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 consolidated financial statements of the Company. Previously reported
results have been restated to reflect the May 29, 1998 sale of the Company's
electronic security division and the Company's courier services division. As a
result, Wells Fargo Alarm Services Company and Pony Express Delivery Services
are reflected in discontinued operations for all years presented. In addition,
the Company's armored security services unit entered into a business combination
with Loomis Armored in January 1997. The combined company, known as Loomis,
Fargo & Co., is accounted for under the equity method. The armored security
services unit was included in the Company's results of operations for 23 days in
1997 and full years 1996, 1995 and 1994. The selected financial data should be
read in connection with the 1998 Consolidated Financial Statements and
accompanying notes.
STATEMENT OF OPERATIONS DATA Year Ended December 31,
(millions of dollars, except per share) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
Net service revenues $ 1,323.4 $ 1,304.6 $ 1,470.1 $ 1,453.8 $ 1,420.6
Earnings before interest and taxes 40.4 57.6 61.0 55.4 44.5
Earnings before taxes 24.9 40.9 33.8 29.1 20.7
Provision for income taxes/(1)/ 9.8 15.1 13.6 13.1 0.4
Earnings from continuing operations 15.1 25.8 20.2 16.0 20.3
Earnings from continuing operations
per share - basic $ 0.64 $ 1.10 $ 0.87 $ 0.69 $ 0.88
Earnings from continuing operations
per share - diluted $ 0.64 $ 1.07 $ 0.86 $ 0.68 $ 0.87
Average common shares outstanding - basic
(in thousands) 23,575 23,475 23,266 23,097 22,893
Average common shares and equivalents
outstanding - diluted (in thousands) 23,958 24,075 23,517 23,399 23,170
BALANCE SHEET DATA (at end of year)
- -----------------------------------------------------------------------------------------------------------
Total assets $ 431.9 $ 625.9 $ 728.9 $ 808.6 $ 780.2
Balance sheet debt 126.7 338.7 437.1 479.0 455.0
Cash and cash equivalents available (105.7) (8.0) (15.4) (17.3) (13.3)
- -----------------------------------------------------------------------------------------------------------
Net balance sheet debt 21.0 330.7 421.7 461.7 441.7
Accounts receivable sold, net 82.4 102.4 110.2 88.9 112.0
Shareholders' equity 96.9 65.0 41.2 49.7 43.8
Net assets of discontinued operations -- $ 327.0 $ 327.5 $ 369.7 $ 360.4
STOCK PRICES FIRST Second Third Fourth
- --------------------------------------------------------------------------------
1998 Quarters
High $ 19 7/16 $ 24 3/4 $ 23 1/16 $ 20 1/16
Low $ 15 5/16 $ 17 7/8 $ 13 1/4 $ 13 1/16
1997 Quarters
High $ 15 1/8 $ 18 $ 19 9/16 $ 19 3/4
Low $ 10 1/8 $ 13 3/4 $ 16 1/8 $ 15 1/4
(/1)/ Income taxes for the year ended December 31, 1994 reflect certain
adjustments related to changes in tax basis.
18
Management's Responsibility for Consolidated Financial Statements
Borg-Warner Security Corporation
The information in this report is the responsibility of management. Borg-Warner
Security Corporation has in place reporting guidelines and policies designed to
ensure that the statements and other information contained in this report
present a fair and accurate financial picture of the Company. In fulfilling this
management responsibility, we make informed judgments and estimates conforming
with generally accepted accounting principles.
The accompanying financial statements have been audited by Deloitte & Touche
llp, independent auditors. Management has made available all of the Company's
financial records and related information deemed necessary by Deloitte & Touche
LLP. Furthermore, management believes that all representations made by it to
Deloitte & Touche LLP during their audit were valid and appropriate.
Management is responsible for maintaining a comprehensive system of internal
control through its operations that provides reasonable assurance that assets
are protected from improper use, that material errors are prevented or detected
within a timely period and that records are sufficient to produce reliable
financial reports. The system of internal control is supported by written
policies and procedures that are updated by management as necessary. The system
is reviewed and evaluated regularly by the Company's internal auditors, as well
as by the independent auditors in connection with their annual audit of the
financial statements.
The independent auditors conduct their audit in accordance with generally
accepted auditing standards and perform such tests of transactions and balances
as they deem necessary. Management considers the recommendations of its internal
auditors and independent auditors concerning the Company's system of internal
control and takes the necessary actions that are cost effective in the
circumstances. Management believes that, as of December 31, 1998, the Company's
system of internal control was adequate to accomplish the objectives set forth
in the previous paragraph.
An audit committee composed entirely of directors of the Company, who are not
employees, meets periodically with the Company's management and independent
auditors to review financial results and procedures, internal financial
controls, and internal and external audit plans and recommendations. To
guarantee independence, the audit committee and the independent auditors have
unrestricted access to each other with or without the presence of management
representatives.
/s/ J. Joe Adorjan /s/ Timothy M. Wood
J. Joe Adorjan Timothy M. Wood
Chairman, President and Vice President and Chief
Chief Executive Officer Financial Officer
19
Management's Discussion and Analysis of Financial Condition and Results of
Operations
SIGNIFICANT EVENTS
On January 24, 1997, the Company's armored services unit entered into a business
combination with Loomis Armored, which is now known as Loomis, Fargo & Co.
("Loomis, Fargo"). The Company, which retains a 49% ownership interest in
Loomis, Fargo, accounts for its investment under the equity method. The business
combination impacts the comparison of the Company's 1998 results to prior
periods because the armored unit was included in the Company's results of
operations for 23 days in 1997 and full year 1996.
On May 29, 1998, the Company sold its electronic security services business to
ADT Security Services, a subsidiary of Tyco International, Ltd., for
approximately $425 million plus the assumption of $6 million of debt by the
buyer. As a result of this transaction, the Company recorded a net after-tax
gain of $42.5 million.
On May 29, 1998, the Company sold its courier services unit. The Company
recorded a $15.9 million after-tax charge in the first quarter of 1998 to reduce
the Company's investment in this business and to provide for costs associated
with its disposition. The Company did not record a gain or loss as a result of
completing the sale of the unit.
On June 3, 1998, the Company irrevocably called for redemption its $150
million principal amount of 9 1/8% senior subordinated notes due 2003. The notes
were fully redeemed on July 3, 1998. This resulted in an extraordinary charge of
$6.3 million in the second quarter.
The Company entered into an agreement with Borg-Warner Automotive, Inc.
("Automotive") effective July 31, 1998 whereby the Company sold its rights to
the "Borg-Warner" name and mark in the security field for $3.6 million.
Automotive granted the Company an exclusive, royalty-free license to use the
"Borg-Warner" name and mark in the security field for a four-year period.
On August 10, 1998, the Company, the California Insurance Commissioner as
trustee of the Mission Insurance Companies Trust ("Mission Trust") and the
Illinois Director of Insurance as rehabilitator of Centaur Insurance Company
agreed to settle the pending lawsuit between the Mission Trust and the Company,
subject to court approval. As part of such settlement, the Company agreed to pay
the Mission Trust $4 million and one-third of any dividend or other distribution
that may be paid to the Company after rehabilitation of Centaur. The payments
will not have an effect on Company earnings. Separately, the Mission Trust and
Centaur agreed to an uncontested liquidated claim in the Centaur estate of $48
million, for which the Company is not liable. Additionally, the Illinois
Director of Insurance, on behalf of the Centaur estate, and the Company agreed
to exchange mutual releases of any remaining liability of the Company to the
Centaur estate. The parties have finalized and executed the settlement and
release agreements. The required court approvals of the settlement are being
sought by the parties with final approval and dismissal of the lawsuit
anticipated by the end of the first half of 1999.
BUSINESS DESCRIPTION
The Company is North America's largest provider of contract security
personnel and related services with approximately 73,000 employees serving
14,000 customers in the United States, Canada, the United Kingdom and Colombia.
