UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997 Commission file number: 1-5529
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Borg-Warner Security Corporation
(Exact name of registrant as specified in its charter)
Delaware 13-3408028
(State of incorporation) (I.R.S. Employer
Identification No.)
200 South Michigan Avenue
Chicago, Illinois 60604
(312) 322-8500
(Address and telephone number of principal executive offices)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, par value $.01 per share New York Stock Exchange
9-1/8% Senior Subordinated Notes due 2003 New York Stock Exchange
9-5/8% Senior Subordinated Notes due 2007 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock of the registrant held by
stockholders (not including voting stock held by directors and executive
officers of the registrant and affiliates of Merrill Lynch & Co., Inc. (the
exclusion of such stock shall not be deemed an admission by the registrant that
such person is an affiliate of the registrant)) on March 6, 1998 was
approximately $219.9 million. As of March 6, 1998, the registrant had 23,364,931
shares of Common Stock and 249,600 shares of Series I Non-Voting Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated herein by reference into
the Part of the Form 10-K indicated.
Document Part of Form 10-K into which
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incorporated
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The Company's annual report to stockholders Parts I, II and IV
for the year ended December 31, 1997
The Company's proxy statement for the 1998 Part III
annual meeting of stockholders
BORG-WARNER SECURITY CORPORATION
FORM 10-K
YEAR ENDED DECEMBER 31, 1997
INDEX
Item Number Page
- ----------- ----
PART I
1. Business 3
2. Properties 9
3. Legal Proceedings 10
4. Submission of Matters to a Vote of Security Holders 12
PART II
5. Market for the Registrant's Common Stock
and Related Stockholder Matters 13
6. Selected Financial Data 13
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
7A.Quantitative and Qualitative Disclosures
About Market Risk 14
8. Financial Statements and Supplementary Data 14
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 14
PART III
10. Directors and Executive Officers of the Registrant 14
11. Executive Compensation 14
12. Security Ownership of Certain Beneficial
Owners and Management 14
13. Certain Relationships and Related Transactions 15
PART IV
14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 15
2
PART I
Item 1. Business
The Company is the world's largest supplier of contract guard services and
is a leading provider of electronic security services. As a result of its
significant market presence and breadth of product offerings, the Company is
well positioned to service local, multi-location and national accounts and
provide total security solutions to its customers.
The Company's protective services business is divided into two business
units: physical security services and electronic security services. Information
concerning the revenues, operating profit or loss and identifiable assets
attributable to each of the Company's business units is incorporated herein by
reference to Note 11 of the Notes to Consolidated Financial Statements.
In January 1997 the Company combined its armored transport business with
Loomis Armored Inc. The Company received a 49% equity interest in the combined
entity and approximately $105 million (net of transaction expenses, but subject
to certain adjustments), and retained casualty and employee liabilities of its
armored transport unit incurred prior to closing. The Company accounts for its
investment in the combined entity under the equity method.
Physical Security Services
The Company provides guard services, as well as background screening,
contract employment and investigative services, to approximately 16,000 clients
in the United States, Canada, the United Kingdom and Colombia. The Company
services these clients with approximately 68,000 employees in approximately 294
offices under the Wells Fargo(R), Burns(R), Globe(R) and other service marks.
The physical security services unit supplies contract uniformed and
plainclothes security officers, who may or may not be armed, to perform a wide
variety of tasks. These security officers patrol and monitor commercial,
financial, industrial, residential and governmental facilities providing
deterrence against crime and breach of governmental security regulations and
detection of fire, accidents and other casualties. The security officers also
monitor electronic systems and control public and employee access to facilities.
Specialized assignments include nuclear and conventional electric power plant
security, pre-departure screening of passengers and luggage at airports, access
control at health care and educational facilities, mailroom services, staffing
services and investigative services, including background investigations of
prospective employees.
The physical security services unit employs approximately 65,000 security
officers. Security officers undergo a standardized pre-employment screening
program that features mandatory drug screening, criminal record checks at the
county and municipal court level and verification of consumer credit reports,
Social Security information and drivers' license records. Security officers
receive classroom orientation and field training in safety, first aid and
security techniques and in the handling of specific problems applicable to
particular industries or situations.
3
The physical security services unit markets guard services through
approximately 141 sales representatives nationwide and in Canada, the United
Kingdom and Colombia. Sales personnel operate out of local branch and sales
offices. The physical security services unit also bids on contracts with
governmental agencies.
