10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------------- 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, 1994 COMMISSION FILE NUMBER: 33-15419 ---------------------------- 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) ---------------------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, par value $.01 per share New York Stock Exchange 9-1/8% Senior Subordinated Notes due 2003 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None ---------------------------- 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. [ ] 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 14, 1995 was approximately $69.3 million. As of March 14, 1995, the registrant had 21,793,425 shares of Common Stock and 1,149,600 shares of Series I Non-Voting Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated herein by reference into the Part of the Form 10-K indicated. DOCUMENT PART OF FORM 10-K INTO WHICH INCORPORATED -------- ----------------------------------------- The Company's annual report to Parts I, II and IV stockholders for the year ended December 31, 1994 The Company's proxy statement for Part III the 1995 annual meeting of stockholders
BORG-WARNER SECURITY CORPORATION FORM 10-K YEAR ENDED DECEMBER 31, 1994 INDEX PART I Item Number Page ----------- ---- 1. Business 3 2. Properties 13 3. Legal Proceedings 13 4. Submission of Matters to a Vote of Security Holders 16 PART II 5. Market for the Registrant's Common Stock and Related Stockholder Matters 16 6. Selected Financial Data 17 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 8. Financial Statements and Supplementary Data 17 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 18 PART III 10. Directors and Executive Officers of the Registrant 18 11. Executive Compensation 18 12. Security Ownership of Certain Beneficial Owners and Management 18 13. Certain Relationships and Related Transactions 18 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 19
2 PART I ITEM 1. BUSINESS The Company provides a broad line of protective services for its customers, including guard, alarm, armored transport and courier services. The Company believes that, based on revenues and the variety of services offered, it is the largest and broadest-based supplier in the protective services industry in the United States. COMPANY'S BUSINESS UNITS The Company's protective services business is divided into four business units: guard services, alarm services, armored transport services and courier services. Information concerning the revenues, operating profit or loss and identifiable assets attributable to each of the Company's business units is incorporated herein by reference to Note 9 of the Notes to Consolidated Financial Statements. GUARD SERVICES The guard services unit provides a variety of guard and related security services under the Wells Fargo(R), Burns(R), Globe(R) and other service marks to over 13,000 government and business customers from approximately 319 locations throughout the United States, and in Canada, Colombia and the United Kingdom. The Company believes that its guard services unit is the largest contract guard services operation in the world, measured by revenues. The Company's guard services unit supplies contract uniformed and plainclothes security officers, who may or may not be armed, to perform a wide variety of tasks. These security officers patrol and monitor commercial, financial, industrial, residential and governmental facilities providing deterrence against crime and breach of governmental security regulations and detection of fire, accidents and other casualties. The security officers also monitor electronic systems and control public and employee access to facilities. Specialized assignments include nuclear and conventional electric power plant security, pre-departure screening of passengers and luggage at airports, mailroom services and investigative services, including background investigations of prospective employees. The guard services unit employs approximately 76,000 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 driver's 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 guard services unit markets guard services through approximately 225 sales representatives nationwide and in Canada, Colombia and the United Kingdom. Sales personnel operate out of local branch and sales offices. The guard services unit also bids on contracts with governmental agencies. Guard services contracts generally provide for such services on a continuing basis and generally are terminable by either party upon 30 to 60 days notice. Charges for guard services are negotiated with customers and are based upon payment of a specified amount per guard hour. Typically, such charges are adjusted for any change in any law, ruling or collective bargaining agreement causing a change in work hours, wage rates, working conditions or other costs. Investigative services are generally provided under specific arrangements, with charges varying according to the nature of the assignment. ALARM SERVICES The alarm services unit provides electronic security services in the United States and Canada under the Wells Fargo(R) service mark for its commercial customers and under the Pony Express(R) service mark for its residential customers. In addition, this unit provides an integrated guard, patrol and alarm service to Bel Air, Beverly Hills and other suburbs of Los Angeles under the trade name Bel-Air Patrol. The Company believes that its alarm services unit is one of the largest electronic security service operations in the United States, measured by revenues. The unit has approximately 2,440 full- time and 165 part-time employees. Commercial. The alarm services unit designs, installs, monitors and services electronic detection systems located at customers' premises. These systems are tailored to customers' needs and may include intrusion and fire detection, critical process and sprinkler monitoring, access control and closed-circuit television monitoring systems. The Company's alarm systems and devices may be monitored on the premises of the customer by the customer's own personnel or linked through telephone lines or long range radio to one of 12 central stations operated by the Company in the United States and Canada. The Company also services its installed systems. The alarm services unit services approximately 79,000 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. Commercial accounts represent approximately 90 percent of this unit's revenues. 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 4 expiration of the initial term of the contract and enter into new five-year monitoring contracts. The cost of the installation is capitalized and depreciated over varying periods that have a weighted average life of approximately ten years. Approximately 71 percent of the alarm services unit's revenue for 1994 was derived from service charges for maintenance and central station monitoring. The alarm 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. In 1994, the alarm services unit was restructured to bring decision-making about service closer to the customer, and to strengthen management's connection with existing operations. Nine regional offices were established to manage the unit's 40 branches. The Company expects that the regional offices will manage most of the administrative issues, while the branch offices devote full attention to sales and service issues. The unit has continued consolidating its monitoring stations into regional monitoring centers in order to reduce costs. Since the beginning of 1991, the Company has reduced the number of its monitoring stations from 34 to 12. The alarm services unit has enhanced customer service through intensive training programs for sales, management, installation and service employees and more sophisticated operational controls. The alarm services unit also makes direct sales of security equipment to government and commercial users (including other companies in the alarm business) and designs, assembles and sells engineered systems for commercial fire suppression. Residential. The alarm services unit also installs fire and intrusion protection systems for residential customers under the Pony Express(R) service mark. Residential customer sales, service and monitoring 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 13,000 customers under 5 the trade name Bel-Air Patrol. The alarm services unit purchases electronic equipment and component parts for systems from a number of suppliers, and is not dependent upon any single source for such equipment or parts. ARMORED TRANSPORT SERVICES The armored transport services unit is a security-related cash services business that provides traditional armored transport services, automatic teller machine ("ATM") services and cash management services in the United States under the Wells Fargo(R) service mark. The unit employs approximately 7,000 employees at approximately 125 facilities throughout the United States and Puerto Rico. Armored Transport. The Company provides vault storage and specialized, secure transportation services using armed guards in carrying currency, securities and other valuables for banks and national and local retail customers. Despite the widespread use of credit cards and wire transfers, billions of dollars of currency, securities and other valuables are transported daily as part of the United States economy. The Company's armored transport business uses a fleet of approximately 2,100 vehicles to transport approximately $5 billion of currency and securities each business day. The Company believes it is the second largest armored transportation operation in the United States, measured by revenues. The Company provides armored transport services for over 15,000 customers, including NationsBank, K-Mart and Wal Mart. Most of the customer contracts are for a multi-year term with automatic renewal for additional one-year terms, unless terminated by either party. It has been the unit's experience that its customers generally continue the service after the initial term of the contract. The armored transport services operation has a sales force of approximately 40 people dedicated to the solicitation of transportation-related accounts and a separate sales force that focuses solely on transportation-related accounts for national retail customers. Approximately 45 percent of the armored transport unit's revenue in 1994 was derived from retail customers. The Company believes that retail customers provide an opportunity for significant growth in the armored transport business. Generally, the Company assumes responsibility for the safe arrival at the destination of transported commodities. The armored transport unit maintains a risk management department that is responsible for loss prevention, security investigation, employee safety and training and coordination with local and federal law enforcement personnel. ATM Servicing. The armored transport unit also provides special services to approximately 18,000 ATMs on a national basis. The Company believes it is the leading 6 servicer of ATMs in the United States, measured by both revenues and the number of ATMs serviced. The Company controls its ATM services through an automated national dispatching center located in Columbia, Maryland. The dispatch center coordinates all customer requests and directs field technicians throughout the country. The automation system provides detailed service confirmation data both internally and to the customer. ATM servicing is a time-critical business and the Company guarantees a response time of 90 minutes or less to its major accounts. During 1994 the Company expanded its service to offer financial institutions a complete range of management and maintenance services for ATM networks. The Company provides cash preparation and replenishment, deposit collection and verification, on-site balancing of ATM funds, preventive maintenance and first and second line maintenance services, including necessary hardware maintenance. The Company also sells refurbished ATM equipment. In January 1994 the Company's ATM servicing unit acquired the assets of Shields Business Machines, Inc., a New Jersey-based servicer of approximately 2,000 ATMs in Pennsylvania, New Jersey and New York. The Company's ATM servicing unit has a sales force of approximately five persons. Most of the customer contracts are for a multi-year term with automatic renewal for additional one-year terms, unless terminated by either party. Cash Management Services. The armored transport unit also provides cash management services to approximately 500 financial institutions and retail customers. These highly automated services include currency storage and preparation, micro-encoding of checks, deposit verification and consolidation, coin wrapping and storage and food stamp processing. The Company's cash management services represent a growing component of service as both financial and retail institutions increasingly are outsourcing such operations. Existing customers of the armored transport and ATM services operations represent a potential market for the Company's cash management service. Most of the customer contracts are for a multi-year term with automatic renewal for additional one-year terms, unless terminated by either party. COURIER SERVICES The courier services unit transports time-sensitive packages for commercial businesses and non-negotiable financial documents for Federal Reserve banks and financial institutions through 39 branch and 70 satellite offices in 32 states under the Pony Express(R) service mark. The unit provides ground courier services through a fleet of approximately 3,300 vehicles and commercial and charter air service for longer distance or extremely time- critical shipments. During 1994 the courier services unit handled 7 approximately 22 million shipments and traveled approximately 230 million miles. Although the Pony Express service mark traces its roots to the Pony Express of Old West fame, the present courier operation began as a financial commodity courier transporting cancelled checks and other non-negotiable financial documents among financial institutions as a part of the armored transportation unit. While shipments of non-negotiable financial documents are still a substantial part of the unit's business, the courier services unit also delivers small packages, particularly business-to-business shipments of parts, extremely urgent mail, film, medical and pharmaceutical supplies and other commodities. The primary focus of the courier service unit is same-day or next-day service by ground transportation in intrastate and regional interstate markets. In 1994, approximately 40 percent of the unit's net service revenues were derived from business involving shipments with a transit time of eight hours or less. The typical customer ships multiple, time- critical, small shipments on a daily or weekly basis from one or more locations to one or more other locations within a 500-mile radius. The Company may design a customized distribution system initially for one or two large customers and make available to smaller customers the excess capacity on such system. The courier services unit attempts to meet customer needs for secure transportation through flexible and customized services. Shipments are picked up and delivered by uniformed courier guards who are trained in security measures. The unit has developed sophisticated information systems that provide automated billing, computer-assisted routing and package tracking and other programs that enhance customer service. The unit is expanding its use of PonyTrak(TM), an electronic tracking system that uses a hand-held scanner to record pickup and delivery times, dates and locations by reading package bar codes. The Company offers services outside of normal business hours that sometimes require couriers to unlock and enter customer premises and secure premises when leaving. The unit employs approximately 6,000 persons. The unit owns approximately 1,400 vehicles and leases the remainder from its employees. The Company believes such lease arrangements provide a competitive advantage because such employees tend to provide better customer service, drive more safely and have a more vested interest in the success of the business. The courier services unit operates both as a common and contract carrier and uses a combination of tariffs and shipping contracts to control the terms, conditions and rates applicable to the transportation of shipments. Rates are dependent upon many factors, including the weight and type of the shipped item, the distance and urgency of the shipment and the geographical location. 8 COMPETITION The guard services unit competes with major national firms, including Pinkerton's Inc. and The Wackenhut Corporation, and numerous smaller regional and local companies providing similar services. Competition in the security guard industry is based on price in relation to the quality of service, the scope of services performed, the extent and quality of guard supervision, recruiting and training and name recognition. The alarm services unit competes with major national firms, including ADT, Inc., the Protection Securities Division of Honeywell, Inc. and The National Guardian Corporation, and numerous smaller regional and local companies. ADT, Inc., which provides primarily residential alarm services, is materially larger than the Company's alarm services unit. Competition in the alarm services industry is based on price in relation to the quality of service, the scope of alarm installation and service, and the level of technological and engineering sophistication. The armored transport unit competes with major national firms, including Brink's Incorporated (a subsidiary of The Pittston Company) and Loomis Armored Inc., and numerous smaller regional and local companies. On a worldwide basis, Brink's Incorporated is materially larger than the Company's armored transportation unit. Competition in the armored transport industry is based primarily on price in relation to quality of service, the scope of services performed, quality of cargo insurance and name recognition. The courier services unit competes with numerous regional and local courier companies. Competition in the courier industry is based primarily on price in relation to quality of service and size and configuration of distribution routes. Because of low barriers to entry in some areas, smaller local competitors with substantially lower overhead expenses are often able to compete effectively with the Company for local shipments. REGULATION Due to the nature of the Company's business, its operations are subject to a variety of federal, state, county and municipal laws, regulations and licensing requirements. The Company believes that its operations are in substantial compliance with those laws, regulations and requirements. The Company's guard services operations are subject to a variety of city, county and state firearm and occupational licensing laws. In addition, many states have laws requiring training and registration of security officers, regulating the use of badges, identification cards and uniforms and imposing minimum bond surety and insurance requirements. 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 9 establishment of such standards will have a material affect on its guard services operations. The Company's alarm services operations are subject to regulatory requirements of federal, state and local authorities. In addition, this unit relies upon the use of telephone lines to transmit signals, and the cost of such lines and the type of equipment which may be used are currently regulated by both federal and state governments. In some instances, the Company contracts with the local government to permit it to link a customer's business or home directly into the local police or fire department station for which it may pay a fee to such local government. As a result of a high incidence of false alarms in some communities, some local governments have imposed assessments, fines and penalties on customers based on the number of false alarms reported, or have restricted police response to systems producing excessive false alarms. The Company's armored transport and courier operations are subject to the regulations of the Interstate Commerce Commission ("ICC") and various state commerce commissions governing safety and insurance matters. Operations are conducted both as a common carrier and as a contract carrier under certificates and permits issued by the ICC. Such operations are also subject to regulation by federal and state agencies with respect to safety of employees, operations and equipment, vehicle emissions and underground fuel storage tanks. From time to time, in the ordinary course of business, the Company is subjected to penalties or fines as the result of licensing irregularities or the misconduct of one or more of its agents or employees. In addition, under principles of common law, the Company can generally be held liable for acts or omissions of its agents or employees performed in the course and scope of their employment. In addition, some states have statutes that expressly impose on the Company legal responsibility for the conduct of its employees. RISK MANAGEMENT The nature of the services provided by the Company potentially exposes it to greater risks of liability for employee acts, injuries (including workers' compensation claims) or omissions than may be posed by other service businesses. See "--Regulation." The Company often obtains customer indemnification or liability limitations in its contracts to mitigate this risk exposure. In addition to self-insurance reserves, the Company carries insurance of various types, including general liability coverage. The Company obtains such insurance at rates and upon terms negotiated periodically with various underwriters. The loss experience of the Company and, to some extent, other protective services companies affects premium rates charged to the Company. The Company generally maintains insurance coverage for punitive damages, although the laws of many states limit or prohibit insurance coverage for liability for punitive damages. The Company does not believe that limitations on, or the uncertainty of, insurance 10 coverage for punitive damages in certain states in which it operates is likely to be material, based upon the Company's prior experience with punitive damages claims. The Company also attempts to manage its risk liability through analysis of customer facilities and transportation routes and employee screening, training, supervision and evaluation. EMPLOYEES The Company's business is labor intensive and, accordingly, is affected by the availability of qualified personnel and the cost of labor. Although the protective services industry is characterized generally by high turnover, the Company believes its experience compares favorably with that of the industry. The Company has not experienced any material difficulty in employing suitable numbers of qualified security guards and other employees. The Company considers its relations with its employees to be generally satisfactory. The Company is a party to collective bargaining agreements with various local unions covering approximately 8,836 employees. The collective bargaining agreements expire at various dates from 1995 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 recognize or withdrawn recognition of labor organizations that admit as members employees other than guards. The NLRB has certified various locals of the International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America as the exclusive collective bargaining representative of certain of its courier services employees. The unit is engaged in contract negotiations with such representative. During 1994 such representative called strikes at branches located in 12 cities. As of the end of 1994, strikes have been abandoned at all locations with striking employees returning to work. TRADEMARKS AND PATENTS The Wells Fargo(R), Pony Express(R) and Burns(R) service marks are especially important to the Company's business. The Company believes that its rights in these marks are adequately protected and of unlimited duration. While the Company has patents it considers to be important to the overall conduct of its business, it does not consider any particular patent, or group of related patents, essential to its operations. The Company's 13 United States patents, which generally relate to the Company's alarm services unit, expire between 1997 and 2008, and the Company's 18 foreign patents, which generally relate to the Company's alarm services unit, expire between 1995 and 2009. For both the United States and the foreign patents, their expiration, individually, and in the aggregate, 11 is not expected to have any material effect on the Company's financial condition or results of operations. EXECUTIVE OFFICERS Set forth below are the names, ages, positions and certain other information concerning the current executive officers of the Company as of March 1, 1995. On March 27, 1995 the Company announced that J. Joe Adorjan had been named President and Chief Operating Officer. He is expected to become Chairman and Chief Executive Officer of the Company after a transition period. NAME AGE POSITION WITH COMPANY Donald C. Trauscht..................61 Chairman of the Board, Chief Executive Officer and President; Director Neal F. Farrell.....................60 Executive Vice President; Director John D. O'Brien.....................52 Senior Vice President Timothy M. Wood.....................47 Vice President, Finance Edwin L. Lewis......................49 Vice President--Law Mr. Trauscht has been a director of the Company since 1987, Chief Executive Officer and President of the Company since January 1992 and Chairman of the Board of Directors since December 1992. He was Chief Operating Officer and President from September 1991 to January 1992 and Chief Operating Officer and Vice President from 1990 to 1991; Vice President-Finance and Strategy from 1987 to 1990. He is also a director of Baker Hughes Incorporated, Blue Bird Corporation, Borg-Warner Automotive, Inc., Esco Electronics Corporation and Thiokol Corporation. Mr. Farrell has been Executive Vice President and a director of the Company since January 1992. He was Vice President, Chief Financial Officer and General Counsel from 1990 to January 1992; Vice President and General Counsel from 1987 to 1990. He is also a director of Calumet Steel 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. He is also a director of Borg-Warner Automotive, Inc. 12 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. Mr. Lewis has been Vice President--Law of the Company since January 1995. He was Vice President--Law of the Company's guard services unit from 1991 to 1994 and was Vice President--Law of the Company's alarm services unit from 1983 to 1991. Each of the executive officers named above was elected by the Board of Directors to serve in the office indicated until his successor is elected and qualified. ITEM 2. PROPERTIES The Company and its subsidiaries maintain armored transport and courier terminals, central alarm stations, plants and general offices in various cities in the United States, Puerto Rico, Canada, the United Kingdom and Colombia. At December 31, 1994, the guard services unit occupied approximately 319 branch and satellite offices, all but one of which were leased. At December 31, 1994, the alarm services unit operated 12 central stations (10 of which are on the same premises as branch offices), of which 6 were leased, 28 additional branch and 48 separate satellite offices, of which 20 branches and all satellites were leased. At December 31, 1994, the armored services unit occupied 125 facilities, of which 108 were leased, and 45 of which contained vaults. At December 31, 1994, the courier services unit occupied approximately 109 branches and satellites, of which all but four were leased. The Company leases approximately 100,000 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 13 rehabilitation since September 1987. Rehabilitation is a process supervised by the Illinois Director of Insurance to attempt to compromise liabilities at an aggregate level that is not in excess of Centaur's assets. In rehabilitation, Centaur's assets are currently being used to satisfy claim liabilities under direct insurance policies written by Centaur. Any remaining assets will be applied to Centaur's obligations to other insurance companies under reinsurance contracts. The foregoing has resulted in one pending lawsuit against the Company for recovery of alleged damages from the failure of Centaur to satisfy its reinsurance obligations. Certain former officers and directors of the Company's current and former subsidiaries have been named as defendants in such lawsuit and the Company has agreed to indemnify such individuals. Centaur is not a defendant in this lawsuit against the Company. Although the Illinois Director of Insurance has not made any claims against the Company for any of Centaur's liabilities, the Illinois Director of Insurance has requested, and the Company has agreed to, an extension of the statute of limitations for any such claims. As of December 31, 1993, Centaur's total liabilities were $135 million and its deficit in net worth was $54.7 million, according to financial statements submitted on behalf of the Illinois Director of Insurance. Such financial statements were presented on a liquidating basis with assets carried at their market value or estimated realizable value and liabilities carried at their present value through the provision of a present value discount. Although Centaur is a subsidiary of the Company, the Company does not operate Centaur and has no responsibility for, nor does it participate in the preparation of, such financial statements. Centaur's financial results, assets and liabilities are not reflected in the Company's financial statements. In June 1988, the Insurance Commissioner of the State of California as trustee of Mission Insurance Trust and four other affiliated insurance companies filed a complaint in the Superior Court of the State of California, County of Los Angeles, against the Company and certain of its current and former subsidiaries alleging damages resulting from the failure of Centaur to satisfy its reinsurance obligations. This lawsuit alleges damages to plaintiff, as Trustee of Mission Insurance Company, Mission National Insurance Company, Enterprise Insurance Company, Holland-America Insurance Company and Mission Reinsurance Corporation, based on (i) conduct justifying piercing the corporate veil, (ii) fraud and (iii) negligent misrepresentation. Plaintiff seeks judgment in the amount of the insurance companies' current losses, which allegedly total approximately $14.2 million, plus a declaratory order that the Company pay future losses alleged to exceed $66 million. The complaint was amended in 1989 to add 11 former officers and directors of the Company's current and former subsidiaries as defendants and to allege additional causes of action based on (i) breach of fiduciary duty and imposition of personal liability, (ii) fraudulent conveyance, (iii) constructive trust and (iv) conspiracy and additional current losses totalling more than $9.8 million and to add a claim for punitive damages in the amount of $270 million. In 1989, the Company filed a motion to dismiss or stay the action, pending resolution 14 of Centaur's rehabilitation in Illinois. The court declined to dismiss the action, but entered an order staying the action until the rehabilitation proceeding is resolved, except that the parties may pursue discovery to preserve evidence. In 1992, the Centaur rehabilitator filed a motion to intervene and dismiss the complaint on the grounds that the plaintiff lacked standing and that its claims were not ripe for adjudication. The motion is pending. In 1993, six of the 11 individual defendants were dismissed from the lawsuit. In September 1994, the court effectively lifted its stay. Active discovery is now being pursued. The Company intends to defend this lawsuit vigorously. The Company believes that any damages for failure to satisfy reinsurance obligations are solely the responsibility of Centaur and that the resolution of the lawsuit relating to Centaur, including the Company's indemnification obligations to former officers and directors, will not have a material adverse effect on its financial position or future operating results; however, no assurance can be given as to the ultimate outcome with respect to such lawsuit. Environmental Proceedings The Company and certain of its current and former subsidiaries have been identified by the U.S. Environmental Protection Agency and certain state environmental agencies as potentially responsible parties ("PRPs") at a number of hazardous waste disposal sites under the Comprehensive Environmental Response, Compensation and Liability Act ("Superfund") and equivalent state laws and, as such, may be liable for the cost of cleanup and other remedial activities at these sites. Responsibility for cleanup and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula. The Company believes that none of these matters individually or in the aggregate will have a material adverse affect on its financial position or future operating results, generally either because the maximum potential liability at a site is not large or because liability will be shared with other PRPs, although no assurance can be given with respect to the ultimate outcome of any such liability. Based on its estimate of allocations of liability among PRPs, the probability that other PRPs, many of whom are large, solvent public companies, will fully pay the costs allocated to them, currently available information concerning the scope of contamination at such sites, estimated remediation costs at such sites, estimated legal fees and other factors, the Company has made provisions for indicated environmental liabilities in its financial statements in the aggregate amount of approximately $12 million (relating to environmental matters with respect to discontinued operations of the Company). The Company believes that such provisions for indicated environmental liabilities have been established on a basis consistent with generally accepted accounting principles. If any environmental liability claim relating to the Company's former chemical and plastics business is made, the Company is indemnified by the purchaser of such business, General Electric Company. Since the disposition, the Company has notified General Electric Company of various claims made with respect to the Company's former chemical and plastics business and General Electric Company has assumed all of such claims and has not contested its indemnification obligations. There 15 is no dollar limitation on the General Electric Company's indemnification obligations and there are no other material limitations or exclusions with respect thereto. If any environmental liability claim relating to the operations of Borg-Warner Automotive, Inc. ("BW-Automotive") is made, the Company will be indemnified by BW-Automotive. There is no dollar limitation on BW-Automotive's indemnification obligations and there are no other material limitations or exclusions with respect thereto. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to the security holders of the Company during the fourth quarter of 1994. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. On January 20, 1993, the Company's Common Stock was listed for trading on the New York Stock Exchange. Prior to that date, there was no established public trading market for shares of Common Stock. As of March 14, 1995, there were approximately 180 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 subject to certain restrictions under the terms of the Company's indebtedness. Under the terms of its credit facility, the Company will be permitted to pay cash dividends with respect to its Common Stock beginning in 1995, subject to certain limitations and restrictions, including that no event of default under such facility has occurred and is continuing; that after giving effect to such dividend the Company meets certain debt and interest coverage ratios; and that the aggregate amount of dividends be limited to the lesser of (a) 50% of the Company's consolidated excess cash flow (as defined in the facility) for the immediately preceding year or (b) $5 million in 1995, $10 million in 1996, $15 million in 1997, $20 million in 1998 and $25 million in 1999. 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. 16 High and low sales prices (as reported on the New York Stock Exchange composite tape) for the Common Stock for each quarter during 1993 and 1994 were:
Quarter ended High Low ------------- ------- ------- 1993 March 31 $22 5/8 $19 5/8 June 30 22 1/4 19 5/8 September 30 22 7/8 18 December 31 20 1/2 18 1/4 1994 March 31 $22 $16 3/8 June 30 16 7/8 10 3/4 September 30 12 3/4 10 5/8 December 31 11 1/8 8 1/4