RESULTS OF OPERATIONS
REVENUES 1998 vs. 1997
Percent
(millions of dollars) 1998 1997 1996 Change
- --------------------------------------------------------------------------------
Physical Security
Services $ 1,323.4 $ 1,289.3 $ 1,223.8 2.6%
Armored Security
Services -- 15.3 246.3 NM
- --------------------------------------------------------------------------------
Total Revenues $ 1,323.4 $ 1,304.6 $ 1,470.1 1.4%
Revenue increased in 1998 and 1997 principally due to new business growth,
acquisitions, higher billing rates and improved customer retention which offset
the impact of withdrawal from certain low-margin businesses. Excluding the
effect of acquisitions, 1998 revenue was $1,310.9 million.
INTERNATIONAL OPERATIONS Revenues for 1998 were $121.1 million compared with
$116.9 million in 1997 and $110.3 million in 1996. Operations are primarily in
Canada, the United Kingdom and Colombia.
COSTS AND EXPENSES Cost of services, as a percentage of revenues, were 84.4%,
84.4% and 83.8% in 1998, 1997, and 1996 respectively. Gross profit margins were
15.6%, 15.6% and 16.2% over the same three year period. Gross margins in 1998
remained stable despite higher labor costs resulting from continued tight labor
markets. Wage increases have principally been offset by better pricing and
improved employee retention which results in generally lower recruiting and
training expenses. The decreased 1997 gross margins are primarily a result of
the Loomis, Fargo combination.
Selling, general and administrative expenses, as a percentage of revenues,
were 11.8%, 10.3%, and 10.5% for the years 1998, 1997, and 1996, respectively.
The 1998 increase reflects a $14.4 million pretax provision recorded in the
second quarter 1998. The 1998 provision was comprised of the following:
. Severance and lease termination costs totaling $2.1 million resulting from
the reorganization of administrative operations subsequent to the sale of
the electronic security services business and the closure and consolidation
of certain offices;
. $5.5 million resulting from a review of the recoverability of certain
intangible assets;
. $2.3 million related to the final settlement of matters resulting from
prior dispositions; and
. $4.5 million related to certain other asset valuation allowances and
provisions.
20
Borg-Warner Security Corporation
Excluding this charge, selling, general and administrative expenses were
10.7% for 1998 versus 10.3% in 1997. The remaining increase is primarily related
to increased investment to strengthen the Company's marketing capabilities and
addressing Year 2000 issues.
Depreciation expense was $4.2 million, $5.0 million, and $12.8 million for
the years 1998, 1997, and 1996 respectively. The 1998 and 1997 decreases are
primarily due to the Loomis, Fargo combination.
Other net expense includes the results from the Company's share of the
Loomis, Fargo joint venture. The Company recorded $0.1 million of earnings for
its share of Loomis, Fargo in 1998 compared with net earnings of $1.1 million in
1997 (which included an after-tax gain of $2.2 million relating to the business
combination). Excluding Loomis, Fargo, other expense was $6.5 million, $8.1
million, and $10.5 million in 1998, 1997, and 1996 respectively. The 1998 and
1997 decrease is principally a result of reduced amortization expenses in
connection with the Loomis, Fargo combination in 1997 and the revaluation of
certain intangible assets in 1998.
NET INTEREST EXPENSE AND FINANCE CHARGES Interest expense attributed to
continuing operations, including the amortization of financing costs, decreased
to $15.5 million in 1998 from $16.7 million in 1997 and $27.2 million in 1996.
The 1998 decrease is primarily related to lower average debt levels and
decreased borrowing costs on the Company's variable rate debt. The 1997 decrease
is principally due to proceeds received from the Loomis, Fargo combination and
improved terms under the subsequent refinancing of bank borrowings.
EARNINGS FROM DISCONTINUED OPERATIONS Refer to footnote 4 for a detailed
explanation.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS The following Pro Forma
Statements of Operations give effect to the armored services business
combination in 1997, the sale of the courier services and electronic security
services businesses, the related debt reduction, as well as certain related
actions taken in 1998 as if they had been consummated on January 1, 1997. They
also assume the aforementioned $14.4 million pretax provision had been recorded
as of that date.
The Pro Forma Statements of Operations are intended for informational
purposes only and are not necessarily indicative of the future results of
operations of the Company had the transactions occurred on the indicated dates
or been in effect for the periods presented. The Pro Forma Statements of
Operations should be read in conjunction with the historical Consolidated
Financial Statements of the Company, including the related notes.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS For Year Ended December 31, 1998
Pro Forma
(millions of dollars, except per share) Historical Adjustments Pro Forma
- ----------------------------------------------------------------------------------------------------------------
Net service revenues $ 1,323.4 $ 1,323.4
Cost of services 1,116.7 1,116.7
Selling, general and administrative expenses 155.7 $ (15.4)/(a)//(b)/ 140.3
Depreciation 4.2 4.2
Other expense, net 6.4 (1.4)/(b)//(c)/ 5.0
Interest expense and finance charges 15.5 (3.5)/(d)/ 12.0
- ----------------------------------------------------------------------------------------------------------------
Earnings before income taxes 24.9 20.3 45.2
Provision for income taxes 9.8 8.3/(h)/ 18.1
- ----------------------------------------------------------------------------------------------------------------
Earnings from continuing operations $ 15.1 $ 12.0 $ 27.1
- ----------------------------------------------------------------------------------------------------------------
Earnings per common share (fully diluted):
Continuing operations $ 0.64 $ 0.49 $ 1.13
Average fully diluted shares outstanding (in thousands) 23,958 23,958
21
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS For Year Ended December 31, 1997
Pro Forma
(millions of dollars, except per share) Historical Adjustments Pro Forma
- --------------------------------------------------------------------------------------------------------------------
Net service revenues $1,304.6 $ (15.3)/(e)/ $ 1,289.3
Cost of services 1,100.7 (12.9)/(e)/ 1,087.8
Selling, general and administrative expenses 134.3 0.1/(b)//(e)//(f)/ 134.4
Depreciation 5.0 (0.5)/(e)/ 4.5
Other expense, net 7.0 (0.6)/(c)//(g)/ 6.4
Interest expense and finance charges 16.7 (3.8)/(d)/ 12.9
- --------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 40.9 2.4 43.3
Provision for income taxes 15.1 2.3/(h)/ 17.4
- --------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations $ 25.8 $ 0.1 $ 25.9
- --------------------------------------------------------------------------------------------------------------------
Earnings per common share (fully diluted):
Continuing operations $ 1.07 -- $ 1.07
Average fully diluted shares outstanding (in thousands) 24,075 24,075
Notes to Pro Forma Consolidated Statement of Operations:
(a) Eliminates the $14,4 million ($8.6 million net of tax) charge in the
1998 second quarter resulting from the reorganization of administrative
support operations following the sale of the electronic security services
business, the reduction of certain intangible assets and other provisions.
(b) Eliminates expenses relating to restructuring activities and other
provisions.
(c) Reflects reduction in the carrying value of certain intangible assets.
(d) Reflects the interest expense reduction as if the sale of Wells Fargo Alarm
had occurred on January 1,1997 with the proceeds applied to eliminate $150
million principal amount of 9 1/8% notes, borrowings under the Company's
bank credit line and the remainder used to reduce usage of the accounts
receivable facility.
(e) Elimination of revenues and expenses associated with the armored security
services operation.
(f) Eliminates a $1.9 million ($1.1 million net of tax) pension curtailment gain
recorded in the third quarter of 1997.
(g) Eliminates the $2.2 million gain recorded in the first quarter of 1997
for the sale of the armored security services operation.
(h) Reflects the tax effect of pro forma adjustments by applying an estimated
federal, state and foreign tax rate of 40% for all periods presented.
EXTRAORDINARY ITEM The Company recorded a $6.3 million extraordinary charge (net
of $4.1 million tax benefit) in the second quarter of 1998 associated with early
redemption of $150 million principal amount of 9 1/8% senior subordinated notes
due 2003 and the write-off of certain deferred financing fees.
CASH FLOW The Company reduced its balance sheet debt by $212.0 million and the
balance of its receivables sold by $20.0 million, while increasing cash and
short-term investments by $97.7 million in 1998. The principle underlying source
was the sale of Wells Fargo Alarm Services Company to ADT for $425.0 million
plus assumptions of $6.0 million debt by the buyer. After taxes this transaction
generated approximately $369 million.
1998 cash provided from continuing operations was $30.7 million, reflecting
earnings of $15.1 million and $16.6 million in non-cash charges. Offsetting this
were outlays aggregating approximately $30 million for corporate insurance,
escheat and other commitments. Further, discontinued operations required
approximately $24 million prior to their sale.