Physical security services contracts generally provide for such services on
a continuing basis and generally are terminable by either party upon 30 to 60
days notice. Charges for services are negotiated with customers and are based
upon payment of a specified amount per service hour. Typically, such charges are
adjusted for any change in any law, ruling or collective bargaining agreement
causing a change in work hours, wage rates, working conditions or other costs.
Investigative services are generally provided under specific arrangements, with
charges varying according to the nature of the assignment.
Electronic Security Services
The Company provides integrated electronic security systems, including
intrusion and fire detection, sprinkler and critical industrial process
monitoring, closed circuit television and access control. The Company designs,
installs, monitors and services electronic security systems located on the
premises of approximately 83,000 commercial and 27,000 residential customers in
the United States and Canada under the Wells Fargo(R) and Pony Express(R)
service marks. The Company also provides, under the Bel-Air Patrol trade name,
an integrated guard, patrol and alarm service to approximately 11,000 customers
in Bel Air, Beverly Hills and other Los Angeles communities. The unit has
approximately 2,200 employees.
Commercial. The Company's electronic security services unit designs,
installs, monitors and services electronic detection systems located at
customers' premises. These systems are tailored to customers' needs and may
include intrusion and fire detection, critical process and sprinkler monitoring,
access control and closed-circuit television monitoring systems. The Company's
alarm systems and devices may be monitored on the premises of the customer by
the customer's own personnel or linked through telephone lines or long range
radio to one of 12 central stations operated by the Company in the United States
and Canada. The Company also services its installed systems.
The electronic security services unit services approximately 83,000
security systems in financial institutions, industrial and commercial businesses
and complexes, warehouses, facilities of federal, state and local governments,
defense installations, and health care and educational facilities.
The majority of the Company's monitoring contracts are for an initial five-
year period with automatic renewal for additional one-year terms, unless
terminated by either party. Upon installation, a customer pays an installation
fee and agrees to pay an annual service charge for ordinary maintenance and
monitoring during the life of the contract. It has been the unit's experience
that its customers generally continue the service after expiration of the
initial term of the contract and enter into new five-year monitoring contracts.
4
The electronic security services unit conducts its sales, installation and
service operations from 40 branch offices in the United States and Canada, some
of which are on the same premises as a monitoring station, and additional
satellite offices. The alarm services unit has a nationwide sales force that is
separated into broad-based commercial groups, as well as specialized sales teams
that address the specific needs of the financial community, engineered systems
market and other high growth segments of the industry. One group, for example,
focuses on multi-location companies such as national retail chains and fast food
outlets that require a single point of control for planning, servicing,
monitoring and reporting for all locations.
The Company also makes direct sales of security equipment to government and
commercial users (including other companies in the alarm business) and designs,
assembles and sells engineered systems for commercial fire suppression.
Residential. The electronic security services unit also installs fire and
intrusion protection systems for residential customers under the Pony Express(R)
service mark. Residential customer sales and service are generally performed
from the same facilities as for commercial accounts. Residential systems are
installed by the Company with monitoring agreements and often with maintenance
agreements. The majority of the residential monitoring contracts are for an
initial period of three to five years with automatic renewal for additional one-
year terms, unless terminated by either party. The unit services approximately
27,000 residential security systems.
Bel-Air Patrol. The Company also provides a complete protective package,
including central station alarm service and surveillance systems, security
guards and day and night patrols, to residents in Bel Air and Beverly Hills and
other nearby communities of Los Angeles. The Company provides these services to
approximately 11,000 customers under the trade name Bel-Air Patrol.
The electronic security services unit purchases electronic equipment and
component parts for systems from a number of suppliers, and is not dependent
upon any single source for such equipment or parts.
Loomis, Fargo & Co.
In January 1997 the Company's armored transport unit contributed
substantially all of its assets and assigned certain of its liabilities to
Loomis, Fargo & Co. ("Loomis Fargo"), a newly established corporation, in
exchange for 49% of Loomis Fargo's outstanding common stock and a cash payment
of approximately $105 million (net of transaction costs, but subject to certain
adjustments). The shareholders of Loomis Holding Corporation ("Loomis")
contributed all of the Loomis common stock to Loomis Fargo in exchange for 51%
of Loomis Fargo's outstanding common stock, a $6 million promissory note and a
cash payment of approximately $15 million. In addition, Loomis Fargo repaid
existing Loomis indebtedness and redeemed outstanding shares of Loomis preferred
stock. Among the liabilities of the Company's armored transport unit that were
retained are casualty and employee claims incurred prior to the closing.