ITEM 6. SELECTED FINANCIAL DATA The selected financial data for the five years ended December 31, 1994, with respect to the following line items shown under the "Consolidated Statistical Review" (set forth on page 12) in the Annual Report is incorporated herein by reference and made a part of this report: Net service revenues; earnings (loss) from continuing operations; earnings (loss) from continuing operations per share; total assets and total debt. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Management's Discussion and Analysis of Results of Operations and Financial Condition (set forth on pages 14 through 19) in the Annual Report are incorporated herein by reference and made a part of this report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements (including the notes thereto) of the Company (set forth on pages 20 through 40) 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, 1994 and 1993 is set forth in Note 14 of the Notes to Consolidated Financial Statements. For a list of financial statements and schedules filed as part of this report, see the "Index to Financial Statements and Financial Statement Schedules." 17 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Inapplicable. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to directors and nominees for election as directors of the Company is incorporated herein by reference to the information under the caption "Election of Directors" on pages 1 through 3 of the Company's proxy statement for the 1995 annual meeting of stockholders. Information with respect to executive officers of the Company is set forth in part I of this report. Information concerning compliance with Section 16(a) of the Exchange Act is incorporated by reference to the information under the caption "Section 16(a) Compliance" on page 6 of the Company's proxy statement for the 1995 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 page 4, of the Company's proxy statement for the 1995 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 1995 annual meeting of stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to certain relationships and related transactions is incorporated herein by reference to the information under the caption "Certain Relationships and Related Transactions" on pages 12 through 16 of the Company's proxy statement for the 1995 annual meeting of stockholders. 18 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) The following consolidated financial statements of the registrant and its consolidated subsidiaries, set forth on pages 20 through 40 of the Annual Report, are incorporated herein by reference: Consolidated Balance Sheet--December 31, 1994 and 1993 Consolidated Statement of Operations--three years ended December 31, 1994 Consolidated Statement of Cash Flows--three years ended December 31, 1994 Consolidated Statement of Stockholders' Equity--three years ended December 31, 1994 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, 1994. 19 EXHIBIT NUMBER DOCUMENT DESCRIPTION ------ -------------------- EXHIBIT INDEX *3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992). *3.2 Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992). *4.1 Credit Agreement dated as of January 27, 1993 ("Credit Agreement") among the Company, the lenders party thereto and the administrative agent named therein (incorporated by reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992), as amended by the First Amendment thereto (incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ending June 30, 1994). *4.2 Credit Agreement dated as of January 27, 1993 ("L/C Agreement") among the Company, the banks party thereto and the agent named therein (incorporated by reference to Exhibit 4.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992), as amended by the First Amendment thereto (incorporated by reference to Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ending June 30, 1994). *4.3 Indenture dated as of January 15, 1983 by and between Borg- Warner and Harris Trust & Savings Bank, Trustee, entered into in connection with the registration of up to $150 million of debt securities and under which Borg-Warner issued 8% Notes due April 1, 1996 (incorporated by reference to Exhibit 9(d) to Registration Statement No. 2-81437). *4.4 Supplemental Indenture dated as of December 31, 1987 to the Indenture dated as of January 15, 1983 by and between the Company and Harris Trust and Savings Bank (incorporated by B-1 EXHIBIT NUMBER DOCUMENT DESCRIPTION ------ -------------------- reference to Exhibit 4.7 to the Company's Annual Report on Form 10-K for the Ten Months ended October 31, 1987). *4.5 Form of Security for 8% Notes due April 1, 1996 (incorporated by reference to Exhibit 4.8 to Registration Statement No. 33-53480). *4.6 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). *4.7 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). 4.8 Second Amendment and Consent to Credit Agreement dated as of March 15, 1995. 4.9 Fifth Amendment to L/C Agreement dated as of March 15, 1995. +*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 Security Corporation Retirement Savings Excess Benefit Plan (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 1988), as amended by Amendment No. 1 thereto (incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 1989). *10.3 Form of Indemnification Agreement dated September 23, 1986 between the Company and Messrs. Farrell, O'Brien, Trauscht and B-2 EXHIBIT NUMBER DOCUMENT DESCRIPTION ------ -------------------- Wood (incorporated by reference to Exhibit 10.17 to Borg- Warner's Annual Report on Form 10-K for the year ended December 31, 1986). +*10.4 Borg-Warner Corporation Management Stock Option Plan, as amended through January 19, 1993 (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992). *10.5 Form of Recourse Secured Promissory Note (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992). +*10.6 Form of Employment Agreement for Messrs. Farrell, O'Brien, Trauscht and Wood (incorporated by reference to Exhibit 10.26 to Registration Statement No. 33-15419). +*10.7 Form of Amendment of Employment Agreement for Messrs. Farrell, O'Brien, Trauscht and Wood, dated January 19, 1989 (incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 1988). +*10.8 Form of Amendment of Employment Agreement for certain executives of the Company (incorporated by reference to Exhibits 10.12 and 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 1990). + 10.9 Borg-Warner Retirement Savings Plan, as amended through January 1, 1995. + 10.10 Borg-Warner Security Corporation Supplemental Benefits Compensation Program. *10.11 Distribution and Indemnity Agreement dated as of January 27, 1993 between the Company and Borg-Warner Automotive, Inc. (incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992). B-3 EXHIBIT NUMBER DOCUMENT DESCRIPTION ------ -------------------- *10.12 Tax Sharing Agreement dated as of January 27, 1993 between the Company and Borg-Warner Automotive, Inc. (incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992). *10.13 Benefits Agreement dated as of January 27, 1993 between the Company and Borg-Warner Automotive, Inc. (incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992). +*10.14 Borg-Warner Security Corporation 1993 Stock Incentive Plan (incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992). *10.15 Service Agreement dated as of December 31, 1992 between the Company and Borg-Warner Automotive, Inc. (incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992). 10.16 Assignment of Trademarks and License Agreement dated as of November 2, 1994 between the Company and Borg-Warner Automotive, Inc. 10.17 Transfer and Administration Agreement dated as of November 21, 1994 among BPS Financial Services, Inc., the Company and Enterprise Funding Corporation. *10.18 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). *10.19 Administrative Services Agreement dated as of January 1, 1994 between the Company and Borg-Warner Automotive, Inc. (incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). B-4 EXHIBIT NUMBER DOCUMENT DESCRIPTION ------ -------------------- *10.20 Government Relations Agreement dated as of January 1, 1994 between the Company and Borg-Warner Automotive, Inc. (incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). + 10.21 Borg-Warner Security Corporation Retirement Savings Excess Benefit Plan, as amended and restated through January 1, 1995. 11 Computation of earnings per share. 13 1994 Annual Report to Stockholders. 21 Subsidiaries of the Company. 23 Consent of Deloitte & Touche LLP. 27 Financial Data Schedule. -------------------- * Incorporated by reference. + Indicates a management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c). B-5 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/ Donald C. Trauscht ---------------------- Donald C. Trauscht Chairman of the Board, Chief Executive Officer and President Date: March 23, 1995 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 23, 1995. Signature Title --------- ------ /s/ Donald C. Trauscht Chairman of the Board, Chief ---------------------- Executive Officer and President Donald C. Trauscht and Director (Principal Executive Officer) /s/ Timothy M. Wood Vice President, Finance ------------------- (Principal Financial and Accounting Timothy M. Wood Officer) /s/ J. Joe Adorjan Director ------------------ J. Joe Adorjan /s/ James J. Burke, Jr. Director ----------------------- James J. Burke, Jr. /s/ Neal F. Farrell Director ------------------- Neal F. Farrell /s/ Albert J. Fitzgibbons, III Director ------------------------------ Albert J. Fitzgibbons, III /s/ Dale W. Lang Director ---------------- Dale W. Lang /s/ Robert A. McCabe Director -------------------- Robert A. McCabe /s/ Alexis P. Michas Director -------------------- Alexis P. Michas /s/ H. Norman Schwarzkopf Director ------------------------- H. Norman Schwarzkopf SCHEDULE II BORG-WARNER SECURITY CORPORATION VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E -------- -------- ------------------------ -------- -------- Additions Years Ended December 31, (1) (2) Balance at Charged to Charged to Balance Beginning Costs and Other at Close Description of Period Expenses Accounts Deductions of Period ----------- ---------- ---------- ---------- ---------- --------- 1992 Allowance for Doubtful Accounts $ 8.1 $ 5.1 $ 0.4 $ 5.4 $ 8.2 ====== ====== ====== ====== ====== 1993 Allowance for Doubtful Accounts $ 8.2 $ 4.2 $ 0.5 $ 4.1 $ 8.8 ====== ====== ====== ====== ====== 1994 Allowance for Doubtful Accounts $ 8.8 $ 5.5 $ 1.5 $ 8.1 $ 7.7 ====== ====== ====== ====== ======
INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders Borg-Warner Security Corporation We have audited the financial statements of Borg-Warner Security Corporation as of December 31, 1994 and 1993 and for each of the three years in the period ended December 31, 1994, and have issued our report thereon dated February 10, 1995 (except as to the fourth sentence of the fifth paragraph of Note 5, for which the date is March 15, 1995); such financial statements and report are included in the 1994 Annual Report to Stockholders and are incorporated herein by reference. Our audit 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. Our responsibility is to express an opinion based on our audit. In our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Chicago, Illinois February 10, 1995 EX-4.8 2 CREDIT AGREEMENT EXHIBIT 4.8 BORG-WARNER SECURITY CORPORATION SECOND AMENDMENT TO CREDIT AGREEMENT AND CONSENT This SECOND AMENDMENT TO CREDIT AGREEMENT AND CONSENT (this "AMENDMENT") is dated as of March 15, 1995 and entered into by and among BORG- WARNER SECURITY CORPORATION, a Delaware corporation ("COMPANY"), the financial institutions listed on the signature pages hereof ("LENDERS"), BANK OF AMERICA ILLINOIS, THE BANK OF NEW YORK and THE BANK OF NOVA SCOTIA, as Lead Managers, BANKERS TRUST COMPANY, CIBC INC. and NATIONSBANK, N.A. ("CAROLINAS"), as Co- Agents, and BANKERS TRUST COMPANY, as Administrative Agent for Lenders (in such capacity, "ADMINISTRATIVE AGENT"), and, for purposes of Section 5 hereof, the Credit Support Parties (as defined in Section 5 hereof) listed on the signature pages hereof, and is made with reference to that certain Credit Agreement dated as of January 27, 1993 by and among Company, Lenders, Lead Managers, Co-Agents and Administrative Agent, as amended by that certain First Amendment to the Credit Agreement dated as of June 30, 1994 (such agreement, as so amended, being referred to herein as the "CREDIT AGREEMENT"). Capitalized terms used herein without definition shall have the same meanings herein as set forth in the Credit Agreement. RECITALS WHEREAS, Company and Lenders desire to amend the Credit Agreement by (i) revising the pricing provisions thereof, (ii) amending certain provisions related to the refinancing of the Senior Notes, (iii) making provision for a proposed off-balance sheet facility for the alarm services businesses, (iv) amending certain of the financial covenants contained therein and (v) making certain other amendments as set forth below; and WHEREAS, subject to the terms and conditions of this Amendment, Lenders are willing to agree to such amendments; NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, the parties hereto agree as follows: SECTION 1. AMENDMENTS TO THE CREDIT AGREEMENT 1.1 AMENDMENTS TO SECTION 1: DEFINITIONS. A. ASSET SALE. The definition of "Asset Sale" contained in subsection 1.1 of the Credit Agreement is hereby amended by deleting clause (B) therefrom in its entirety and by substituting the following therefor: 1 "(B) the sale or discount of notes, accounts receivable, contracts, leases or other receivables to the extent sold or discounted in connection with the off-balance sheet facilities permitted by subsections 6.1(vii) and (x) and, in the case of the off-balance sheet facility permitted by subsection 6.1(x), the sale of related equipment." B. BW - OTHER CORPORATION. The definition of "BW-Other Corporation" contained in subsection 1.1 of the Credit Agreement is hereby amended by deleting it in its entirety and by substituting the following therefor: "'BW-Other Corporation' means the direct and indirect subsidiaries of BW-Other Corporation, a Delaware corporation, prior to its liquidation into Company, including without limitation Borg-Warner Equities Corporation, Borg-Warner Equities Corporation of California, Borg-Warner Equities Corporation of Monterey, Inc., NAL II, Ltd., Borg- Warner Insurance Holding Corporation and Centaur Insurance Company." C. NEW DEFINITIONS. Section 1.1 of the Credit Agreement is hereby further amended by adding thereto the following definitions, which definitions shall be inserted in proper alphabetical order: "'Alarm Installation Costs' means the costs allocated to a subscriber installation in connection with the original installation of an alarm system, including without limitation all charges for materials and for the labor associated with such installation. 'Centaur Interest Amount' means, for each period for which the determination is being made and for each Centaur Settlement Amount for which such calculation is being made, an amount equal to the interest expense attributable to such Centaur Settlement Amount for such period, commencing from the date of payment of such Centaur Settlement Amount for the first such period, which amount shall be calculated by utilizing the Prime Rate then in effect for Loans outstanding under this Agreement (without reference to the Prime Rate Margin). 'Centaur Settlement Amount' means all amounts paid or contributed by Company to Centaur Insurance Company ("Centaur") or directly or indirectly paid by Company on behalf of Centaur, in each case on or after the effective date of the Second Amendment for the purpose of settling litigation pending against Centaur or against Company but relating to Centaur or of paying the costs and expenses associated with such litigation provided that the aggregate amount of all such payments does not exceed the amount disclosed in writing by Company to Co-Agents and approved by Co-Agents as of the effective date of the Second Amendment. 2 'New Receivables Facility' means an off-balance sheet receivables financing facility in the amount of not less than $100,000,000, the terms and conditions of which are satisfactory to Requisite Lenders, which facility shall be provided by a financial institution satisfactory to Requisite Lenders, to replace Company's existing off- balance sheet receivables financing facility with Enterprise Funding Corporation. 'Second Amendment' means the Second Amendment to Credit Agreement and Consent dated as of March 15, 1995, by and among Company, Lenders, Lead Managers, Co-Agents and Administrative Agent." 1.2 AMENDMENTS TO SECTION 2: AMOUNTS AND TERMS OF COMMITMENTS AND LOANS; NOTES; LETTERS OF CREDIT. A. RATE OF INTEREST. Subsection 2.2A of the Credit Agreement is hereby amended by deleting the table contained in the second paragraph thereof in its entirety and substituting the following therefor:
"Adjusted Interest Prime Rate Eurodollar Coverage Ratio Margin Rate Margin -------------- ---------- ----------- Less than 2.25:1.00 1.50% 2.50% Equal to or greater than 2.25:1.00 1.25% 2.25% but less than 2.75:1.00 Equal to or greater than 2.75:1.00 1.00% 2.00% but less than 3.55:1.00 Equal to or greater than 3.55:1:00 0.75% 1.75% but less than 4.00:1.00 Equal to or greater than 4.00:1.00 but less than 4.50:1.00 0.50% 1.50% Equal to or greater than 4.50:1.00 0.25% 1.25%
provided, however, in the event that Company has not obtained a commitment letter for the New Receivables Facility by August 15, 1995, from a financial institution which is, and the terms and conditions of which commitment letter are, satisfactory to Requisite Lenders, each of the percentages set forth above for the Prime Rate Margin and the Eurodollar Rate Margin shall increase by an additional .25%; provided further in the event that the New Receivables Facility has not been executed and delivered by the Company and the other parties thereto by September 15, 1995, each 3 of the percentages set forth above for the Prime Rate Margin and the Eurodollar Rate Margin, as such percentages may have been adjusted by operation of the foregoing proviso, shall increase by an additional .25%; provided further in the event that the Company has refinanced its existing receivables facility with Enterprise Funding Corporation with the proceeds of the New Receivables Facility on or prior to September 30, 1995, commencing as of the date of such refinancing, the rate increases provided for in the foregoing two provisos shall be terminated and shall be of no further force or effect." B. FEES. Subsection 2.3 of the Credit Agreement is hereby amended by adding the following at the end thereof: "C. Refinancing Fees. In the event that Company has not obtained a commitment letter for the New Receivables Facility by July 1, 1995, the terms and conditions of which are satisfactory to Requisite Lenders, Company shall pay to Administrative Agent for distribution to each Lender in proportion to that Lender's Pro Rata Share of the Commitments, an aggregate fee equal to .50% of the then outstanding Commitments." 1.3 AMENDMENTS TO SECTION 5: COMPANY'S AFFIRMATIVE COVENANTS. Subsection 5.10A of the Credit Agreement is hereby amended by deleting the two provisos contained in the first sentence thereof and by substituting the following therefor: "; provided that prior to the effective date of the Second Amendment, Company may pay such amounts as have been disclosed in writing to the Co-Agents as of such effective date and thereafter Company may pay the Centaur Settlement Amount." 1.4 AMENDMENTS TO SECTION 6: COMPANY'S NEGATIVE COVENANTS A. INDEBTEDNESS. Subsection 6.1 of the Credit Agreement is hereby amended by: (1) deleting subclause (y) from clause (iii) thereof in its entirety and by substituting the following therefor: "(y) concurrently with any such refinancing, renewal or extension of the Existing Indebtedness of Company to The Long-Term Credit Bank of Japan, Ltd. listed in Item 1 of Schedule C annexed hereto prior to its final scheduled maturity, the Commitments shall be permanently reduced in an amount equal to the amount of such Existing Indebtedness so refinanced, renewed or extended; and (z) notwithstanding the foregoing, in connection 4 with any refinancing of the Senior Notes, Company may issue up to $140,000,000 principal amount of such refinancing Indebtedness;"; (2) adding immediately after the phrase "of which" in the fourth line of clause (vii) thereof the following ", and any modifications, amendments or supplements thereto,"; (3) deleting the phrase "clauses (i)-(vii)" from clause (viii) thereof and by substituting "clauses (i)-(vii) and clause (x)" therefor; (4) deleting the phrase "clauses (i)-(viii)" from clause (ix) thereof and by substituting "clauses (i)-(viii) and clause (x)" therefor and by deleting the period at the end of such clause (ix) and by substituting "; and" therefor; and (5) by adding a new clause (x) at the end of such subsection 6.1 as follows: "(x) Wells Fargo Alarm Services, Inc., BW-Canada Alarm (Wells Fargo) Corporation, and their respective wholly owned subsidiaries may become and remain liable with respect to an off-balance sheet facility providing for the purchase of receivables, contracts, leases and related equipment from such entities, the terms and conditions of which facility, and any modifications, amendments or supplements thereto, shall be satisfactory in form and substance to the Requisite Lenders.". B. LIENS. Subsection 6.2 of the Credit Agreement is hereby amended by: (1) deleting the phrase "Additional Senior Indebtedness" from clause (ii) thereof and by substituting the following therefor: "Additional Senior Indebtedness, including the holders of Indebtedness refinancing the Senior Notes in accordance with subsection 6.1(iii)," and (2) deleting the period at the end of clause (vii) thereof and by substituting "; and" therefor and by adding a new clause (viii) at the end of such subsection 6.2 as follows: "(viii) Liens in favor of the purchaser of receivables, contracts, leases and related equipment from Wells Fargo Alarm Services, Inc., BW- Canada Alarm (Wells Fargo) Corporation, and their respective subsidiaries, which Liens are filed with respect to such receivables, contracts, leases and related equipment in connection with the off- balance sheet facility permitted under subsection 6.1(x)". 5 C. INVESTMENTS. Subsection 6.3 of the Credit Agreement is hereby amended by adding the following at the end of clause 6.3(iii) thereof: "and Wells Fargo Alarm Services, Inc. and BW-Canada Alarm (Wells Fargo) Corporation may make and own Investments approved by Requisite Lenders in financing subsidiaries established for the purpose of purchasing and selling receivables, contracts, leases and related equipment in connection with the off-balance sheet facility permitted pursuant to subsection 6.1(x)". D. INTEREST COVERAGE RATIO. Subsection 6.6A of the Credit Agreement is hereby amended by deleting the subsection in its entirety and by substituting the following therefor: "A. INTEREST COVERAGE RATIO. Company will not permit the ratio (the "Interest Coverage Ratio") of (i) Consolidated EBITDA minus the sum of (x) Consolidated Capital Expenditures plus (y) an amount equal to Alarm Installation Costs originated during the period for which the determination is being made which are treated as sales-type leases and which have not been sold in connection with the off-balance sheet facility permitted pursuant to subsection 6.1(x) hereof, to (ii) Consolidated Interest Expense as of the last day of each of the fiscal quarters shown below for the four consecutive preceding fiscal quarters ended on such date, to be less than the correlative ratio indicated below:
PERIOD MINIMUM INTEREST COVERAGE RATIO ------ ------------------------------- Fiscal year ending 1994 ----------------------- Fourth fiscal quarter 1.60:1.00 Fiscal year ending 1995 ----------------------- First fiscal quarter 1.30:1.00 Second fiscal quarter 1.30:1.00 Third fiscal quarter 1.35:1.00 Fourth fiscal quarter 1.50:1.00 Fiscal year ending 1996 ----------------------- First fiscal quarter 1.50:1.00 Second fiscal quarter 1.55:1.00 Third fiscal quarter 1.60:1.00 Fourth fiscal quarter 1.75:1.00
6
Fiscal year ending 1997 ----------------------- First fiscal quarter 1.75:1.00 Second fiscal quarter 1.80:1.00 Third fiscal quarter 1.85:1.00 Fourth fiscal quarter 2.00:1.00 Fiscal year ending 1998 ----------------------- First fiscal quarter 2.00:1.00 Second fiscal quarter 2.05:1.00 Third fiscal quarter 2.10:1.00 Fourth fiscal quarter 2.25:1.00 Fiscal year ending 1999 ----------------------- First fiscal quarter 2.35:1.00 Second fiscal quarter 2.50:1.00
provided however that for each fiscal quarter in which a Centaur Settlement Amount is paid by Company and for the immediately succeeding three fiscal quarters, in calculating Consolidated Interest Expense for each such fiscal quarter, Company may exclude the Centaur Interest Amount for such Centaur Settlement Amount for each such fiscal quarter." E. LEVERAGE RATIO. Subsection 6.6B of the Credit Agreement is hereby amended by deleting the table set forth therein for each fiscal quarter, commencing with the 1994 fourth fiscal quarter, and by substituting the following therefor:
"PERIOD MAXIMUM LEVERAGE RATIO ------ ---------------------- Fiscal year ending 1994 ----------------------- Fourth fiscal quarter 3.35:1.00 Fiscal year ending 1995 ----------------------- First fiscal quarter 3.65:1.00 Second fiscal quarter 3.65:1.00 Third fiscal quarter 3.60:1.00 Fourth fiscal quarter 3.35:1.00
7
Fiscal year ending 1996 ----------------------- First fiscal quarter 3.35:1.00 Second fiscal quarter 3.20:1.00 Third fiscal quarter 3.00:1.00 Fourth fiscal quarter 2.90:1.00 Fiscal year ending 1997 ----------------------- First fiscal quarter 2.90:1.00 Second fiscal quarter 2.80:1.00 Third fiscal quarter 2.65:1.00 Fourth fiscal quarter 2.50:1.00 Fiscal year ending 1998 ----------------------- First fiscal quarter 2.45:1.00 Second fiscal quarter 2.35:1.00 Third fiscal quarter 2.25:1.00 Fourth fiscal quarter 2.15:1.00 Fiscal year ending 1999 ----------------------- First fiscal quarter 2.00:1.00 Second fiscal quarter 1.80:1.00
provided however that for each fiscal quarter in which a Centaur Settlement Amount is paid by Company and for the immediately succeeding three fiscal quarters, in calculating the amount of Funded Debt for each such fiscal quarter, Company may exclude such Centaur Settlement Amount for each such fiscal quarter." F. CONSOLIDATED NET WORTH. Subsection 6.6C of the Credit Agreement is hereby amended by deleting the table set forth therein for each fiscal quarter, commencing with the 1994 fourth fiscal quarter, and by substituting the following therefor:
"PERIOD MINIMUM CONSOLIDATED NET WORTH ------ ------------------------------ Fiscal year ending 1994 ----------------------- Fourth fiscal quarter $55,000,000
8
Fiscal year ending 1995 ----------------------- First fiscal quarter 50,000,000 Second fiscal quarter 50,000,000 Third fiscal quarter 55,000,000 Fourth fiscal quarter 60,000,000 Fiscal year ending 1996 ----------------------- First fiscal quarter 60,000,000 Second fiscal quarter 65,000,000 Third fiscal quarter 70,000,000 Fourth fiscal quarter 85,000,000 Fiscal year ending 1997 ----------------------- First fiscal quarter 87,500,000 Second fiscal quarter 90,000,000 Third fiscal quarter 95,000,000 Fourth fiscal quarter 105,000,000 Fiscal year ending 1998 ----------------------- First fiscal quarter 110,000,000 Second fiscal quarter 120,000,000 Third fiscal quarter 125,000,000 Fourth fiscal quarter 130,000,000 Fiscal year ending 1999 ----------------------- First fiscal quarter 145,000,000 Second fiscal quarter 160,000,000
provided however that in calculating Consolidated Net Worth, Company shall exclude the effect of any gain related to taking into Consolidated Net Income any reserves previously established to pay Centaur Settlement Amounts." G. CONSOLIDATED EBITDA. Subsection 6.6D of the Credit Agreement is hereby amended by deleting the table set forth therein for each fiscal quarter, commencing with the 1994 fourth fiscal quarter, and by substituting the following therefor: 9
"PERIOD MINIMUM CONSOLIDATED EBITDA ------- --------------------------- Fiscal year ending 1994 ----------------------- Fourth fiscal quarter $145,000,000 Fiscal year ending 1995 ----------------------- First fiscal quarter 130,000,000 Second fiscal quarter 130,000,000 Third fiscal quarter 132,500,000 Fourth fiscal quarter 140,000,000 Fiscal year ending 1996 ----------------------- First fiscal quarter 140,000,000 Second fiscal quarter 150,000,000 Third fiscal quarter 160,000,000 Fourth fiscal quarter 160,000,000 Fiscal year ending 1997 ----------------------- First fiscal quarter 162,500,000 Second fiscal quarter 165,000,000 Third fiscal quarter 167,500,000 Fourth fiscal quarter 170,000,000 Fiscal year ending 1998 ----------------------- First fiscal quarter 172,500,000 Second fiscal quarter 175,000,000 Third fiscal quarter 177,500,000 Fourth fiscal quarter 180,000,000 Fiscal year ending 1999 ----------------------- First fiscal quarter 185,000,000 Second fiscal quarter 190,000,000"
H. CONSOLIDATED CAPITAL EXPENDITURES. Subsection 6.6E of the Credit Agreement is hereby amended by deleting the text of subsection 6.6E up to but not including the proviso set forth therein and substituting the following therefor: "E. Consolidated Capital Expenditures. Company and its Subsidiaries shall not permit the sum of (i) Consolidated Capital Expenditures plus (ii) an 10 amount equal to 75% of the Alarm Installation Costs originated in such fiscal year which are sold in connection with the off-balance sheet facility permitted pursuant to subsection 6.1(x) plus (iii) an amount equal to 100% of the Alarm Installation Costs originated in such fiscal year which are treated as sales-type leases which are not sold in connection with the off- balance sheet facility permitted pursuant to subsection 6.1(x) to exceed in any fiscal year the amount set forth below for such fiscal year (the "Capital Expenditure Amount"):
PERIOD CAPITAL EXPENDITURE AMOUNT ------ -------------------------- Fiscal year ending 1993 $70,000,000 Fiscal year ending 1994 $75,000,000 Fiscal year ending 1995 $55,000,000 Fiscal year ending 1996 $60,000,000 Fiscal year ending 1997 $60,000,000 Fiscal year ending 1998 $60,000,000 Fiscal year ending 1999 $60,000,000
; provided that for fiscal years commencing on and after January 1, 1996, if the Company's Adjusted Interest Coverage Ratio for such fiscal year is greater than 2.90 to 1.00 as of December 31, 1995, or as of the last day of any fiscal year thereafter, the Capital Expenditure Amount for the immediately succeeding fiscal year, and for each fiscal year thereafter, shall be increased to $75,000,000;" and (2) adding the following sentence at the end of subsection 6.6E: "Notwithstanding the foregoing, in no event shall the Capital Expenditure Amount for the fiscal year ending December 31, 1995, be increased by any Unutilized Amount from the fiscal year ending December 31, 1994." I. ACQUISITIONS. Subsection 6.7(iv) of the Credit Agreement is hereby amended by deleting it in its entirety and substituting the following therefor: "(iv) Company and its Consolidated Subsidiaries may acquire all or substantially all the business, property or fixed assets of, or stock or other evidence of beneficial ownership of, any Person engaged in businesses substantially similar to those conducted by the Company and its Consolidated Subsidiaries (such asset or stock acquisitions being herein collectively referred to as "Acquisitions"); provided that the purchase price (including all assumed liabilities) paid with respect to Acquisitions made on or after the effective date of the Second Amendment (A) does not exceed $25,000,000 in the aggregate for all such Acquisitions or (B) in the event that (x) no Event of Default or Potential Event of Default has occurred and is continuing, (y) the ratio of Company's Funded Debt to Consolidated 11 EBITDA for the immediately preceding four consecutive fiscal quarters is not greater than 2.50 to 1.00 and (z) the Company's Adjusted Interest Coverage Ratio for the immediately preceding four consecutive fiscal quarters is not less than 3.00 to 1.00 (in determining compliance with clauses (y) and (z) hereof, such calculations shall be made on a pro forma basis for the period of calculation after giving effect to the occurrence of the Acquisition on the first day of the relevant calculation period and after giving effect to all Indebtedness, including any assumed liabilities, incurred in connection therewith and calculating interest on any such Indebtedness at a fixed rate equal to the rate (whether fixed or floating) which such Indebtedness would bear on the date of determination), does not exceed $50,000,000 in the aggregate for all such Acquisitions; provided however in the event that thereafter Company no longer meets the conditions set forth in clauses (y) and (z), Company shall again be required to comply with the foregoing clause (A) of this subsection 6.7(iv); provided that no Potential Event of Default or Event of Default shall occur under this Agreement if the aggregate Acquisitions then exceed $25,000,000 if such Acquisitions, at the time made, were permitted under this Agreement; provided further that to the extent that Company pays all or any portion of the purchase price for an Acquisition through the issuance of shares of Common Stock, the value of the shares of such Common Stock shall be deducted from the calculation of the purchase price payable by Company or its Consolidated Subsidiaries for such Acquisitions for purposes of determining compliance with the provisions of this subsection 6.7(iv); and provided further that any such Person so acquired that constitutes a Material Subsidiary shall execute counterparts of the Borg-Warner Subsidiary Guaranty and the Borg-Warner Subsidiary Pledge Agreement as provided in subsection 5.11; and" J. SALE OR DISCOUNT OF RECEIVABLES. Subsection 6.9 of the Credit Agreement is hereby amended by deleting the subsection in its entirety and substituting the following therefor: "Company will not, and will not permit any of its Consolidated Subsidiaries to, directly or indirectly, sell with recourse, or discount or otherwise sell for less than the face value thereof, notes, accounts receivable, contracts, leases or other receivables, other than pursuant to the off-balance sheet facilities permitted under subsections 6.1(vii) and 6.1(x)." 1.5 AMENDMENT OF EXHIBITS. Exhibit IV to the Credit Agreement is hereby amended by deleting it in its entirety and by substituting therefor the form of Compliance Certificate annexed hereto as Annex A. 12 SECTION 2. CONSENT A. COMPANY PLEDGE AGREEMENT. Each Lender executing this Amendment hereby consents to the amendment of the Company Pledge Agreement by a First Amendment to Pledge Agreement substantially in the form annexed hereto as Annex B and each such Lender hereby authorizes the Collateral Agent, upon request of the Company and on such Lender's behalf, to execute and deliver such First Amendment to Pledge Agreement. B. INTERCREDITOR AGREEMENT. Each Lender executing this Amendment hereby consents to the amendment of the Intercreditor Agreement by a First Amendment to Intercreditor Agreement substantially in the form annexed hereto as Annex C and each such Lender hereby authorized the Collateral Agent, upon request of the Company and on such Lender's behalf, to execute and deliver such First Amendment to Intercreditor Agreement. SECTION 3. CONDITIONS TO EFFECTIVENESS Section 1 and Section 2 of this Amendment shall become effective as of the date hereof only upon the satisfaction of all of the following conditions precedent (upon such satisfaction, the "SECOND AMENDMENT EFFECTIVE DATE"): A. On or before the Second Amendment Effective Date, Company shall deliver to Lenders (or to Administrative Agent for Lenders with sufficient originally executed copies, where appropriate, for each Lender) the following, each, unless otherwise noted, dated the Second Amendment Effective Date: 1. Resolutions of its Board of Directors authorizing and approving the execution, delivery and performance of this Amendment and of the Agreement as amended by this Amendment, certified as of the Second Amendment Effective Date by its secretary or assistant secretary as being in full force and effect without modification or amendment. 2. Signature and incumbency certificates of its officers executing this Amendment; 3. Executed copies of this Amendment; and 4. A letter from a responsible officer of the Company with respect to past and anticipated Centaur Settlement Amounts, which letter shall have been approved by Co-Agents. B. On or before the Second Amendment Effective Date, each of the Borg-Warner Guarantor Subsidiaries shall deliver to Lenders (or to Administrative Agent 13 for Lenders with sufficient originally executed copies, where appropriate, for each Lender) the following, each, unless otherwise noted, dated the Second Amendment Effective Date: 1. Signature and incumbency certificates of its officers executing this Amendment; and 2. Executed copies of this Amendment. C. On or before the Second Amendment Effective Date, each Lender executing this Amendment shall have received an amendment fee in an amount equal to such Lender's Pro Rata Share of the Commitments multiplied by 0.25% and each Co-Agent shall have received a structuring fee in an amount previously agreed upon by Company and Co-Agents. D. On or before the Second Amendment Effective Date, Requisite Lenders shall have delivered to Administrative Agent originally executed copies of this Amendment. E. On or before the Second Amendment Effective Date, corresponding consents and amendments shall have been obtained or made with respect to the Credit Agreement dated as of January 27, 1993, as amended, among Company, the financial institutions named therein, and The Long Term Credit Bank of Japan, Chicago Agency. F. On or before the Second Amendment Effective Date, all corporate and other proceedings taken or to be taken in connection with the transactions contemplated hereby and all documents incidental thereto not previously found acceptable by Administrative Agent, acting on behalf of Lenders, and its counsel shall be satisfactory in form and substance to Administrative Agent and such counsel, and Administrative Agent and such counsel shall have received all such counterpart originals or certified copies of such documents as Administrative Agent may reasonably request. SECTION 4. COMPANY'S REPRESENTATIONS AND WARRANTIES In order to induce Lenders to enter into this Amendment and to amend the Credit Agreement in the manner provided herein, Company represents and warrants to each Lender that the following statements are true, correct and complete: A. CORPORATE POWER AND AUTHORITY. Company has all requisite corporate power and authority to enter into this Amendment and to carry out the transactions contemplated by, and perform its obligations under, the Credit Agreement as amended by this Amendment (the "AMENDED AGREEMENT"). 14 B. AUTHORIZATION OF AGREEMENTS. The execution and delivery of this Amendment and the performance of the Amended Agreement have been duly authorized by all necessary corporate action on the part of Company. C. NO CONFLICT. The execution and delivery by Company of this Amendment and the performance by Company of the Amended Agreement do not and will not (i) violate any provision of any law or any governmental rule or regulation applicable to Company or any of its Subsidiaries, the Certificate or Articles of Incorporation or Bylaws of Company or any of its Subsidiaries or any order, judgment or decree of any court or other agency of government binding on Company or any of its Subsidiaries, (ii) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any Contractual Obligation of Company or any of its Subsidiaries, (iii) result in or require the creation or imposition of any Lien upon any of the properties or assets of Company or any of its Subsidiaries (other than any Liens created under any of the Loan Documents in favor of Collateral Agent on behalf of Lenders), or (iv) require any approval of stockholders or any approval or consent of any Person under any Contractual Obligation of Company or any of its Subsidiaries. D. GOVERNMENTAL CONSENTS. The execution and delivery by Company of this Amendment and the performance by Company of the Amended Agreement do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any federal, state or other governmental authority or regulatory body. E. BINDING OBLIGATION. This Amendment and the Amended Agreement have been duly executed and delivered by Company and are the legally valid and binding obligations of Company, enforceable against Company in accordance with their respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability. F. INCORPORATION OF REPRESENTATIONS AND WARRANTIES FROM CREDIT AGREEMENT. The representations and warranties contained in Section 4 of the Credit Agreement are and will be true, correct and complete in all material respects on and as of the Second Amendment Effective Date to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects on and as of such earlier date. G. ABSENCE OF DEFAULT. No event has occurred and is continuing or will result from the consummation of the transactions contemplated by this Amendment that would constitute an Event of Default or a Potential Event of Default. 