In 1997, balance sheet debt declined $98.4 million, and accounts receivable
sold declined $7.8 million, while cash and short-term investments declined $7.4
million. The combination of Wells Fargo Armored with Loomis Armored generated
approximately $92.9 million inflow. Cash flow from continuing operations was
$13.0 million while $7.1 million was absorbed by discontinued operations.
LIQUIDITY The Company maintained a $225 million bank line of credit at December
31, 1998 which matures on March 31, 2002. Of this, a maximum of $125 million is
available for issuance of letters of credit. At December 31, 1998, there were no
borrowings under the bank facility. Letters of credit totaled $93.2 million.
The Company maintained an accounts receivable facility allowing for
aggregate sales of $120 million at December 31, 1998. Net sales at that date
were $82.4 million. In January 1999, this facility was replaced by a new $120
million facility which concludes on December 31, 2003.
Cash and equivalents were $105.7 million at December 31, 1998. Of this,
$50 million was restricted under the terms of the bank credit line.
The Company believes that cash flow from operations, together with existing
cash and borrowing capacity, is adequate to meet its capital needs.
22
Borg-Warner Security Corporation
DISCLOSURES ABOUT MARKET RISK The Company has minimal market risk exposures
which are primarily related to changes in interest rates. The Company's policy
is to manage interest rate exposures with a blend of fixed and floating rate
borrowings and, from time to time, with interest rate swap agreements that hedge
outstanding borrowings. The Company entered into no interest rate swap
agreements during 1998. As of December 31, 1998, the Company's long-term
indebtedness consists of fixed rate debt of $124.4 million. The Company also
maintains a revolving bank credit facility with a total commitment of $225
million, which carries variable interest rates (based on LIBOR or the prime
rate). At December 31,1998, there were no borrowings under the bank facility. In
addition, the Company sells up to $120 million of accounts receivable on a
revolving basis under an accounts receivable securitization arrangement. The
funding costs associated with proceeds received from sales of receivables under
this arrangement, which is accounted for under SFAS No. 125, are based on a mix
of fixed and floating rates. As of December 31,1998, the Company has arranged a
replacement facility, and future sales will be based on short-term commercial
paper rates. Currently, the Company does not use foreign currency forward
contracts and does not have any material foreign currency exposure.
YEAR 2000
GENERAL Since the inception of computers, software applications were programmed
to identify a year as a two-digit data field. In the new millennium, computer
applications and software may recognize the year 2000 as two zeros (00) or 1900.
This incorrect date recognition could cause systems and software malfunctions
that could have a material effect on business operations.
COMPANY'S READINESS To ensure minimal business interruption due to computer
failure, the Company has performed a review of all software and computer
applications for the Year 2000 entry. Both "IT systems" and "non-IT systems"
were reviewed. IT systems refer to all purchased and internally developed
software applications and programs. Non-IT systems refer to various business
machines that have "embedded" computer language, examples of which are computer
integrated circuits ("chips") and telephone switches. The review was completed
using company technologists as well as external consulting firms.
System date remediation is being conducted in phases. First, all relevant
computer systems were assessed as to functionality and to determine the Year
2000 impact. Second, for those systems and software found to be non-compliant or
in need of upgrading, corrective steps have been, and will be taken, such as the
reprogramming or purchasing of replacement system software. Finally, all systems
and software modifications will be tested and then implemented at all necessary
levels. The Company has completed the initial corrective phase and approximately
80% of all systems are deemed to be Year 2000 compliant. Systems are in the
process of being installed and production tested .
COMPANY RISKS AND CONTINGENCY PLANS Systems crucial to the operations of the
Company such as payroll and client billing and logistical security guard
scheduling are Year 2000 compliant. The remaining systems identified as non-
compliant are being upgraded or replaced. The Company expects that all upgrades,
replacements and installments will be completed in all material aspects by
December 1, 1999.
Operationally, the worst case scenario, the failure of the payroll, client
billing or guard scheduling systems is backed up by an on-line, time-entry
system that will prevent any material business interruption.
The likely financial and non-financial impact of non-compliant third party
computer systems on the Company has not been quantified, as the Company cannot
predict other businesses' Year 2000 efforts. However, no single customer or
third party vendor of the Company could likely generate a material adverse
impact on Company operations. The Company will continue to assess its exposure
to any potential risks.
COSTS OF COMPLIANCE To date, the Company has spent approximately $0.5 million
toward remediation of its Year 2000 problems, which includes computer consultant
costs. Estimates of the remaining cost of compliance are deemed not material by
the Company. Independent of the Year 2000 issue, the Company has been in the
process of both upgrading and replacing certain systems and obsolete hardware to
enhance their functionality.
The Company's Year 2000 analysis and disclosure contains "forward looking"
statements about matters that are inherently difficult to predict. Such
statements include statements regarding the intent, opinion and current
expectations of the Company and its management. Such "forward looking"
statements involve risks and uncertainties that may affect future developments,
such as, the inability to deal with a Year 2000 issue due to a problem arising
on the part of a third party or vendor. While the Company believes that it has
implemented methodologies to address the Year 2000 issue so that it should not
materially affect its financial position, future operating results or cash
flows, no assurance can be given with respect to the ultimate outcome.
23
Consolidated Statement of Operations and Comprehensive Income
Year Ended December 31,
(millions of dollars, except per share) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
Net service revenues $ 1,323.4 $ 1,304.6 $ 1,470.1
Cost of services 1,116.7 1,100.7 1,231.4
Selling, general and administrative expenses 155.7 134.3 154.4
Depreciation 4.2 5.0 12.8
Other expense, net 6.4 7.0 10.5
Interest expense and finance charges 15.5 16.7 27.2
- ---------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 24.9 40.9 33.8
Provision for income taxes -- Note 12 9.8 15.1 13.6
- ---------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations 15.1 25.8 20.2
Gain (loss) from discontinued operations, net of income taxes -- Note 4 20.3 (6.8) (34.8)
- ---------------------------------------------------------------------------------------------------------------------
Earnings (loss) before extraordinary item 35.4 19.0 (14.6)
Extraordinary item:
Loss from early extinguishment of debt, net of $4.1 tax benefit (6.3) -- --
- ---------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 29.1 $ 19.0 $ (14.6)
=====================================================================================================================
Earnings (loss) per common share -- basic:
Continuing operations $ 0.64 $ 1.10 $ 0.87
Discontinued operations 0.87 (0.29) (1.50)
Extraordinary item (0.27) -- --
- ---------------------------------------------------------------------------------------------------------------------
Net earnings (loss) per share $ 1.24 $ 0.81 $ (0.63)
=====================================================================================================================
Earnings (loss) per common share -- diluted:
Continuing operations $ 0.64 $ 1.07 $ 0.86
Discontinued operations 0.83 (0.28) (1.48)
Extraordinary item (0.26) -- --
- ---------------------------------------------------------------------------------------------------------------------
Net earnings (loss) per share $ 1.21 $ 0.79 $ (0.62)
=====================================================================================================================
Comprehensive income:
Net earnings (loss) $ 29.1 $ 19.0 $ (14.6)
Other comprehensive income (loss):
Currency translation adjustment, net of tax ($1.0 benefit
in 1998, $0.3 benefit in 1997, $0.5 expense in 1996) (1.5) (0.5) 0.8
Minimum pension liability adjustment, net of tax ($1.0 benefit
in 1997, $2.7 benefit in 1996) -- 2.1 4.0
- ---------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ 27.6 $ 20.6 $ (9.8)
=====================================================================================================================
(See accompanying notes to consolidated financial statements)
24
Consolidated Balance Sheet Borg-Warner Security Corporation
December 31,
(millions of dollars, except share data) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 105.7 $ 8.0
Receivables, net 55.9 18.5
Other current assets 68.9 67.3
- ---------------------------------------------------------------------------------------------------------------------
Total current assets 230.5 93.8
Property, plant and equipment
Land and buildings 18.5 18.0
Machinery and equipment 25.2 20.2
- ---------------------------------------------------------------------------------------------------------------------
43.7 38.2
Less accumulated depreciation 25.6 23.1
- ---------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 18.1 15.1
