9 210.6
Depreciation 13.6 13.0 13.0 12.5 52.1 12.1 11.8 11.7 11.4 47.0
Amortization of excess
purchase price over
net assets acquired 3.5 3.4 3.1 3.4 13.4 3.3 3.4 3.4 3.3 13.4
Interest expense and
finance charges 13.4 13.9 13.7 14.9 55.9 14.5 14.1 14.1 13.9 56.6
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings before income
taxes 0.5 1.2 5.3 8.3 15.3 1.9 4.6 5.7 11.2 23.4
Provision (benefit) for
income taxes (0.1) 0.3 2.5 4.2 6.9 0.3 1.7 2.5 5.0 9.5
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings from continuing
operations 0.6 0.9 2.8 4.1 8.4 1.6 2.9 3.2 6.2 13.9
Loss from discontinued
operations, net of
income taxes (0.5) (0.3) (0.4) (1.3) (2.5) (1.1) (1.0) (26.4) -- (28.5)
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before
extraordinary item 0.1 0.6 2.4 2.8 5.9 0.5 1.9 (23.2) 6.2 (14.6)
Extraordinary item:
Loss from early
extinguishment of debt,
net of income taxes -- -- -- (4.7) (4.7) -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 0.1 $ 0.6 $ 2.4 $ (1.9) $ 1.2 $ 0.5 $ 1.9 $(23.2) $ 6.2 $ (14.6)
====================================================================================================================================
Earnings (loss) per common
share:
Continuing operations $ 0.02 $ 0.04 $ 0.12 $ 0.18 $ 0.36 $ 0.07 $ 0.12 $ 0.14 $ 0.26 $ 0.59
Discontinued operations (0.02) (0.01) (0.02) (0.06) (0.11) (0.05) (0.04) (1.13) -- (1.21)
Extraordinary item -- -- -- (0.20) (0.20) -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss)
per share -- $ 0.03 $ 0.10 $(0.08) $ 0.05 $ 0.02 $ 0.08 $(0.99) $ 0.26 $ (0.62)
====================================================================================================================================
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Note 15--Subsequent Event and Related Pro Forma Financial Information
(Unaudited)
The following unaudited Pro Forma Financial Information has been prepared as a
result of the combination on January 24, 1997, of the Company's armored services
unit with Loomis Holding Corporation. The unaudited Pro Forma Financial
Information is based on the historical financial statements of the Company and
gives effect to (i) the disposition of substantially all of the assets and
certain liabilities of the armored unit and other adjustments related to the
business combination and (ii) the application of the net proceeds received by
the Company to repay certain indebtedness. The accompanying unaudited Pro Forma
Consolidated Statement of Operations for the year ended December 31, 1996 gives
effect to the transactions as if they had been consummated on January 1, 1996.
The unaudited Pro Forma Consolidated Balance Sheet at December 31, 1996 is
presented giving effect to the transactions as if they had been consummated as
of that date.
While the Company anticipates that it will recognize a gain from the sale of
the armored unit's net assets, the ultimate gain is subject to potential
purchase price adjustments and other contingencies of which the amounts have not
been finalized at this time. However, the Company does not anticipate that the
gain will be material, and the Company does not expect any material nonrecurring
charges or credits to result from the transaction.
The unaudited Pro Forma Financial Information is intended for informational
purposes only and is not necessarily indicative of the future results of
operations or financial position of the Company had the transactions described
above occurred on the indicated dates or been in effect for the periods
presented.
The unaudited Pro Forma Financial Information and the accompanying notes
should be read in conjunction with the historical Consolidated Financial
Statements of the Company, including the related notes thereto.