15 SECTION 5. ACKNOWLEDGEMENT AND CONSENT Company is a party to the Company Pledge Agreement, as amended through the Second Amendment Effective Date, pursuant to which Company has pledged certain Collateral to Collateral Agent to secure the Obligations. Each of the Borg-Warner Guarantor Subsidiaries is a party to the Borg-Warner Subsidiary Guaranty, as amended through the Second Amendment Effective Date, pursuant to which each such Borg-Warner Guarantor Subsidiary has guarantied the Obligations. Company and Borg-Warner Guarantor Subsidiaries are collectively referred to herein as the "CREDIT SUPPORT PARTIES," and the Company Pledge Agreement and Borg-Warner Subsidiary Guaranty are collectively referred to herein as the "CREDIT SUPPORT DOCUMENTS." Each Credit Support Party hereby acknowledges that it has reviewed the terms and provisions of the Credit Agreement and this Amendment and consents to the amendment of the Credit Agreement effected pursuant to this Amendment. Each Credit Support Party hereby confirms that each Credit Support Document to which it is a party or otherwise bound and all Collateral encumbered thereby will continue to guaranty or secure, as the case may be, to the fullest extent possible the payment and performance of all "Obligations," "Guarantied Obligations" and "Secured Obligations," as the case may be (in each case as such terms are defined in the applicable Credit Support Document), including without limitation the payment and performance of all such "Obligations," "Guarantied Obligations" or "Secured Obligations," as the case may be, in respect of the Obligations of Company now or hereafter existing under or in respect of the Amended Agreement and the Notes defined therein. Each Credit Support Party acknowledges and agrees that any of the Credit Support Documents to which it is a party or otherwise bound shall continue in full force and effect and that all of its obligations thereunder shall be valid and enforceable and shall not be impaired or limited by the execution or effectiveness of this Amendment. Each Credit Support Party represents and warrants that all representations and warranties contained in the Amended Agreement and the Credit Support Documents to which it is a party or otherwise bound are true, correct and complete in all material respects on and as of the Second Amendment Effective Date to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects on and as of such earlier date. Each Credit Support Party (other than Company) acknowledges and agrees that (i) notwithstanding the conditions to effectiveness set forth in this Amendment, such Credit Support Party is not required by the terms of the Credit Agreement or any other Loan Document to consent to the amendments to the Credit Agreement effected pursuant to this Amendment and (ii) nothing in the Credit Agreement, this Amendment or any other Loan Document shall be deemed to require the consent of such Credit Support Party to any future amendments to the Credit Agreement. 16 SECTION 6. MISCELLANEOUS A. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS. (1) On and after the Second Amendment Effective Date, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to the "Credit Agreement", "thereunder", "thereof" or words of like import referring to the Credit Agreement shall mean and be a reference to the Amended Agreement. (2) Except as specifically amended by this Amendment, the Credit Agreement and the other Loan Documents shall remain in full force and effect and are hereby ratified and confirmed. (3) The execution, delivery and performance of this Amendment shall not, except as expressly provided herein, constitute a waiver of any provision of, or operate as a waiver of any right, power or remedy of Administrative Agent or any Lender under, the Credit Agreement or any of the other Loan Documents. B. FEES AND EXPENSES. Company acknowledges that all costs, fees and expenses as described in subsection 9.3 of the Credit Agreement incurred by Administrative Agent and its counsel with respect to this Amendment and the documents and transactions contemplated hereby shall be for the account of Company. C. HEADINGS. Section and subsection headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose or be given any substantive effect. D. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. E. COUNTERPARTS. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. 17 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. BORG-WARNER SECURITY CORPORATION By:____________________________________ Title:_________________________________ WELLS FARGO ALARM SERVICES, INC. (for purposes of Section 5 only) as a Credit Support Party By:____________________________________ Title:_________________________________ WELLS FARGO ARMORED SERVICE CORPORATION (for purposes of Section 5 only) as a Credit Support Party By:___________________________________ Title:________________________________ BW-CANADIAN GUARD CORPORATION (for purposes of Section 5 only) as a Credit Support Party By:___________________________________ Title:________________________________ S-1 BORG-WARNER PROTECTIVE SERVICES CORPORATION (for purposes of Section 5 only) as a Credit Support Party By:___________________________________ Title:________________________________ PONY EXPRESS COURIER CORP. (for purposes of Section 5 only) as a Credit Support Party By:___________________________________ Title:________________________________ BANKERS TRUST COMPANY, INDIVIDUALLY AND AS CO-AGENT AND AS ADMINISTRATIVE AGENT By:___________________________________ Title:________________________________ CIBC INC., INDIVIDUALLY AND AS CO-AGENT By:___________________________________ Title:________________________________ NATIONSBANK, N.A. ("CAROLINAS"), INDIVIDUALLY AND AS CO-AGENT By:___________________________________ Title:________________________________ S-2 BANK OF AMERICA ILLINOIS, INDIVIDUALLY AND AS LEAD MANAGER By:___________________________________ Title:________________________________ THE BANK OF NEW YORK, INDIVIDUALLY AND AS LEAD MANAGER By:___________________________________ Title:________________________________ THE BANK OF NOVA SCOTIA, INDIVIDUALLY AND AS LEAD MANAGER By:___________________________________ Title:________________________________ COMPAGNIE FINANCIERE DE CIC ET DE L'UNION EUROPEENNE By:___________________________________ Title:________________________________ By:___________________________________ Title:________________________________ S-3 DRESDNER BANK AG (CHICAGO AND GRAND CAYMAN BRANCHES) By:________________________________ Title:_____________________________ THE MITSUBISHI TRUST AND BANKING CORPORATION By:________________________________ Title:_____________________________ THE NIPPON CREDIT BANK, LTD. By:________________________________ Title:_____________________________ THE NORTHERN TRUST COMPANY By:________________________________ Title:_____________________________ UNION BANK OF FINLAND LTD. - GRAND CAYMAN BRANCH By:________________________________ Title:_____________________________ By:________________________________ Title:_____________________________ S-4 EX-4.9 3 AMEND. NO. 5 EXHIBIT 4.9 AMENDMENT NO. 5 This AMENDMENT NO. 5 (this "Amendment") is dated as of March 15, 1995 and entered into by and among Borg-Warner Security Corporation, a Delaware corporation (the "Company"), the financial institutions listed on the signature pages hereof (the "Banks") and THE LONG-TERM CREDIT BANK OF JAPAN, LTD., as Agent for the Banks (the "Agent") and, for purposes of Section 7 hereof, the Credit Support Parties (as defined in Section 7 hereof) listed on the signature pages hereof, and is made with reference to that certain Credit Agreement dated as of January 27, 1993, as amended as of November 2, 1993, January 24, 1994, June 30, 1994 and December 14, 1994 (as so amended, the "Credit Agreement"), by and among the Company, the Banks and the Agent. Capitalized terms used herein without definition shall have the same meanings herein as set forth in the Credit Agreement. RECITALS WHEREAS, the Company and the Banks wish to make certain amendments with respect to the provisions regarding the extension of the Scheduled Commitment Termination Date, the financial covenants, certain other covenants, Letters of Credit containing provisions for the automatic increase of their Stated Amounts, and certain fees, subject to the terms and conditions set forth herein; and WHEREAS, the Company has requested that the Banks consent to an amendment of the Company Pledge Agreement; NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, the parties hereto agree as follows: SECTION 1. NEXT EXTENSION DATE With regard to any extension of the Scheduled Commitment Termination Date from January 27, 1997, the next applicable Extension Date under Section 2.1.C of the Credit Agreement shall be September 30, 1995, and the Company may give an Extension Notice for such Extension Date by August 31, 1995. SECTION 2. AMENDMENTS Effective as of the Amendment Effective Date (as defined in Section 4 hereof), the Credit Agreement is hereby amended as follows: (a) Section 2.1.B (Participation Commitments) of the Credit Agreement is amended by replacing the phrase "its Percentage of the Stated Amount thereof" with the phrase "its Percentage of the Stated Amount thereof (and of any automatic increases in such Stated Amount provided for in such Letter of Credit)". (b) Section 2.1.C (Extension of Facility) of the Credit Agreement is amended by (1) replacing the phrase "not more than 90 days, but not less than 60 days," in the first sentence of paragraph (a) with the phrase "not less than 30 days", and (2) replacing the term "Stated Amount" in paragraph (f) with the phrase "Stated Amount (including any automatic increases thereof provided for in such Letter of Credit)". (c) Section 2.3.A (Issuance Request) of the Credit Agreement is amended so that the clause (a) thereof reads in its entirety as follows: "(a) be issued in a Stated Amount which, after giving effect to any automatic increases provided for in such Letter of Credit and when added to the then aggregate amount of LC Outstandings, does not exceed the then Total Commitment Amount; and" (d) Section 2.3.B (Issuance of Letters of Credit) of the Credit Agreement is amended by replacing the term "Stated Amount" in the last sentence thereof with the phrase "Stated Amount (and the amounts and timing of any automatic increases thereof provided for in such Letter of Credit)" and by adding the following sentence at the end thereof: "No Automatically Increasing Letter of Credit shall provide for any automatic increases in its Stated Amount after the first anniversary of its Issuance Date." (e) Section 2.3.F (Deemed Disbursements) of the Credit Agreement is amended by replacing the phrase in clause (a) thereof "that portion of the LC Outstandings attributable to the then aggregate amount which is undrawn and available under all then outstanding Letters of Credit" with the phrase "that portion -2- of the LC Outstandings attributable to the then aggregate amount which is undrawn and available (or will be available upon the occurrence of an automatic increase in Stated Amount) under all then outstanding Letters of Credit". (f) Section 2.4.D [commitment fee] of the Credit Agreement is amended by deleting the phrase "of 0.375% per annum" and substituting therefor the phrase "determined as specified in Section 2.5 hereof". (g) Section 2.4 (Fees) of the Credit Agreement is further amended by replacing the period at the end of Section 2.4.E with a semicolon and adding the following Sections 2.4.F [extension fees], 2.4.G [Automatically Increasing Letter of Credit commitment fee] and 2.4.H [Refinancing Fees]: "F. for the account of each Bank that in its sole discretion consents to the extension of the Scheduled Commitment Termination Date to January 27, 1998, an extension fee in the amount of 0.20% of such Bank's Participation Commitment, such extension fee to be payable on September 30, 1995 (it being understood and agreed that in the event the Banks in their sole discretion consent to any further extensions of the Scheduled Commitment Termination Date, an extension fee mutually agreed to by the Banks and the Company shall be payable by the Company to the Agent for the account of the Banks in consideration of each such further extension); and "G. with respect to each Automatically Increasing Letter of Credit, for the account of each Bank an Automatically Increasing Letter of Credit commitment fee (in addition to the commitment fee referred to in Section 2.4.D) of 0.625% per annum on the aggregate amount of prospective automatic increases in the Stated Amount of such Automatically Increasing Letter of Credit provided for in such Automatically Increasing Letter of Credit; and "H. in the event that the Company has not obtained a commitment letter for the New Receivables Facility by July 1, 1995, the terms and conditions of which are satisfactory to the Required Banks, then for the account of each Bank a fee equal to .50% of such Bank's Commitment." (h) Section 2.5 of the Credit Agreement is amended to read in its entirety as follows: "SECTION 2.5 Letter of Credit Fee Rates; Commitment Fee Rates. -3- The letter of credit fee rate and the commitment fee rate for any fiscal quarter shall be equal to the rate per annum set forth opposite the Company's Adjusted Interest Coverage Ratio for the twelve-month period immediately preceding the fiscal quarter for which the determination is being made.
Adjusted Interest Letter of Commitment Coverage Ratio Credit Fee Rate Fee Rate ----------------- --------------- ---------- Less than 2.25:1.00 2.25% 0.50% Less than 2.75:1.00 2.00% 0.50% but greater than or equal to 2.25:1.00 Less than 4.00:1.00 1.75% 0.375% but greater than or equal to 2.75:1.00 Equal to or greater than 1.50% 0.375% 4.00:1.00 but less than 4.50:1.00 Equal to or greater than 1.25% 0.375% 4.50:1.00
Upon delivery of the Compliance Certificate pursuant to Section 5.1(iv) of the Credit Agreement, the letter of credit fee rate and the commitment fee rate shall automatically be adjusted in accordance with the Adjusted Interest Coverage Ratio for the 12-month period immediately preceding the fiscal quarter for which the determination is being made as set forth in such Compliance Certificate and the table set forth above, such adjustment to be retroactive to the first day of the fiscal quarter during which such Compliance Certificate is delivered; provided that any payment made with respect to a Letter of Credit on other than a Quarterly Payment Date shall not be adjusted. For purposes of the Quarterly Payment Date that is the last Business Day of February, at least 15 days prior to such Quarterly Payment Date, the Company shall deliver to the Agent a good faith estimate of the Adjusted Interest Coverage Ratio for the 12-month period ending on the last day of the Company's fourth fiscal quarter, which estimate shall be used to determine the letter of credit fee rate and the commitment fee rate. Upon delivery of the Compliance Certificate for such period, appropriate adjustment of the letter of credit fee rate, the commitment fee rate and amounts paid shall be made. If the Company fails to deliver a Compliance Certificate which sets forth the information -4- necessary to determine the Adjusted Interest Coverage Ratio during any fiscal quarter, the letter of credit fee rate during the fiscal quarter for which such Compliance Certificate was not delivered shall automatically be adjusted to 2.25% per annum and the commitment fee rate during such fiscal quarter shall automatically be adjusted to 0.50% per annum. In the event that the Company has not obtained a commitment letter for the New Receivables Facility by August 15, 1995 from a financial institution which is, and the terms and conditions of which are, satisfactory to the Required Banks, then each of the percentages set forth above for the Letter of Credit Fee Rate shall increase by an additional 0.25%. In the event that the New Receivables Facility has not been executed and delivered by the Company and the other parties thereto by September 15, 1995, each of the percentages set forth above for the Letter of Credit Fee Rate, as such percentages may have been adjusted by operation of the preceding sentence, shall increase by an additional 0.25%. In the event that the Company has refinanced its existing receivables facility with Enterprise Funding Corporation with the proceeds of the New Receivables Facility on or prior to September 30, 1995, commencing as of the date of such refinancing, the rate increases provided for in the foregoing two sentences shall be terminated and of no further force or effect." (i) Section 5.10.A (BW-Other Corporation) of the Credit Agreement is amended by deleting the two provisos contained in the first sentence thereof and by substituting the following therefor: "provided that prior to the effective date of Amendment No. 5 dated as of March 15, 1995 to this Agreement, the Company may pay such amounts as have been disclosed in writing to the Agent as of such effective date and thereafter the Company may pay the Centaur Settlement Amount." (j) Section 6.1 (Indebtedness) of the Credit Agreement is amended by: (1) deleting subclause (y) from clause (iii) thereof in its entirety and by substituting the following therefor: "(y) notwithstanding the foregoing, in connection with any refinancing of the Senior Notes, the Company may issue up to $140,000,000 principal amount of such refinancing Indebtedness;"; (2) adding immediately after the phrase "of which" in the fourth line of clause (vii) thereof the following: ", and any modifications, amendments or supplements thereto,"; -5- (3) deleting the phrase "clauses (i)-(vii)" from clause (viii) thereof and by substituting "clauses (i)-(vii) and clause (x)" therefor; (4) deleting the phrase "clauses (i)-(viii)" from clause (ix) thereof and by substituting "clauses (i)-(viii) and clause (x)" therefor and by deleting the period at the end of such clause (ix) and by substituting "; and" therefor; and (5) adding a new clause (x) at the end of such Section 6.1 as follows: "(x) Wells Fargo Alarm Services, Inc., BW-Canada Alarm (Wells Fargo) Corporation, and their respective wholly owned subsidiaries may become and remain liable with respect to an off- balance sheet facility providing for the purchase of receivables, contracts, leases and related equipment from such entities, the terms and conditions of which facility, and any modifications, amendments or supplements thereto, shall be satisfactory in form and substance to the Required Banks." (k) Section 6.2 (Liens) of the Credit Agreement is amended by: (1) deleting the phrase "Additional Senior Indebtedness from clause (ii) thereof and by substituting the following therefor: "Additional Senior Indebtedness, including the holders of Indebtedness refinancing the Senior Notes in accordance with Section 6.1(iii)," and (2) deleting the period at the end of clause (vii) thereof and by substituting "; and" therefor and by adding a new clause (viii) after clause (vii) thereof as follows: "(viii) Liens in favor of the purchaser of receivables, contracts, leases and related equipment from Wells Fargo Alarm Services, Inc., BW-Canada Alarm (Wells Fargo) Corporation, and their respective subsidiaries, which Liens are filed with respect to such receivables, contracts, leases and related equipment in connection with the off-balance sheet facility permitted under Section 6.1(x)." -6- (l) Section 6.3 (Investments) of the Credit Agreement is amended by adding the following at the end of clause (iii) thereof: "and Wells Fargo Alarm Services, Inc. and BW-Canada Alarm (Wells Fargo) Corporation may make and own Investments approved by the Required Banks in financing subsidiaries established for the purpose of purchasing and selling receivables, contracts, leases and related equipment in connection with the off-balance sheet facility permitted pursuant to Section 6.1(x)". (m) Section 6.6.A (Interest Coverage Ratio) of the Credit Agreement is amended by deleting such Section in its entirety and by substituting the following therefor: "A. Interest Coverage Ratio. The Company will not permit the ratio (the "Interest Coverage Ratio") of (i) Consolidated EBITDA minus the sum of (x) Consolidated Capital Expenditures plus (y) an amount equal to Alarm Installation Costs originated during the period for which the determination is being made which are treated as sales-type leases and which have not been sold in connection with the off-balance sheet facility permitted pursuant to Section 6.1(x) hereof to (ii) Consolidated Interest Expense as of the last day of each of the fiscal quarters shown below for the four consecutive preceding fiscal quarters ended on such date, to be less than the correlative ratio indicated below:
Minimum Interest "Period Coverage Ratio ------ ---------------- "Fiscal year ending 1994 ----------------------- Fourth fiscal quarter 1.60:1.00 Fiscal year ending 1995 ----------------------- First fiscal quarter 1.30:1.00 Second fiscal quarter 1.30:1.00 Third fiscal quarter 1.35:1.00 Fourth fiscal quarter 1.50:1.00 Fiscal year ending 1996 ----------------------- First fiscal quarter 1.50:1.00 Second fiscal quarter 1.55:1.00 Third fiscal quarter 1.60:1.00 Fourth fiscal quarter 1.75:1.00
-7-
Fiscal year ending 1997 ----------------------- First fiscal quarter 1.75:1.00 Second fiscal quarter 1.80:1.00 Third fiscal quarter 1.85:1.00 Fourth fiscal quarter 2.00:1.00 Fiscal year ending 1998 ----------------------- First fiscal quarter 2.00:1.00 Second fiscal quarter 2.05:1.00 Third fiscal quarter 2.10:1.00 Fourth fiscal quarter 2.25:1.00 Fiscal year ending 1999 ----------------------- First fiscal quarter 2.35:1.00 Second fiscal quarter 2.50:1.00
provided however that for each fiscal quarter in which a Centaur Settlement Amount is paid by the Company and for the immediately succeeding three fiscal quarters, in calculating Consolidated Interest Expense for each such fiscal quarter, the Company may exclude the Centaur Interest Amount for such Centaur Settlement Amount for each such fiscal quarter." (n) Section 6.6.B (Leverage Ratio) of the Credit Agreement is amended by deleting the table set forth therein for the fiscal years ending 1994 through 1999 and substituting the following therefor:
Maximum "Period Leverage Ratio ------ -------------- Fiscal year ending 1994 ----------------------- Fourth fiscal quarter 3.35:1.00 Fiscal year ending 1995 ----------------------- First fiscal quarter 3.65:1.00 Second fiscal quarter 3.65:1.00 Third fiscal quarter 3.60:1.00 Fourth fiscal quarter 3.35:1.00 Fiscal year ending 1996 ----------------------- First fiscal quarter 3.35:1.00 Second fiscal quarter 3.20:1.00 Third fiscal quarter 3.00:1.00 Fourth fiscal quarter 2.90:1.00
-8-
Fiscal year ending 1997 ----------------------- First fiscal quarter 2.90:1.00 Second fiscal quarter 2.80:1.00 Third fiscal quarter 2.65:1.00 Fourth fiscal quarter 2.50:1.00 Fiscal year ending 1998 ----------------------- First fiscal quarter 2.45:1.00 Second fiscal quarter 2.35:1.00 Third fiscal quarter 2.25:1.00 Fourth fiscal quarter 2.15:1.00 Fiscal year ending 1999 ----------------------- First fiscal quarter 2.00:1.00 Second fiscal quarter 1.80:1.00
provided however that for each fiscal quarter in which a Centaur Settlement Amount is paid by the Company and for the immediately succeeding three fiscal quarters, in calculating the amount of Funded Debt for each such fiscal quarter, the Company may exclude such Centaur Settlement Amount for each such fiscal quarter." (o) Section 6.6.C (Consolidated Net Worth) of the Credit Agreement is amended by deleting the table set forth therein for the fiscal years ending 1994 through 1999 and substituting the following therefor:
Minimum Consolidated "Period Net Worth ------ -------------------- Fiscal year ending 1994 ----------------------- Fourth fiscal quarter $ 55,000,000 Fiscal year ending 1995 ----------------------- First fiscal quarter 50,000,000 Second fiscal quarter 50,000,000 Third fiscal quarter 55,000,000 Fourth fiscal quarter 60,000,000 Fiscal year ending 1996 ----------------------- First fiscal quarter 60,000,000 Second fiscal quarter 65,000,000 Third fiscal quarter 70,000,000 Fourth fiscal quarter 85,000,000
-9-
Fiscal year ending 1997 ----------------------- First fiscal quarter 87,500,000 Second fiscal quarter 90,000,000 Third fiscal quarter 95,000,000 Fourth fiscal quarter 105,000,000 Fiscal year ending 1998 ----------------------- First fiscal quarter 110,000,000 Second fiscal quarter 120,000,000 Third fiscal quarter 125,000,000 Fourth fiscal quarter 130,000,000 Fiscal year ending 1999 ----------------------- First fiscal quarter 145,000,000 Second fiscal quarter 160,000,000
provided however that in calculating Consolidated Net Worth, the Company shall exclude the effect of any gain related to taking into Consolidated Net Income any reserves previously established to pay Centaur Settlement Amounts." (p) Section 6.6.D (Consolidated EBITDA) of the Credit Agreement is amended by deleting the table set forth therein for the fiscal years ending 1994 through 1999 and substituting the following therefor:
Minimum Consolidated "Period EBITDA ------ -------------------- Fiscal year ending 1994 ----------------------- Fourth fiscal quarter $145,000,000 Fiscal year ending 1995 ----------------------- First fiscal quarter 130,000,000 Second fiscal quarter 130,000,000 Third fiscal quarter 132,500,000 Fourth fiscal quarter 140,000,000 Fiscal year ending 1996 ----------------------- First fiscal quarter 140,000,000 Second fiscal quarter 150,000,000 Third fiscal quarter 160,000,000 Fourth fiscal quarter 160,000,000
-10-
Fiscal year ending 1997 ----------------------- First fiscal quarter 162,500,000 Second fiscal quarter 165,000,000 Third fiscal quarter 167,500,000 Fourth fiscal quarter 170,000,000 Fiscal year ending 1998 ----------------------- First fiscal quarter 172,500,000 Second fiscal quarter 175,000,000 Third fiscal quarter 177,500,000 Fourth fiscal quarter 180,000,000 Fiscal year ending 1999 ----------------------- First fiscal quarter 185,000,000 Second fiscal quarter 190,000,000"
(q) Section 6.6.E (Consolidated Capital Expenditures) of the Credit Agreement is amended by: (1) deleting the text thereof up to but not including the proviso set forth therein and substituting the following therefor: "E. Consolidated Capital Expenditures. The Company and its Subsidiaries shall not permit the sum of (i) Consolidated Capital Expenditures plus (ii) an amount equal to 75% of the Alarm Installation Costs originated in such fiscal year which are sold in connection with the off-balance sheet facility permitted pursuant to Section 6.1(x) plus (iii) an amount equal to 100% of the Alarm Installation Costs originated in such fiscal year which are treated as sales-type leases which are not sold in connection with the off- balance sheet facility permitted pursuant to Section 6.1(x) to exceed in any fiscal year the amount set forth below for such fiscal year (the "Capital Expenditure Amount"):
Period Capital Expenditure Amount ------ -------------------------- Fiscal year ending 1993 $70,000,000 Fiscal year ending 1994 $75,000,000 Fiscal year ending 1995 $55,000,000 Fiscal year ending 1996 $60,000,000 Fiscal year ending 1997 $60,000,000 Fiscal year ending 1998 $60,000,000 Fiscal year ending 1999 $60,000,000
-11- ; provided that for fiscal years commencing on and after January 1, 1996, if the Company's Adjusted Interest Coverage Ratio for such fiscal year is greater than 2.90:1.00 as of December 31, 1995, or as of the last day of any fiscal year thereafter, the Capital Expenditure Amount for the immediately succeeding fiscal year, and for each fiscal year thereafter, shall be increased to $75,000,000; and" (2) adding the following sentence at the end of Section 6.6.E of the Credit Agreement: "Notwithstanding the foregoing, in no event shall the Capital Expenditure Amount for the fiscal year ending December 31, 1995, be increased by any Unutilized Amount from the fiscal year ending December 31, 1994." (r) Section 6.7 (Restriction on Fundamental Changes) of the Credit Agreement is amended by deleting clause (iv) thereof in its entirety and substituting the following therefor: "(iv) the Company and its Consolidated Subsidiaries may acquire all or substantially all the business, property, fixed assets of, or stock or other evidence of beneficial ownership of, any Person engaged in businesses substantially similar to those conducted by the Company and its Consolidated Subsidiaries (such asset or stock acquisitions being herein collectively referred to as "Acquisitions"); provided that the purchase price (including all assumed liabilities) paid with respect to Acquisitions made on or after the effective date of Amendment No. 5 dated as of March 15, 1995 hereto (A) does not exceed $25,000,000 in the aggregate for all such Acquisitions or (B) in the event that (x) no Default or Unmatured Default has occurred and is continuing, (y) the ratio of the Company's Funded Debt to Consolidated EBITDA for the immediately preceding four consecutive fiscal quarters is not greater than 2.50 to 1.00 and (z) the Company's Adjusted Interest Coverage Ratio for the immediately preceding four consecutive fiscal quarters is not less than 3.00 to 1.00 (in determining compliance with clauses (y) and (z) hereof, such calculations shall be made on a pro forma basis for the period of calculation after giving effect to the occurrence of the Acquisition on the first day of the relevant calculation period and after giving effect to all Indebtedness, including any assumed liabilities, incurred in connection therewith and calculating interest on any such Indebtedness at a fixed rate equal to the rate (whether fixed or floating) which such Indebtedness would bear on the date of determination), does not exceed $50,000,000 in the aggregate for all such Acquisitions; provided however in the event that thereafter the Company no longer meets the conditions set forth in -12- clauses (y) and (z), the Company shall again be required to comply with the foregoing clause (A) of this Section 6.7(iv); provided that no Default or Unmatured Default shall occur under this Agreement if the aggregate Acquisitions then exceed $25,000,000 if such Acquisitions, at the time made, were permitted under this Agreement; provided further that to the extent that the Company pays all or a portion of the purchase price for an Acquisition through the issuance of shares of Common Stock, the value of the shares of such Common Stock shall be deducted from the calculation of the purchase price payable by the Company or its Consolidated Subsidiaries for such Acquisition for purposes of determining compliance with this Section 6.7(iv); and provided further that any such Person so acquired that constitutes a Material Subsidiary shall execute counterparts of the Borg- Warner Subsidiary Guaranty and the Borg-Warner Subsidiary Pledge Agreement as provided in Section 5.11; and" (s) Section 6.9 (Sale or Discount of Receivables) of the Credit Agreement is amended to read in its entirety as follows: "SECTION 6.9. Sale or Discount of Receivables. The Company will not, and will not permit any of its Consolidated Subsidiaries to, directly or indirectly, sell with recourse, or discount or otherwise sell for less than the face value thereof, notes, accounts receivable, contracts, leases or other receivables, other than pursuant to the off-balance sheet facilities permitted under Sections 6.1(vii) and 6.1(x)." (t) Article VII (Defaults) of the Credit Agreement is further amended so that clause (i)(b) of the first paragraph following Section 7.14 of the Credit Agreement is replaced with the following: "(b) an amount equal to the maximum amount that may at any time be drawn under all Letters of Credit then outstanding (whether or not any beneficiary under any Letter of Credit shall have presented or be entitled to present, the drafts and other documents required to draw under such Letter of Credit and including the amount of any automatic increases in Stated Amounts of Automatically Increasing Letters of Credit which have not yet occurred)". (u) Annex I (Defined Terms) to the Credit Agreement is amended so that the following definitions of "Alarm Installation Costs", "Automatically Increasing Letter of Credit", "Centaur Interest Amount", "Centaur Settlement Amount", and "New Receivables Facility" are inserted in the appropriate alphabetical positions, and the definitions of "BW-Other -13- Corporation", "Contingent Liability", "Extension Date" and "LC Outstandings" are restated to read in their entirety as follows: ""Alarm Installation Costs" means the costs allocated to a subscriber installation in connection with the original installation of an alarm system, including without limitation all charges for materials and for the labor associated with such installation." ""Automatically Increasing Letter of Credit" means a Letter of Credit which provides for automatic increase or increases in the Stated Amount of such Letter of Credit." ""BW-Other Corporation" means the direct and indirect subsidiaries of BW-Other Corporation, a Delaware corporation, prior to its liquidation into the Company, including without limitation Borg-Warner Equities Corporation, Borg-Warner Equities Corporation of California, Borg-Warner Equities Corporation of Monterey, Inc., NAL II, Ltd., Borg-Warner Insurance Holding Corporation and Centaur Insurance Company." ""Centaur Interest Amount" means, for each period for which the determination is being made and for each Centaur Settlement Amount for which such calculation is being made, an amount equal to the interest expense attributable to such Centaur Settlement Amount for such period, commencing from the date of payment of such Centaur Settlement Amount for the first such period, which amount shall be calculated by utilizing the "Prime Rate" (as defined in the BT Credit Agreement) then in effect for loans under the BT Credit Agreement (without reference to the "Prime Rate Margin" as defined therein)." ""Centaur Settlement Amount" means all amounts paid or contributed by the Company to Centaur Insurance Company ("Centaur") or directly or indirectly paid by the Company on behalf of Centaur, in each case on or after the effective date of Amendment No. 5 dated as of March 15, 1995 to this Agreement for the purpose of settling litigation pending against Centaur or against the Company but relating to Centaur or of paying the costs and expenses associated with such litigation, provided that the aggregate amount of all such payments does not exceed the amount disclosed in writing by the Company to the Agent and approved by the Agent as of the effective date of Amendment No. 5 dated as of March 15, 1995 to this Agreement." ""Contingent Liability" means the undrawn outstanding portion of the Stated Amount of a Letter of Credit and, in the case of an Automatically Increasing Letter of Credit, -14- any automatic increases in such Stated Amount provided for in such Letter of Credit which have not yet occurred." ""Extension Date" means September 30, 1995 and March 15 of each subsequent year, beginning with March 15, 1996." ""LC Outstandings" means, on any date, the sum of (i) the maximum aggregate liability of the Issuers under outstanding Letters of Credit (determined as if all automatic increases provided for in Automatically Increasing Letters of Credit have occurred whether or not they have), and (ii) the aggregate amount of drawings under Letters of Credit for which the Issuers and the Banks have not been reimbursed by the Company on that date." ""New Receivables Facility" means an off-balance sheet receivables financing facility in the amount of not less than $100,000,000, the terms and conditions of which are satisfactory to the Required Banks, which facility shall be provided by a financial institution satisfactory to the Required Banks, to replace the Company's existing off-balance sheet receivables financing facility with Enterprise Funding Corporation." (v) The definition of "Asset Sale" contained in Annex I (Defined Terms) to the Credit Agreement is amended by deleting clause (B) therefrom in its entirety and replacing it with the following: "(B) the sale or discount of notes, accounts receivable, contracts, leases or other receivables to the extent sold or discounted in connection with the off-balance sheet facilities permitted by Section 6.1(vii) and (x) and, in the case of the off-balance sheet facility permitted by Section 6.1(x), the sale of related equipment." (w) Exhibit E (Form of Compliance Certificate) to the Credit Agreement is amended to read in its entirety in the form of Annex A hereto. SECTION 3. CONSENTS. (a) Each Bank executing this Amendment hereby consents to the amendment of the Company Pledge Agreement by a First Amendment to Pledge Agreement substantially in the form annexed hereto as Annex B and each such Bank hereby authorizes the Collateral Agent, upon request of the Company and on such Bank's behalf, to execute and deliver such First Amendment to Pledge Agreement. (b) Each Bank executing this Amendment hereby consents to the amendment of the Intercreditor Agreement by a First Amendment to Intercreditor Agreement substantially in the form annexed -15- hereto as Annex C and each such Bank hereby authorizes the Collateral Agent, upon request of the Company and on such Bank's behalf, to execute and deliver such First Amendment to Intercreditor Agreement. SECTION 4. CONDITIONS TO EFFECTIVENESS Section 2 of this Amendment shall become effective as of the date hereof only upon the satisfaction of all of the following conditions precedent (upon such satisfaction, the "Amendment Effective Date") prior to March 24, 1995: (a) On or before the Amendment Effective Date, the Company shall deliver to the Banks (or to the Agent with sufficient originally executed copies, where appropriate, for each Bank and its counsel) the following, each, unless otherwise noted, dated the Amendment Effective Date: (1) Resolutions of its board of directors authorizing and approving the execution, delivery