Net excess purchase price over net assets acquired 111.1 114.6
Deferred tax asset, net 42.4 40.5
Net assets of discontinued operations -- 327.0
Other assets 29.8 34.9
- ---------------------------------------------------------------------------------------------------------------------
Total other assets 183.3 517.0
- ---------------------------------------------------------------------------------------------------------------------
$ 431.9 $ 625.9
=====================================================================================================================
Liabilities and Shareholders' Equity
Notes payable $ 2.3 $ 1.2
Accounts payable and accrued expenses 130.5 119.6
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 132.8 120.8
Long-term debt 124.4 337.5
Other long-term liabilities 77.8 102.6
Capital stock:
Common stock, issued 23,879,092 shares in 1998
and 23,362,806 shares in 1997 0.2 0.2
Series I non-voting common stock, issued 2,720,000 shares
in 1998 and 1997 -- --
Capital in excess of par value 35.2 30.8
Retained earnings 70.8 41.7
Accumulated other comprehensive income:
Currency translation adjustment (1.5) --
- ---------------------------------------------------------------------------------------------------------------------
104.7 72.7
Treasury common stock, at cost, 2,768,339 shares
in 1998 and 2,506,400 shares in 1997 (7.8) (7.7)
- ---------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 96.9 65.0
- ---------------------------------------------------------------------------------------------------------------------
$ 431.9 $ 625.9
=====================================================================================================================
(See accompanying notes to consolidated financial statements)
25
Consolidated Statement of Cash Flows
Year ended December 31,
(millions of dollars) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Operating:
Continuing operations:
Earnings from continuing operations $ 15.1 $ 25.8 $ 20.2
Adjustments to reconcile net earnings to net cash
provided by continuing operations:
Non-cash charges to earnings:
Depreciation and amortization 10.7 13.1 23.3
Provision for losses on receivables 5.1 3.1 2.9
Deferred income taxes (5.5) 77 6.3
Adjustment to excess purchase price 5.5 -- --
Amortization of debt discount 0.8 -- 0.6
Changes in assets and liabilities:
Increase in receivables (32.0) (17.0) (5.0)
Decrease (increase) in other current assets 18.4 6.5 (3.5)
Increase (decrease) in accounts payable and accrued expenses 42.6 (23.1) (12.3)
Net change in other long-term assets and liabilities (30.0) (0.9) (13.3)
Gain on sale of assets of armored services unit -- (2.2) --
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operations 30.7 13.0 19.2
Discontinued operations:
Net loss, excluding gain on alarm sale (22.2) (6.8) (34.8)
Other cash related to discontinued operations (17.5) (0.3) 42.2
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by discontinued operations (39.7) (7.1) 7.4
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (9.0) 5.9 26.6
Investing:
Capital expenditures (6.9) (4.3) (11.2)
Proceeds from sale of subsidiaries, net of tax paid ($58.5 million in 1998) 362.9 92.9 --
Proceeds from land sale 6.7 -- --
Net cash paid for acquisitions (11.5) -- --
Other, net 0.2 0.1 1.8
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 351.4 88.7 (9.4)
Financing:
Increase (decrease) in notes payable 1.1 (1.5) 0.7
Decrease in debt outstanding under revolving credit facility (63.9) (22.9) (37.8)
(Decrease) increase in receivables sold (20.0) (7.8) 21.3
Issuance of long-term debt -- 125.0 100.0
Retirement of long-term debt (150.0) (197.8) (103.7)
Treasury shares (acquired) sold (0.1) 1.1 0.3
Repurchase of old BW Corporation shares (7.9) -- --
Premium on extinguishment of debt (6.8) -- --
Other, net 2.9 1.9 0.1
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (244.7) (102.0) (19.1)
- ---------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 97.7 (7.4) (1.9)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8.0 15.4 17.3
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 105.7 $ 8.0 $ 15.4
===========================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 34.6 $ 40.8 $ 57.7
Income taxes paid 60.4 9.4 2.8
(See accompanying notes to consolidated financial statements)
26
Consolidated Statement of Shareholders' Equity Borg-Warner Security Corporation
Year Ended December 31, 1998 1997 1996
(millions of dollars, except per share) SHARES AMOUNT Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------
Common Stock Issued
Beginning balance 26,082,806 $ 0.2 25,166,100 $ 0.2 25,166,100 $ 0.2
Shares issued under stock option
and related plans 266,686 -- 16,706 -- -- --
Conversion of Series I non-voting shares
to common shares 249,600 -- 900,000 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 26,599,092 0.2 26,082,806 0.2 25,166,100 0.2
- ------------------------------------------------------------------------------------------------------------------------------
Capital in Excess of Par Value
Beginning balance 30.8 29.0 28.1
Shares issued under stock option
and related plans 3.2 1.0 0.4
Tax benefit from trust distribution and
exercise of stock options 1.2 0.8 0.5
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 35.2 30.8 29.0
- ------------------------------------------------------------------------------------------------------------------------------
Retained Earnings
Beginning balance 41.7 20.6 31.2
Net earnings (loss) 29.1 19.0 (14.6)
Adjustment for deferred pension experience loss -- 2.1 4.0
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 70.8 41.7 20.6
- ------------------------------------------------------------------------------------------------------------------------------
Notes Receivable - Management Stock Purchase
Beginning balance -- (0.3) (0.3)
Net activity -- 0.3 --
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 -- -- (0.3)
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated Other Comprehensive Income -
Currency Translation Adjustment
Beginning balance -- 0.5 (0.4)
Current year adjustment (1.5) (0.5) 0.9
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 (1.5) -- 0.5
- ------------------------------------------------------------------------------------------------------------------------------
Treasury Stock
Beginning balance 2,506,400 (7.7) 1,862,311 (8.8) 1,928,861 (9.1)
Shares issued under stock option
and related plans -- -- (255,911) 1.1 (66,550) 0.3
Shares acquired 12,339 (0.1) -- -- -- --
Conversion of Series I non-voting shares
to common shares 249,600 -- 900,000 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 2,768,339 (7.8) 2,506,400 (7.7) 1,862,311 (8.8)
- ------------------------------------------------------------------------------------------------------------------------------
Total Shareholder's Equity $ 96.9 $ 65.0 $ 41.2
- ------------------------------------------------------------------------------------------------------------------------------
(See accompanying notes to consolidated financial statements)
27
Notes to Consolidated Financial Statements
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following paragraphs
briefly describe significant accounting policies. Certain 1997 and 1996 amounts
have been reclassified to conform with the 1998 presentation.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include all
significant subsidiaries. Due to the May 29, 1998 sale of the electronic
security and courier services units, the assets, liabilities, results of
operations and cash flows of such units have been segregated and reported as
discontinued operations for all periods presented. Previously reported results
have been restated (see Note 4). The Company's 49% investment in Loomis, Fargo
is accounted for under the equity method (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 short-term money market funds.
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 40 years
Machinery and equipment 3 to 5 years
Capitalized software 5 years
AMORTIZATION OF EXCESS 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. As
a result of such a review, based on anticipated future cash flows in 1998 the
Company adjusted the carrying value of such excess purchase price related to
certain security services acquisitions by $5.5 million. The charge is included
in selling, general and administrative expenses in the Consolidated Statement of
Operations and Comprehensive Income.
DERIVATIVE FINANCIAL INSTRUMENTS Prior to 1998, the Company used 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. At December 31, 1998 and
1997, there were no interest rate swaps outstanding.
CASUALTY INSURANCE LIABILITIES The Company has accrued a discounted liability
for the retained portion of insurance costs related to its various deductible
policies. This insurance liability is determined by the Company based on claims
filed and an estimate of claims incurred but not yet reported (see Note 2).
REVENUE RECOGNITION Revenue is recognized at the time services are provided. In
certain circumstances this can result in revenue recognition prior to customer
billing.
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.
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 (see Note 9).
STOCK OPTIONS The Company uses the intrinsic value method for expense
recognition for stock options and discloses additional information, including
the impact under the fair value method, in the notes to the financial statements
(see Note 10).
28
Borg-Warner Security Corporation
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 basis 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 12).
EARNINGS PER COMMON SHARE (EPS) Earnings per share is presented on a basic and a
fully diluted basis in the financial statements. Basic EPS is based on average
outstanding common shares. Diluted EPS is 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 (see Note 14).