Pro Forma Consolidated Statement of Operations (Unaudited)
Year Ended December 31, 1996
- --------------------------------------------------------------------------------------------------------------
Pro Forma
(millions of dollars, except per share) Historical Adjustments/(a)/ Pro Forma
- --------------------------------------------------------------------------------------------------------------
Net service revenues $1,711.2 $(246.3) $1,464.9
Cost of services 1,360.2 (204.5) 1,155.7
Selling, general and administrative expenses 210.6 (20.7) 189.9
Depreciation 47.0 (7.1) 39.9
Amortization of excess purchase price over net assets acquired 13.4 (1.5) 11.9
Interest expense and finance charges 56.6 (9.1)/(b)/ 47.5
- --------------------------------------------------------------------------------------------------------------
Earnings before income taxes and equity in earnings
of unconsolidated subsidiaries 23.4 (3.4) 20.0
Provision for income taxes 9.5 (1.3)/(c)/ 8.2
- --------------------------------------------------------------------------------------------------------------
Earnings before equity in earnings of unconsolidated subsidiaries 13.9 (2.1) 11.8
Equity in earnings of Loomis, Fargo & Co. -- 3.8 /(d)/ 3.8
- --------------------------------------------------------------------------------------------------------------
Earnings from continuing operations $ 13.9 $ 1.7 $ 15.6
==============================================================================================================
Earnings per share from continuing operations $ 0.59 $ 0.66
Average shares outstanding (in thousands) 23,517 23,517
Borg-warner Security Corporation
Notes To Consolidated Financial Statements, continued
Pro Forma Consolidated Balance Sheet (Unaudited)
Year Ended December 31, 1996
- ----------------------------------------------------------------------------------------------------------------------
Pro Forma
(millions of dollars) Historical Adjustments /(e)/ Pro Forma
- ----------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 17.8 -- $ 17.8
Receivables, net 100.4 $(28.7) 71.7
Inventories 12.1 (1.8) 10.3
Other current assets 36.8 11.3 /(b)/ 48.1
- ----------------------------------------------------------------------------------------------------------------------
Total current assets 167.1 (19.2) 147.9
Property, plant and equipment, at cost 442.6 (76.5) 366.1
Less accumulated depreciation 239.5 (45.6) 193.9
- ----------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 203.1 (30.9) 172.2
Net excess purchase price over net assets acquired 237.2 (27.4) 209.8
Deferred tax asset, net 46.8 (5.1) 41.7
Net assets of discontinued operations 12.6 -- 12.6
Investment in Loomis, Fargo & Co. -- 3.4 /(d)/ 3.4
Other assets 94.0 (11.3) 82.7
- ----------------------------------------------------------------------------------------------------------------------
Total assets $760.8 $(90.5) $670.3
======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 4.4 $ (0.6) $ 3.8
Accounts payable and accrued expenses 173.7 (10.1) 163.6
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 178.1 (10.7) 167.4
Long-term debt 438.2 (91.0)/(b)/ 347.2
Other long-term liabilities 103.3 11.2 /(f)/ 114.5
Capital stock:
Common stock 0.2 -- 0.2
Series I non-voting common stock -- -- --
Capital in excess of par value 29.0 -- 29.0
Retained earnings 20.6 -- 20.6
Notes receivable - management stock purchase (0.3) -- (0.3)
Cumulative translation adjustment 0.5 -- 0.5
- ----------------------------------------------------------------------------------------------------------------------
50.0 -- 50.0
Treasury common stock (8.8) -- (8.8)
- ----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 41.2 -- 41.2
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $760.8 $(90.5) $670.3
======================================================================================================================
Borg-Warner Security Corporation
Notes to Consolidated Financial Statements, continued
Notes to Pro Forma Statement of Operations and Balance Sheet
a) To eliminate the historical revenues and expenses of the armored unit.
b) To eliminate debt retired with proceeds received from the transaction and to
adjust related interest expense. Cash proceeds from the transaction, net of
transaction and related expenses, were approximately $105 million and were
applied as follows: decrease in borrowings under the term loan, $80 million;
decrease in borrowings under the revolving line of credit, $10 million; and
increase in interest-bearing cash deposits under the accounts receivable
facility, $15 million. The interest expense adjustment was computed using the
average interest rates for the respective periods. Such rates were used because
management believes these rates would have been the same if the facilities had
been negotiated by the Company on a stand-alone basis without the armored unit.
c) To record the estimated income tax effect for the pro forma adjustments
described in Notes (a) and (b) for the respective periods.
d) To recognize, under the equity method, the Company's 49% interest in the pro
forma net assets and earnings of Loomis, Fargo & Co.
e) To eliminate the sold assets and liabilities of the armored unit.
f) For anticipated expenses incurred as a direct result of the business
combination and for purchase price adjustments under the contribution agreement,
including indemnifications and performance guarantees.
Borg-Warner Security Corporation
Independent Auditors' Report
To the Board of Directors and Stockholders
Borg-Warner Security Corporation
We have audited the consolidated balance sheets of Borg-Warner Security
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Chicago, Illinois
February 4, 1997