and performance of this Amendment and of the Credit Agreement as amended by this Amendment, certified as of the Amendment Effective Date by its secretary or assistant secretary as being in full force and effect without modification or amendment; (2) Signature and incumbency certificates of its officers executing this Amendment; (3) Executed copies of this Amendment; (4) An opinion of counsel to the Company as to the Amendment in form and substance satisfactory to the Agent and the Banks; and (5) A letter from a responsible officer of the Company with respect to past and anticipated Centaur Settlement Amounts which letter shall have been approved by the Agent. (b) On or before the Amendment Effective Date, each of the Borg-Warner Guarantor Subsidiaries shall deliver to the Banks (or to the Agent with sufficient originally executed copies, where appropriate, for each Bank and its counsel) the following, each, unless otherwise noted, dated the Amendment Effective Date: (i) Signature and incumbency certificates of its officers executing this Amendment; and (ii) Executed copies of this Amendment. (c) On or before the Amendment Effective Date, each Bank executing this Amendment shall have received an amendment fee in -16- the amount equal to such Bank's Commitment multiplied by 0.30% and the Agent shall have received an Agent's amendment fee in an amount previously agreed to by the Company and the Agent. (d) On or before the Amendment Effective Date, the Required Banks shall have delivered to the Agent originally executed copies of this Amendment. (e) On or before the Amendment Effective Date, corresponding consents and amendments shall have been made to the BT Credit Agreement and such BT Credit Agreement, as so amended, shall have become effective. (f) On or before the Amendment Effective Date, all corporate and other proceedings taken or to be taken in connection with the transactions contemplated hereby and all documents incidental thereto not previously found acceptable by the Agent, acting on behalf of the Banks, and its counsel shall be satisfactory in form and substance to the Agent and such counsel, and the Agent and such counsel shall have received all such counterpart originals or certified copies of such documents as the Agent may reasonably request. SECTION 5. COMPANY'S REPRESENTATIONS AND WARRANTIES In order to induce the Agent and the Banks to enter into this Amendment and to amend the Credit Agreement in the manner provided herein, the Company represents and warrants to the Agent and each Bank that the following statements are true, correct and complete: (a) Corporate Power and Authority. The Company has all requisite corporate power and authority to enter into this Amendment and to carry out the transactions contemplated by, and perform its obligations under, the Credit Agreement as amended by this Amendment (the "Amended Agreement"). (b) Authorization of Agreements. The execution and delivery of this Amendment and the performance of the Amended Agreement have been duly authorized by all necessary corporate action on the part of the Company. (c) No Conflict. The execution and delivery by the Company of this Amendment and the performance by the Company of the Amended Agreement do not and will not (i) violate any provision of any law or any governmental rule or regulation applicable to the Company or any of its Subsidiaries, the Certificate or Articles of Incorporation or Bylaws of the Company or any of its Subsidiaries or any order, judgment or decree of any court or other agency of government binding on the Company or any of its Subsidiaries, (ii) conflict with, result in a breach of or -17- constitute (with due notice or lapse of time or both) a default under any Contractual Obligation of the Company or any of its Subsidiaries, (iii) result in or require the creation or imposition of any Lien upon any of the properties or assets of the Company or any of its Subsidiaries (other than any Liens created under any of the Credit Documents in favor of Collateral Agent on behalf of the Banks), or (iv) require any approval of stockholders or any approval or consent of any Person under any Contractual Obligation of the Company or any of its Subsidiaries. (d) Governmental Consents. The execution and delivery by the Company of this Amendment and the performance by the Company of the Amended Agreement do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any federal, state or other governmental authority or regulatory body. (e) Binding Obligation. This Amendment and the Amended Agreement have been duly executed and delivered by the Company and are the legally valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability. (f) Incorporation of Representations and Warranties From Credit Agreement. The representations and warranties contained in Article IV of the Credit Agreement are and will be true, correct and complete in all material respects on and as of the Fifth Amendment Effective Date to the same extent as through made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects on and as of such earlier date. (g) Absence of Default. No event has occurred and is continuing or will result from the consummation of the transactions contemplated by this Amendment that would constitute a Default. SECTION 6. MISCELLANEOUS (a) Reference to and Effect on the Credit Agreement and the other Credit -------------------------------------------------------------------- Documents. --------- (1) On and after the Amendment Effective Date, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import referring to the Credit Agreement, and each reference in the other Credit Documents to the "Credit Agreement", -18- "thereunder", "thereof" or words of like import referring to the Credit Agreement shall mean and be a reference to the Amended Agreement. (2) Except as specifically amended by this Amendment, the Credit Agreement and the other Credit Documents shall remain in full force and effect and are hereby ratified and confirmed. (3) The execution, delivery and performance of this Amendment shall not, except as expressly provided herein, constitute a waiver of any provision of, or operate as a waiver of any right, power or remedy of the Agent or any Bank under, the Credit Agreement or any of the other Credit Documents. (b) Fees and Expenses. The Company acknowledges that all costs, fees and expenses as described in Section 9.9 of the Credit Agreement incurred by the Agent and its counsel with respect to this Amendment and the documents and transactions contemplated hereby shall be for the account of the Company. (c) Headings. Section and subsection headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose or be given any substantive effect. (d) Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. (e) Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. SECTION 7. ACKNOWLEDGEMENT AND CONSENT Each of the Borg-Warner Guarantor Subsidiaries is a party to the Borg- Warner Subsidiary Guaranty, as amended, pursuant to which each such Borg-Warner Guarantor Subsidiary has guarantied the Obligations. The Borg-Warner Guarantor Subsidiaries are collectively referred to herein as the "Credit Support Parties" and the Borg-Warner Subsidiary Guaranty is referred to herein as the "Credit Support Documents". -19- Each Credit Support Party hereby acknowledges that it has reviewed the terms and provisions of this Amendment and consents to the terms hereof. Each Credit Support Party hereby confirms that each Credit Support Document to which it is a party or otherwise bound and all Collateral encumbered thereby will continue to guaranty or secure, as the case may be, to the fullest extent possible the payment and performance of all "Obligations", "Guarantied Obligations" and "Secured Obligations", as the case may be (in each case as such terms are defined in the applicable Credit Support Document), including without limitation the payment and performance of all such "Obligations", "Guarantied Obligations" or "Secured Obligations", as the case may be, in respect of the Obligations of the Company now or hereafter existing under or in respect of the Credit Agreement. Each Credit Support Party acknowledges and agrees that any of the Credit Support Documents to which it is party or otherwise bound shall continue in full force and effect and that all of its obligations thereunder shall be valid and enforceable and shall not be impaired or limited by the execution or effectiveness of this Amendment. Each Credit Support Party represents and warrants that all representations and warranties contained in the Credit Agreement and the Credit Support Documents to which it is a party or otherwise bound are true, correct and complete in all material respects on and as of the date hereof to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects on and as of such earlier date. Each Credit Support Party acknowledges and agrees that (i) such Credit Support Party is not required by the terms of the Credit Agreement or any other Credit Document to consent to the amendments of the Credit Agreement effected pursuant to this Amendment and (ii) nothing in the Credit Agreement, this Amendment or any other Credit Document shall be deemed to require the consent of such Credit Support Party to any future amendments to the Credit Agreement. -20- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. BORG-WARNER SECURITY CORPORATION By:_____________________________ Title:__________________________ WELLS FARGO ALARM SERVICES, INC. (for purposes of Section 7 only) as a Credit Support Party By:_____________________________ Title:__________________________ WELLS FARGO ARMORED SERVICE CORPORATION (for purposes of Section 7 only) as a Credit Support Party By:_____________________________ Title:__________________________ BW-CANADIAN GUARD CORPORATION (for purposes of Section 7 only) as a Credit Support Party By:_____________________________ Title:__________________________ BORG-WARNER PROTECTIVE SERVICES CORPORATION (for purposes of Section 7 only) as a Credit Support Party By:_____________________________ Title:__________________________ S-1 PONY EXPRESS COURIER CORP. (for purposes of Section 7 only) as a Credit Support Party By:_____________________________ Title:__________________________ THE LONG-TERM CREDIT BANK OF JAPAN, LTD., individually as a Bank and as Agent By:_____________________________ Title:__________________________ CAISSE NATIONALE DE CREDIT AGRICOLE By:_____________________________ Title:__________________________ THE SUMITOMO BANK LIMITED, CHICAGO BRANCH By:_____________________________ Title:__________________________ U.S. NATIONAL BANK OF OREGON By:_____________________________ Title:__________________________ BANK OF HAWAII By:_____________________________ Title:__________________________ THE FUJI BANK, LIMITED By:_____________________________ Title:__________________________ S-2 BANK OF NEW YORK By:_____________________________ Title:__________________________ THE TORONTO-DOMINION BANK By:_____________________________ Title:__________________________ S-3 EX-10.9 4 RET. SAVINGS PLAN EXHIBIT 10.9 BORG-WARNER RETIREMENT SAVINGS PLAN (EFFECTIVE AS OF JUNE 1, 1988 AND FURTHER AMENDED AND RESTATED EFFECTIVE AS OF APRIL 1, 1994 AND JANUARY 1, 1995) ARTICLE 1. ESTABLISHMENT, TITLE, PURPOSE, INTENT AND EFFECTIVE DATE OF PLAN --------- ---------------------------------------------------------------- Section 1.01 Establishment, Effective Date and Title of Plan. The Borg- Warner Retirement Savings Plan (the "Plan") was established for the benefit of certain employees of the Borg-Warner Security Corporation (the "Corporation") and its divisions, subsidiaries and affiliates, effective as of June 1, 1988 and further amended and restated effective as of April 1, 1994 and January 1, 1995. Section 1.02 Purpose of Plan. The purpose of the Plan is to provide retirement benefits and a method of long-term savings for Eligible Employees. Section 1.03 Intent of Plan. The Corporation intends that the Plan, as the same may be amended from time to time, shall constitute a qualified plan under the provisions of Section 401(a) and related or successor provisions of the Code and shall be in full compliance with ERISA. The Corporation intends that the Plan shall continue to be maintained by it for the above purposes indefinitely, subject to the rights reserved to the Corporation to amend and terminate the Plan as set forth below. ARTICLE 2. DEFINITIONS --------- ----------- The terms set forth in this Article 2, when used in the Plan, shall have the following meanings, unless the context clearly requires a different meaning. Section 2.01 Actual Contribution Percentage. The term "Actual Contribution Percentage" means a percentage calculated for purposes of Section 6.04 for (a) the group of Eligible Employees who are Highly Compensated Employees or (b) the group of all other Eligible Employees. For each group being tested, the Actual Contribution Percentage shall be the average of the following percentages, which shall be calculated separately for each member of the group: the sum of the Company Matching Contributions under Section 4.02 and the After-Tax Contributions under Section 5.04 on behalf of each group member, divided by the Compensation of each group member. For purposes of meeting the test under Section 6.04, the Employee Benefits Committee may elect for each Plan Year to include the Before-Tax Contributions for each Participant in the numerator of each corresponding percentage under this Section 2.01. In addition, a Participant's similarly calculated actual contribution percentage under any other Section 401(k) plan of the Company under certain circumstances shall be included in determining the Actual Contribution Percentage and, under other circumstances, may at the discretion of the Employee Benefits Committee be included in determining the Actual Contribution Percentage. Section 2.02 Actual Deferral Percentage. The term "Actual Deferral Percentage" means a percentage calculated for purposes of Section 5.10 for (a) the group of Eligible Employees who are Highly Compensated Employees or (b) the group of all other Eligible Employees. For each group being tested, the Actual Deferral Percentage shall be the average of the following percentages, which shall be calculated separately for each member of the group: the sum of the Before-Tax Contributions under Sections 5.01 and 5.02 on behalf of each group member, divided by the Compensation of each group member. A Participant's actual deferral percentage under any other Section 401(k) plan of the Company under certain circumstances shall be included in determining the Actual Deferral Percentage and, under other circumstances, may at the discretion of the Employee Benefits Committee be included in determining the Actual Deferral Percentage. Section 2.03 Administrative Services Provider. The term "Administrative Services Provider" means the person or entity appointed by the Employee Benefits Committee to provide administrative services to the Plan. Section 2.04 After-Tax Contributions. The term "After-Tax Contributions" means the contributions made by a Participant pursuant to Section 5.04. After- Tax Contributions are not intended to qualify as salary reduction contributions under Section 401(k) of the Code. Section 2.05 Authorized Leave of Absence. The term "Authorized Leave of Absence" means any absence of an Employee on account of time during which no duties are performed due to vacation, holiday, illness, incapacity, layoff of less than one year, jury duty, military duty or other leave of absence authorized by the Company under its applicable personnel practices, administered in a uniform and nondiscriminatory manner. During an Authorized Leave of Absence, an Employee shall be given credit for service, provided that he retires or returns to employment with the Company within the period specified in the Authorized Leave of Absence. Section 2.06 Before-Tax Contributions. The term "Before-Tax Contributions" means the contributions made by a Participant pursuant to Sections 5.01 and 5.02. Before-Tax Contributions are intended to qualify as salary reduction contributions under Section 401(k) of the Code. -2- Section 2.07 Beneficiary. The term "Beneficiary" means the person, persons or trust designated under Section 3.04 or Section 11.02, as applicable, to receive a benefit under the Plan after the death of a Participant. Section 2.08 Board of Directors. The term "Board of Directors" means the Board of Directors of Borg-Warner Security Corporation as constituted from time to time. Section 2.09 Code. The term "Code" means the Internal Revenue Code of 1986, as amended from time to time. Section 2.10 Company. The term "Company" means, individually, the Corporation and the Corporation's divisions, subsidiaries and affiliates which are participating in the Plan. Divisions of the Corporation shall participate in the Plan as determined from time to time by the Employee Benefits Committee. Subsidiaries and affiliates of the Corporation shall participate in the Plan by taking appropriate corporate action with the consent of the Employee Benefits Committee. Section 2.11 Company Matching Contributions. The term "Company Matching Contributions" means those contributions made by the Company on behalf of Participants pursuant to Section 4.02. Section 2.12 Company Retirement Account. The term "Company Retirement Account" means the account maintained for each Participant showing the aggregate of the Company Retirement Contributions made on such Participant's behalf pursuant to Section 4.01 and certain amounts transferred to the Plan pursuant to Section 7.01, after adjustment for earnings, changes in market valuation, Forfeitures or distributions, if any. The Vested Portion of a Participant's Company Retirement Account shall be determined pursuant to Section 2.49. Section 2.13 Company Retirement Contributions. The term "Company Retirement Contributions" means those contributions made by the Company on behalf of Participants pursuant to Section 4.01. Section 2.14 Compensation. The term "Compensation" means direct compensation in the form of salary or wages paid to a Participant by the Company during a Plan Year, including overtime pay, commissions and bonuses, but excluding reimbursement for education or relocation expenses, severance or transitional income pay, and other taxable fringe benefits. Other than for purposes of Sections 6.02 and 19.02, Compensation shall also include Before-Tax Contributions made by the Company on behalf of a Participant. Effective as of January 1, 1994, Compensation shall be limited for all Plan purposes to $150,000 of Compensation per Participant, as adjusted by the Secretary of the Treasury pursuant to Section 401(a)(17) of the Code. -3- For purposes of determining the Actual Contribution Percentage and Actual Deferral Percentage the term "Compensation" shall have a meaning permitted under Section 414(s) of the Code and the regulations thereunder, with any such definitions to be consistently applied for each testing year. For purposes of Section 2.25, the term "Compensation" shall have the meaning set forth in Section 414(q)(7) of the Code. Section 2.15 Corporation. The term "Corporation" means Borg-Warner Security Corporation, a Delaware corporation, and any successor thereto which continues the Plan as provided in Section 18.01. Section 2.16 Effective Date. The term "Effective Date" means June 1, 1988. The Plan was amended and restated effective as of April 1, 1994 and January 1, 1995. Section 2.17 Eligible Employee. The term "Eligible Employee" means an Employee who has completed a Six-Month Period of Service. Section 2.18 Employee. The term "Employee" means (a) any resident of the United States who is a common law employee of the Company or (b) any citizen of the United States who is a common law employee of the Company or a foreign subsidiary of the Company which subsidiary has entered into an agreement with the Company under Section 3121(l) of the Code which is in effect, and as to whom no contributions under a funded plan of deferred compensation are being made by the Company or any other entity. Notwithstanding the foregoing, an employee who elected to remain a participant in the Borg-Warner Corporation Retirement Plan effective as of June 1, 1988 shall be deemed to be an Employee for purposes of this Section 2.18. If approved by the Employee Benefits Committee, the term Employee may include a non-U.S. citizen who is employed by the Company outside of the United States. The term "Employee" also means any leased employee who performs services for the Company, to the extent required by Section 414(n) or Section 414(o) of the Code. Any employer contributions to a tax-qualified retirement plan provided on behalf of such leased employee by the leasing organization for services provided to the Company shall for all purposes of the Plan be treated as contributions by the Company. Effective as of January 1, 1995, the term "Employee" shall exclude all Highly Compensated Employees or employees who are expected to meet the definition of a Highly Compensated Employee pursuant to Section 2.25. The term "Employee" also excludes non-U.S. citizens who are temporarily transferred to the Company, all agents, consultants and independent contractors, and any Highly Compensated Employee who has an employment agreement with the Company and who is provided retirement benefits by the Company, its subsidiaries or affiliates under any other -4- plan or program. Further, an employee who is employed within a collective bargaining unit recognized as such by the Company shall not become or remain a Participant who is eligible to receive any Company Retirement Contribution or Company Matching Contribution under Article 4 or to make any Before-Tax Contribution or After-Tax Contribution under Article 5 unless and until mutually satisfactory agreements have been reached with the union bargaining agent for coverage of the employees in the bargaining unit represented by the union under the terms of the Plan, together with such other waivers as the Company may deem necessary in light of local contractual situations. Section 2.19 Employee Benefits Committee. The term "Employee Benefits Committee" means the committee appointed by the Board of Directors to administer all retirement plans maintained by the Corporation and any division, subsidiary or affiliate of the Corporation. Section 2.20 Employee Retirement Account. The term "Employee Retirement Account" means the account maintained for each Participant showing the aggregate of the Before-Tax Contributions made on such Participant's behalf pursuant to Section 5.01 and the Company Matching Contributions made on such Participant's behalf pursuant to Section 4.02, after adjustment for earnings, changes in market valuation, Forfeitures or distributions, if any. A Participant shall at all times have a fully vested nonforfeitable interest in the balance in his Employee Retirement Account attributable to Before-Tax Contributions. The Vested Portion of the balance in a Participant's Employee Retirement Account attributable to Company Matching Contributions shall be determined pursuant to Section 2.49. Section 2.21 Employment Commencement Date. The term "Employment Commencement Date" means the date on which an Employee first performs an Hour of Service for the Company. Section 2.22 ERISA. The term "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. Section 2.23 Fiduciaries. The term "Fiduciaries" means the Board of Directors, the Employee Benefits Committee, the RSP Committee, the Plan Administrator and the Trustee, but only with respect to the specific responsibilities of each for Plan or Trust administration, as described and allocated in Article 15. Section 2.24 Forfeiture. The term "Forfeiture" means the Unvested Portion of a Participant's Company Retirement Account and the Unvested Portion of the balance in a Participant's Employee Retirement Account attributable to Company Matching Contributions, which will be forfeited by a Participant upon termination of employment as provided in Section 11.03. Each Forfeiture shall be applied solely to reduce the amount of Company Retirement Contributions and Company Matching Contributions otherwise payable by the -5- Company. No part of any Forfeiture may be applied to increase the benefits any Participant otherwise would receive under the Plan. Section 2.25 Highly Compensated Employee. The term "Highly Compensated Employee" means each Employee of the Company (for purposes of this Section 2.25 "Company" shall mean Borg-Warner Security Corporation and its divisions, subsidiaries and affiliates) who, during the Plan Year under consideration (the "current Plan Year") or the preceding Plan Year: (a) was at any time a more-than-five-percent (5%) owner of the Company; (b) received Compensation from the Company in excess of $99,000, as adjusted by the Secretary of the Treasury pursuant to Section 414(q)(l) of the Code for years beginning after 1994; (c) received Compensation from the Company in excess of $66,000, as adjusted by the Secretary of the Treasury pursuant to Section 414(q)(1) of the Code for years beginning after 1994, and was in the top twenty percent (20%) of Employees (in terms of Compensation received) for that Plan Year; or (d) was at any time an officer and received Compensation greater than fifty percent (50%) of the amount in effect under Section 415(b)(1)(A) of the Code for that Plan Year. An Employee who is not described in subsection 2.25(b), (c) or (d) above for the year preceding the current Plan Year shall not be treated as being described in subsection 2.25(b), (c) or (d) for the current Plan Year unless the Employee is one of the 100 Employees paid the greatest Compensation during the current Plan Year. For purposes of subsection 2.25(c), the term "Employees" shall not include any Employees who are excludeable under Section 414(q)(8) of the Code. For purposes of subsection 2.25(d), no more than 50 Employees (or, if less, the greater of three Employees or ten percent (10%) of Employees) shall be treated as officers. However, if all officers of the Company have less Compensation than the threshold amount stated in subsection 2.25(d) for a particular Plan Year, the officer with the highest Compensation for such year shall be treated as described in subsection 2.25(d). Family members (i.e., an Employee's spouse and lineal ascendants or descendants, and the spouses of such lineal ascendants or descendants) of a more-than-five-percent (5%) owner or of a Highly Compensated Employee included in the group consisting of the ten most Highly Compensated Employees during the Plan Year shall not be treated as separate -6- Employees, and any Compensation paid to such family members shall be treated as if it were paid to such more-than-five-percent (5%) owner or Highly Compensated Employee. A former Employee shall be treated as a Highly Compensated Employee if such individual was a Highly Compensated Employee when he separated from service or if such individual was a Highly Compensated Employee at any time after attaining age 55. Section 2.26 Hour of Service. The term "Hour of Service" means each hour for which an Employee is directly or indirectly paid or entitled to payment by the Company for the performance of services. Section 2.27 Investment Funds or Funds. The term "Investment Funds" or "Funds" means, as the context requires, any one or all of the funds provided for in Article 9. Section 2.28 Limitation Year. The term "Limitation Year" means, with respect to the restrictions in Sections 6.02 and 6.03, the Plan Year. Section 2.29 Local Plan Administrator. The term "Local Plan Administrator" means the person appointed by the Plan Administrator to administer the Plan on behalf of a specific division, subsidiary or affiliate of the Corporation. Section 2.30 Normal Retirement Date. The term "Normal Retirement Date" means the last day of the calendar month coincident with or immediately following the day on which a Participant attains age 65. Section 2.31 One-Year Period of Severance. The term "One-Year Period of Severance" means the 12-month period beginning on a Participant's Severance from Service Date and each successive 12-month period during which the Participant does not perform an Hour of Service. Section 2.32 Payroll Period. The term "Payroll Period" means the period for which the Participant is directly or indirectly paid or entitled to payment by the Company for the performance of services. Section 2.33 Participant. The term "Participant" means any Eligible Employee or former Eligible Employee for whom an RSP Account is maintained under the Plan. Section 2.34 Permanent Disability. The term "Permanent Disability" means the permanent and total incapacity of a Participant to perform the duties of his employment with the Company by reason of physical or mental impairment, as determined by the Plan Administrator based upon the written opinion of a licensed physician approved by it. The Plan Administrator, acting upon the written advice of such physician, shall determine the date -7- on which the Permanent Disability shall be deemed to exist. Subject to the provisions of Section 15.11, the final decision of the Plan Administrator with respect to Permanent Disability shall be conclusive for all purposes of the Plan and Trust. Section 2.35 Plan. The term "Plan" means the Borg-Warner Retirement Savings Plan, as set forth herein and as from time to time amended and in effect. Section 2.36 Plan Administrator. The term "Plan Administrator" means the person or persons appointed to administer the Plan pursuant to Section 15.03. Section 2.37 Plan Year. The term "Plan Year" means the administrative year of the Plan and Trust, which is maintained on a January 1 through December 31 basis. Section 2.38 Reemployment Commencement Date. The term "Reemployment Commencement Date" means the date on which an Employee first performs an Hour of Service for the Company after a One-Year Period of Severance. Section 2.39 Related Employer. The term "Related Employer" means (i) any trade or business under common control (as defined in Sections 414(b) and (c) of the Code) with the Company, (ii) members of a controlled group of corporations (as defined in Section 1563(a) of the Code, applied without regard to Sections 1563(a)(4) and 1563(e)(3)(C) of the Code) of which the Company is also a member, (iii) any member of an affiliated service group (as defined in Section 414(m) of the Code) of which the Company is also a member, and/or (iv) any entity required to be aggregated with the Company pursuant to Section 414(o) of the Code. Section 2.40 RSP Account. The term "RSP Account" means the Company Retirement Account, the Employee Retirement Account and/or the Savings Account maintained for a Participant, as the context requires. Section 2.41 RSP Committee. The term "RSP Committee" means the committee, as constituted from time to time, which is appointed to administer the Plan pursuant to Article 15. Section 2.42 Savings Account. The term "Savings Account" means the account maintained for each Participant showing the aggregate of the Before-Tax Contributions made on such Participant's behalf pursuant to Section 5.02, the After-Tax Contributions made by the Participant pursuant to Section 5.04 and certain amounts transferred to the Plan pursuant to Section 7.01, after adjustment for earnings, changes in market valuation or distributions, if any. A Participant shall at all times have a fully vested and nonforfeitable interest in his Savings Account. -8- Section 2.43 Severance from Service Date. The term "Severance from Service Date" means the date on which an Employee's employment with the Company is severed, which shall occur on the earlier of: (a) the date on which the Employee quits, is discharged, retires or dies, or (b) the first day next following a one-year period during which the Employee remains absent from employment for any reason other than those specified in (a) above; provided, however, that if the Employee is on an Authorized Leave of Absence at the end of such one-year period, his Severance from Service Date shall occur on the expiration date of such Authorized Leave of Absence unless he returns to active employment with the Company prior to that date. If an Employee is on an Authorized Leave of Absence due to a layoff, the Plan Administrator may approve a Severance from Service Date which shall be the last day worked by the Employee. Notwithstanding the foregoing, a Severance from Service Date shall not be deemed to have occurred until the second anniversary of the first day of an absence from work due to (w) the pregnancy of the Employee, (x) the birth of a child of the Employee, (y) the placement of a child in connection with the adoption of the child by the Employee, or (z) the caring for the child by the Employee during the period immediately following the child's birth or placement for adoption. Section 2.44 Six-Month Period of Service. The term "Six-Month Period of Service" means the period beginning on an Employee's Employment Commencement Date and ending on the date as of which the Employee completes six consecutive months of employment with the Company. Section 2.45 Trust. The term "Trust" means the trust or trusts established pursuant to Section 14.01. Section 2.46 Trustee. The term "Trustee" means the trustee or trustees appointed by the Employee Benefits Committee pursuant to Section 14.02, and any successor trustee or trustees. Section 2.47 Unvested Portion. The term "Unvested Portion" means (i) that portion of the balance in a Participant's Company Retirement Account not attributable to amounts transferred pursuant to Section 7.01 which is not the Vested Portion, and (ii) that portion of the balance in a Participant's Employee Retirement Account attributable to Company Matching Contributions which is not the Vested Portion. Section 2.48 Valuation Date. The term "Valuation Date" means a date as of which each Investment Fund is valued and the RSP Accounts adjusted as provided in Article 10. Valuation Dates shall be each business day (any day on which the New York Stock Exchange is open for trading and on which the principal office of the Administrative Services Provider is open) during the Plan Year. -9- Section 2.49 Vested Portion. The term "Vested Portion" means (a) that portion of the balance in a Participant's Company Retirement Account, not attributable to amounts transferred pursuant to Section 7.01, which results from the application of the following schedule, and (b) that portion of the balance in a Participant's Employee Retirement Account attributable to Company Matching Contributions which results from the application of the following schedule: Years of Vested Service Vested Portion ----------------------- -------------- Less than Five 0% Five or more 100% provided, however, that the balance in a Participant's Company Retirement Account, not attributable to amounts transferred pursuant to Section 7.01, and the balance in a Participant's Employee Retirement Account attributable to Company Matching Contributions shall become fully vested and nonforfeitable on the date on which the Participant suffers a Permanent Disability, the date on which he attains age 65, provided he is employed by the Company on that date, or the date of his death, provided he is employed by the Company on that date, whichever occurs first. A Participant shall at all times have a fully vested and nonforfeitable interest in the balance in his Employee Retirement Account attributable to his Before-Tax Contributions and his Savings Account. Section 2.50 Year of Vested Service. The term "Year of Vested Service" means each 12-month period of employment with the Company or with Borg-Warner Automotive, Inc. or its subsidiaries, divisions and/or affiliates. An Employee shall be credited with Years of Vested Service based on the time elapsed between the Employee's Employment Commencement Date and his Severance from Service Date. However, if an Employee, who is absent from service with the Company, is rehired before incurring a One-Year Period of Severance, the Employee's period of absence from service shall be included in his Years of Vested Service. Further, any period during which an Employee is on an Authorized Leave of Absence or is employed with a Related Employer shall be included in determining an Employee's Years of Vested Service. ARTICLE 3. PARTICIPATION --------- ------------- Section 3.01 Commencement of Participation. Effective as of April 1, 1994, an Eligible Employee shall become a Participant in the Plan on the first day of the first Payroll Period immediately following the date the Employee first satisfies the eligibility requirements -10- of Section 2.17 or as soon as practicable thereafter. Such Eligible Employee, upon becoming a Participant in the Plan, must submit the appropriate form to the Local Plan Administrator. Section 3.02 Participation After One-Year Period of Severance. If a Participant's employment is terminated for any reason and he subsequently is reemployed by the Company after incurring a One-Year Period of Severance, he shall be eligible to become a Participant again on his Reemployment Commencement Date, provided his prior Years of Vested Service are not disregarded under subsection 11.05(c). The participation of any Employee whose prior Years of Vested Service are disregarded under subsection 11.05(c) and who is so reemployed shall commence when he satisfies the requirements of Section 3.01 after his Reemployment Commencement Date. Section 3.03 Participation Upon Return From Authorized Leave of Absence. A Participant on an Authorized Leave of Absence shall resume participation in the Plan as of the first day of the first Payroll Period immediately following the date such Participant returns to active employment with the Company or as soon as practicable thereafter. Section 3.04 Designation of Beneficiary. A Participant, by written instrument executed and delivered to the Local Plan Administrator during his lifetime, shall designate a Beneficiary to whom distribution shall be made in the event of his death prior to the full receipt of his interest under the Plan. The designation may be in favor of one or more Beneficiaries, may include contingent as well as primary designations and named or unnamed trustees under any will or trust agreement, may apportion the benefits payable in any manner among the Beneficiaries and shall include the full name and post office address of each Beneficiary; provided, however, that a married Participant's primary Beneficiary shall at all times while the Participant is married be his current spouse only (unless the spouse consents in writing, properly notarized or witnessed by the Local Plan Administrator, to the Participant naming someone other than the spouse as a primary Beneficiary and the consent acknowledges the financial effect of the waiver and further acknowledges the nonspouse beneficiary(ies), class of beneficiaries or contingent beneficiary(ies) and the specific form of payment, if any, chosen by the Participant). Any designation pursuant to this Section 3.04 may be changed or revoked by the Participant at any time and from time to time by similar instrument in writing delivered to the Local Plan Administrator on a form provided by the Plan Administrator. The designation form received and acknowledged most recently by the Local Plan Administrator shall control as of any date. Subject to the provisions of Section 12.01, a Beneficiary with rights under the Plan, which will or may survive such Beneficiary's death, may designate a Beneficiary of those rights in the same manner and subject to the same limitations applicable to a Participant, except that the spousal consent requirement shall not apply. Distribution of any benefits with respect to which a Participant (or a Beneficiary so entitled) fails effectively to designate a Beneficiary or successor Beneficiary shall be made as provided in Section 11.02. -11- If concurrent Beneficiaries are named without specifying the proportion of benefits due to each, distribution shall be made in equal shares to those Beneficiaries. Any distribution other than to the estate of the person entitled to make the designation shall not be subject to the claims of creditors of that person. Section 3.05 Transfer from and to a Tax-Qualified Defined-Benefit Pension ------------ ------------------------------------------------------------ Plan of the Company. ------------------- (a) If a participant in a tax-qualified defined-benefit pension plan to which the Company contributes becomes a Participant eligible to receive a Company Retirement Contribution pursuant to Section 4.01, then such Participant shall not accrue any benefit under such tax- qualified defined-benefit pension plan for service with respect to which he is eligible to receive a Company Retirement Contribution. (b) If a Participant ceases to be eligible to receive a Company Retirement Contribution pursuant to Section 4.01 and participates in any tax qualified defined-benefit pension plan, the provisions of which would grant the Participant credit for service for the period during which he was eligible to receive a Company Retirement Contribution, the Participant may upon retirement elect under the tax-qualified defined- benefit pension plan to (i) receive his vested accrued benefit under the terms of the tax-qualified defined-benefit pension plan and forfeit the Vested Portion of his Company Retirement Account or (ii) receive his vested accrued benefit under the tax-qualified defined- benefit pension plan, reduced by the actuarially equivalent benefit amount of the Vested Portion of the balance in his Company Retirement Account (as determined by an actuary selected by the Plan Administrator), and receive the Vested Portion of the balance in his Company Retirement Account. (c) If a Participant transfers the present value of his accrued benefit under a tax-qualified defined-benefit pension plan maintained by the Company to the Plan pursuant to Section 7.01 and subsequently ceases to be an Eligible Employee and participates in a tax-qualified defined benefit pension plan maintained by the Company, then for purposes of subsection 3.05(b), such Participant's Company Retirement Account shall include the amount transferred pursuant to Section 7.01. Section 3.06 Transfer from Borg-Warner Automotive, Inc. Effective as of January 27, 1993, if an Employee is transferred to the Corporation from Borg- Warner Automotive, Inc. or its subsidiaries, divisions or affiliates, ("BWA") such Employee shall be eligible to participate in the Plan effective as of the first day of the first Payroll Period immediately following the date the Employee first satisfies the eligibility requirements of Section 2.17 or -12- as soon as practicable thereafter. If such Employee has already met the eligibility requirements under Section 2.17, they shall be eligible immediately. Years of Service with BWA shall be counted as Years of Service for purposes of Sections 2.17, 2.40 and 4.01. ARTICLE 4. COMPANY CONTRIBUTIONS --------- --------------------- Section 4.01 Amount of Company Retirement Contribution. For each Payroll Period, subject to the provisions of Sections 6.01, 6.02 and 6.03, the Company shall make a Company Retirement Contribution to the Participant's Company Retirement Account which is established by the Trustee on behalf of each Participant who is an Eligible Employee at any time during such Payroll Period; provided, however, that no Company Retirement Contribution shall be made to the Participant's Company Retirement Account on behalf of a Participant who elected on or before May 16, 1988 to continue participation in the Borg-Warner Corporation Retirement Plan. Effective as of January 27, 1993, all Years of Vested Service the Employee accrued with Borg-Warner Automotive, Inc. or its subsidiaries, divisions and/or affiliates shall be counted for purposes of calculating the Company Retirement Contribution to the Participant's Company Retirement Account. The amount of such Company Retirement Contribution shall be computed on the following basis: (a) The Company shall make a Company Retirement Contribution to the Trustee on behalf of each Participant as follows:
Years of Vested % of Compensation under % of Compensation over Service as of January 1 Social Security Wage Base Social Security Wage Base ----------------------- ------------------------- ------------------------- Less than or equal to 10 4% 8% Greater than 10, but less 5% 10% than or equal to 20 Greater than 20 6% 11.5% -----------------------------------------------------------------------------------
(b) The Company shall make an additional Company Retirement Contributions to the Trustee on behalf of each Participant who (i) participated in a qualified benefit plan of the Borg-Warner Corporation, subsidiaries, divisions and affiliates as of May 31, 1988, and (ii) attained age 45 as of December 31, 1988, as follows: -13-
Attained Age as of December 31, 1988 Additional Company Retirement Contribution -------------------------------------- ------------------------------------------ At least 45 but less than 50 1% of Compensation Greater than or equal to 50 2% of Compensation ----------------------------------------------------------------------------------
Section 4.02 Amount of Company Matching Contribution. For each Payroll Period, subject to the provisions of Sections 6.01, 6.02, 6.03 and 6.04, the Company shall make a Company Matching Contribution to the Participant's Employee Retirement Account which is established by the Trustee on behalf of each Participant who is an Eligible Employee at any time during such Payroll Period, provided such Participant makes a Before-Tax Contribution to his Employee Retirement Account during such Payroll Period. The Company Matching Contribution shall be an amount equal to the Participant's Before-Tax Contribution which he made to his Employee Retirement Account pursuant to Section 5.01 during such Payroll Period. ARTICLE 5. PARTICIPANT CONTRIBUTIONS --------- ------------------------- Section 5.01 Authorization of Before-Tax Contributions to Employee Retirement Account. At the time an Eligible Employee becomes a Participant, he may file an initial written election with the Local Plan Administrator authorizing the Company to make deductions, for each Payroll Period, from his Compensation for deposit with the Trustee in the Participant's Employee Retirement Account in an amount not less than one percent (1%) nor more than three percent (3%) of his Compensation for such Payroll Period, in whole multiples of one percent (1%), which shall be characterized as Before-Tax Contributions. Amounts contributed pursuant to this Section 5.01 shall be eligible for Company Matching Contributions as described in Section 4.02. Section 5.02 Authorization of Before-Tax Contributions to Savings Account. At the time an Eligible Employee becomes a Participant, he may file an initial written election with the Local Plan Administrator authorizing the Company to make deductions, for each Payroll Period, from his Compensation for deposit with the Trustee in the Participant's Savings Account in an amount not less than one percent (1%) nor more than ten percent (10%) of his Compensation for such Payroll Period, in whole multiples of one percent (1%), which shall be characterized as Before-Tax Contributions. Amounts contributed pursuant to this Section 5.02 shall not be eligible for Company Matching Contributions as described in Section 4.02. Section 5.03 Yearly Limitations on Before-Tax Contributions. No Participant shall be permitted to have Before-Tax Contributions made under the Plan during any calendar year in excess of $9,240 (reduced by the Participant's elective deferrals for such year under any other salary reduction arrangement under Section 401(k) or 403(b) of the Code), adjusted by -14- the cost-of-living factor prescribed by the Secretary of the Treasury pursuant to Section 402(g)(5) of the Code for years beginning after 1994. Any Before-Tax Contributions made by the Company on behalf of a Participant in excess of the $9,240 limit, as adjusted for any calendar year, shall be returned to the Participant (with earnings attributable thereto) no later than the April 15 following the close of the calendar year to which such excess relates. Section 5.04 Authorization of After-Tax Contributions to Savings Account. At the time an Eligible Employee becomes a Participant, he may file an initial written election with the Local Plan Administrator authorizing the Company to make deductions, for each Payroll Period, from his Compensation for deposit with the Trustee in the Participant's Savings Account in an amount not less than one percent (1%) nor more than ten percent (10%) of his Compensation for such Payroll Period, in whole multiples of one percent (1%), which shall be characterized as After-Tax Contributions, provided, however, that the amount the Eligible Employee may contribute shall be reduced by the percentage amount contributed by the Eligible Employee pursuant to Section 5.02. Section 5.05 Deduction of Before-Tax Contributions and After-Tax Contributions. The Company shall deduct the Participant's Before-Tax Contributions and After-Tax Contributions from his Compensation and shall transmit the sums so deducted to the Trustee for investment as provided in Article 9. Such transmittal shall be made as soon as practicable after the Administrative Services Provider confirms the information provided by the Company. Section 5.06 Change in Rate of Before-Tax Contributions and After-Tax Contributions. Within the limitations provided in Sections 5.01, 5.02 and 5.04, a Participant may change the rate of his Before-Tax Contributions and/or After- Tax Contributions as of the first day of the Payroll Period next following the completion of the processing of the request. Section 5.07 Suspension of Before-Tax Contributions and After-Tax Contributions. A Participant may elect to suspend his Before-Tax Contributions and/or After-Tax Contributions as of the first day of the Payroll Period next following the completion of the processing of the request. Section 5.08 Resumption of Before-Tax Contributions and After-Tax Contributions. A Participant may elect to resume his Before-Tax Contributions and/or After-Tax Contributions as of the first day of the Payroll Period next following the completion of the processing of the request. Section 5.09 Limitation on Before-Tax Contributions and After-Tax Contributions to Savings Account. Notwithstanding the foregoing, the aggregate of a Participant's Before-Tax Contributions to his Savings Account pursuant to Section 5.02 and his After-Tax Contributions pursuant to Section 5.04 shall not exceed ten percent (10%) of his Compensation. -15- Section 5.10 Limitation on Amount of Before-Tax Contributions. The Employee Benefits Committee shall decrease the Before-Tax Contributions made by certain Participants and shall return the Before-Tax Contributions made by certain Participants (and income allocable thereto) to the extent necessary to meet either of the following tests for any Plan Year: (a) The Actual Deferral Percentage of Eligible Employees who are Highly Compensated Employees is not more than 1.25 times the Actual Deferral Percentage of all other Eligible Employees; or (b) The excess of the Actual Deferral Percentage of Eligible Employees who are Highly Compensated Employees over the Actual Deferral Percentage of all other Eligible Employees is not more than two percentage points and the Actual Deferral Percentage of Eligible Employees who are Highly Compensated Employees is not more than two times the Actual Deferral Percentage of all other Eligible Employees. If neither test (a) or (b) is satisfied for the Plan Year, the Actual Deferral Percentage of the Highly Compensated Employee(s) with the highest Actual Deferral Percentage must be reduced to the next highest Actual Deferral Percentage of any Highly Compensated Employee(s) or, if it would involve less of a reduction, to the highest Actual Deferral Percentage which allows the Plan to satisfy test (a) or (b). This reduction must be repeated as many times (for Highly Compensated Employees with successively lower Actual Deferral Percentages) as necessary to satisfy test (a) or (b). Once the permitted Actual Deferral Percentages of Highly Compensated Employees are determined under the preceding paragraph, the Employee Benefits Committee shall stop or decrease future Before-Tax Contributions by Highly Compensated Employees for the rest of the Plan Year, or it may, instead of or in addition thereto, take the following steps with respect to Before-Tax Contributions or Company Matching Contributions made for a Highly Compensated Employee: (x) First, Before-Tax Contributions to the Participant's Savings Account and earnings on those contributions shall be returned to him; (y) Second, Before-Tax Contributions to the Participant's Employee Retirement Account and earnings on those contributions shall be returned to him; and (z) Third, Company Matching Contributions to the Participant's Employee Retirement Account shall be forfeited. -16- The earnings to be returned under (x) or (y) shall be calculated on a uniform basis under Reg. (S)1.401(k)-1(f)(4). All returns of contributions and earnings (including gap earnings) under (x) or (y) shall be made within 2-1/2 months after the end of the Plan Year. ARTICLE 6. LIMITATIONS ON CONTRIBUTIONS TO THE PLAN --------- ---------------------------------------- Section 6.01 Limitation on Amount of Company Retirement Contributions and Company Matching Contributions. Company Retirement Contributions and Company Matching Contributions made by any party to the Plan which, along with the Company, is a member of an affiliated group within the meaning of Code Section 1504 (for purposes of this Section 6.01, a "Member") shall be made only on behalf of Participants who are Eligible Employees of the contributing Member, and Company Retirement Contributions and Company Matching Contributions shall be made only from current or accumulated earnings or profits of such Member. If any Member is prevented from making a contribution which it otherwise would have made by reason of having no current or accumulated earnings or profits, or because such earnings or profits are less than the contribution which it otherwise would have made, then so much of the contribution which such Member was so prevented from making may be made for the benefit of the Participants who are Eligible Employees of such Member by any of the other Members to the extent of each such other Member's current or accumulated earnings or profits. If the Members do not file a consolidated federal income tax return, such contribution by each such other Member shall be limited to that portion of its total current and accumulated earnings or profits remaining after adjustment for its contributions on behalf of Participants who are its own Eligible Employees which the total prevented contribution bears to the total current and accumulated earnings or profits of all such other Members remaining after adjustment for all contributions on behalf of Participants who are their own Eligible Employees. The Corporation may waive the earnings and profits limitation under this Section 6.01 for any Plan Year. The amount of contributions made by any Member for a Plan Year shall not exceed the amount deemed to be deductible in computing the taxable income of such Member (taking into account all contributions under all of such Member's tax-qualified plans and all privileges and limitations of carryovers and carryforwards and established by law) for the purpose of computing taxes on or measured by income under the provisions of the Code and/or any other laws in effect from time to time. A contribution which was made by a Member upon a mistake of fact, or conditioned upon initial qualification of the Plan or upon the deductibility of the contribution under Section 404 of the Code (all contributions to this Plan shall be made conditioned on the deductibility of such contributions) shall, upon a contributing Member's request, be returned -17- to such Member within one year after the payment of the mistaken contribution, the denial of qualification or the disallowance of the deduction (to the extent disallowed), which is applicable. Section 6.02 Maximum Annual Additions to RSP Account. Notwithstanding any other provision of the Plan, the "total additions" to a Participant's RSP Account for any Limitation Year shall not exceed an amount equal to the lesser of: (a) $30,000 adjusted for each Limitation Year to take into account any cost-of-living increase provided for that Limitation Year under Section 415(d) of the Code; or (b) Twenty-five percent (25%) of the Compensation paid to the Participant by the Company in the Limitation Year. For purposes of this Section 6.02 and Section 6.03, the term "total additions" shall mean, with respect to each Participant for each Limitation Year, the aggregate of the Company Retirement Contributions, Company Matching Contributions, Before-Tax Contributions and After-Tax Contributions allocated to his RSP Account. If any Participant's total additions exceed the applicable maximum limitation set forth above, contributions shall be returned to the Participant or the contributing Company to the extent necessary and in the following priority: (v) First, After-Tax Contributions to the Participant's Savings Account and earnings on those contributions shall be returned to him; (w) Second, Before-Tax Contributions to the Participant's Savings Account shall be placed in a suspense account and reallocated to the Participant's Savings Account in the following year and any earnings on these Before-Tax Contributions shall be forfeited; (x) Third, Before-Tax Contributions to the Participant's Employee Retirement Account shall be placed in a suspense account and reallocated to the Participant's Employee Retirement Account in the following year and any earnings on these Before-Tax Contributions shall be forfeited; (y) Fourth, Company Matching Contributions to the Participant's Employee Retirement Account shall be forfeited; and (z) Fifth, Company Retirement Contributions to the Participant's Company Retirement Account shall be forfeited. -18- Section 6.03 Participation in More Than One Plan of Company. In the event that the total additions which otherwise would be credited to a Participant's account under all tax-qualified defined-contribution plans of the Company for any Limitation Year exceed the limitations set forth in Section 6.02, the excess total additions shall be returned to the Participant or the contributing Company to the extent necessary and in the priority established under subsections 6.02(v), (w), (x), (y) and (z). In the event a Participant is also a participant in one or more tax- qualified defined-benefit pension plans of the Company, the sum of such Participant's defined-benefit plan fraction and defined-contribution plan fraction, as determined pursuant to Section 415(e) of the Code for any Limitation Year, shall not exceed 1.0. If the sum of a Participant's defined- contribution plan and defined-benefit plan fractions otherwise would exceed 1.0 for any Limitation Year, then the total additions which otherwise would be credited to his accounts under all applicable defined-contribution plans shall be adjusted pursuant to Section 6.02 and this Section 6.03 to the extent necessary so that the sum of such fractions does not exceed 1.0. If, after all such adjustments, the sum of a Participant's defined-contribution plan and defined-benefit plan fractions would still exceed 1.0, then the benefit which otherwise would be accrued with respect to such Participant under any applicable tax-qualified defined-benefit pension plan shall be considered not to have been accrued and will be limited to the extent necessary so that the sum does not exceed 1.0. Section 6.04 Limitation on Amount of Company Matching Contributions and After-Tax Contributions. For each Plan Year, the Employee Benefits Committee shall determine whether Company Matching Contributions and After-Tax Contributions for that Plan Year meet either of the following tests: (a) The Actual Contribution Percentage of Eligible Employees who are Highly Compensated Employees is not more than 1.25 times the Actual Contribution Percentage of all other Eligible Employees; or (b) The excess of the Actual Contribution Percentage of Eligible Employees who are Highly Compensated Employees over the Actual Contribution Percentage of all other Eligible Employees is not more than two percentage points and the Actual Contribution Percentage of Eligible Employees who are Highly Compensated Employees is not more than two times the Actual Contribution Percentage of all other Eligible Employees. If neither test (a) or (b) is satisfied for the Plan Year, the Actual Contribution Percentage of the Highly Compensated Employee(s) with the highest Actual Contribution Percentage must be reduced to the next highest Actual Contribution Percentage of any Highly Compensated Employee(s) or, if it would involve less of a reduction, to the highest Actual Contribution Percentage which allows the Plan to satisfy test (a) or (b). This reduction must -19- be repeated as many times (for Highly Compensated Employees with successively lower Actual Contribution Percentages) as necessary to satisfy test (a) or (b). Once the permitted Actual Contribution Percentages of Highly Compensated Employees are determined under the preceding paragraph, the Employee Benefits Committee shall stop or decrease future After-Tax Contributions by Highly Compensated Employees for the rest of the Plan Year, or it may, instead of or in addition thereto, return to the Highly Compensated Employee his After-Tax Contributions to his Savings Account and earnings on those contributions, and forfeit his Company Matching Contributions to the extent necessary to satisfy either test (a) or (b). The earnings to be returned shall be calculated on a uniform basis under Reg. (S)1.401(m)-1(e)(3). All returns of contributions and earnings (including gap earnings) shall be made within 2-1/2 months after the end of the Plan Year. Section 6.05 Limit on Multiple Use of Alternate Limitations. If, for any Plan Year, the Employee Benefits Committee relies on Sections 5.10(b) and 6.04(b) to pass the relevant limitations in those Sections, the "Relevant Percentage" must be calculated with respect to Highly Compensated Employees. For any Plan Year, the Relevant Percentage is the greater of (a) or (b), calculated as follows: (a) 1.25 times the greater of the Actual Contribution Percentage or Actual Deferral Percentage for all Eligible Employees who are not Highly Compensated Employees, plus the lesser of the Actual Contribution Percentage or Actual Deferral Percentage for Eligible Employees either increased by 2% or doubled, whichever is less; (b) 1.25 times the lesser of the Actual Contribution Percentage or Actual Deferral Percentage for all Eligible Employees who are not Highly Compensated Employees, plus the greater of the Actual Contribution Percentage or Actual Deferral Percentage for Eligible Employees who are not Highly Compensated Employees either increased by 2% or doubled, whichever is less. If the sum of the Actual Contribution Percentage and Actual Deferral Percentage for all Eligible Employees who are Highly Compensated Employees exceeds the Relevant Percentage, the Employee Benefits Committee may make reductions in After-Tax Contributions as described in Section 6.04, Before-Tax Contributions as described in Section 5.10 or Company Matching Contributions as described in Section 6.04 until the sum of the Actual Contribution Percentage and Actual Deferral Percentage for Eligible Employees who are Highly Compensated Employees no longer exceeds the Relevant Percentage. The -20- reductions described in the previous sentence may be made either for all Highly Compensated Employees or only for all Highly Compensated Employees who make both Before-Tax Contributions and After-Tax Contributions. ARTICLE 7. TRANSFER OF AMOUNTS TO/FROM OTHER QUALIFIED PLANS --------- ------------------------------------------------- Section 7.01 Receipt of Portable Accounts. The RSP Committee may approve the transfer to the Plan of all or a portion of the assets and liabilities of any other plan of deferred compensation qualified under Section 401(a) of the Code; provided, however, that the RSP Committee shall not accept a transfer of any amount which would cause the Plan to be deemed a "transferee plan" within the meaning of Section 401(a)(11)(B)(iii) of the Code. Transfers to the Plan pursuant to this Section 7.01 shall be in the form of a direct trustee-to- Trustee transfer. Notwithstanding the foregoing, the RSP Committee shall not accept a transfer of any after-tax contributions. The amounts transferred pursuant to this Section 7.01 from any tax-qualified defined-benefit pension plan maintained by the Company shall be credited to the Participant's Company Retirement Account. In all other cases, any amounts transferred pursuant to this Section 7.01 shall be credited to the Participant's Savings Account. The interest of each Participant in that portion of his Company Retirement Account attributable to amounts transferred pursuant to this Section 7.01, if any, shall be fully vested and nonforfeitable at all times. In no event shall the Trustee receive accounts if such receipt or the subsequent administration of such accounts might subject the Trust assets to tax liability deriving from an Employee's terminated participation in any other tax-qualified plan. ARTICLE 8. RSP ACCOUNTS --------- ------------ Section 8.01 Establishment of RSP Accounts and Statement of Account Balances. The Trustee shall establish and maintain for each Participant an RSP Account, which shall consist of a Company Retirement Account, an Employee Retirement Account and a Savings Account, if applicable. Each RSP Account shall be invested as provided in Article 9. The Plan Administrator shall provide each Participant with a statement of the balance in his Company Retirement Account, Employee Retirement Account and Savings Account not less frequently than once every Plan Year. Section 8.02 Nonforfeitability of Certain Accounts. The interest of each Participant in the balance in his Company Retirement Account attributable to amounts transferred pursuant to Section 7.01, if any, the balance in his Employee Retirement Account attributable to Before-Tax Contributions and the entire balance in his Savings Account shall at all times be fully vested and nonforfeitable. -21- ARTICLE 9. INVESTMENT FUNDS --------- ---------------- Section 9.01 Establishment of Funds. The Employee Benefits Committee shall cause the Trustee to establish the following Investment Funds effective as of April 1, 1994 and such Funds as the Employee Benefits Committee shall determine in its discretion from time to time. The Employee Benefit's Committee may in its discretion discontinue the availability of any of the Investment Funds established under the Plan from time to time. (a) Investment Contracts Fund ------------------------- The Investment Contracts Fund (the "IC Fund") seeks to preserve capital and provide income through investments in investment contracts with either highly rated insurance companies, major banks or a fund or funds that invest in investment contracts of insurance companies or major banks. The IC Fund also invests in short-term investments which provide liquidity for meeting regular benefit payments, transfers and other payments. The investment contracts provide that the insurance company or bank will pay the IC Fund the amount invested plus interest for a specified period of time. (b) Putnam U.S. Government Income Trust ----------------------------------- The Putnam U.S. Government Income Trust seeks a high level of current income consistent with capital preservation by investing exclusively in securities backed by the full faith and credit of the United States government and in repurchase agreements and forward commitments with respect to such securities. (c) The George Putnam Fund of Boston -------------------------------- The George Putnam Fund of Boston seeks to provide a balanced investment composed of a well-diversified portfolio of stocks and bonds. It is designed to produce both capital growth and current income. (d) The Putnam S&P 500 Index Fund ----------------------------- The Putnam S&P 500 Index Fund is a collective investment trust that will invest primarily in publicly traded common stocks either directly or through collective investment trusts having a similar investment objective. In addition, for liquidity and hedging purposes, a small portion of the fund's assets will be invested in high-quality money market instruments and financial futures contracts. This fund seeks to mirror the performance of the Standard & Poor's 500 Index. -22- (e) Putnam Voyager Fund ------------------- The Putnam Voyager Fund seeks capital appreciation, primarily from a portfolio of common stocks. The fund generally invests a significant portion of its assets in the securities of smaller and newer issuers. The fund may use "leverage" -- that is, it may borrow money to purchase additional portfolio securities. The fund may also trade securities for short-term profits. Section 9.02 Investment in Funds. Each of the Investment Funds shall be invested without distinction between principal and income within the investment directive for that Fund. Pending payment of costs, expenses or anticipated benefits, or acquisition of investments, the Trustee may hold any portion of the Investment Funds in obligations issued or fully guaranteed as to payment of principal or interest by the Federal government or governmental agencies, short- term demand notes, certificates of deposit, commercial paper, collective trust funds that invest in short-term investments or any other interest-paying short- term investment product or in cash, and may deposit any uninvested funds with any bank selected by the Trustee. Section 9.03 Investment of RSP Accounts. Each Participant shall have the right to file an initial written election with the Local Plan Administrator directing that Company Retirement Contributions, Company Matching Contributions, Before-Tax Contributions and After-Tax Contributions to his Company Retirement Account, Employee Retirement Account and Savings Account be invested in specified multiples of five percent (5%) up to one hundred percent (100%) thereof, in any one or more of the Investment Funds. A Participant's initial investment election shall be made by submitting the required form to the Local Plan Administrator. In the absence of an effective election, one hundred percent (100%) of the Company Retirement Contributions in a Participant's Company Retirement Account shall be invested in The George Putnam Fund of Boston. Section 9.04 Transfer of RSP Accounts From the Former Investment Funds (Stock Fund, Bond Fund, Spectrum Fund and Investment Contracts Fund) to the Investment Funds Pursuant to Section 9.01 of the Plan. Each Participant who had a balance in their Company Retirement Account, Employee Retirement Account and/or Savings Account as of March 31, 1994 shall have the right to file a written election with the Local Plan Administrator directing the value of his Company Retirement Account, Employee Retirement Account and Savings Account be invested in any one or more of the Investment Funds established under Section 9.01. Such election shall be effective and such assets shall be transferred from the former investment funds (the Stock Fund, Bond Fund, Spectrum Fund and Investment Contracts Fund) to the Investment Funds under Section 9.01 following the final accounting of the records by the Administrative Services Provider. If the Participant does not make a written election, the assets in his Company Retirement Account, Employee Retirement Account and Savings Account that were invested -23- in the Investment Contracts Fund prior to the date of transfer shall be transferred to the IC Fund, the amount in the Bond Fund shall be invested in the Putnam U.S. Government Income Trust, the amount in the Spectrum Fund shall be invested in The George Putnam Fund of Boston, and the amount in the Stock Fund shall be invested 50% in the Putnam S&P 500 Index Fund and 50% in the Putnam Voyager Fund. Section 9.05 Change in Participant's Investment Election of Future Contributions. Each Participant may elect to change the investment of future Company Retirement Contributions, Employee Retirement Contributions, Before-Tax Contributions, and After-Tax Contributions to his Company Retirement Account, Employee Retirement Account and Savings Account in any multiple of five percent (5%) of such contributions up to one hundred percent (100%) thereof by contacting the Administrative Services Provider. After the Participant's request to change has been processed, future Company Retirement Contributions, Employee Retirement Contributions, Before-Tax Contributions, and After-Tax Contributions made to the Participant's Company Retirement Account, Employee Retirement Account and Savings Account will be invested, according to the Participant's investment election. Section 9.06 Change in Participant's Investment Election on the Balance of the Participant's Account. Each Participant may elect to change the investment (transfer from one Investment Fund to another) of the balance of the Company Retirement Contributions, Company Matching Contributions, Before-Tax Contributions and After-Tax Contributions made to his Company Retirement Account, Employee Retirement Account and Savings Account in any multiple of five percent (5%) of such contributions up to one hundred percent (100%) thereof by contacting the Administrative Services Provider. A Participant can make transfers among the Investment Funds (move a percentage of money from one Investment Fund to another) as of the close of business on any business day, if the request is received by the Administrative Services Provider by 4:00 p.m. Eastern time. If any request for a transfer is received after 4:00 p.m. Eastern time, it will be treated as being received the next business day. Section 9.07 Limitation of Liability of Fiduciaries. The Fiduciaries shall not be responsible for any loss, depreciation or diminution in value of Trust assets invested in accordance with the direction of a Participant. The Plan is intended to constitute a plan described in Section 404(c) of ERISA, and Department of Labor Regulation 2550.404(c)-1. To the extent of such compliance, the Fiduciaries of the Plan may be relieved of liability with respect to the Participant-directed investments. The RSP Committee is the Fiduciary responsible for overseeing investments under the Plan, but has delegated the daily administrative responsibility for implementing Participant investment instructions to the -24- Administrative Services Provider. Also, the Administrative Services Provider is responsible for providing the following detailed information about the Investment Funds when requested by a Participant: - copies of any prospectuses and/or brochures for any Investment Fund; - copies of any other financial statements and reports provided to the Pan about an Investment Fund; - a description of the annual operating expenses of any Investment Fund and the aggregate annual expenses expressed as a percentage of average net assets; - information about the past and current value of shares or units available in the Investment Funds; and - the current share or unit value of a Participant's RSP Account. The RSP Committee has established procedures to protect the confidentiality of information relating to Participant investments in all the Investment Funds. Information about any Participant exercise of voting, tender and similar rights is also subject to these confidentiality procedures. Investment information and voting instructions from Participants shall not be divulged to anyone, including the Company or any director, officer, employee or agent of the Company. The intent is to insure that the Company (and its directors, officers, employees, agents) cannot determine the instructions given by any Participant. The RSP Committee is the Fiduciary responsible for insuring that these confidentiality procedures are followed. ARTICLE 10. VALUATIONS AND ADJUSTMENTS OF ACCOUNTS ---------- -------------------------------------- Section 10.01 Method of Valuation of RSP Accounts. Notwithstanding any other provision of the Plan, to the extent that Participants' RSP Accounts are invested in mutual funds or other assets for which daily pricing is available, all amounts contributed to the Trust will be invested at the time of their actual receipt by the Administrative Services Provider and the balance of each Participant's RSP Account shall reflect the results of such daily pricing from the time of the actual receipt until the time of distribution. References elsewhere in the Plan to the investment of contributions "as of" a date other than that described in this Section 10.01 shall apply only to the extent, if any, that assets of the Trust are not invested in an asset for which daily pricing is available. Section 10.02 Forfeitures. As of the last Valuation Date of each month, Forfeitures that arose during such month shall be applied to reduce the total amount the Company -25- otherwise is required to contribute pursuant to Sections 4.01 and 4.02 as of the Valuation Date or subsequent Valuation Date. Any amount applied to reduce a Company contribution for any Valuation Date in accordance with this Section 10.02 shall be considered a part of the Company's contribution for such Payroll Period. Section 10.03 Date of Adjustments. Every adjustment made pursuant to Section 10.01 and 10.02 shall be considered as having been made