NEW ACCOUNTING PRONOUNCEMENTS In 1998, the Company adopted Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income." The
Company's comprehensive earnings included adjustments for foreign currency
translation and minimum pension liability costs.
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
(SFAS 131). This statement modifies segment disclosure requirements and has no
impact upon the consolidated financial position, results of operations or cash
flows of the Company (see Note 11).
In February 1998, Statement of Financial Accounting Standards No. 132
"Employer's Disclosures about Pensions and Other Retirement Benefits" was
issued. This statement revises disclosures on retirement benefit plans but does
not change their measurement or timing of recognition (see Note 9).
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133),
which is effective for the year ending December 31, 2000. SFAS 133 will require
the Company, to the extent that it makes use of derivative financial
instruments, to record them on the balance sheet at fair value. Given the
Company's current and anticipated usage of derivative financial instruments, the
impact of adopting this standard will not be material to its financial position
or results of operations.
In 1998, the Company adopted AICPA SOP No. 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use" (SOP 98-1). SOP
98-1 requires the cost of purchased software and certain costs incurred in
developing computer software for internal use to be capitalized and amortized
over future periods, During the year ended December 31, 1998, the Company
capitalized $1.6 million of such costs that would have been charged to expense
under its previous accounting policy.
NOTE 2 -- BALANCE SHEET INFORMATION
Detailed balance sheet data are as follows:
DECEMBER 31,
(millions of dollars) 1998 1997
- --------------------------------------------------------------------------------
Receivables
Customers $ 53.5 $ 21.2
Other 9.4 1.3
- --------------------------------------------------------------------------------
62.9 22.5
Less allowance for losses 7.0 4.0
- --------------------------------------------------------------------------------
Net receivables $ 55.9 $ 18.5
- --------------------------------------------------------------------------------
Other current assets
Retained interest in receivables $ 15.7 $ 30.8
Restricted interest-bearing cash deposits 37.6 17.6
Uniforms 6.4 6.2
Other 9.2 12.7
- --------------------------------------------------------------------------------
Total other current assets $ 68.9 $ 67.3
- --------------------------------------------------------------------------------
Other assets
Debt issuance costs $ 3.5 $ 8.0
Deferred pension asset 15.9 12.1
Other 10.4 14.8
- --------------------------------------------------------------------------------
Total other assets $ 29.8 $ 34.9
- --------------------------------------------------------------------------------
Accounts payable and accrued expenses
Trade payables $ 21.8 $ 24.9
Payroll and related 36.4 36.1
Casualty insurance and claims 36.2 28.5
Interest 3.5 6.7
Liabilities to former shareholders 0.1 7.4
Other 32.5 16.0
- --------------------------------------------------------------------------------
Total accounts payable and accrued expenses $130.5 $119.6
- --------------------------------------------------------------------------------
The Company has an agreement under which it sells a revolving pool of
trade accounts receivable to a special purpose subsidiary of the Company. At
December 31,1998 and 1997, the subsidiary had purchased $135.7 million and
$150.8 million of such accounts receivable, respectively. The subsidiary sells
up to $120 million of undivided interests in such accounts receivable. The
difference represents the interest retained by the Company which is considered
as an interest in a security and has been included in "Other current assets."
The fair value of the retained interest approximates its carrying value due to
the short-term nature of the receivables. Also included in "Other current
assets" is $37.6 million and $17.6 million at December 31, 1998 and
1997 respectively, representing interest-bearing cash
29
Notes to Consolidated Financial Statements, continued
deposits held in trust under the terms of the agreement. These deposits
represent proceeds of collections held back based on the amount of eligible
receivables in the pool. The Company's retained interest in the receivables and
cash deposits is generally restricted.
Selling, general and administrative expenses include provisions for losses
on receivables of $5.1 million, $3.1 million and $2.9 million in 1998, 1997 and
1996, respectively.
Accumulated amortization related to excess purchase price over net assets
acquired amounted to $53.7 million and $48.9 million at December 31, 1998 and
1997, 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 $21.1 million and $24.1 million at December 31, 1998 and 1997,
respectively.
The non-current portion of the casualty insurance liability, included in
other long-term liabilities, was $47.9 million and $58.6 million at December 31,
1998 and 1997, respectively. The total discounted insurance accrual, including
the portion reflected in accounts payable and accrued liabilities, was $79.1
million and $86.2 million at December 31, 1998 and 1997, respectively. The
estimated aggregate undiscounted insurance liability was $85.4 million and
$101.1 million at December 31, 1998 and 1997, respectively. The discount rate
used to value the future obligation at December 31, 1998 and 1997 was 4.5
percent and 6.0 percent, respectively.
NOTE 3 -- INVESTMENT IN AFFILIATES
On January 24, 1997, the Company's armored security services unit 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 the Company. The Company's armored services unit contributed
substantially all of its assets and assigned certain of its liabilities to
Loomis, Fargo in exchange for (i) 4,900,000 shares of Loomis, Fargo common stock
and (ii) a cash payment of approximately $105 million which includes amounts
paid to satisfy intercompany indebtedness assumed by Loomis, Fargo. The cash
proceeds received were net of transaction costs and subject to certain
adjustments.
The business combination impacts the comparison of the Company's 1998
results to prior periods because the armored services unit was included in the
Company's results of consolidated operations for only 23 days in 1997 and the
full year 1996. Armored security revenues were $15.3 million and $246.3 million
in 1997 and 1996, respectively. Armored security operating profit was $0.9
million in 1997, compared with $12.1 million in 1996.
The Company accounts for its interest in Loomis, Fargo as an equity
investment. The Company recorded net income related to Loomis, Fargo of $0.1
million in 1998 and $1.1 million in 1997, including a $2.2 million gain
recognized in the combination. The Company does not guarantee the indebtedness
of Loomis, Fargo nor is it required to fund Loomis, Fargo's future operations.
30
Borg-Warner Security Corporation
NOTE 4 - DISCONTINUED OPERATIONS
On May 29, 1998, the Company sold its electronic security services business to
ADT Security Services, a subsidiary of Tyco International, Ltd. for
approximately $425 million plus the assumption of approximately $6 million of
debt by the buyer. The Company recorded a net after-tax gain of $42.5 million in
the second quarter.
On May 29, 1998, the Company sold its courier services business. In the
first quarter of 1998, the Company recorded a $15.9 million after-tax charge
(net of $11.0 million tax benefit) to reduce its investment in this business, to
provide for costs associated with its disposition, and for anticipated further
losses prior to sale. The Company did not record a gain or loss as a result of
completing the sale. The courier services operation has been carried as a
discontinued operation since September 1996.
The assets, liabilities, results of operations and cash flows have been
segregated and reported as discontinued operations for all periods presented.
Previously reported discontinued operations have been restated to reflect the
discontinued presentation of both businesses.
Year ended December 31,
(millions of dollars, except per share) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
Net service revenues:
Electronic security services business $ 81.2 $ 243.4 $ 241.1
Courier services business 56.0 142.2 140.0
- -----------------------------------------------------------------------------------------------------------------
Total net service revenue $ 137.2 $ 385.6 $ 381.1
- -----------------------------------------------------------------------------------------------------------------
Loss from operations before income taxes:
Electronic security services business $ (10.3) $ (10.8) $ (10.6)
Courier services business -- -- (5.4)
- -----------------------------------------------------------------------------------------------------------------
Total loss from operations before income taxes (10.3) (10.8) (16.0)
Income tax benefit 4.0 4.0 6.2
- -----------------------------------------------------------------------------------------------------------------
Loss from operations (6.3) (6.8) (9.8)
Adjustment of courier assets to realizable value and provision for
future losses (net of $11.0 million tax benefit in 1998 and $2.0
million tax benefit in 1996) (15.9) -- (25.0)
Gain on sale of electronic security services business (net of $59.8
million tax expense) 42.5 -- --
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) from discontinued operations $ 20.3 $ (6.8) $ (34.8)
- -----------------------------------------------------------------------------------------------------------------
Income (loss) per common share (fully diluted):
Loss from operations $ (0.27) $ (0.28) $ (0.42)
Gain (loss) on sale and net asset adjustment 1.10 -- (1.06)
- -----------------------------------------------------------------------------------------------------------------
Income (loss) per common share $ 0.83 $ (0.28) $ (1.48)
- -----------------------------------------------------------------------------------------------------------------
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, 1998 December 31, 1997
- -----------------------------------------------------------------------------------------------------------------
(millions of dollars) CURRENT LONG-TERM Current Long-Term
- -----------------------------------------------------------------------------------------------------------------
9 1/8% senior subordinated notes (face amount $150 million
due 2003) $ -- $ -- $ -- $ 149.2
9 5/8% senior subordinated notes (face amount $125 million
due 2007) -- 124.4 -- 124.2
Bank revolving credit loan due through 1999 (at an average rate
of 7.9% in 1997) -- -- -- 63.9
Unsecured notes (at an average rate of 8.8% in 1998
and 7.6% in 1997) 2.3 -- 1.2 0.2
- -----------------------------------------------------------------------------------------------------------------
Total notes payable and long-term debt $ 2.3 $ 124.4 $ 1.2 $ 337.5
- -----------------------------------------------------------------------------------------------------------------
31
Notes to Consolidated Financial Statements, continued
Included in long-term debt at December 31, 1998 and 1997 were obligations
of $124.4 million and $273.6 million, respectively, with fixed interest rates.