5
The Company agreed to indemnify Loomis Fargo for environmental liabilities
associated with existing underground storage tanks and other known and
identified environmental liabilities. Such indemnification obligation will
continue until the earlier of December 31, 1998 or the first anniversary of an
initial public offering of Loomis Fargo common stock. The Company has also
agreed to indemnify Loomis Fargo against certain other claims, including claims
relating to receivables and taxes.
The Company and the former Loomis shareholders entered into a stockholders
agreement providing that Loomis Fargo's board of directors initially will
consist of seven directors: three directors nominated by the Company; three
directors nominated by the former Loomis shareholders and Loomis Fargo's chief
executive officer. The number of directors that may be designated pursuant to
the stockholder agreement may adjust if either the Company or the former Loomis
shareholders reduce their ownership stake in Loomis Fargo. The stockholder
agreement provides that the vote of five of the seven directors is required for
Loomis Fargo to engage in certain specified activities.
In addition, the stockholder agreement prohibits the transfer of Loomis
Fargo common stock by either party for three years following the closing without
the prior consent of the other party. After such period Loomis Fargo common
stock may be transferred only in accordance with the provisions of the
stockholder agreement, which include rights of first refusal and co-sale rights.
The current stockholders also have certain preemptive and registration rights
with respect to equity issuances by Loomis Fargo.
Loomis Fargo operates in all 50 states and Puerto Rico to provide armored
ground transportation services, ATM services and cash vault and related services
to financial institutions and commercial customers.
Employees
The Company's business is labor intensive and, accordingly, is affected by
the availability of qualified personnel and the cost of labor. Although the
protective services industry is characterized generally by high turnover, the
Company believes its experience compares favorably with that of the industry.
The Company has not experienced any material difficulty in employing suitable
numbers of qualified security guards and other employees. The Company considers
its relations with its employees to be generally satisfactory.
The Company is a party to collective bargaining agreements with various
local unions covering approximately 5,700 employees. The collective bargaining
agreements expire at various dates from 1998 to 2000 and relate, among other
things, to wages, hours and conditions of employment. Under section 9(b)(3) of
the National Labor Relations Act, if a union admits to membership, or is
affiliated directly or indirectly with a union that admits to membership,
employees other than guards, an employer of guards can refuse to bargain with
such union and such union cannot be certified as the representative of a unit of
guards. As a result, the Company has in many instances refused to
6
recognize or withdrawn recognition of labor organizations that admit as members
employees other than guards.
Competition
The physical security services unit competes with major national firms and
numerous smaller regional and local companies providing similar services.
Competition in the security guard industry is based on price in relation to the
quality of service, the scope of services performed, the extent and quality of
guard supervision, recruiting and training and name recognition.
The electronic security services unit competes with major national firms
and numerous smaller regional and local companies. Competition in the alarm
services industry is based on price in relation to the quality of service, the
scope of alarm installation and service, and the level of technological and
engineering sophistication.
Regulation
Due to the nature of the Company's business, its operations are subject to
a variety of federal, state, county and municipal laws, regulations and
licensing requirements. The Company believes that its operations are in
substantial compliance with those laws, regulations and requirements.
The Company's physical security services operations are subject to a
variety of city, county and state firearm and occupational licensing laws. In
addition, many states have laws requiring training and registration of security
officers, regulating the use of badges, identification cards and uniforms and
imposing minimum bond surety and insurance requirements. Federal legislation has
been introduced relating to security officer qualification and training. Similar
legislation is pending in several states. The Company generally supports the
creation of standards for the industry and does not expect that the
establishment of such standards will have a material affect on its physical
security services operations.
The Company's electronic security services operations are subject to
regulatory requirements of federal, state and local authorities. In addition,
this unit relies upon the use of telephone lines to transmit signals, and the
cost of such lines and the type of equipment which may be used are currently
regulated by both federal and state governments. In some instances, the Company
contracts with the local government to permit it to link a customer's business
or home directly into the local police or fire department station for which it
may pay a fee to such local government. As a result of a high incidence of false
alarms in some communities, some local governments have imposed assessments,
fines and penalties on customers based on the number of false alarms reported,
or have restricted police response to systems producing excessive false alarms.
From time to time, in the ordinary course of business, the Company is
subjected to penalties or fines as the result of licensing irregularities or the
misconduct of one or more of its agents or employees. In addition, under
principles of common law, the Company can generally be held liable
7
for acts or omissions of its agents or employees performed in the course and
scope of their employment. In addition, some states have statutes that expressly
impose on the Company legal responsibility for the conduct of its employees.