on the applicable Valuation Date. The Employee Benefits Committee's determination of the net value of the assets of the Trust (which shall be based upon accountings rendered by the Trustee) and charges or credits to the RSP Accounts shall be conclusive and binding on all parties having or claiming to have any interest hereunder. ARTICLE 11. BENEFITS ---------- -------- Section 11.01 Upon Termination After Full Vesting Except by Reason of Death. Each Participant whose employment with the Company is terminated on or after (a) his 65th birthday, (b) the date on which he completes the number of Years of Vested Service necessary for full vesting or (c) the date on which he suffers a Permanent Disability, shall be entitled to receive a benefit, to be distributed as provided in Article 12, equal to the balance in his RSP Account as of the Valuation Date coinciding with the date on which distribution of benefits commences. Section 11.02 Upon Termination by Reason of Death. If a Participant dies, his Beneficiary shall be entitled to receive a benefit, to be distributed as provided in Article 12, equal to the balance in the Participant's RSP Account as of the Valuation Date coinciding with the date on which distribution of benefits commences. In the event there is no designated Beneficiary living at the death of the Participant, distribution shall be made as follows: (a) If the Participant is survived by his spouse, the surviving spouse shall be treated as the sole designated Beneficiary. (b) If the Participant is not survived by his spouse and a will of the Participant is admitted to probate, then as the Participant shall have specifically directed in such will, and if he shall have made no specific direction, then as his will shall direct distribution of his residuary estate. (c) If the Participant is not survived by his spouse and the Plan Administrator has no notice that a will of the Participant has been admitted to probate within 180 days after his death, then to the heirs-at-law of the Participant, said heirs-at-law and the proportions they shall respectively be entitled to receive to be -26- determined according to the laws of descent and distribution of the state in which the Participant resided immediately before his death. Section 11.03 Upon Termination Prior to Full Vesting. Each Participant whose employment with the Company terminates by reason of resignation or dismissal prior to completing the number of Years of Vested Service necessary for full vesting shall be entitled to receive a benefit, to be distributed as provided in Article 12, equal to the sum of the balance in his Company Retirement Account attributable to amounts transferred pursuant to Section 7.01, if any, the balance in his Employee Retirement Account attributable to Before- Tax Contributions pursuant to Section 5.01 and the entire balance in his Savings Account as of the Valuation Date, coincident with the date on which distribution of benefits commences. The Unvested Portion of such Participant's Company Retirement Account and Employee Retirement Account shall be forfeited pursuant to Section 10.02. Section 11.04 Amendment to Vesting Schedule. In the event of an amendment to the vesting schedule in Section 2.49, each Participant with at least three Years of Vested Service may elect to continue to have his Vested Portion computed without regard to such amendment. Such a Participant shall make the foregoing election no later than the last to occur of the following: (a) The date which is 60 days after the date on which the amendment is adopted; (b) The date which is 60 days after the date on which the amendment becomes effective; or (c) The date which is 60 days after the date on which the Participant receives written notice of the amendment. Section 11.05 Period of Severance. A Participant's rights and benefits under the Plan generally shall be determined in accordance with his Years of Vested Service and the balance in his RSP Account at the time of termination of service, subject to the following: (a) If a Participant, who had a vested interest in that portion of the balance in his Company Retirement Account not attributable to amounts transferred pursuant to Section 7.01, and that portion of the balance in his Employee Retirement Account attributable to Company Matching Contributions when his employment terminated, is reemployed by the Company, his Years of Vested Service prior to his termination of employment shall be reinstated. (b) If a Participant, who had no vested interest in that portion of the balance in his Company Retirement Account not attributable to amounts transferred pursuant to Section 7.01, and that portion of the balance in his Employee Retirement -27- Account attributable to Company Matching Contributions when his employment terminated, is reemployed by the Company before incurring five consecutive One-Year Periods of Severance, the amounts forfeited pursuant to Section 11.03 shall be restored to his Company Retirement Account and Employee Retirement Account as of his Reemployment Commencement Date and his Years of Vested Service prior to that period of severance shall be reinstated. (c) If a Participant had no vested interest in his RSP Account, then the Years of Vested Service prior to his separation of service will be disregarded, but only if the number of consecutive one year breaks in service equals or exceeds the greater of his Years of Vested Service prior to his separation of service, or five years. Section 11.06 Suspension of Benefits Upon Reemployment of Participant. Subject to Sections 12.04(b) or 12.06, a Participant who is receiving installment payments from the Plan is reemployed by the Company, his installment payments shall be suspended as of his reemployment, subject to the following rules: (a) the Participant must receive a notice (by personal delivery of first- class mail) during the first month for which his installments are suspended, with the notice to contain the information required by Department of Labor Reg. (S)2530.230-3(b)(4); (b) no installment may be withheld for any month in which the Participant is credited with less than 40 Hours of Service or receives pay for fewer than 8 days; and (c) with his first installment after he is again eligible to receive benefits under this Article 11, the Participant will receive all his suspended installments. ARTICLE 12. DISTRIBUTION OF BENEFITS ---------- ------------------------ Section 12.01 Request for Distribution. A Participant entitled to a benefit under the Plan may request that his benefit be distributed to him under one or more of the alternative methods of distribution described in Section 12.02. In the event a Participant dies prior to the commencement of benefits under the Plan, or after the commencement of benefits but before distribution of his entire interest under the Plan, the Participant's remaining interest shall be distributed in such manner as the Participant has elected in writing prior to his death, or in the absence of such an election, under one or more of the alternative methods of distribution described in Section 12.02, as the Beneficiary shall direct. Notwithstanding the foregoing, the -28- benefit payable to a Beneficiary of a Beneficiary pursuant to Section 3.04 shall be distributed in a lump-sum payment. Section 12.02 Methods of Distribution. Subject to the provisions of Section 12.01, upon the termination of employment of a Participant for any reason, distribution shall be made by one of the following methods, or combination thereof, as the Participant or Beneficiary shall elect on a properly completed final distribution form submitted to the Plan Administrator or to such other person designated by the Plan Administrator, except that if the Vested Portion in the Participant's RSP Account does not exceed $3,500, the Plan Administrator shall require that distribution be made in one lump-sum payment without the consent of the Participant or Beneficiary: (a) Lump-Sum Distribution. Distribution may be made by lump-sum payment; (b) Installment Distribution. Distribution may be made in approximately equal installments not less frequently than annually for any definite period which does not exceed (i) the life or life expectancy of the Participant or (ii) the joint lives or joint life expectancy of the Participant and his Beneficiary, whether or not the Beneficiary is his spouse. The present value of benefits payable to the Participant during his lifetime shall be more than fifty percent (50%) of the present value of the total benefits payable to the Participant and his Beneficiary, determined as of the termination of employment. Subject to the provisions of Section 12.06, when a Participant's RSP Account is distributable in periodic installments, it shall not thereafter be eligible for any Company contributions pursuant to Sections 4.01 and 4.02. In the event distribution of a benefit is made, in whole or in part, in installments pursuant to this subsection 12.02(b), the distributee may elect in writing, on a form provided by the Plan Administrator or by such other person designated by the Plan Administrator, to accelerate the payment of all or any portion of any unpaid installments; provided, however, that the distributee may not make more than two elections to accelerate the payment of any unpaid installments in any calendar year. The life expectancy used in this subsection 12.02(b) shall be determined as of the Valuation Date immediately preceding the later of the Participant's (i) retirement, or receipt of benefit, or (ii) death, but in no event later than the required minimum distribution date pursuant to Section 401(a)(9) of the Code. (c) Death Before Commencement of Benefits. If a Participant dies before distribution pursuant to this Section 12.02 has begun, the entire interest of the Participant's RSP Account shall be distributed within five years after his death, with the following exceptions: -29- (1) If the Participant's Beneficiary is not his surviving spouse, the entire interest of the Participant may be distributed to the Beneficiary over a period not exceeding the Beneficiary's life or life expectancy, provided such payments begin within one year after the Participant's death. (2) If the Beneficiary is the surviving spouse, distribution to the surviving spouse shall begin no later than the later of the date on which the Participant would have attained age 70-1/2 or the first anniversary of the Participant's death, and shall be made over a period not exceeding the life or life expectancy of the surviving spouse. (3) If the surviving spouse dies before payments begin, the surviving spouse shall be treated for the purpose of the rules in this subsection 12.02(c) as the Participant. If the surviving spouse dies after payments begin but before the entire interest is distributed, the entire remaining interest shall be distributed to the surviving spouse's Beneficiary over a period not exceeding the surviving spouse's Beneficiary's life or life expectancy, provided such payments begin within one year after the surviving spouse's death. (4) Notwithstanding the foregoing provisions of this subsection 12.02(c), the Beneficiary may elect in writing, on a form provided by the Plan Administrator or such other person designated by the Plan Administrator, to accelerate the distribution of all or any portion of the benefits payable to him; provided, however, that the Beneficiary may not make more than two elections to accelerate the distribution of benefits in any calendar year. (d) Death After Commencement of Installment Payments. If a Participant dies after distribution pursuant to subsection 12.02(b) has begun but before his entire interest is distributed and such distribution is to be for a period certain not exceeding the life or life expectancy of the Participant or the joint lives or joint life expectancy of the Participant and his Beneficiary, the remaining portion shall continue to be distributed according to that schedule. Notwithstanding the preceding sentence, the Beneficiary may elect in writing, on a form provided by the Plan Administrator or such other person designated by the Plan Administrator, to accelerate the payment of all or any portion of any unpaid installments; provided, however, that the Beneficiary may not make more than two elections to accelerate the payment of any unpaid installments in any calendar year. -30- (e) Distribution to Trust for Primary Benefit of a Spouse. In addition to the requirements under subsections 12.02(c) and (d), if the Participant's Beneficiary is a trust which qualifies for the Federal estate tax marital deduction because it is held for the primary benefit of the Participant's spouse, and if the trustee of that trust elects to receive distributions from the Plan in installments, then installment payments for each calendar year commencing upon the death of the Participant shall be equal to or exceed the greater of (i) the minimum amount necessary to satisfy the requirements under Section 401(a)(9) of the Code or (ii) the income earned by the Participant's RSP Account. If a Participant elects to begin distribution of his RSP Account prior to his Normal Retirement Date pursuant to this Section 12.02, such election will be deemed to be consent for purposes of Section 411(a)(11) of the Code. Section 12.03 Treatment of RSP Account in Installment Distribution. In the event distribution of a benefit is to be made in periodic installments pursuant to subsection 12.02(b), (c), (d) or (e), each installment payment shall be charged to each Investment Fund in the same ratio as the balance in the Participant's RSP Account invested in that Fund bears to the total balance in the Participant's RSP Account. The Participant (or Beneficiary, if applicable) shall continue to have the right to change the investment of the balance in his Company Retirement Account, Employee Retirement Account and Savings Account among the Investment Funds pursuant to Section 9.06. The Participant's RSP Account shall share in all adjustments pursuant to Article 10 until the entire balance in the Participant's RSP Account is distributed. Section 12.04 Commencement of Distribution. Subject to the provisions of Section 12.02: (a) After a Participant's termination of employment, distributions shall commence as of any Valuation Date coincident with or next following the date on which the request is received by the Plan Administrator or such other person designated by the Plan Administrator, or as soon as practicable thereafter. (b) A Participant who has attained age 65 and continues to be employed by the Company may request that all or any part of the Vested Portion in his RSP Account be distributed to him in a lump-sum payment as of any Valuation Date coincident with or next following the date on which such request is received by the Plan Administrator or as soon as practicable thereafter. Such Participant shall continue to be an Eligible Employee for all purposes of the Plan. Section 12.05 Deferral of Distribution. If the Participant's termination of employment occurs prior to the date on which he attains age 70-1/2 and the Vested Portion in his RSP Account is in excess of $3,500, the Participant, by written notice to the Plan Administrator, -31- may defer commencement of distributions, but in no event may the Participant defer distribution beyond the April 1 of the calendar year following the calendar year in which he attains age 70-1/2. If a Participant defers distribution pursuant to this Section 12.05, distributions to him shall commence as of the Valuation Date following the date to which distribution is deferred or as soon as practicable thereafter; provided, however, that the Participant shall request such distribution from the Plan Administrator or from such other person designated by the Plan Administrator. Any Participant who has deferred receipt of benefits under the Plan may elect in writing, on a form provided by the Plan Administrator, or from such other person designated by the Plan Administrator to accelerate the distribution of all or any portion of the vested balance in his RSP Account; provided, however, that the Participant may not make more than two elections to accelerate the distribution of benefits in any calendar year. Section 12.06 Notice. If a Participant's benefit does not exceed $3,500 and if a distribution of such Participant's benefit is one to which Sections 401(a)(11) and 417 of the Internal Revenue Code do not apply, such distribution may commence less than 30 days after the notice required under Section 1.411(a)- 11(c) of the Income Tax Regulations is given provided that: (a) the Plan Administrator clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (b) the Participant, after receiving the notice, affirmatively elects a distribution. Section 12.07 Distribution Upon Attainment of Age 70-1/2. Distributions to any Participant whose employment with the Company continues after he has attained age 70-1/2 shall commence no later than the April 1 of the calendar year following the calendar year in which he attains age 70-1/2 (or such later date as may be permitted by law). Any distributions which are made pursuant to this Section 12.07 shall satisfy the minimum distribution requirements of Section 401(a)(9) of the Code. Such Participant shall continue to be an Eligible Employee for all purposes of the Plan. Section 12.08 Distribution to Alternate Payee Pursuant to Qualified Domestic Relations Order. If the Plan Administrator receives a domestic relations order and determines that such order is a qualified domestic relations order (as described in Section 15.12), benefits payable to the alternate payee thereunder shall be distributed in [any form permitted by the Plan (as if the alternate payee were a Participant)] as soon as practicable following the first Valuation Date after the Plan Administrator receives the alternate payee's request for such distribution, which request shall be in any form requested by the Plan Administrator. For -32- purposes of this Section 12.08, the terms "alternate payee" and "qualified domestic relations order" shall have the meanings set forth in Section 414(p) of the Code. Section 12.09 Direct Rollovers On or After January 1, 1993. A Distributee on or after January 1, 1993 may elect, at the time and in the manner prescribed by the RSP Committee, to have any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan specified by the Distributee in a Direct Rollover. For purposes of this Section the following definitions shall apply: (a) Eligible Rollover Distribution: An Eligible Rollover Distribution is any distribution of all or any portion of the Distributee's RSP Account, except that an Eligible Rollover Distribution does not include: (i) any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributees and the Distributee's joint annuitant, (ii) any distribution that is one of a series of payments made for a specified period of ten years or more, or (iii) any distribution to the extent such distribution is required under Section 401(a)(9) of the Code. (b) Eligible Retirement Plan: An Eligible Retirement Plan is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, an annuity plan described in Section 401(a) of the Code, or any qualified trust described in Section 401(a) of the Code, that accepts the Distributee's Eligible Rollover Distribution. However, in the case of an Eligible Rollover Distribution to the surviving spouse, an Eligible Retirement Plan is an individual retirement account or individual retirement annuity. (c) Distributee: The term Distributee means, where applicable, the Participant, the Participant's surviving spouse, and the Participant's spouse or former spouse who is an alternate payee under a Qualified Domestic Relations Order, as defined in Section 414(p) of the Code. (d) Direct Rollover: A Direct Rollover is a payment by the Plan to the Eligible Retirement Plan specified by the Distributee. Section 12.10 Loans to Participants. If a signed credit agreement is on file with the Administrative Services Provider, any "party in interest" (as defined in Section 3(14) of ERISA) who is either a Participant, or a Beneficiary entitled to receive a vested benefit under the Plan as a result of the death of a Participant, may request a loan from the Plan Administrator. The Plan Administrator may in its discretion to grant a loan to such -33- Participant or Beneficiary from the Participant's Savings Account. The loan will be effective as of the Valuation Date on which the Participant requested a loan and distributed as soon as reasonably practicable thereafter. Loans are subject to specific conditions: (a) The loan is one which is made available to all Participants and Beneficiaries who are parties in interest on a reasonably equivalent basis and is not made available to Participants who are Highly Compensated Employees in an amount greater in proportion to the size of such Participants' Savings Accounts than that available to other Participants; (b) Each loan shall bear a reasonable rate of interest commensurate with the prime rate quoted in The Wall Street Journal as of the first business day of each month plus one percentage point. The interest rate shall apply to all loans issued during that month; (c) The loan shall be adequately secured by assignment of a portion of the balance in the Participant's Savings Account in an amount equal to the principal amount of the loan, but not in excess of fifty percent (50%) of the balance in the Participant's Savings Account determined as of the Valuation Date on which the loan is requested; (d) The minimum amount which may be loaned hereunder at any one time to any Participant or Beneficiary shall be $500. The maximum amount which may be loaned hereunder at any one time to any Participant or Beneficiary shall not exceed the lesser of (i) $50,000 reduced by the excess (if any) of the highest outstanding balance of all loans to the Participant or Beneficiary from all tax-qualified plans of the Company during the 1-year period ending on the day before the date on which such loan is made, over the outstanding balance of all loans to the Participant or Beneficiary from all tax-qualified plans of the Company on the date on which such loan is made, or (ii) fifty percent (50%) of the balance in the Participant's Savings Account determined as of the Valuation Date on which the loan is requested; (e) Refusal of the Plan Administrator or such other person designated by the Plan Administrator to grant any loan shall not preclude future applications by the same Participant or Beneficiary, and application for or acceptance of a loan hereunder shall not of itself be construed to constitute termination of participation in or waiver of any rights under the Plan; (f) All loans granted under the Plan shall be repaid, pursuant to a written repayment schedule, by payroll deduction (or as otherwise determined by the Plan Administrator if not paid by payroll deduction) and shall be evidenced by -34- a written promissory note payable to the Trustee. In no event shall loans be extended for a period of less than six months or greater than five years. In no event shall more than one loan be extended to a Participant or Beneficiary hereunder at any one time. Principal and interest payments by the Participant or Beneficiary shall be at least monthly on a level amortization basis. Any Participant or Beneficiary to whom a loan is extended pursuant to this Section 12.10 may elect to accelerate the repayment of such loan; (g) In the event of the failure to pay on a timely basis any amount of either principal or interest which is due under the terms of any loan, the Trustee, at the direction of the RSP Committee, shall declare the loan in default and the full amount of the loan due and payable. Upon declaration of default, the Plan Administrator shall take whatever action may be lawful to remedy the default. Such action may include setoff of the remaining balance of the loan against the appropriate Participant's Savings Account, provided that setoff may not be made prior to the first date on which any such amount could otherwise have been distributed pursuant to Article 12. The Plan Administrator may setoff amounts owed by the Participant or Beneficiary as described in the preceding sentence without being in violation of Section 16.01. No Participant or Beneficiary who has once defaulted on a loan extended hereunder shall be granted any additional loan whatsoever. In the event a Participant or Beneficiary to whom a loan has been extended pursuant to this Section 12.10 ceases to be a "party in interest," the loan shall be deemed to be in default and subject to the provisions of this subsection 12.10(g); (h) A separate segregated account shall be established for each Participant or Beneficiary who is granted a loan pursuant to this Section 12.10. The segregated account, which shall be part of the Participant's Savings Account, shall be credited with the amount of the loan. Segregated accounts shall not share in the dividends, earnings, losses and gains of the Trust. Each payment of principal and interest shall be credited to the segregated account in the Participant's Savings Account and shall be reinvested in the Investment Funds in the same percentages as the contributions to the Participant's Savings Account are invested at such time or, if there are no current contributions to the Participant's Savings Account, in the percentages in which such contributions were invested immediately prior to the loan. In the absence of an effective investment election, each payment of principal and interest shall be credited to the segregated account in the Participant's Savings Account and shall be reinvested in The George Putnam Fund of Boston; (i) Amounts advanced as loans under this Section 12.10 shall not be considered distributions; and -35- (j) Loan distributions shall commence following the Valuation Date in which the Participant requested a loan or as soon as practicable thereafter. ARTICLE 13. IN-SERVICE WITHDRAWALS ---------- ---------------------- Section 13.01 Withdrawals from Balance in the Participant's Savings Account Attributable to After-Tax Contributions and the Company Matching Contributions and After-Tax Contributions to the Borg-Warner Corporation Investment Plan Transferred to the Savings Account Pursuant to Section 7.01. Prior to the termination of his employment with the Company, a Participant may withdraw as of any Valuation Date, subject to the limitations provided in this Section 13.01, all or any portion of the balance in his Savings Account attributable to his (i) After-Tax Contributions, and (ii) the company matching contributions made on his behalf and any after-tax contributions made by him to the Borg-Warner Corporation Investment Plan transferred to his Savings Account pursuant to Section 7.01, by completing the applicable form setting forth the amount he desires to withdraw to the Plan Administrator or such other person designated by the Plan Administrator. No Participant will be required to provide evidence of an immediate and heavy financial need to qualify for a withdrawal pursuant to this Section 13.01. Any Before-Tax Contributions which are treated as After-Tax Contributions under Section 2.01 shall be subject to the withdrawal rules of Section 13.02 and not this Section 13.01. Section 13.02 Withdrawals from Balance in the Participant's Savings Account Attributable to Before-Tax Contributions and Amounts Transferred to the Savings Account Pursuant to Section 7.01 Excluding Company Matching Contributions and After-Tax Contributions to the Borg-Warner Corporation Investment Plan Transferred to the Savings Account Pursuant to Section 7.01. If a Participant has withdrawn the maximum amount permitted by Section 13.01, the Participant may withdraw as of any Valuation Date, subject to the limitations provided in this Section 13.02, all or any portion of the balance in his Savings Account attributable to the Before-Tax Contributions made on his behalf and amounts transferred to his Savings Account pursuant to Section 7.01 (excluding the company matching contributions made on his behalf and any after-tax contributions made by him to the Borg-Warner Corporation Investment Plan transferred to his Savings Account pursuant to Section 7.01) by making a written request to the Plan Administrator or such other person as designated by the Plan Administrator. A Participant who has not attained age 59-1/2 on or before the date on which he would otherwise receive a withdrawal pursuant to this Section 13.02 shall be permitted to withdraw all or any portion of the balance in his Savings Account attributable to the Before-Tax Contributions made on his behalf and amounts transferred to his Savings Account pursuant to Section 7.01 (excluding the company matching contributions made on his behalf and any after-tax contributions made by him to the Borg-Warner Corporation Investment Plan -36- transferred to his Savings Account pursuant to Section 7.01), provided the Participant has submitted satisfactory proof to the Plan Administrator that (i) a hardship exists, which hardship shall be limited to the Participant's immediate and heavy financial need, and (ii) such withdrawal is necessary to satisfy such immediate and heavy financial need. The determination of the existence of an immediate and heavy financial need and of the amount necessary to meet the need shall be made by the Plan Administrator in a nondiscriminatory manner. A distribution will be deemed to be made on account of an immediate and heavy financial need of the Participant if the Participant provides evidence satisfactory to the Plan Administrator that the distribution is on account of: (a) Medical expenses described in Section 213(d) of the Code previously incurred by the Participant, the Participant's spouse, or any dependent of the Participant (as defined in Section 152 of the Code) or necessary for these persons to obtain medical care as described in Section 213(d) of the Code; (b) Purchase (excluding mortgage payments) of a principal residence for the Participant; (c) Payment of tuition for and related educational fees for the next twelve months of post-secondary education for the Participant, his spouse, children or dependents (as defined in Section 152 of the Code); or (d) The need to prevent the eviction of the Participant from his principal residence or foreclosure on the mortgage of the Participant's principal residence. A withdrawal shall be necessary to satisfy a Participant's immediate and heavy financial need only if all of the following requirements are met: (w) The amount of the withdrawal is not in excess of the amount of the immediate and heavy financial need including any Federal, State or Local taxes or penalties from the withdrawal; (x) The Participant has obtained all withdrawals, other than hardship withdrawals, and all nontaxable loans available at the time of the requested withdrawal under all plans maintained by the Company; (y) The Before-Tax Contributions and After-Tax Contributions of any Participant who makes a hardship withdrawal pursuant to this Section 13.02 shall be suspended until the first day of the first Payroll Period following the end of the 12-month period beginning on the date the withdrawal is effective; and -37- (z) A Participant may not make Before-Tax Contributions during the calendar year immediately following the calendar year of the hardship withdrawal in excess of the applicable dollar limit under Section 5.03 for such next calendar year less the amount of such Participant's Before-Tax Contributions for the calendar year of the hardship withdrawal. The maximum amount which a Participant, who has not attained age 59-1/2 on or before the date on which he would otherwise receive a withdrawal pursuant to this Section 13.02, may withdraw from the balance in his Savings Account attributable to Before-Tax Contributions shall be equal to the lesser of the current balance in his Savings Account attributable to Before-Tax Contributions, or the balance in his Savings Account attributable to Before-Tax Contributions as of December 31, 1988 increased by the Before-Tax Contributions made on his behalf after that date and reduced by any withdrawals pursuant to this Section 13.02 after that date. A Participant who has attained age 59-1/2 on or before the date on which he would otherwise receive a withdrawal pursuant to this Section 13.02 shall not be required to provide evidence of an immediate and heavy financial need to qualify for a withdrawal from the balance in his Savings Account attributable to the Before-Tax Contributions made on his behalf and amounts transferred to his Savings Account pursuant to Section 7.01 (excluding the company matching contributions made on his behalf and any after-tax contributions made by him to the Borg-Warner Corporation Investment Plan transferred to his Savings Account pursuant to Section 7.01). A Participant described in the preceding sentence shall be permitted to withdraw all or any portion of his Before-Tax Contributions and amounts transferred to his Savings Account pursuant to Section 7.01 (excluding the company matching contributions made on his behalf and any after-tax contributions made by him to the Borg-Warner Corporation Investment Plan transferred to his Savings Account pursuant to Section 7.01), and the income allocable thereto, including income credited to his Savings Account after December 31, 1988. Such Participant's Before-Tax Contributions and After-Tax Contributions shall not be suspended as a result of a withdrawal pursuant to this Section 13.02. Section 13.03 Number of Withdrawals and Distribution from Investment Funds. Each withdrawal shall be made pro rata from the Investment Funds in which the Participant's Savings Account is invested. A Participant may not make more than two withdrawals pursuant to Sections 13.01 and 13.02 in any calendar year. Section 13.04 Time of Withdrawal. Withdrawals pursuant to Sections 13.01 and 13.02 shall commence following the Valuation Date as of which the withdrawal is effective or as soon as practicable thereafter. -38- ARTICLE 14. THE TRUST ---------- --------- Section 14.01 Establishment of Trust. All of the assets under the Plan shall be held as a single trust, to be held, invested and distributed in accordance with the provisions of the Plan providing benefits to Participants and their Beneficiaries. Section 14.02 Appointment of Trustee. The Trust shall be held by a Trustee appointed by the Employee Benefits Committee, from time to time, under a trust instrument which shall be approved by the Employee Benefits Committee and shall constitute part of the Plan. ARTICLE 15. ADMINISTRATION ---------- -------------- Section 15.01 Allocation of Fiduciary Duties. The Fiduciaries shall have only those specific powers, duties, responsibilities and obligations as are expressly given them under the Plan. In general, the Employee Benefits Committee shall have the sole responsibility for setting or authorizing the contributions required under the Plan as specified in Article 4, the sole authority to appoint and remove any Trustee and any member of the RSP Committee and the sole power to amend or terminate, in whole or in part, the Plan or Trust. The RSP Committee shall have the sole responsibility for the administration of the Plan, which responsibility is specifically described in the Plan and the Trust. The Plan Administrator will have the duties provided for it in ERISA. The Trustee shall have the sole responsibility for the administration of the Trust and the management of the assets under the Trust, all as specifically provided in the Trust. Each Fiduciary warrants that any directions given, information furnished, or action taken by it shall be in accordance with the provisions of the Plan and Trust, as the case may be, authorizing or providing for such direction, information or action. Furthermore, each Fiduciary may rely upon any such direction, information or action of another Fiduciary as being proper under this Plan and Trust, and is not required under the Plan or Trust to inquire into the propriety of any such direction, information or action, except that each Fiduciary shall not be relieved from liability for a breach of Fiduciary responsibility by a co- Fiduciary under Section 405(a) of Title I of ERISA. It is intended under the Plan and Trust that each Fiduciary shall be responsible for the proper exercise of its own powers, duties, responsibilities and obligations under this Plan. Section 15.02 Establishment of RSP Committee. The RSP Committee shall consist of at least three members who shall be appointed by the Employee Benefits Committee and who may also be officers, directors, employees, agents or shareholders of the Company or members of the Employee Benefits Committee. RSP Committee members may resign by written notice to, or may be removed by, the Employee Benefits Committee, which shall appoint a successor to fill any vacancy on the RSP Committee, howsoever caused. The Employee Benefits Committee shall advise the Trustee in writing of the names of the -39- members of the RSP Committee and of any changes which may occur in its membership from time to time. Section 15.03 Appointment and Duties of Plan Administrator. The Plan Administrator shall be appointed by the RSP Committee to serve at the RSP Committee's discretion and shall exercise such authority and responsibility as he deems appropriate in order to comply with ERISA and governmental regulations issued thereunder relating to: (a) The administration of the Plan; (b) Reports and notifications to Participants; (c) Reports to and registration with the Internal Revenue Service; (d) Annual reports to the Department of Labor; and (e) Any other actions required by ERISA or the Plan. Section 15.04 Powers and Duties of RSP Committee. The RSP Committee shall have such powers as may be necessary to discharge its duties hereunder, including, but not by way of limitation, the following: (a) To administer and enforce the Plan, including exclusive powers to interpret the Plan, to determine and to resolve questions as between the Company and Participants or Beneficiaries which relate to eligibility and distributions from the Plan, to remedy possible ambiguities, inconsistencies or omissions in a manner which does not discriminate in favor of Highly Compensated Employees, and which shall, subject to the claims procedure of Section 15.11, be conclusive and binding upon all persons hereunder, including, without limitation, Participants, other employees of the Company, Beneficiaries, and former Participants, and their executors, administrators, conservators, or heirs; (b) To prescribe procedures to be followed by Participants or Beneficiaries filing applications for benefits; (c) To prepare and distribute, in such manner as the RSP Committee determines to be appropriate, information explaining the Plan and Trust; (d) To receive from the Company and from Participants such information as