At December 31, 1997 there was $63.9 million of long-term debt with variable
interest rates (generally based on LIBOR or prime rate).
In 1998, the Company amended its bank facility and called the entire $150
million principal amount of its 9 1/8% senior subordinated notes for early
redemption. The Company recorded a $6.3 million extraordinary charge (net of
$4.1 million tax benefit) in the second quarter of 1998 associated with its
early redemption and the write-off of certain deferred financing fees. The bank
facility was reduced from $285 million to $225 million to reflect lower
requirements after the disposal of the courier and electronic segments. Up to
$125 million of the bank facility is available for letters of credit. The
revolving credit commitment is reduced by the total dollar amount of letters of
credit issued and outstanding, $93.2 million at December 31, 1998. The entire
bank facility is available through March 31, 2002.
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, to pay dividends or to make certain
other restricted payments. To secure its obligations under these facilities, the
Company pledged the stock of certain of its subsidiaries.
NOTE 6 - 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 fair values of the Company's long-term debt are estimated
based on quoted market prices of 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, 1998 and
1997 were as follows:
December 31,
(millions of dollars) 1998 1997
- --------------------------------------------------------------------------------
Carrying amount $ 124.4 $337.5
Fair value 134.0 342.1
INTEREST RATE SWAPS The Company uses interest rate swap agreements from time to
time 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. There were no interest rate
swap agreements outstanding at December 31, 1998 or 1997.
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, 1998 and 1997 was $93.2 million and $110.8
million, respectively. To assure the counter parties' ability to perform, these
letters of credit are only executed with major financial institutions.
NOTE 7 - 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, 1998 as follows:
Fiscal year (millions of dollars)
- --------------------------------------------------------------------------------
1999 $10.9
2000 8.2
2001 5.1
2002 2.6
2003 1.7
2004 and after 5.4
- --------------------------------------------------------------------------------
Total $33.9
- --------------------------------------------------------------------------------
Total rental expense amounted to $14.3 million, $12.3 million and $21.0 million
in 1998, 1997 and 1996, respectively.
32
Borg-Warner Security Corporation
NOTE 8 - 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.
The foregoing has resulted in a pending lawsuit against the Company for recovery
of alleged damages incurred in excess of $100 million as a result of the failure
of Centaur to satisfy its reinsurance obligations. On August 10, 1998 the
Company, the California Insurance Commissioner as trustee of the Mission
Insurance Companies Trust ("Mission Trust") and the Illinois Director of
Insurance as rehabilitator of Centaur agreed to settle such lawsuit, subject to
court approval. As part of such settlement, the Company agreed to pay the
Mission Trust $4 million and one-third of any dividend or other distribution
that may be paid to the Company after rehabilitation of Centaur. The payments
will not have an effect on Company earnings. Separately, the Mission Trust and
Centaur agreed to an uncontested liquidated claim in the Centaur estate of $48
million, for which the Company is not liable. Additionally, the Illinois
Director of Insurance, on behalf of the Centaur estate, and the Company agreed
to exchange mutual releases of any remaining liability of the Company to the
Centaur estate. The parties have finalized and executed the settlement and
release agreements. The required court approvals of the settlement are being
sought by the parties with final approval and dismissal of the lawsuit
anticipated in the first half of 1999.
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 mailers individually or in the aggregate
will have a material adverse effect on its financial position or future
operating results, generally either because the maximum potential liability at a
site is not large or because liability will be shared with other PRPs, although
no assurance can be given with respect to the ultimate outcome of any such
liability. Based on its estimate of allocations of liability among PRPs, the
probability that other PRPs, many of whom are large, solvent public companies,
will fully pay the costs allocated to them, currently available information
concerning the scope of contamination at such sites, estimated remediation costs
at such sites, 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 $5 million. Additionally,
the Company will be indemnified by its former subsidiary, Borg-Warner
Automotive, against certain future costs relating to environmental liabilities
associated with certain former automotive operations.
In November and December, 1998, Loomis, Fargo & Company made various claims
against the Company for indemnification under the Contribution Agreement dated
November 28, 1996 for certain cargo losses and environmental losses. The Company
has objected to the claims. If the parties are unable to resolve their dispute,
it will be referred to arbitration as provided for under the Contribution
Agreement.
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.
33
Notes to Consolidated Financial Statements, continued
NOTE 9 - RETIREMENT BENEFITS
The Company provides various defined benefit and contribution plans as well as
other postretirement benefit plans to employees. The following provides a
reconciliation of benefit obligations, plan assets, and funded status of plans.
(millions of dollars) Pension Benefits Other Postretirement Benefits
- -----------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1 $ 106.6 $ 94.0 $ 10.8 $ 8.8
Service cost 1.4 2.4 -- --
Interest cost 7.5 7.6 0.3 0.3
Actuarial loss 3.3 12.6 1.2 2.7
Curtailment gain (0.9) (3.6) -- --
Benefits paid from plan assets (9.3) (6.4) (1.1) (1.1)
- -----------------------------------------------------------------------------------------------------------------------
Benefit obligation at December 31 $ 108.6 $ 106.6 $ 11.2 $ 10.7
- -----------------------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1 $ 124.4 $ 101.8
Actual return on plan assets 24.3 26.4
Company contributions -- 2.6
Benefits paid from plan assets (9.3) (6.4)
- -------------------------------------------------------------------------------------
Fair value of plan assets at December 31 $ 139.4 $ 124.4
- --------------------------------------------------------------------------------------
Funded status of the plans $ 30.8 $ 17.8 $ (11.2) $ (10.7)
Unrecognized actuarial gain (15.2) (6.5) (0.3) --
Unrecognized prior service cost 0.2 0.8 -- --
- -----------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 15.8 $ 12.1 $ (11.5) $ (10.7)
- -----------------------------------------------------------------------------------------------------------------------
ASSUMPTIONS AS OF DECEMBER 31
Discount rate 7.00% 7.50% 7.00% 750%
Expected return on plan assets 10.00% 10.00% N/A N/A
Rate of compensation increase 4.00% 4.00% N/A N/A
Medical trend-valuation year N/A N/A 7.00% 6.25%
Medical trend-ultimate N/A N/A 5.25% 5.25%
Net periodic pension and other postretirement benefit costs include the
following components:
Pension Benefits Other Postretirement Benefits
- -----------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Service cost $ 1.4 $ 2.4 $ 3.3 -- -- --
Interest cost 7.5 7.6 7.0 $ 0.3 $ 0.3 $ 0.3
Return on plan assets (expected) (10.8) (9.4) (8.4) -- -- --
Amortization and deferrals 0.1 0.5 0.8 -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Subtotal (1.8) 1.1 2.7 0.3 0.3 0.3
Curtailment Gain (0.5) (3.7) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Net periodic (benefit) cost $ (2.3) $ (2.6) $ 2.7 $ 0.3 $ 0.3 $ 0.3
- -----------------------------------------------------------------------------------------------------------------------
Defined contribution plan expenses were $1.2 million, $1.5 million, and $1.5
million in 1998,1997, and 1996, respectively. Also, under the provisions of SFAS
No. 88, "Accounting for Settlements and Curtailments of Defined Benefit Pension
Plans and for Termination Benefits," benefit freezes resulted in the recognition
of gains in 1998 and 1997. These gains resulted from the net decrease in the
Company's benefit obligation for employees affected by the armored unit
combination with Loomis Armored Inc. and other benefit freezes. Assets held in
trust for the defined benefit plans are comprised primarily of marketable equity
and fixed income securities.