Risk Management
The nature of the services provided by the Company potentially exposes it
to greater risks of liability for employee acts, injuries (including workers'
compensation claims) or omissions than may be posed by other service businesses.
The Company generally obtains customer indemnification or liability
limitations in its contracts to mitigate this risk exposure. The Company carries
insurance of various types, including workers' compensation, automobile and
general liability coverage. These policies include deductibles per occurrence
for which the Company is self-insured. The Company obtains its insurance at
rates and upon terms negotiated periodically with various underwriters. The loss
experience of the Company and, to some extent, other protective services
companies affects premium rates charged to the Company. The Company does not
believe that limitations on, or the uncertainty of, insurance coverage for
punitive damages in certain states in which it operates is likely to be
material, based upon the Company's prior experience with punitive damages
claims. The Company also attempts to manage its risk liability through analysis
of customer facilities and transportation routes and employee screening,
training, supervision and evaluation.
Discontinued Operations
The Company has treated its courier services unit as a discontinued
operation since September 1996. The unit transports time-sensitive packages for
commercial businesses and non-negotiable financial documents for Federal Reserve
banks and financial institutions in 36 states under the Pony Express(R) service
mark. The unit employs approximately 3,600 persons and uses a fleet of
approximately 3,000 vehicles, many of which are vehicles provided by the unit's
employees. The courier services unit operates both as a common and contract
carrier and uses a combination of tariffs and shipping contracts to control the
terms, conditions and rates applicable to the transportation of shipments. Rates
are dependent upon many factors, including the weight and type of the shipped
item, the distance and urgency of the shipment and the geographical location.
Trademarks and Patents
The Wells Fargo(R), Pony Express(R) and Burns(R) service marks are
especially important to the Company's business. The Company believes that its
rights in these marks are adequately protected and of unlimited duration. While
the Company has patents it considers to be important to the overall conduct of
its business, it does not consider any particular patent, or group of related
patents, essential to its operations. For both the United States and foreign
patents, their expiration, individually or in the aggregate, is not expected to
have any material effect on the Company's financial condition or results of
operations.
8
Executive Officers
Set forth below are the names, ages, positions and certain other
information concerning the executive officers of the Company as of March 1,
1998.
Name Age Position with Company
J. Joe Adorjan........ 59 Chairman of the Board, Chief Executive Officer and
President; Director
John D. O'Brien....... 55 Senior Vice President
Timothy M. Wood....... 50 Vice President, Finance
Robert E.T. Lackey.... 49 Vice President, General Counsel and Secretary
Mr. Adorjan has been a director of the Company since 1993, Chairman of the
Board (since January 1996), Chief Executive Officer (since October 1995) and
President (since April 1995). Mr. Adorjan was President of Emerson Electric Co.,
a manufacturer of electronic, electrical and other products, from 1992 to 1995.
Mr. Adorjan is also a director of The Earthgrains Company, ESCO Electronics
Corporation, Goss Graphic Systems, Inc. and Loomis, Fargo & Co.
Mr. O'Brien has been Senior Vice President of the Company since 1993 and
was Vice President of the Company from 1987 to 1993. Mr. O'Brien is also
President of Borg-Warner Protective Services Corporation and a director of
Loomis, Fargo & Co.
Mr. Wood has been Vice President, Finance of the Company since 1994 and was
Vice President and Controller of the Company from 1987 to 1994 and is also a
director of Loomis, Fargo & Co.
Mr. Lackey has been Vice President, General Counsel and Secretary of the
Company since 1997 and was Vice President, General Counsel and Secretary of
Transamerica Commercial Finance Corp. from 1991 to 1995.
Each of the executive officers named above was elected by the Board of
Directors to serve in the office indicated until his successor is elected and
qualified.
Item 2. Properties
The Company and its subsidiaries maintain central alarm stations, plants
and general offices in various cities in the United States, Canada, the United
Kingdom and Colombia. At December 31, 1997, the physical security services unit
occupied approximately 294 branch and satellite offices, all
9
but one of which were leased. At December 31, 1997, the electronic security
services unit operated 12 central stations, of which 5 were leased, 28
additional branch and headquarters offices, 11 of which were owned and 48
additional satellite offices, all of which were leased. The Company leases
approximately 57,000 square feet of office space in Chicago, Illinois for its
executive offices. The Company believes that its properties are in good
condition and are adequate to meet its current and reasonably anticipated needs.