shall be necessary for the proper administration of the Plan and Trust; -40- (e) To furnish the Company, upon request, such annual reports with respect to the administration of the Plan as are reasonable and appropriate; (f) To receive, review and keep on file (as it deems convenient or proper) reports of the financial condition, the receipts and disbursements and the assets of the Trust; (g) To appoint or employ individuals to assist in the administration of the Plan and any other agents it deems advisable, including legal counsel, and such clerical, medical, accounting, auditing, actuarial and other services as it may require in carrying out the provisions of the Plan or in connection with any legal claim or proceeding involving the Plan, to settle, compromise, contest, prosecute or abandon claims in favor of or against the Plan, and to pay all costs and expenses related to the above actions from the assets of the Trust; and (h) To discharge all other duties set forth herein. The RSP Committee shall have no power to add to, subtract from or modify any of the terms of the Plan, or to change or add to any benefits provided by the Plan, or to waive or fail to apply any requirements of eligibility under the Plan. No member of the RSP Committee shall participate in any action on any matters involving solely his own rights or benefits as a Participant under the Plan, and any such matters shall be determined by the other members of the RSP Committee. Section 15.05 RSP Committee Direction on Payments. The RSP Committee, or an RSP Committee member designated by the RSP Committee shall direct the Trustee concerning all payments which shall be made out of the Trust pursuant to the provisions of the Plan. Section 15.06 Actions by RSP Committee. The RSP Committee may act at a meeting or by writing without a meeting, by the vote or assent of a majority of its members. The RSP Committee may adopt such by-laws and regulations as it deems desirable for the conduct of its affairs and the administration of the Plan. A dissenting RSP Committee member who, within a reasonable time after he has knowledge of any action or failure to act by the majority, registers his dissent in writing delivered to the other RSP Committee members shall not be responsible for any such action or failure to act. Section 15.07 Expenses of RSP Committee. Members of the RSP Committee shall not receive compensation from the Plan for those services they perform as RSP Committee members while employed by the Company. Any and all necessary expenses related to Plan and Trust administration shall be paid from the Trust, but may be paid by the Company if it so elects. -41- Section 15.08 Records of RSP Committee. The RSP Committee shall keep a record of all of its meetings and shall keep all such books of account, records and other data as may be necessary or desirable in its judgment for the administration of the Plan. The RSP Committee shall keep on file, in such form as it shall deem convenient and proper, all reports of the Trust received from the Trustee. Section 15.09 Information from Participant. The Plan Administrator may require a Participant to complete and file with the Plan Administrator forms approved by the RSP Committee, and to furnish all pertinent information requested by such RSP Committee. The RSP Committee may rely upon all such information so furnished, including the Participant's current mailing address. Section 15.10 Notification of Participant's Address. Each Participant, retired Participant and Beneficiary entitled to benefits under the Plan must file with the Plan Administrator or such other person designated by the Plan Administrator, in writing, his post office address and each change of post office address. Any communication, statement or notice addressed to such a person at this latest post office address as filed with the Plan Administrator will, on deposit in the United States mail with postage prepaid, be binding upon such person for all purposes of the Plan, and the Plan Administrator shall not be obliged to search for, or to ascertain the whereabouts of, any such person. Section 15.11 Claims Procedure. A Participant or Beneficiary shall file a claim for benefits under the Plan in writing with the Plan Administrator who shall process it and approve or disapprove it within 90 days of the date that the claim is received. If special circumstances arise and the Plan Administrator cannot process the claim within 90 days, the Plan Administrator shall notify the claimant that the time for making the decision is extended for up to 90 additional days. If the Plan Administrator fails to notify the claimant within the applicable period, the claim is considered denied. If the Plan Administrator makes a determination to deny benefits to a Participant, the denial shall be stated in writing and delivered or mailed to the Participant or Beneficiary. Such notice shall set forth the specific reasons for the denial, written in a manner that may be understood by the Participant, and shall describe the steps necessary for appeal. The Participant whose claim for benefits has been denied shall have a period of 60 days in which to appeal to the RSP Committee and submit additional information to the RSP Committee. The RSP Committee shall consider the request at its next scheduled meeting. If the claim is again denied in writing, the Participant or Beneficiary may request a hearing within 60 days of the second denial, and the RSP Committee shall afford a reasonable opportunity for a hearing to any Participant or Beneficiary for a review of its decision denying the claim, which hearing shall be held within 60 days following receipt of the request. The Claimant shall have an opportunity to present evidence and appear before the RSP Committee. The RSP Committee shall review all evidence submitted by the claimant, shall make its decision regarding the claim within 120 days following the receipt of the request for a hearing by the claimant and shall provide the -42- claimant with a written decision. The decision of the RSP Committee regarding the claim shall be final and conclusive. Section 15.12 Qualified Domestic Relations Order Procedure. In the case of any domestic relations order received by the Plan Administrator, the Plan Administrator shall promptly notify the Participant and the spouse, former spouse, child or other alternate payee of the receipt of such order and the Plan's procedures for determining the qualified status of domestic relations orders. Within a reasonable period after receipt of such order, the Plan Administrator shall determine whether such order is a "qualified domestic relations order" within the meaning of Section 414(p) of the Code. It shall then notify the Participant and the alternate payee of such determination. The Plan Administrator shall establish reasonable procedures to determine the qualified status of domestic relations orders and to administer distributions under such qualified orders. Such procedures shall be in writing, shall provide for the notification of each person specified in a domestic relations order as entitled to payment of benefits under the Plan (at the address included in the domestic relations order) of such procedures promptly upon receipt by the Plan Administrator of the domestic relations order and shall permit an alternate payee to designate a representative for receipt of copies of notices that are sent to the alternate payee with respect to a domestic relations order. During any period in which the issue of whether a domestic relations order is a qualified domestic relations order is being determined (by the Plan Administrator, by a court of competent jurisdiction or otherwise), the Plan Administrator shall cause the Trustee to segregate in a separate account in the Trust or in an escrow account the amounts which would have been payable to the alternate payee during such period if the order had been determined to be a qualified domestic relations order. If within the 18-month period beginning on the date on which the first payment would be required to be made under the domestic relations order it is determined that the order is not a qualified domestic relations order or the question of whether the order is a qualified domestic relations order is not resolved, the Plan Administrator shall cause the Trustee to pay the segregated amounts (plus any interest thereon) to the person or persons who would have been entitled to such amounts if there had been no order. Any determination that an order is a qualified domestic relations order which is made after the close of the 18-month period described in the preceding paragraph shall be applied prospectively only. If the Plan Administrator or any Fiduciary acts in accordance with this Section 15.12 in treating a domestic relations order as being (or not being) a qualified domestic relations order or taking action under this Section 15.12, the Plan's obligation to the Participant and each alternate payee shall be discharged to the extent of any payment made. -43- ARTICLE 16. GENERAL PROVISIONS ---------- ------------------ Section 16.01 Nonalienation of Benefits. Except for qualified domestic relations orders, and as otherwise required under federal law, assignment of benefits under the Plan or their pledge or encumbrance in any manner shall not be permitted or recognized under any circumstance, nor shall such benefits be subject to attachment or other legal process for the debts of any Participant, former Participant or Beneficiary. Section 16.02 Payment to Incapacitated Participant or Beneficiary. If the RSP Committee shall find that a Participant, former Participant or Beneficiary is unable to care for his affairs because of illness or accident, or is a minor, or has died, the RSP Committee may direct that any payment due him, unless claim therefor shall have been made by a duly appointed legal representative, shall be paid to his spouse, a child, a parent, or other blood relative or to a person with whom he resides, and any such payment so made shall be in complete discharge of the liabilities of the Plan therefor. Section 16.03 Payment Because of Inability to Locate Participant of Beneficiary. If the Plan Administrator is unable, within three years after any benefit becomes due under the Plan to a Participant or Beneficiary, to make payment because the identity and/or whereabouts of such Participant or Beneficiary cannot be ascertained notwithstanding the mailing of notice to any last known address or addresses, the Plan Administrator shall make payment of such benefit as provided in Section 11.02 as though such Participant had died three years after the date such benefit became due. In the event the payment cannot be made pursuant to the provisions of Section 11.02 the balance in such Participant's RSP Account shall be forfeited. If the Participant or Beneficiary later makes a claim for a benefit under the Plan, and that claim for a benefit is granted, the amount in the Participant's RSP Account that was forfeited shall be paid to the Participant or Beneficiary without regard to any subsequent gain or loss. Section 16.04 Interest in Fund Governed by Terms of the Plan. No Participant, former Participant or Beneficiary, or any other person, shall have any interest in or right under the Plan or in any part of the assets or earnings thereof held in the Trust except as and to the extent provided in the Plan. Section 16.05 Trust Sole Source of Benefits. The assets of the Trust shall be the sole source of all benefits provided for in the Plan. The Company, the Employee Benefits Committee and the RSP Committee do not in any way guarantee the assets of the Trust from loss or depreciation as a result of Participants' investments in the Investment Funds of the Plan. Section 16.06 Actions by Board of Directors, Employee Benefits Committee or RSP Committee. Whenever in the administration of the Plan, action by the Board of Directors, the -44- Employee Benefits Committee or the RSP Committee is required with respect to eligibility or classification of Employees, contributions or benefits, such action shall be uniform in nature as applied to all persons similarly situated, and no such action shall be taken which shall discriminate in favor of Employees who are officers, stockholders or Highly Compensated Employees. Section 16.07 Plan for Exclusive Benefit of Participant and Beneficiary. No part of any Company Retirement Contribution or Company Matching Contribution under Article 4 or of any Before-Tax Contribution or After-Tax Contribution under Article 5 or of any part of the Trust (other than such part as provided for under the Plan) shall be used for, or diverted to, purposes other than for the exclusive benefit of the Participants under the Plan or their Beneficiaries. Section 16.08 No Contract of Employment. Nothing contained in this Plan shall be construed as a contract of employment between the Company and any Employee, or as a right of any Employee to be continued in the employment of the Company or as a limitation of the right of the Company to discharge any Employee at any time with or without cause. Section 16.09 Indemnification of Employee Benefits Committee, RSP Committee and Plan Administrator. Members of the Employee Benefits Committee, members of the RSP Committee and the Plan Administrator shall be indemnified by the Corporation and the Company against any and all liabilities arising by reason of any act or failure to act made in good faith pursuant to the provisions of the Plan, including expenses reasonably incurred in the defense of any claim relating thereto. If the Corporation takes any action to liquidate under circumstances which require that the Employee Benefits Committee and/or the RSP Committee remain in existence, the Corporation shall purchase insurance for each member of the Employee Benefits Committee and the RSP Committee to cover liability or losses occurring by reason of an act or omission of any such member, unless the same is determined to be due to acts of gross negligence or willful misconduct. The expenses incurred for such insurance or indemnification shall be paid by the Company or Corporation, as applicable, and shall not be reimbursable under the provisions of the Plan. Section 16.10 Change in Business. In the event of the sale, dissolution, merger, consolidation, reorganization or discontinuance of all or any part of any trade or business of the Company, the RSP Committee, in its sole discretion, may (a) determine that all or a portion of the affected Employees of the Company shall no longer be Eligible Employees in the Plan and (b) determine that the rights of the affected Employees accrued to the date of such sale, dissolution, merger, consolidation, reorganization or discontinuance shall be nonforfeitable. -45- ARTICLE 17. AMENDMENTS AND TERMINATION ---------- -------------------------- Section 17.01 Right to Amend Plan. The Corporation has delegated the power to amend or modify the Plan in whole or in part to the Employee Benefits Committee and, through the powers delegated to the Employee Benefits Committee pursuant to Section 15.01, reserves the right at any time and from time to time to amend or modify the Plan in whole or in part and either retroactively or prospectively through a written instrument delivered to the Trustee; provided, however, that: (a) Except as expressly provided to the contrary herein, no such amendment or modification shall authorize or permit any part of the corpus or income of the Trust to be used for or diverted to purposes other than for the exclusive benefit of Participants or Beneficiaries, or to deprive any of them of funds then held for their account; (b) No amendment or modification shall increase the duties or liabilities of the Trustee without its written consent; and (c) Notwithstanding anything herein to the contrary, the Employee Benefit Committee may make any amendment or modification to the Plan and the Trust that it deems necessary or appropriate to comply with any statute or regulation, including requirements for qualification, exempt status and deductibility of contributions under the Code, and such amendments or modifications shall have retroactive effect if necessary or appropriate for such purposes. Section 17.02 Termination of Plan or Discontinuance of Contributions. It is the intention of the Corporation to continue the Plan and to make contributions thereto, but the Corporation reserves the right, through the powers delegated to the Employee Benefits Committee pursuant to Section 15.01, to suspend or terminate the Plan at any time and for any reason. In the event of termination, dissolution, merger, consolidation or reorganization of the Corporation, where the successor does not continue the Plan in accordance with Section 18.01, upon partial termination of the Plan with respect to a group of Participants, upon complete discontinuance of Company contributions under the Plan or any other termination of the Plan, the interests of the affected Participants shall become fully vested and their interests shall be nonforfeitable. There shall be no Company contributions under Article 4 after the date the Plan terminates. However, the RSP Committee and the Trust shall remain in existence, and all of the provisions of the Plan (other than the provisions relating to contributions and Forfeitures), which in the sole opinion of the RSP Committee are necessary, shall remain in full force and effect. Section 17.03 Distribution on Termination of Plan. In the event of the termination or partial termination of the Plan, after payment of all expenses (including Trustee fees), there -46- shall be distributed to each affected Participant, or to his Beneficiary in the case of a deceased Participant, in such manner as the RSP Committee shall direct, a benefit equal to the balance in the Participant's RSP Account, such balance to be adjusted as provided in Article 10 as of the later of the Valuation Date on which termination or partial termination occurs or the Valuation Date coinciding with or immediately preceding the date of distribution; provided, however, that the RSP Committee and the Trustee shall not be required to effect such distribution until written evidence of approval of such termination and distribution has been received from the Internal Revenue Service. If such benefits shall not exhaust the assets of the Trust, any remaining assets shall be allocated among the RSP Accounts of continuing Participants in the same proportion that the balance in each continuing Participant's RSP Account bears to the aggregate balance in all continuing Participant's RSP Accounts, and in no event shall such assets revert or inure to the benefit of the Company. Upon termination, the RSP Committee may authorize the payment to Participants or Beneficiaries of such amounts in cash or in kind, with all such assets being measured at their fair market value. The Trustee shall continue to hold, invest, administer and distribute the assets of the Trust pursuant to the terms of the Plan until no Trust assets remain in its hands. If a Participant dies after termination of the Plan and before all of his interest in the Trust has been paid, the undistributed portion shall be distributed to his Beneficiary in a lump-sum. ARTICLE 18. SUCCESSOR CORPORATION, PLAN MERGER, CONSOLIDATION OR TRANSFER OF ---------- ---------------------------------------------------------------- ASSETS ------ Section 18.01 Successor Corporation. In the event of the sale, dissolution, merger, consolidation or reorganization of the Corporation, provision may be made by which the Plan will be continued by the successor; and in that event, such successor shall be substituted for the Corporation under the Plan. The substitution of the successor shall constitute an assumption of Plan liabilities by the successor, and the successor shall have all of the powers, duties and responsibilities of the Corporation under the Plan. Section 18.02 Plan Merger, Consolidation or Transfer of Assets to Other Qualified Plans. In the event of any merger or consolidation of the Plan with, or transfer in whole or in part of the assets and liabilities of the Trust to, any other plan of deferred compensation maintained or to be established for the benefit of all or some of the Participants of this Plan, the assets of the Trust applicable to such Participants shall be transferred to the other trust only if: (a) Each Participant would (if the other plan then terminated) receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation or transfer (if the Plan had then terminated); -47- (b) Resolutions of the Board of Directors (as defined in Section 2.07 of the Plan), and of the Board of Directors of any new successor employer of the affected Participants, shall authorize such transfer of assets; and in the case of the new successor employer of the affected Participants, its resolutions shall include an assumption of liabilities with respect to such Participants' inclusion in the new employer's plan; and (c) Such other plan is qualified under Sections 401(a) and 501(a) of the Code. ARTICLE 19. TOP-HEAVY PLAN PROVISIONS ---------- ------------------------- Section 19.01 Top-Heavy Plan Definitions. The definitions relating to ------------- -------------------------- top-heavy plan provisions are as follows: (a) The term "Top-Heavy Plan" or "Top-Heavy" means the Plan or refers to the Plan if, as of the Determination Date (as defined in subsection 19.01(b) below), the aggregate balance in the RSP Accounts of Key Employees (as defined in subsection 19.01(c) below) under the Plan exceeds sixty percent (60%) of the aggregate balance in the RSP Accounts of all Employees under the Plan, as determined in accordance with the provisions of Section 416(g) of the Code. The determination of whether the Plan is Top-Heavy shall be made after aggregating all other tax-qualified plans of the Company, if any, which are required to be aggregated pursuant to Section 416(g)(2) of the Code and after aggregating any other such plan of the Company which may be taken into account under the permissive aggregation rules of Section 416(g)(2)(A)(ii) of the Code if such permissive aggregation thereby eliminates the Top-Heavy status of any plan within such permissive aggregation group. The Plan is "Super Top Heavy" if, as of the Determination Date, the Plan would meet the test specified above for being a Top-Heavy Plan if ninety percent (90%) were substituted for sixty percent (60%) in each place in which it appears in this subsection 19.01(a). The plans which are required to be aggregated include (1) all qualified plans of the Company in which at least one Key Employee participates and all qualified plans of the Company in which at least one Key Employee participated which were terminated within the five-year period ending on the Determination Date, and (2) all other plans of the Company which enable a plan described in (1) to meet the requirements of Section 401(a)(4) or Section 410 of the Code. The plans which are permitted to be aggregated include the plans which are required to be aggregated plus any plan or plans of the Company which, when considered as a group with the required aggregation group, would continue to satisfy the requirements of Sections 401(a)(4) and 410 of the Code. For the purposes of these Top-Heavy -48- provisions, Employees and Key Employees shall include only such individuals who performed any services for the Company at any time during the five-year period ending on the Determination Date. (b) The term "Determination Date," for purposes of determining whether the Plan is Top Heavy for a particular Plan Year, means the last day of the preceding Plan Year (or, in the case of the first Plan Year of the Plan, the last day of the first Plan Year). (c) The term "Key Employee" means any Participant in the Plan (including a Beneficiary of such Participant) who at any time during the Plan Year or any of the four preceding Plan Years is: (1) An individual who receives as annual Compensation more than 50% of the dollar limit under Section 415(b)(1)(A) of the Code and who is an officer of the Company (but in no event shall more than fifty (50) Employees or, if less, the greater of three or ten percent (10%) of all Employees be taken into account under this paragraph (1) as Key Employees); (2) One of the ten (10) Employees owning (or considered as owning within the meaning of Section 318 of the Code) both more than a one-half percent (1/2%) interest and the largest interests in the Company, provided that such Employee also had Compensation for that Plan Year exceeding the maximum dollar limitation under Section 415(c)(1)(A) of the Code in effect for the calendar year in which the Determination Date falls; (3) A person owning (or considered as owning within the meaning of Section 318 of the Code) more than five percent (5%) of the outstanding stock of the Company or stock possessing more than five percent (5%) of the total combined voting power of all stock of the Company; or (4) A person who receives as annual Compensation from the Company more than $150,000 and who would be described in paragraph (3) of this subsection 19.01(c) if one percent (1%) were substituted for five percent (5%). For purposes of applying Section 318 of the Code to the provisions of this subsection 19.01(c), paragraph (C) of Section 318(a)(2) of the Code shall be applied by substituting five percent (5%) of fifty percent (50%). In addition, the rules of subsections (b), (c) and (m) of -49- Section 414 of the Code shall not apply for purposes of determining ownership percentage in the Company under this subsection 19.01(c). (d) The term "Non-Key Employee" means any Participant in the Plan (including a Beneficiary of such Participant) who is not a Key Employee. Section 19.02 Requirements in Plan Years in Which Plan is Top-Heavy. Notwithstanding anything herein to the contrary, if the Plan is Top-Heavy as determined pursuant to Section 416 of the Code for any Plan Year, then the Plan shall meet the following requirements for any such Plan Year: (a) Minimum Vesting Requirements. A Participant's vested percentage in his Company Retirement Contribution Account and that portion of the balance in his Employee Retirement Account attributable to Company Matching Contributions under Section 4.02 shall be determined in accordance with the following schedule and not in accordance with Section 2.49: Years of Vested Service Vested Portion ----------------------- -------------- Less than Three 0% Three or more 100% In the event that the Top-Heavy Plan ceases thereafter to be Top- Heavy, each Participant's vested percentage shall again be determined under Section 2.49, provided that a Participant's vested percentage shall not be reduced thereby. (b) Minimum Contribution Requirement. It is intended that the Company will meet the minimum contribution requirements of Sections 416(c) and 416(h) of the Code by providing the minimum contribution through a combination of Company Retirement Contributions, Company Matching Contributions and Before-Tax Contributions for such Plan Year for each Participant who is a Non-Key Employee, in accordance with whichever of the following paragraphs in applicable: (1) If the Company does not maintain a tax-qualified defined-benefit pension plan, or if the Company maintains such a pension plan in which no Participant can participate, the minimum contribution per Participant shall be three percent (3%) of the Participant's Compensation for the Plan Year; (2) If the Company maintains a tax-qualified defined-benefit pension plan in which one or more Participants may participate, and that pension plan is -50- not Top-Heavy, the minimum contribution per Participant shall be three percent (3%) of a Participant's Compensation for that Plan Year; provided, however, that if the Plan is not Super Top-Heavy, the minimum contribution shall be increased to four percent (4%) if necessary to avoid the application of Section 416(h)(1) of the Code (relating to the adjustment of the combined plan contributions and benefits limitation which would substitute 1.0 for 1.25 in the defined-contribution and benefit plan factors under Section 415 of the Code) and if such adjusted plan contributions and benefits limitation would otherwise be exceeded if such increased minimum contribution were not so increased; and (3) If the Company maintains a tax-qualified defined-benefit pension plan in which one or more Participants may participate, and that pension plan is Top-Heavy, the minimum contribution per Participant shall be five percent (5%) of the Participant's Compensation for that Plan Year; provided, however, that if the Plan is not Super Top-Heavy, the minimum contribution shall be increased to seven point five percent (7.5%) if necessary to avoid the application of Section 416(h)(l) of the Code (relating to the adjustments to the combined plan contributions and benefits limitation described in paragraph (2) above) and if such adjusted plan contributions and benefits limitation would otherwise be exceeded if an increased minimum contribution is not made. The minimum Company contribution under this subsection 19.02(b) shall be allocated to the Participants' RSP Accounts in the necessary amounts and in such proportions as the RSP Committee shall determine. The minimum contribution requirements set forth herein shall be reduced in the following circumstances: (1) The percentage minimum contribution required hereunder shall in no event exceed the percentage contribution made for the Key Employee for whom such percentage is the highest for the Plan Year after taking into account contributions or benefits under other qualified plans in this Plan's aggregate group as provided pursuant to Section 416(c)(2)(B)(ii) of the Code; and (2) No minimum contribution will be required (or the minimum contribution will be reduced, as the case may be) for a Participant for any Plan Year if the Employer maintains another qualified plan under which a minimum benefit or contribution is being accrued or made for -51- such Plan Year in whole or in part for the Participant in accordance with Section 416(c) of the Code. ARTICLE 20. CONSTRUCTION ---------- ------------ Section 20.01 Plan Administered According to Law. The Plan and the Trust forming part thereof shall be construed and administered according to the laws of the State of Illinois to the extent such laws are not preempted by ERISA or subsequent amendments thereto of any other laws of the United States of America. Section 20.02 Gender, Number and Context. Words used in the Plan in the masculine gender shall include the feminine gender, the singular shall include the plural and the plural shall include the singular, all unless the context clearly indicates otherwise. The titles of Sections and subsections in this instrument are included solely for convenience of reference and, if there is any conflict between the titles and the text, the text shall control. ARTICLE 21. QUALIFICATION OF PLAN ---------- --------------------- Section 21.01 Qualification Intended. The Company shall promptly submit the Plan to the Internal Revenue Service along with all necessary supporting documents with a request for a determination letter that the Plan meets the qualification requirements of Section 401(a) of the Code and that the Trust is exempt from taxation under Section 501(a) of the Code. Any modification or amendment of the Plan may be made retroactively, if necessary or appropriate, to qualify or maintain the Plan as a qualified plan meeting the requirements of Sections 401 and 501 of the Code, ERISA or any other provisions of federal law. Witness Whereof, the Company has caused this Plan to be signed on this _____ day of __________________, 1994. BORG-WARNER SECURITY CORPORATION By: ____________________________________ Its: Executive Vice President Attest: ______________________________ Its: _________________________ -52- EX-10.10 5 SUPP BENEFITS EXHIBIT 10.10 THE BORG-WARNER SECURITY CORPORATION HEADQUARTERS' -------------------------------------------------- SUPPLEMENTAL BENEFITS COMPENSATION PROGRAM ------------------------------------------ The Borg-Warner Security Corporation Headquarters' Supplemental Benefits Compensation Program (the "Program"), established January 1, 1995, provides additional income to employees not eligible to participate in the Borg-Warner Security Corporation Retirement Savings Plan. Under the Program, you will receive after-tax cash payments (at least monthly). As a participant in the Program, you may request that your payments be directed to Fidelity Investments Life Insurance Company ("Fidelity") to invest in Fidelity's tax deferred annuity ("TDA"). Supplemental payments are sent to Fidelity monthly. ELIGIBILITY Borg-Warner Security Corporation (the "Company") will determine an employee's eligibility for the Program: participating employees are those employees who have completed six consecutive months of service with the Company and are determined by the Company to be highly compensated -- and as such not eligible for the Retirement Savings Plan. The Company's determination of who is a highly compensated employee will be binding and conclusive. Program participants are: . any employee previously notified that he or she is eligible to participate in this Program, . an employee whose 1994 earnings equal or exceed $66,000 or . an employee whose base annual salary, when hired, exceeds that amount. The Company, in accordance with IRS regulations, will adjust these dollar limits for determining eligibility each year. You will become a participant in the Program on the January 1 following the date the Company notifies you of your eligibility. Once you begin participating in the Program, you remain a participant in the Program -- even if you no longer meet the definition of a highly compensated employee. SUPPLEMENTAL PAYMENTS The amount you receive as supplemental payments under the Program depends on two factors: . your years of service, and . whether you receive the payments as monthly cash compensation or elect to have the payments remitted directly to your TDA. The payments are a specified percentage of your earnings, adjusted for taxes. In calculating your payments, your earnings means your salary received during the calendar year, including overtime pay, commissions and bonuses, but does not include reimbursement of education or relocation expenses, severance or transitional income benefits, or any payments made by the Company under any option or stock plans, or other taxable fringe benefits. The supplemental payment is not included in earnings used to calculate your supplemental benefit 1 payment. In making your payments, the Company will withhold the appropriate taxes based upon your current W-4 withholding election. You do not need to make a separate withholding election with respect to the supplemental payments. IF YOU ARE AGE 45 OR YOUNGER AS OF THE DATE YOU BECOME ELIGIBLE: If You Receive Your Supplemental Payments as Cash, the percentage to be used to calculate your payments is as shown:
================================================================================================================= YEARS OF SERVICE UNDER SS OVER SS WAGE AS OF JANUARY 1 WAGE BASE* BASE* ----------------------------------------------------------------------------------------------------------------- Less than or equal to 10 years 6.55% 9.90% Greater than 10, but less than or equal to 20 years 7.40% 11.58% Greater than 20 years 8.22% 12.84% ----------------------------------------------------------------------------------------------------------------- *Social Security Wage Base as indexed for the year ($60,600 in 1994). Note that payment is LESS APPLICABLE TAXES. =================================================================================================================
If You Remit Your Supplemental Payments to your Fidelity TDA, the percentage used to calculate those payments is:
================================================================================================================== UNDER SS OVER SS YEARS OF SERVICE AS OF JANUARY 1 WAGE BASE* WAGE BASE* ------------------------------------------------------------------------------------------------------------------ Less than or equal to 10 years 9.83% 14.86% Greater than 10, but less than or equal to 20 years 11.08% 17.38% Greater than 20 years 12.34% 19.27% ------------------------------------------------------------------------------------------------------------------ *Social Security Wage Base as indexed for the year ($60,600 in 1994). Note that payment is LESS APPLICABLE TAXES. ==================================================================================================================
2 IF YOU ARE AGE 46 OR OLDER AS OF THE DATE YOU BECOME ELIGIBLE: If You Receive Your Supplemental Payments as Cash, the percentage to be used to calculate your payments is as shown:
================================================================================================== YEARS OF SERVICE UNDER SS OVER SS WAGE AS OF JANUARY 1 WAGE BASE* BASE* -------------------------------------------------------------------------------------------------- Less than or equal to 10 years 6.09% 9.17% Greater than 10, but less than or equal to 20 years 6.86% 10.72% Greater than 20 years 7.63% 11.88% -------------------------------------------------------------------------------------------------- The Company makes additional payments if you were: (i) a participant in a qualified benefit plan of the Company as of May 31, 1988, and (ii) age 45 or older as of December 31, 1988. This additional payment is: PLUS: 1.11% of compensation if you were age 45 or older, but less than age 50 as of 12/31/88 or 2.22% of compensation if you were age 50 or older as of 12/31/88 *Social Security Wage Base as indexed for the year ($60,600 in 1994). Note that payment is LESS APPLICABLE TAXES. ==================================================================================================
If You Remit Your Supplemental Payments to your Fidelity TDA, the percentage used to calculate those payments is:
================================================================================================== UNDER SS OVER SS YEARS OF SERVICE AS OF JANUARY 1 WAGE BASE* WAGE BASE* -------------------------------------------------------------------------------------------------- Less than or equal to 10 years 9.13% 13.76% Greater than 10, but less than or equal to 20 years 10.28% 16.08% Greater than 20 years 11.44% 17.82% -------------------------------------------------------------------------------------------------- The Company makes additional payments if you were: (i) a participant in a qualified benefit plan of the Company as of May 31, 1988, and (ii) age 45 or older as of December 31, 1988. This additional payment is: PLUS: 1.16% of compensation if you were age 45 or older, but less than age 50 as of 12/31/88 or 2.32% of compensation if you were age 50 or older as of 12/31/88 *Social Security Wage Base as indexed for the year ($60,600 in 1994). Note that payment is LESS APPLICABLE TAXES. ==================================================================================================