34
Borg-Warner Security Corporation
NOTE 10 - STOCK OPTIONS
The Company has stock incentive plans that authorize the grant of options to
purchase shares of the Company's common stock. Outstanding options carry
exercise prices ranging from $8.43 to $21.59 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.
Common shares under option for the years ended December 31, 1998, 1997, and
1996 are summarized as follows:
Number of Shares (thousands of shares) Weighted-Average Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Shares under option at January 1 1,972 1,545 1,810 $ 12.38 $ 12.20 $ 13.34
Granted 39 843 159 18.90 11.30 10.98
Exercised (267) (273) (66) 11.04 6.12 5.00
Cancelled (104) -- -- 14.83 -- --
Forfeited (93) (143) (358) 14.29 16.03 18.76
- -----------------------------------------------------------------------------------------------------------------------------------
Shares under option at end of year 1,547 1,972 1,545 $ 12.49 $ 12.38 $ 12.20
==================================================================================================================================
Options exercisable 820 917 985
========================================================================
Shares available for future grant 713 664 1,177
========================================================================
Weighted-average fair value of
options granted during the year $ 7.12 $ 4.39 $ 4.00
========================================================================
Additional information regarding options outstanding as of December 31,
1998 is as follows (thousands of shares):
Options Outstanding Options Exercisable
------------------------------------------------------------------ --------------------------------------
Weighted-Average
Range of Remaining Weighted-Average Weighted-Average
Exercise Prices Number Outstanding Contractual Life (yrs) Exercise Price Number Exercisable Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------------
$ 8.43 - 8.75 300 6.4 $ 8.49 300 $ 8.49
10.56 - 15.94 958 7.6 11.94 263 13.72
16.03 - 18.83 219 3.1 17.89 203 17.89
19.06 - 21.59 70 6.3 20.31 54 19.89
- ----------------------------------------------------------------------------------------------------------------------------------
$ 8.43 - 21.59 1,547 6.6 $ 12.49 820 $ 13.24
==================================================================================================================================
The 727,000 options outstanding at December 31, 1998 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
proforma net income and earnings per share would have been as follows:
Year Ended December 31,
(millions of dollars, except per share) 1998 1997
- ----------------------------------------------------------------------------------
Net income As reported $ 29.1 $ 19.0
Pro forma 28.5 18.2
Earnings per share-basic As reported $ 1.24 $ 0.81
Pro forma 1.21 0.78
Earnings per share-diluted As reported $ 1.21 $ 0.79
Pro forma 1.18 0.76
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998 and 1997, respectively: expected volatility
of 40% and 41%; risk-free interest rates of 4.54-4.72% and 5.28-5.30%; and
expected lives of four years.
35
Notes to Consolidated Financial Statements, continued
NOTE 11 - BUSINESS SEGMENT INFORMATION
GENERAL INFORMATION Due to the similarity of their services and economic
characteristics, the Company's four service-based and three geographic-based
operating segments have been aggregated for reporting purposes as allowed by
SFAS 131. Segment operating performance as reviewed by the Company's Chief
operating decision maker is measured on a basis consistent with the information
presented in the financial statements. Such performance measurement consists of
earnings from continuing operations before interest expense and finance charges
and the provision for income taxes. The Company does not allocate assets to the
individual operating segments for purposes of measuring operating performance.
ENTERPRISE-WIDE DISCLOSURES:
INFORMATION ABOUT SERVICES The Company derives its revenues from various
security services offered to clients. The Company provides security officers to
deter crime, monitor electronic security systems, control public and private
access to facilities, perform general investigative services and background
screening of potential employees.
GEOGRAPHIC INFORMATION The Company operates in the United States, Canada, Europe
and South America. No revenues attributed to an individual foreign country
represents ten percent or more of consolidated revenues. The following revenues
are disclosed by geographical area:
(millions of dollars) 1998 1997 1996
- --------------------------------------------------------------------------------
United States $ 1,202.3 $ 1,187.7 $ 1,359.8
Foreign 121.1 116.9 110.3
- --------------------------------------------------------------------------------
Total Revenue $ 1,323.4 $ 1,304.6 $ 1,470.1
================================================================================
INFORMATION ABOUT MAJOR CUSTOMERS The Company has no individual customer from
whom it derives ten percent or more of its revenues.
INFORMATION ON LONG-LIVED ASSETS The long-lived assets listed below include
plant, property and equipment, capital leases and intangibles. No assets
attributed to an individual foreign country exceeds ten percent or more of
consolidated assets.
(millions of dollars) 1998 1997
- --------------------------------------------------------------------------------
United States $ 119.0 $ 126.9
Foreign 10.2 2.8
- --------------------------------------------------------------------------------
Total long lived assets $ 129.2 $ 129.7
================================================================================
NOTE 12 - INCOME TAXES
Earnings before income taxes from continuing operations and provision for income
taxes consist of:
1998 1997 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 $ 22.6 $ 2.3 $ 24.9 $ 37.5 $ 3.4 $ 40.9 $ 29.2 $ 4.6 $ 33.8
===============================================================================================================================
Income taxes:
Current:
Federal/Foreign $ 9.0 $ 1.2 $ 10.2 $ 4.9 $ 1.0 $ 5.9 $ 4.1 $ 2.0 $ 6.1
State 1.5 -- 1.5 1.5 -- 1.5 1.5 -- 1.5
- -------------------------------------------------------------------------------------------------------------------------------
10.5 1.2 11.7 6.4 1.0 7.4 5.6 2.0 7.6
Deferred (1.9) -- (1.9) 7.7 -- 7.7 6.0 -- 6.0
- -------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes $ 8.6 $ 1.2 $ 9.8 $ 14.1 $ 1.0 $ 15.1 $ 11.6 $ 2.0 $ 13.6
===============================================================================================================================
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) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Income taxes at U.S. statutory rate of 35% $ 8.7 $ 14.3 $ 11.9
Increases (decreases) resulting from:
State income taxes 1.0 1.0 0.8
Non-temporary differences 0.2 0.1 0.7
Other, net (0.1) (0.3) 0.2
- ---------------------------------------------------------------------------------------------------------------------------------
Income taxes reported $ 9.8 $ 15.1 $ 13.6
=================================================================================================================================
36
Borg-Warner Security Corporation
Following are the components of the deferred tax asset as of December 31,
1998 and 1997:
(millions of dollars) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Liabilities for casualty insurance $ 32.0 $ 35.9
Liabilities related to discontinued operations 5.1 7.9
Liabilities for other postretirement benefits 5.1 4.2
Other, net 3.4 1.1
General business credit 5.5 24.8
Minimum tax credit -- 26.6
Foreign tax credit -- 0.4
- ------------------------------------------------------------------------------------------------------------------------
Subtotal deferred tax assets 51.1 100.9
Valuation allowance -- (5.3)
- ------------------------------------------------------------------------------------------------------------------------
51.1 95.6
Deferred tax liabilities:
Fixed assets -- (36.3)
Investments (7.0) (13.1)
Net excess purchase price over net assets acquired (1.7) (5.7)
- ------------------------------------------------------------------------------------------------------------------------
Subtotal deferred tax liabilities (8.7) (55.1)