Item 3. Legal Proceedings
The Company is presently, and is from time to time, subject to claims and
suits arising in the ordinary course of its business. In certain of such
actions, plaintiffs request punitive or other damages that may not be covered by
insurance. In addition, the Company has been subject to claims and suits
relating to certain discontinued operations. The most important of these legal
proceedings are discussed below. The Company believes that the various asserted
claims and litigation in which it is currently involved will not materially
affect its financial position or future operating results, although no assurance
can be given with respect to the ultimate outcome for any such claim or
litigation. The Company believes that it has established adequate provisions for
litigation liabilities in its financial statements in accordance with generally
accepted accounting principles. These provisions include both legal fees and
possible outcomes of legal proceedings (including the environmental matters
discussed below).
Centaur Litigation
Centaur Insurance Company ("Centaur"), a discontinued property and casualty
insurance subsidiary, ceased writing insurance in 1984 and has been operating
under rehabilitation since September 1987. Rehabilitation is a process
supervised by the Illinois Director of Insurance to attempt to compromise 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. The foregoing has resulted in one pending lawsuit
against the Company for recovery of alleged damages from the failure of Centaur
to satisfy its reinsurance obligations. Certain former officers and directors of
the Company's current and former subsidiaries have been named as defendants in
such lawsuit and the Company has agreed to indemnify such individuals. Centaur
is not a defendant in this lawsuit against the Company. Although the Illinois
Director of Insurance has not made any claims against the Company for any of
Centaur's liabilities, the Illinois Director of Insurance has requested, and the
Company has agreed to, an extension of the statute of limitations for any such
claims.
As of December 31, 1996, Centaur's total liabilities were $166.9 million
and its deficit in net worth was $84.4 million, according to financial
statements submitted on behalf of the Illinois Director of Insurance. Such
financial statements were presented on a liquidating basis with assets carried
at their market value or estimated realizable value and liabilities for direct
insurance based on estimates of Centaur's potential exposure and liabilities for
reinsurance based on the amount of the reinsurer's
10
claim. Although Centaur is a subsidiary of the Company, the Company does not
operate Centaur and has no responsibility for, nor does it participate in the
preparation of, such financial statements. Centaur's financial results, assets
and liabilities are not reflected in the Company's financial statements.
In June 1988, the Insurance Commissioner of the State of California as
trustee of Mission Insurance Trust and four other affiliated insurance companies
filed a complaint in the Superior Court of the State of California, County of
Los Angeles, against the Company and certain of its current and former
subsidiaries alleging damages resulting from the failure of Centaur to satisfy
its reinsurance obligations. This lawsuit alleges damages to plaintiff, as
Trustee of Mission Insurance Company, Mission National Insurance Company,
Enterprise Insurance Company, Holland-America Insurance Company and Mission
Reinsurance Corporation, based on (i) conduct justifying piercing the corporate
veil, (ii) fraud and (iii) negligent misrepresentation. The complaint was
amended in 1989 to add 11 former officers and directors of the Company's current
and former subsidiaries as defendants and to allege additional causes of action
based on (i) breach of fiduciary duty and imposition of personal liability, (ii)
fraudulent conveyance, (iii) constructive trust and (iv) conspiracy.
Subsequently, seven of the 11 individual defendants were dismissed from the
lawsuit. The complaint was amended again in 1995 to allege additional causes of
action based on negligence and breach of the covenant of good faith and fair
dealing. Plaintiff seeks judgment in excess of $100 million for current losses,
future losses and other damages and also seeks punitive damages. In 1992, the
Centaur rehabilitator filed a motion to intervene and dismiss the complaint on
the grounds that the plaintiff lacked standing and that its claims were not ripe
for adjudication. The motion is pending.
The parties have agreed to split the trial into two phases; the first phase
was to address liability issues and the second phase was to address damages
issues. The liability phase of the trial was held in 1996. The court requested
post-trial briefs and set a schedule for closing arguments. Before hearing
closing arguments, the presiding judge declared a mistrial and recused himself
from the case. A new judge has been assigned to the case and a new trial to
address liability issues is scheduled to be held in 1998. The Company intends to
defend this lawsuit vigorously.
The Company believes that any damages for failure to satisfy reinsurance
obligations are solely the responsibility of Centaur and that the resolution of
the lawsuit relating to Centaur, including the Company's indemnification
obligations to former officers and directors, will not have a material adverse
effect on its financial position or future operating results; however, no
assurance can be given as to the ultimate outcome with respect to such lawsuit.
Environmental Proceedings
The Company and certain of its current and former subsidiaries have been
identified by the U.S. Environmental Protection Agency and certain state
environmental agencies as potentially responsible parties ("PRPs") at a number
of hazardous waste disposal sites under the Comprehensive Environmental
Response, Compensation and Liability Act ("Superfund") and equivalent state laws
and, as such, may be liable for the cost of cleanup and other remedial
activities at these sites.
11
Responsibility for cleanup and other remedial activities at a Superfund site is
typically shared among PRPs based on an allocation formula. In addition, the
Company has or may have liability for environmental matters at properties it
presently or previously owned or leased.
Based on currently available information, the Company believes that none of
these matters individually or in the aggregate will have a material adverse
affect on its financial position or future operating results, generally either
because the maximum potential liability at a site is not large or because
liability will be shared with other PRPs, although no assurance can be given
with respect to the ultimate outcome of any such liability. Based on its
estimate of allocations of liability among PRPs, the probability that other
PRPs, many of whom are large, solvent public companies, will fully pay the costs
allocated to them, currently available information concerning the scope of
contamination at such sites, estimated remediation costs at such sites,
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 its
financial statements in the aggregate amount of approximately $7 million
(relating to environmental matters with respect to discontinued operations of
the Company). While estimates of liability for environmental matters can vary
over time due to, among other things, changes in laws, technology or available
information, the Company believes that such provisions for indicated
environmental liabilities have been established on a basis consistent with
generally accepted accounting principles.
Borg-Warner Automotive
The Company has requested that its former subsidiary, Borg-Warner
Automotive, Inc., indemnify it against certain past and future costs relating to
environmental and financing liabilities associated with certain former
automotive operations. At December 31, 1997 such past costs were approximately
$3.5 million. Borg-Warner Automotive has contested its indemnification
obligation with respect to such liabilities, and the parties submitted the
dispute to binding arbitration. In November 1997, the arbitrator found in favor
of the Company. In February 1998, an appellate panel upheld the arbitration
award.
Separately, in January 1998, Borg-Warner Automotive filed suit in Circuit
Court of Cook County, Illinois against the Company, Merrill Lynch Capital
Partners, Inc. and certain current and former directors, officers and employees
of the Company. The lawsuit seeks declaratory, injunctive and other equitable
relief, and for the recovery of assets, losses and unspecified compensatory and
punitive damages arising from alleged fraudulent misrepresentations, breaches of
fiduciary duties, breaches of contract and civil conspiracy relating to the 1993
spin-off of Borg-Warner Automotive to the Company's stockholders. The Company
intends to defend this lawsuit vigorously.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to the security holders of the Company
during the fourth quarter of 1997.
12
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
As of March 6, 1998, there were approximately 161 holders of record of
Common Stock.
The Company has neither paid nor declared any cash dividends on its Common
Stock during the last two years. The payment of dividends by the Company is
prohibited under the terms of the Company's indebtedness. The Company currently
intends to retain earnings for acquisitions, working capital, capital
expenditures, general corporate purposes and reduction of outstanding
indebtedness. Accordingly, the Company does not expect to be able to nor does it
expect to pay cash dividends in the foreseeable future.
High and low sales prices (as reported on the New York Stock Exchange
composite tape) for the Common Stock for each quarter during 1996 and 1997 were:
Quarter ended High Low
------------- ---- ---
1996 March 31 $12 3/4 $10 1/4
June 30 13 1/8 9 5/8
September 30 9 7/8 8 1/4
December 31 11 3/8 9 3/8
1997 March 31 $15 1/8 $10 1/8
June 30 18 13 3/4
September 30 19 9/16 16 1/8
December 31 19 3/4 15 1/4
Item 6. Selected Financial Data
The selected financial data for the five years ended December 31, 1997,
with respect to the following line items shown under the "Consolidated
Statistical Review" (set forth on page 14) in the Annual Report is incorporated
herein by reference and made a part of this report: net service revenues;
earnings (loss) from continuing operations; earnings (loss) from continuing
operations per share; total assets and total debt.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Management's Discussion and Analysis of Financial Condition and Results
of Operations (set forth on pages 16 through 18) in the Annual Report are
incorporated herein by reference and made a part of this report.