- ------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 42.4 $ 40.5
========================================================================================================================
NOTE 13 - CAPITAL STOCK
The following table summarizes the Company's capital stock at December 31,
1998 and 1997:
December 31,
(thousands of shares) 1998 1997
-------------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value: Authorized 50,000.0 50,000.0
Issued 23,879.1 23,362.8
Outstanding 23,830.8 23,326.8
Series 1 non-voting common stock, $.01 par value: Authorized 25,000.0 25,000.o
Issued 2,720.0 2,720.0
Outstanding - 249.6
Preferred stock, $.01 par value Authorized 5,000.0 5,000.0
Issued and Outstanding - -
NOTE 14- EARNINGS PER SHARE:
1998 1997 1996
PER SHARE Per Share Per Share
(millions of dollars, except per share) EARNINGS SHARES AMOUNT Earnings Shares Amount Earnings Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations $ 15.1 $ 25.8 $20.2
BASIC EPS
Earnings available to
commom shareholders 15.1 23.6 $ 0.64 25.8 23.5 $ 1.10 20.2 23.3 $0.87
==================================================================================================================================
EFFECT OF DILUTIVE SECURITIES
Outstanding stock options - 0.4 - 0.6 - 0.2
DILUTED EPS
Earnings available to common shareholders
+assumed conversions $15.1 24.0 $ 0.64 $ 25.8 24.1 $ 1.07 $20.2 23.5 $0.86
==================================================================================================================================
37
Notes to Consolidated Financial Statements, continued
NOTE 15-INTERIM FINANCIAL INFORMATION (UNAUDITED)
1998 Quarter Ended 1997 Quarter Ended
--------------------------------------------- ------------------------------------------
(millions of dollars, except per share) MAR. 31 JUNE 30 SEPT. 30 DEC. 31 YEAR 1998 Mar. 31 June 30 Sept. 30 Dec. 31 Year 1997
Net service revenues $318.6 $323.9 $336.6 $344.3 $1,323.4 $326.4 $317.1 $330.5 $330.6 $1,304.6
Cost of services 269.1 273.0 284.2 290.4 1,116.7 275.0 267.0 279.9 278.8 1,100.7
Selling, general and
administrative expenses 35.7 50.0 35.5 34.5 155.7 37.2 33.7 32.6 30.8 134.3
Depreciation 1.0 1.0 1.0 1.2 4.2 1.6 1.2 1.1 1.1 5.0
Other expense (income), net 2.4 2.1 1.2 0.7 6.4 (0.1) 1.8 2.6 2.7 7.0
Interest expense and
finance charges 4.2 4.2 3.4 3.7 15.5 5.3 3.7 3.7 4.0 16.7
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before
income taxes 6.2 (6.4) 11.3 13.8 24.9 7.4 9.7 10.6 13.2 40.9
Provision (benefit) for income taxes 2.3 (2.4) 4.5 5.4 9.8 1.7 4.0 3.9 5.5 15.1
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing
operations 3.9 (4.0) 6.8 8.4 15.1 5.7 5.7 6.7 7.7 25.8
Gain (loss) from discontinued
operations, net of
income taxes (19.1) 39.4 -- -- 20.3 (1.7) (1.6) (2.0) (1.5) (6.8)
Extraordinary loss, early
extinguishment of debt -- (6.3) -- -- (6.3) -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $(15.2) $ 29.1 $ 6.8 $ 8.4 $ 29.1 $ 4.0 $ 4.1 $ 4.7 $ 6.2 $ 19.0
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share - basic:
Continuing operations $ 0.17 $(0.17) $ 0.29 $ 0.35 $ 0.64 $ 0.24 $ 0.24 $ 0.29 $ 0.33 $ 1.10
Discontinued operations (0.81) 1.68 -- -- 0.87 (0.07) (0.07) (0.09) (0.06) (0.29)
Extraordinary loss, early
extinguishment of debt -- (0.27) -- -- (0.27) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss)
per share $(0.64) $ 1.24 $ 0.29 $ 0.35 $ 1.24 $ 0.17 $ 0.17 $ 0.20 $ 0.27 $ 0.81
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share - diluted:
Continuing operations $ 0.16 $(0.16) $ 0.29 $ 0.35 $ 0.64 $ 0.24 $ 0.24 $ 0.28 $ 0.31 $ 1.07
Discontinued operations (0.79) 1.62 -- -- 0.83 (0.07) (0.07) (0.09) (0.05) (0.28)
Extraordinary loss, early
extinguishment of debt -- (0.26) -- -- (0.26) -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss)
per share $(0.63) $ 1.20 $ 0.29 $ 0.35 $ 1.21 $ 0.17 $ 0.17 $ 0.19 $ 0.26 $ 0.79
- -----------------------------------------------------------------------------------------------------------------------------------
NOTE 16-ACQUISITION OF BUSINESSES
During 1998, the Company purchased three security service businesses, two in the
United States and one with operations in the United Kingdom and Ireland for an
aggregate purchase price of $11.5 million. The results of operations of these
acquired businesses are included as of the date of acquisition. The acquisitions
were accounted for under the purchase method. Substantially all of the purchase
price represents excess of purchase price over net assets acquired which is
being amortized on a straight-line basis over 5 to 10 years. None of the
acquisitions individually, or in aggregate, had a significant effect on revenues
or the results of operations in 1998.
38
Independent Auditors' Report Borg-Warner Security Corporation
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS,
BORG-WARNER SECURITY CORPORATION:
We have audited the consolidated balance sheets of Borg-Warner Security
Corporation and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations and comprehensive income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Chicago, Illinois
February 2, 1999
39
Directors, Officers and Shareholder Information Borg-Warner Security Corporation
Officers
- ---------------------------------------------------------------------------------------------------------------------------------
J. Joe Adorjan Robert E.T. Lackey John D. O'Brien Timothy M. Wood
Chairman, President Vice President, General Counsel Senior Vice President Vice President
and Chief Executive Officer and Corporate Secretary and Chief Financial Officer
Craig J. Bollinger Brian S. Cooper Nancy E. Kittle
Vice President, Risk Treasurer Vice President,
Management Human Resources
Directors
- ---------------------------------------------------------------------------------------------------------------------------------
J. Joe Adorjan James J. Burke, Jr. Albert J. Fitzgibbons, III Arthur F. Golden
Chairman, President Partner Partner Partner
and Chief Executive Officer Stonington Partners Inc. Stonington Partners Inc. Davis Polk & Wardwell
Borg-Warner Security Corporation
Dale W. Lang Robert A. McCabe Andrew McNally IV Alexis P. Michas
President Chairman Retired Chairman Managing Partner
KX Acquisition Corporation Pilot Capital Corporation and Chief Executive Officer Stonington Partners Inc.
Rand McNally & Company
H. Norman Schwarzkopf Donald C. Trauscht
General Retired Chairman
U.S. Army, Retired and Chief Executive Officer
Borg-Warner Security Corporation
Committees of the Board
- ---------------------------------------------------------------------------------------------------------------------------------
EXECUTIVE COMMITTEE FINANCE AND AUDIT COMMITTEE COMPENSATION COMMITTEE NOMINATING COMMITTEE
J. Joe Adorjan, Chairman Alexis P. Michas, Chairman Robert A. McCabe, Chairman H. Norman Schwarzkopf,
Arthur F. Golden James J. Burke, Jr. Albert J. Fitzgibbons, III Chairman
Alexis P. Michas Arthur F. Golden Dale W. Lang Albert J. Fitzgibbons, III
Donald C. Trauscht H. Norman Schwarzkopf Andrew McNally IV Dale W. Lang
Donald C. Trauscht Alexis P. Michas Robert A. McCabe
Andrew McNally IV
- ---------------------------------------------------------------------------------------------------------------------------------
Company Headquarters Investor Contact Securities Information Shareholder inquiries to:
Borg-Warner Jeffrey S. Cartwright The common stock of Shareholder Relations
Security Corporation Director of Investor Relations Borg-Warner Security Department - 11E
200 South Michigan Avenue 312-322-8836 Corporation is listed on the P.O. Box 11258
Chicago, IL 60604 New York Stock Exchange. Church Street Station
Form 10-K Report The ticker symbol is BOR. New York, NY 10286-1258
www.Borg-WarnerSecurity.com A copy of the Company's Annual
Report on Form 10-K is available Independent Accountants Send certificates for transfer
Shareholder Information to shareholders without charge Deloitte & Touche LLP and address changes to:
The 1999 annual meeting of upon request to the Investor 180 North Stetson Receive and Deliver
shareholders will be held on Relations Department Chicago, IL 60601 Department - 11W
Tuesday, April 20, at 10 a.m. P.O. Box 11002
at the Company headquarters, Transfer Agent Church Street Station
200 South Michigan Avenue, The Bank of New York New York, NY 10286-1002
Chicago, IL. 1-800-524-4458
40