13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Inapplicable.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements (including the notes thereto) of the
Company (set forth on pages 19 through 34) in the Annual Report are incorporated
herein by reference and made a part of this report. Supplementary financial
information regarding quarterly results of operations (unaudited) for the years
ended December 31, 1997 and 1996 is set forth in Note 15 of the Notes to
Consolidated Financial Statements. For a list of financial statements and
schedules filed as part of this report, see Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Inapplicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to directors and nominees for election as
directors of the Company is incorporated herein by reference to the information
under the caption "Election of Directors" on pages 2 and 3 of the Company's
proxy statement for the 1998 annual meeting of stockholders. Information with
respect to executive officers of the Company is set forth in part I of this
report. Information concerning compliance with Section 16(a) of the Exchange Act
is incorporated by reference to the information under the caption "Section 16(a)
Beneficial Ownership Reporting Compliance" on page 6 of the Company's proxy
statement for the 1998 annual meeting of stockholders.
Item 11. Executive Compensation
Information with respect to compensation of executive officers and
directors of the Company is incorporated herein by reference to the information
under the captions "Executive Compensation" on pages 7 through 9, and
"Compensation of Directors" on pages 4 and 5, of the Company's proxy statement
for the 1998 annual meeting of stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to security ownership by persons known to the
Company to beneficially own more than five percent of the Company's common
stock, by directors and nominees for director of the Company and by all
directors and executive officers of the Company as a group is incorporated
herein by reference to the information under the caption "Stock Ownership" on
pages 5 and 6 of the Company's proxy statement for the 1998 annual meeting of
stockholders.
14
Item 13. Certain Relationships and Related Transactions
Information with respect to certain relationships and related transactions
is incorporated herein by reference to the information under the caption
"Certain Relationships and Related Transactions" on pages 12 and 13 of the
Company's proxy statement for the 1998 annual meeting of stockholders.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) The following consolidated financial statements of the registrant
and its consolidated subsidiaries, set forth on pages 19 through 34 of the
Annual Report, and the Independent Auditors' Report, set forth on page 35 of the
Annual Report, are incorporated herein by reference:
Consolidated Statement of Operations--three years ended December 31,
1997
Consolidated Balance Sheet--December 31, 1997 and 1996
Consolidated Statement of Cash Flows--three years ended December 31,
1997
Consolidated Statement of Shareholders' Equity--three years ended
December 31, 1997
Notes to Consolidated Financial Statements
(a)(2) The following report of independent auditors and financial
statement schedule of the registrant and its consolidated subsidiaries are
included herein:
Report of Deloitte & Touche LLP, independent auditors
II Valuation and Qualifying Accounts
Certain schedules for which provisions are made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
(a)(3) The exhibits listed in the "Exhibit Index."
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the
three-month period ended December 31, 1997.
15
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Borg-Warner Security Corporation
We have audited the consolidated financial statements of Borg-Warner Security
Corporation (the "Company") as of December 31, 1997 and 1996, and for each of
the three years in the period ended December 31, 1997, and have issued our
report thereon dated February 3, 1998; such consolidated financial statements
and report are included in your 1997 Annual Report to Stockholders and are
incorporated herein by reference. Our audits also included the financial
statement schedule of Borg-Warner Security Corporation listed in Item 14 of this
Annual Report on Form 10-K. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, the financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
/s/ Deloitte & Touche LLP
---------------------
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 3, 1998
SCHEDULE II
BORG-WARNER SECURITY CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
($ MILLIONS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- ---------- ----------------------- ---------- ----------
Years Ended December 31, (1) (2)
Balance at Charged to Charged to Balance at
Beginning Costs and Other Close of
Description of Period Expenses Accounts Deductions Period
- ----------- --------- ---------- ---------- ---------- ----------
1995
Allowance for Doubtful Accounts $7.4 $4.4 $2.3 $7.3 $6.8
========= ========== ========== ========== ==========
1996
Allowance for Doubtful Accounts $6.8 $2.7 $3.1 $6.3 $6.3
========= ========== ========== ========== ==========
1997
Allowance for Doubtful Accounts $6.3 $1.8 $3.5 $6.7 $4.9
========= ========== ========== ========== ==========
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BORG-WARNER SECURITY CORPORATION
By /s/ J. Joe Adorjan
--------------------------------------------
J. Joe Adorjan
Chairman of the Board, Chief Executive Officer
and President
Date: March 20, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on this day of March 20, 1998.
Signature Title
- --------- ------
/s/ J. Joe Adorjan Chairman of the Board, Chief Executive
- -------------------------------- Officer and President and Director (Principal
J. Joe Adorjan Executive Officer)
/s/ Timothy M. Wood Vice President, Finance
- -------------------------------- (Principal Financial and Accounting Officer)
Timothy M. Wood
/s/ James J. Burke, Jr. Director
- --------------------------------
James J. Burke, Jr.
/s/ Albert J. Fitzgibbons, III Director
- --------------------------------
Albert J. Fitzgibbons, III
/s/ Arthur F. Golden Director
- --------------------------------
Arthur F. Golden
/s/ Dale W. Lang Director
________________________________
Dale W. Lang
/s/ Robert A. McCabe Director
- --------------------------------
Robert A. McCabe
/s/ Andrew McNally IV
- --------------------------------
Andrew McNally IV Director
/s/ Alexis P. Michas Director
- --------------------------------
Alexis P. Michas
/s/ H. Norman Schwarzkopf Director
- --------------------------------
H. Norman Schwarzkopf
/s/ Donald C. Trauscht Director
- --------------------------------
Donald C. Trauscht
EXHIBIT INDEX
Exhibit
Number Document Description
- ------- --------------------
*3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992).
*3.2 Amended and Restated Bylaws of the Company (incorporated by reference
to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992).
*4.1 Credit Agreement dated as of March 24, 1997 among the Company, the
lenders party thereto and the agents named therein (incorporated by
reference to Exhibit 4.5 to the Company's Registration Statement No.
333-26573).
*4.2 Indenture dated as of April 1, 1986 by and between Borg-Warner and
Harris Trust and Savings Bank, entered into in connection with the
registration of up to $150,000,000 of Debt Securities and Warrants to
Purchase Debt Securities for issuance under a shelf registration on
Form S-3 (incorporated by reference to Registration Statement No. 33-
4670).
*4.3 Indenture dated as of May 3, 1993 by and between the Company and The
First National Bank of Chicago (incorporated by reference to Exhibit
4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1993).
*4.4 Indenture dated as of March 24, 1997 by and between the Company and
The Bank of New York, as trustee (incorporated by reference to
Exhibit 4.3 to Registration Statement No. 333-26573).
+*10.1 Borg-Warner Security Corporation Directors Stock Appreciation Rights
Plan (incorporated by reference to Exhibit 10.5 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1988).
+*10.2 Borg-Warner Corporation Management Stock Option Plan, as amended
through January 19, 1993 (incorporated by reference to Exhibit 10.7
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1992).
B-1
Exhibit
Number Document Description
- ------- --------------------
+10.3 Borg-Warner Security Corporation 1993 Stock Incentive Plan, conformed
to include amendments thereto.
+10.4 Borg-Warner Security Corporation Performance Share Plan, conformed to
include amendments thereto.
+10.5 Borg-Warner Security Corporation Executive Officer Incentive Plan.
+*10.6 Employment Agreement dated as of March 28, 1995 for J.J. Adorjan
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995).
+10.7 Amendment to Employment Agreement dated as of September 5, 1997 for
J.J. Adorjan.
+10.8 Noncompetition Agreement dated as of September 5, 1997 by and between
the Company and J.J. Adorjan.
+10.9 Employment Agreement dated September 5, 1997 for J.D. O'Brien.
+10.10 Noncompetition Agreement dated as of September 5, 1997 by and between
the Company and J.D. O'Brien.
+10.11 Employment Agreement dated September 5, 1997 for T.M. Wood.
+10.12 Noncompetition Agreement dated as of September 5, 1997 by and between
the Company and T.M. Wood.
+*10.13 Borg-Warner Security Corporation Retirement Savings Excess Benefit
Plan, as amended and restated through January 1, 1995 (incorporated
by reference to Exhibit 10.21 to the Company's Annual Report on Form
10-K for the year ended December 31, 1994).
+*10.14 Borg-Warner Security Corporation Supplemental Benefits Compensation
Program (incorporated by reference to Exhibit 10.10 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994).
*10.15 Consulting Agreement dated as of September 1, 1993 between the
Company and H. Norman Schwarzkopf (incorporated by reference to
Exhibit 10.20 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1993).
B-2
Exhibit
Number Document Description
- ------- --------------------
*10.16 Contribution Agreement dated as of November 28, 1996 by and among the
Company, Wells Fargo Armored Service Corporation, Loomis-Wells
Corporation (now known as Loomis, Fargo & Co.), Loomis Holding
Corporation and Loomis Stockholders Trust (incorporated by reference
to Exhibit 2.1 to the Company's Current Report on Form 8-K dated
February 7, 1997.
13 Portions of the 1997 Annual Report to Stockholders.
21 Subsidiaries of the Company.
23 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule.
99 Cautionary Statement.
- --------
* Incorporated by reference.
+ Indicates a management contract or compensatory plan or arrangement
required to be filed pursuant to Item 14(c).
B-3