3 TRANSFERS OF SUPPLEMENTAL PAYMENTS To encourage you to save your supplemental payments and invest them for future use, the Company makes it possible for you to invest your payments directly in your TDA. You are not required to invest your supplemental payments in the Fidelity TDA; however, the Fidelity TDA is the only product into which the Company will make direct payments on your behalf. Since your participation in the Fidelity TDA is entirely voluntary, you must provide the Company with your written instructions to have your payments sent to Fidelity. If you do not make this election, you will receive your supplemental payments in cash on a monthly basis. It's important that you save for your future. The Program is one way for you to do so. For further information regarding Fidelity's TDA, please read "Fidelity's TDA: A Way to Save," available from your Benefits Administrator. You can also obtain copies of additional information by contacting Fidelity directly at P.O. Box 1306, Boston, Massachusetts 021049907, (800) 634-9361. -------------------------------------------------------------------------------- While the Company intends to continue this Program, it does reserve the right to modify, amend or terminate the Program at any time. [sbchq1.eh] 4 For Senior Management, the following formulas apply: NEAL FARRELL Wages Under the Social Security Wage Base 13.34% Wages Over the Social Security Wage Base 19.83% JOHN O'BRIEN Wages Under the Social Security Wage Base 13.29% Wages Over the Social Security Wage Base 20.39% DON TRAUSCHT Wages Under the Social Security Wage Base 13.34% Wages Over the Social Security Wage Base 19.83% TIM WOOD Wages Under the Social Security Wage Base 11.42% Wages Over the Social Security Wage Base 18.33% 5 EX-10.16 6 LICENSE AGREEMENT EXHIBIT 10.16 ASSIGNMENT OF TRADEMARKS AND LICENSE AGREEMENT ---------------------------------------------- This Agreement is entered into as of the 2nd day of November, 1994, by and between BORG-WARNER SECURITY CORPORATION (formerly known as Borg-Warner Corporation), a Delaware corporation having a place of business at 200 South Michigan Avenue, Chicago, Illinois 60604 ("Security"), and BORG-WARNER AUTOMOTIVE, INC. (formerly a subsidiary of Borg-Warner Corporation), a Delaware corporation having a place of business at 200 South Michigan Avenue, Chicago, Illinois 60604 ("Automotive"). W I T N E S S E T H : WHEREAS, Security has been for many years and is in the business of providing a broad range of protective and security services and products, including, but not limited to guard, alarm, armored transport, ATM maintenance and servicing, cash management, courier, investigative, pre-employment screening and mailroom services, and developing, manufacturing, distributing, selling and servicing fire detection and burglary alarm products. WHEREAS, Security has been for many years and will continue to be in the business of, among other things, acquiring and operating other businesses in a variety of industries. WHEREAS, for many years, Security has used and is using, by license or otherwise, in its many businesses various trademarks, service marks, trade names and trade dress comprised, in whole or in part, of the term "Borg Warner", "B" and "W" and variations thereof, including but not limited to, the trademarks, trade names and trade dress identified in Schedules A, B, C and D (the "Borg Warner Trademarks"). WHEREAS, Automotive, for many years, was, as a subsidiary of Security, and currently is, as a separate corporation, primarily in the business of developing, manufacturing and selling automotive products to original equipment manufacturers of passenger cars, light trucks and other vehicles, and in the associated aftermarket, under and in connection with trademarks, service marks, trade names and trade dress comprised, in whole or in part, of the term "Borg Warner", "B" and "W" and variations thereof, including but not limited to the trademarks, service marks and trade names identified in Schedule A (the "Automotive Trademarks") and Schedule D (the "Base Trademarks"). WHEREAS, Security and Automotive entered into an Amended and Restated Trademark and Trade Name License Agreement dated as of August 24, 1993 (the "Automotive License Agreement"), pursuant to which Automotive was licensed the right to use the Automotive Trademarks and Base Trademarks in connection with certain products. WHEREAS, Security has also licensed to Echlin, Inc. the use of some of the trademarks and trade dress identified in Schedule C (the "Bow Tie Trademarks") in an agreement dated as of September 1, 1993 (the "Echlin License Agreement"). WHEREAS, Security operates its present business in the Security Field as defined in Article I and does not plan to expand its business into the Automotive Field as defined in Article I, but intends to expand its business into other industries. WHEREAS, Automotive operates its present business in the Automotive Field as defined in Article I and does not presently plan to expand its business into the Security Field as defined in Article I or any other field other than the Automotive Field. WHEREAS, substantial differences exist between Security's products and services and Automotive's products and services; substantial differences exist in the channels of trade in -2- which Security's and Automotive's respective products and services are marketed, promoted, advertised and sold; and substantial differences exist in the consumers and purchasers of Security's products and services and Automotive's products and services. WHEREAS, there has been no known actual confusion between Security's products and services and Automotive's products and services on account of the similarity of the Borg Warner Trademarks, and no likelihood of confusion is foreseen. WHEREAS, subject to the terms and conditions of this Agreement, Automotive desires to 1) acquire all of Security's right, title and interest in and to all of the Automotive Trademarks, Bow Tie Trademarks and Base Trademarks in the Automotive Field, the goodwill associated therewith, and the United States and foreign Trademark Registrations and Registration Applications therefor; 2) acquire all of Security's rights and obligations under the Echlin License Agreement; and 3) terminate the Automotive License Agreement. WHEREAS, subject to the terms and conditions of this Agreement, Security desires to 1) assign to Automotive all of its right, title and interest in and to all of the Automotive Trademarks, Bow Tie Trademarks and Base Trademarks in the Automotive Field, the goodwill associated therewith, and the United States and foreign Trademark Registrations and Registration Applications therefor; 2) assign to Automotive all of its rights and obligations under the Echlin License Agreement; and 3) terminate the Automotive License Agreement. NOW, THEREFORE, based on the aforesaid premises, and subject to the terms and conditions set forth below, the parties agree as follows: ARTICLE I - DEFINITIONS ----------------------- 1.1) "Automotive Field" means the business of supplying products, components, accessories and services for the manufacture, service and repair of (a) vehicles, including without -3- limitation passenger cars, vans, trucks, fork-lift trucks and other industrial vehicles, off-highway motive equipment, motorcycles and other recreational vehicles, aircraft, marine vessels, tractors and other agricultural vehicles, railroad rolling stock and trailers and (b) internal combustion engines and associated fuel supply or emission control systems or devices for any application. The "Automotive Field" does not include monitoring, tracking or servicing of any alarm, signal or security device installed on any vehicle. The "Automotive Field" includes all such products, components, accessories and services used on vehicles that also have an application or use on industrial equipment. The "Automotive Field" also includes use of promotional items and events associated with the promotion, marketing and sale of any of the foregoing products, components, accessories and services. 1.2) "Security Field" means the business of supplying products or services that provide or enhance security, including but not limited to guard services, alarm services, armored transport services, ATM maintenance and servicing, cash management services, courier services, investigative services, pre- employment screening, mailroom services; developing, manufacturing, distributing, selling and servicing fire detection and burglary alarms and products; and monitoring, tracking or servicing of any alarm, signal or security device installed on any vehicle but does not include the manufacture or sale of any alarm, signal or security device installed on vehicles and replacement parts therefor. ARTICLE II - ASSIGNMENT OF MARKS -------------------------------- 2.1) Security hereby assigns to Automotive all of its right, title and interest world-wide in and to the Base Trademarks, Automotive Trademarks and Bow Tie Trademarks in the Automotive Field, together with the goodwill of the business associated with such marks, -4- and all United States and foreign Registrations and Registration Applications therefor. Security agrees that it will not challenge or contest the validity of the Automotive Trademarks, the Bow Tie Trademarks or Base Trademarks used or licensed by Automotive in the Automotive Field. 2.2) Security retains all right, title and interest world-wide in and to trademarks and trade names identified in Schedule B (the "Security Trademarks") and the Base Trademarks other than in the Automotive Field, together with all goodwill of the business associated with such marks, and all United States and foreign Registrations and Registration Applications therefor. Automotive agrees that it will not challenge or contest the validity of the Security Trademarks or Base Trademarks used or licensed by Security other than in the Automotive Field. ARTICLE III - RESTRICTIONS ON USE OF MARKS ------------------------------------------ 3.1) Security shall not use or license for use any of the Automotive Trademarks or Bow Tie Trademarks. Security shall not use or license for use any of the Security Trademarks, Base Trademarks or any trademarks, service marks, trade dress and trade names comprised or, in whole or in part, the term "Borg Warner", "B" and "W" or variations thereof, in the Automotive Field. Security may adopt, use or license any new trademark, service mark, trade dress, trade name or the like utilizing, in whole or in part, the term "Borg Warner", "B" and "W" or variations thereof in any business, industry or field other than in the Automotive Field except as restricted by law. 3.2) Automotive shall not use or license for use any of the Security Trademarks. Automotive shall not use or license for use any of the Automotive Trademarks, the Bow Tie Trademarks, Base Trademarks or any trademarks, service marks, trade dress and trade -5- names comprised of, in whole or in part, the term "Borg Warner", "B" and "W" or variations thereof, other than in the Automotive Field. Automotive may adopt, use or license any new trademark, service mark, trade dress, trade name or the like, utilizing, in whole or in part, the term "Borg Warner", "B" and "W" or variations thereof in the Automotive Field except as restricted by law. 3.3) Automotive may license the Automotive Trademarks, Bow Tie Trademarks, the Base Trademarks or any other trademark, service mark, trade dress or trade name comprised of, in whole or in part, the term "Borg Warner", "B" or "W" or variations thereof for use in the Automotive Field to any entity provided that for any such license granted after August 24, 1993, Automotive retains the contractual right to control the products and services to be produced or provided by such entity under or in connection with the Automotive Trademarks, the Bow Tie Trademarks or Base Trademarks, the quality of such products and services, the manner in which such products and services are marketed and sold, and the manner in which such trademarks, service marks, trade dress or trade names are displayed and used. ARTICLE IV - ASSIGNMENT AND TERMINATION OF LICENSE AGREEMENTS ------------------------------------------------------------- 4.1) Security hereby assigns to Automotive all of its rights, interests and obligations in, under, and to the Echlin License Agreement and Automotive hereby assumes all rights, obligations and restrictions of Security thereunder. 4.2) The Automotive License Agreement is hereby terminated and superseded by this Agreement. -6- ARTICLE V - PAYMENTS -------------------- 5.1) Upon approval of this Agreement by the Board of Directors of both Automotive and Security, Automotive shall pay Security $10,000,000.00. Automotive shall also pay Security any royalties collected by Automotive from Echlin pursuant to the Echlin License Agreement relating to the sale of products sold by Echlin under or in connection with the Bow Tie Trademarks which are attributable to any sales during the period of time prior to November 1, 1994. 5.2) As additional consideration for the transactions contemplated by this Agreement, Automotive shall pay Security the sum of $7,500,000.00 within 30 days following the first to occur of: (i) a "Change in Control" of Automotive; (ii) the assignment by Automotive or any of its successors or assigns of, or the entering of an agreement to assign, any of the Automotive Trademarks, Bow Tie Trademarks, Base Trademarks or any other trademark, service mark, trade dress or trade name comprised of, in whole or in part, the term "Borg Warner", "B" or "W" or variations thereof other than to a "Subsidiary;" or (iii) the license by Automotive or any of its successors or assigns of, or the entering of an agreement to license, any of the Automotive Trademarks, Bow Tie Trademarks, Base Trademarks or any other trademark, service mark, trade dress or trade name comprised of, in whole or in part, the term "Borg Warner", "B" or "W" or variations thereof, other than as provided in paragraph 3.3 of this Agreement. -7- As used herein, a "Change in Control" shall be deemed to have occurred when (i) more than 50% of Automotive's Board of Directors (the "Board") consists of individuals who were not members of the Board on August 24, 1993, and whose election, or nomination for election, was not approved by a vote of at least 75% of the directors then in the office, who either were directors on August 24, 1993 or whose election or nomination for election was previously so approved or (ii) any person or group (within the meaning of Rule 13d-3 promulgated under the Security Exchange Act of 1934), other than Merrill Lynch & Co. and its affiliates and members of Automotive's management on August 24, 1993, shall become or be the owner, directly or indirectly, beneficially or of record, of shares representing more than 50% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of Automotive on a fully diluted basis. As used herein, "Subsidiary" means any corporation with respect to which Automotive or one of its Subsidiaries has the power to vote or direct the voting of sufficient securities to elect a majority of the directors. ARTICLE VI - ENFORCEMENT OF TRADEMARK RIGHTS -------------------------------------------- 6.1) The parties agree and acknowledge that the enforcement of the Automotive Trademarks, the Bow Tie Trademarks, Security Trademarks, Base Trademarks and other trademarks, service marks, trade dress and trade names comprised, in whole or in part, of the term "Borg Warner", "B" and "W" and variations thereof by their respective owners, is integral to the maintenance of the strength, goodwill and value thereof. Security and Automotive shall (i) maintain a consistent and high level of quality, at least equal to that which has previously been employed, for the products and services offered under such marks and (ii) correctly use and properly identify such marks. -8- 6.2) Automotive will, at its reasonable discretion and sole expense, register, maintain and police the Automotive Trademarks, the Bow Tie Trademarks, Base Trademarks in the Automotive Field, and any trademarks, service marks, trade dress and trade names comprised, in whole or in part, of the term "Borg Warner", "B" and "W" and variations thereof, which Automotive hereafter adopts or uses consistent with Paragraph 3.2 hereof. 6.3) Security will, at its reasonable discretion and sole expense, register, maintain and police the Security Trademarks, Base Trademarks outside the Automotive Field, and any trademarks, service marks, trade dress and trade names comprised, in whole or in part, of the term "Borg Warner", "B" and "W" and variations thereof, which Security hereafter adopts or uses consistent with Paragraph 3.1 hereof. 6.4) Each party will promptly provide the other with written notification upon learning of the use by a third party of a trademark, service mark, trade dress or trade name that is the same as or substantially similar to any trademark, service mark, trade dress or trade name comprised, in whole or in part, of the term "Borg Warner", "B" and "W" or any variation thereof, used at any time by Security or Automotive (the "Infringing Mark"). Either party may join any enforcement action initiated by the other party against any use by any third party of any Infringing Mark, at its sole expense, as long as joining does not adversely affect the rights of the initiating party. In any event, each party shall cooperate with the other in any enforcement action reasonably brought and prosecuted by either party against any use by any third party of any Infringing Mark, and each party shall bear its own expenses and costs, including attorneys' fees incurred in providing such cooperation. In the event damages (or sanctions) are awarded in any such action, -9- each party shall be responsible for and/or entitled to such damages (or sanctions) as are proved by or against it. ARTICLE VII - RELEASE AND INDEMNIFICATION ----------------------------------------- 7.1) Security and Automotive hereby release and forever discharge each other, and covenant not to sue each other, for and from any and all claims, causes of action, damages, and liabilities arising from the use of the trademarks, service marks, trade dress and trade names comprised, in whole or in part, of the term "Borg Warner", "B" and "W" and variations thereof, as are permitted under this Agreement. 7.2) Automotive agrees to indemnify and hold Security harmless from and against, and to defend against, any loss, liability, damage, claim or expense (including reasonable attorneys' fees and court costs) ("Loss") resulting from, arising out of, relating to, or caused by (i) Automotive's breach of any term of this Agreement, (ii) Automotive's use of any trademarks, service marks, trade dress and trade names comprised, in whole or in part, of the term "Borg Warner", "B" or "W" or variations thereof, and (iii) the assignment of rights, interests or obligations herein, provided that Automotive shall not have any obligation to indemnify Security under this clause (iii) from and against any Loss that results from, arises out of, relates to, or is caused by a challenge by any governmental entity or administrative body. 7.3) Security agrees to indemnify and hold Automotive harmless from and against, and to defend against, any Loss resulting from, arising out of, relating to, or caused by (i) Security's breach of any term of this Agreement, and (ii) Security's use of any trademarks, service marks, trade dress and trade names comprised, in whole or in part, of the term "Borg Warner", "B" or "W" or variations thereof. -10- ARTICLE VIII - ARBITRATION -------------------------- 8.1) Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in Chicago, Illinois, in accordance with the Rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrator may be entered into any court having jurisdiction thereof. 8.2) The arbitrator shall resolve any controversies, disputes or claims in accordance with the terms of this Agreement interpreted in accordance with the law of Illinois, and applicable federal law acting always as an impartial judge without a jury and not as mediator or conciliator. Depositions may be taken and other discovery obtained during such arbitration proceedings to the same extent as authorized in civil judicial proceedings in the State of Illinois. The arbitration award, which may include equitable relief, shall state in writing the reasons for the award and, in connection therewith, set for the arbitrator's findings of fact and conclusions of law. ARTICLE IX - MISCELLANEOUS PROVISIONS ------------------------------------- 9.1) This Agreement shall be binding upon the parties, their successors and assigns. This Agreement shall not confer any rights or remedies upon any person other than the parties and their respective successors and permitted assigns. 9.2) This Agreement constitutes the entire agreement between Security and Automotive with respect to the subject matter hereof and no other representations, oral or otherwise, have been relied upon. 9.3) The parties will execute such other documents as are necessary and reasonable to effect the purpose of this Agreement. -11- 9.4) This Agreement shall be deemed drafted by both parties, and entered into after review and with advise of counsel. 9.5) The rights and obligations under this Agreement shall not become effective unless and until approved by the parties' respective Boards of Directors. 9.6) This Agreement shall be governed by and construed in accordance with the internal laws (and not the law of conflicts) of the State of Illinois and the applicable federal law of the United States. 9.7) All notices required under this Agreement shall be sent to the attention of the General Counsel at the respective parties, at the above addresses, or as otherwise directed by the parties. 9.8) Each party hereto will have all rights and remedies set forth in this Agreement and all rights and remedies which such parties have been granted at any time under any other existing agreement or contract and under applicable law. Any person having rights under this Agreement will be entitled to enforce such rights specifically, to recover damages by reason of any breach of this Agreement and to exercise all other rights granted by law. In the event that either party shall institute any action specifically to enforce the other party's performance under this Agreement, such other party agrees to waive the defense that the enforcing party has an adequate remedy at law and to interpose no opposition, legal or otherwise, as to the propriety of specific performance as a remedy. 9.9) The obligations and restrictions imposed upon Automotive under this Agreement, including but not limited to Paragraph 5.2, shall not apply to the mark or name "BORG & BECK" and equivalents thereof. -12- In witness whereof, the parties have caused this Agreement to be executed as of the date first above written. BORG-WARNER SECURITY BORG-WARNER AUTOMOTIVE, INC. CORPORATION BY: /s/ Donald C. Trauscht BY: /s/ J. Gordon Amedee --------------------------- --------------------------- TYPED NAME: Donald C. Trauscht TYPED NAME: J. Gordon Amedee ------------------- ------------------- TITLE: President TITLE: Chairman ------------------------ ------------------------ -13- EX-10.17 7 ADMIN. AGREEMENT =============================================================================== TRANSFER AND ADMINISTRATION AGREEMENT among ENTERPRISE FUNDING CORPORATION, as Company and BPS FINANCIAL SERVICES, INC. as Transferor and BORG-WARNER SECURITY CORPORATION as Collection Agent Dated as of November 21, 1994 =============================================================================== TABLE OF CONTENTS ----------------- ARTICLE I DEFINITIONS
Page ---- SECTION 1.1 Certain Defined Terms..................................... 1 SECTION 1.2 Other Terms............................................... 23 SECTION 1.3 Computation of Time Periods............................... 23 ARTICLE II PURCHASES AND SETTLEMENTS SECTION 2.1 Facility................................................. 24 SECTION 2.2 Transfers; Company Certificate; Eligible Recievables..... 24 SECTION 2.3 Selection of Tranche Periods and Tranche Rates........... 27 SECTION 2.4 Discount, Fees and Other Costs and Expenses.............. 28 SECTION 2.6 Liquidation Settlement Procedures........................ 29 SECTION 2.7 Fees..................................................... 30 SECTION 2.8 Protection of Ownership Interest of the Company.......... 30 SECTION 2.9 Deemed Collections; Application of Payments.............. 32 SECTION 2.10 Payments and Computations, Etc........................... 33 SECTION 2.11 Reports.................................................. 33 SECTION 2.12 Collection Account....................................... 33 ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.1 Representations and Warranties of the Transferor......... 35 SECTION 3.2 Reaffirmation of Representations and Warranties by the Transferor............................................. 38 ARTICLE IV CONDITIONS PRECEDENT SECTION 4.1 Conditions to Closing.................................... 42 ARTICLE V COVENANTS SECTION 5.2 Negative Covenants....................................... 51
i ARTICLE VI ADMINISTRATION AND COLLECTIONS
Page ---- SECTION 6.1 Appointment of Collection Agent.......................... 53 SECTION 6.2 Duties of Collection Agent............................... 53 SECTION 6.3 Rights After Designation of New Collection Agent......... 55 SECTION 6.4 Responsibilities of the Transferor....................... 56 ARTICLE VII TERMINATION EVENTS SECTION 7.1 Termination Events....................................... 57 SECTION 7.2 Termination.............................................. 61 ARTICLE VIII INDEMNIFICATION; EXPENSES; RELATED MATTERS SECTION 8.1 Indemnities by the Transferor............................ 62 SECTION 8.2 Indemnity for Taxes, Reserves and Expenses............... 64 SECTION 8.3 Other Costs, Expenses and Related Matters................ 66 SECTION 8.4 Reconveyance Under Certain Circumstances................. 67 ARTICLE IX MISCELLANEOUS SECTION 9.1 Term of Agreement........................................ 68 SECTION 9.2 Waivers; Amendments...................................... 68 SECTION 9.3 Notices.................................................. 68 SECTION 9.4 Governing Law; Submission to Jurisdiction; Integration... 70 SECTION 9.5 Severability; Counterparts............................... 71 SECTION 9.6 Successors and Assigns................................... 71 SECTION 9.7 Waiver of Confidentiality................................ 71 SECTION 9.8 Confidentiality Agreement................................ 72 SECTION 9.9 No Bankruptcy Petition Against the Company............... 72 SECTION 9.10 No Recourse Against Stockholders, Officers or Directors.. 72 SECTION 9.11 Characterization of the Transactions Contemplated by the Agreement; Assignment of Rights Under Receivables Purchase Agreement..................................... 73
ii EXHIBITS EXHIBIT A [Reserved] EXHIBIT B Credit and Collection Policies and Practices EXHIBIT C List of Lock-Box Banks EXHIBIT D Form of Lock-Box Agreement EXHIBIT E Form of Investor Report EXHIBIT F Form of Transfer Certificate EXHIBIT G Form of Weekly Report EXHIBIT H List of Actions and Suits EXHIBIT I Location of Records and Chief Executive Offices EXHIBIT J List of Subsidiaries, Divisions and Tradenames EXHIBIT K Form of Opinion of Counsel for the Transferor EXHIBIT L Form of Responsible Officer's Certificate EXHIBIT M Form of Company Certificate EXHIBIT N Certain Definitions iii TRANSFER AND ADMINISTRATION AGREEMENT TRANSFER AND ADMINISTRATION AGREEMENT (this "Agreement"), dated as of November 21, 1994, between BPS FINANCIAL SERVICES, INC., a Delaware corporation, as transferor (in such capacity, the "Transferor"), BORG-WARNER SECURITY CORPORATION, a Delaware corporation, as collection agent (in such capacity, the "Collection Agent"), and ENTERPRISE FUNDING CORPORATION, a Delaware corporation (the "Company"). PRELIMINARY STATEMENTS ---------------------- WHEREAS, the Transferor may desire to convey, transfer and assign, from time to time, undivided percentage ownership interests in a pool of certain billed trade receivables, all monies due or to become due in payment of such receivables, as well as monies on deposit in certain bank accounts established under this Agreement, and the Company may desire to accept such conveyance, transfer and assignment of such undivided percentage ownership interests, subject to the terms and conditions of this Agreement. NOW, THEREFORE, the parties hereby agree as follows: ARTICLE I DEFINITIONS SECTION 1.1 Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "Adverse Claim" means a lien, security interest, charge or encumbrance, or other right or claim in, of or on any Person's assets or properties in favor of any other Person. "Administrative Agent" means NationsBank of North Carolina, N.A., as administrative agent. "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person. A Person shall be deemed to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of voting stock, by contract or otherwise. "Affiliated Obligor" means any Obligor which is an Affiliate of another Obligor. "Aggregate Unpaids" means, at any time, an amount equal to the sum of (i) the aggregate accrued and unpaid Discount with respect to all Tranche Periods at such time, (ii) the Net Investment at such time, and (iii) all other amounts owed (whether due or accrued) hereunder by Transferor to the Company at such time. "Arrangement Fee" means the fee payable by the Transferor to the Administrative Agent pursuant to Section 2.7 hereof, the terms of which are set forth in the Fee Letter. "Average Collection Period" means at any time a period of days equal to the product of (i) a fraction the numerator of which shall be the amount set forth in the most recent Investor Report as the "Beginning Balance" of the Receivables and the denominator of which shall be the Collections as set forth in the most recent Investor Report and (ii) thirty (30). "Base Rate" or "BR" means, a rate per annum equal to the greater of (i) the prime rate of interest announced by the Liquidity Provider from time to time, changing when and as said prime rate changes (such rate 2 not necessarily being the lowest or best rate charged by the Liquidity Provider) and (ii) the rate equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day for such transactions received by the Liquidity Provider from three Federal funds brokers of recognized standing selected by it plus 2%. "Borg-Warner" shall mean Borg-Warner Security Corporation, a Delaware corporation, and its successors. "Business Day" means any day excluding Saturday, Sunday and any day on which banks in New York, New York, Charlotte, North Carolina, Dallas, Texas or Chicago, Illinois are authorized or required by law to close, and, when used with respect to the determination of any Eurodollar Rate or any notice with respect thereto, any such day which is also a day for trading by and between banks in United States dollar deposits in the London interbank market. "BR Tranche" means a Tranche as to which Discount is calculated at the Base Rate. "BR Tranche Period" means, with respect to a BR Tranche, prior to the Termination Date, a period of up to 30 days requested by the Transferor and agreed to by the Company or the Liquidity Provider , as the case may be, commencing on a Business Day requested by the Transferor and agreed to by the Company or the Liquidity Provider , as the case may be, and after the Termination Date, a period of one day. If such BR Tranche Period would end on a day which is not a Business Day, such BR Tranche Period shall end on the next succeeding Business Day. "Capitalized Lease" of a Person means any lease of property by such Person as lessee which would be capitalized on a balance sheet of such Person prepared in accordance with generally accepted accounting principles. "CD Rate" shall mean, with respect to any CD Tranche Period, a rate which is .75% in excess of a rate 3 per annum equal to the sum (rounded upward to the nearest 1/100 of 1%) of (A) the rate obtained by dividing (x) the Certificate of Deposit Rate for such CD Tranche Period by (y) a percentage equal to 100% minus the stated maximum rate for all reserve requirements as specified in Regulation D (including without limitation any marginal, emergency, supplemental, special or other reserves) that would be applicable during such Tranche Period to a negotiable certificate of deposit in excess of $100,000, with a maturity approximately equal to such Tranche Period, of any member bank of the Federal Reserve System plus (B) the then daily net annual assessment rate (rounded upward, if necessary, to the nearest 1/100 of 1%) as estimated by the Liquidity Provider for determining the current annual assessment payable by the Liquidity Provider to the Federal Deposit Insurance Corporation for insuring such certificates of deposit. "CD Tranche" means a Tranche as to which Discount is calculated at the CD Rate. "CD Tranche Period" means, with respect to a CD Tranche, prior to the Termination Date, a period of up to one month requested by the Transferor and agreed to by the Company or the Liquidity Provider, as the case may be, commencing on a Business Day requested by the Transferor and agreed to by the Company or the Liquidity Provider, as the case may be, and after the Termination Date, a period of one day. If such CD Tranche Period would end on a day which is not a Business Day, such CD Tranche Period shall end on the next succeeding Business Day. "Certificate of Deposit Rate" means, with respect to any CD Tranche Period, the average of the bid rates determined by the Liquidity Provider to be bid rates per annum, at approximately 10:00 a.m. (New York City time) on the Business Day before the first day of the CD Tranche Period for which such CD Rate is to be applicable, of two or more New York certificate of deposit dealers of recognized standing selected by the Liquidity Provider for the purchase in New York from the Liquidity Provider at face value of certificates of deposit of the Liquidity Provider in an aggregate amount approximately comparable to the amount of the CD Tranche to which such CD Rate is to be applicable and with a maturi- 4 ty approximately equal to the applicable CD Tranche Period. "Closing Date" means November 21, 1994. "Collateral Agent" means NationsBank of North Carolina, N.A., as collateral agent for any Liquidity Provider, any Credit Support Provider, the holders of Commercial Paper and certain other parties. "Collections" means, with respect to any Receivable, all cash collections and other cash proceeds of such Receivable, including, without limitation, all Finance Charges, if any, and cash proceeds of Related Security with respect to such Receivable. "Collection Account" means the account, established by the Collateral Agent, for the benefit of the Company, pursuant to Section 2.12. "Collection Agent" means at any time the Person then authorized pursuant to Section 6.1 to service, administer and collect Receivables. "Commercial Paper" means the promissory notes of the Company issued by the Company in the commercial paper market. "Company Certificate" means the certificate issued to the Company pursuant to Section 2.2 hereof. "Concentration Factor" means at any time for any Designated Obligor, (a) 2% of the Outstanding Balance of the Eligible Receivables, or (b) 3% of the Outstanding Balance of the Eligible Receivables, if the Obligor's senior unsecured long term debt is rated at least "BBB-" by S&P and "Baa3" by Moody's, or (c) such other amount determined by the Company in the reasonable exercise of its good faith judgment and disclosed in a written notice delivered to the Transferor. "Consolidated Net Worth" shall have the meaning specified in Exhibit N. "Contract" means an agreement, instrument or invoice, pursuant to or under which an Obligor shall be obligated to pay the Seller for services rendered. 5 "CP Rate" means, with respect to any CP Tranche Period, the rate equivalent to the rate (or if more than one rate, the weighted average of the rates) at which Commercial Paper having a term equal to such CP Tranche Period may be sold by any placement agent or commercial paper dealer selected by the Company, provided, however, that if the rate (or rates) as agreed between any such agent or dealer and the Company is a discount rate, then the rate (or if more than one rate, the weighted average of the rates) resulting from the Company's converting such discount rate (or rates) to an interest-bearing equivalent rate per annum. "CP Tranche" means a Tranche as to which Discount is calculated at a CP Rate. "CP Tranche Period" means, with respect to a CP Tranche, a period of days not to exceed 120 days commencing on a Business Day requested by the Transferor and agreed to by the Company pursuant to Section 2. If such CP Tranche Period would end on a day which is not a Business Day, such CP Tranche Period shall end on the next succeeding Business Day. "Credit and Collection Policy" shall mean the credit and collection policies and practices, relating to Contracts and Receivables existing on the date hereof and referred to in Exhibit B attached hereto, as modified from time to time in compliance with Section 5.2(d). "Credit Support Agreement" means the agreement between the Company and the Credit Support Provider evidencing the obligation of the Credit Support Provider to provide credit support to the Company in connection with the issuance by the Company of Commercial Paper. "Credit Support Provider" means the Person or Persons who will provide credit support to the Company in connection with the issuance by the Company of Commercial Paper. "Dealer Fee" means the fee payable by the Transferor to the Collateral Agent, pursuant to Section 2.4 hereof, the terms of which are set forth in the Fee Letter. 6 "Deemed Collections" means any Collections on any Receivable deemed to have been received pursuant to Section 2.9(a) or (b). "Defaulted Receivable" means a Receivable: (i) as to which any payment, or part thereof, remains unpaid for 120 days or more from the billing date for such Receivable; (ii) as to which an Event of Bankruptcy has occurred with respect to the Obligor thereof; (iii) which has been identified by the Transferor or the Collection Agent as uncollectible; or (iv) which, consistent with the applicable Credit and Collection Policy, should be written off the Transferor's books as uncollectible. "Delinquency Ratio" means, the ratio (expressed as a percentage) computed as of the last day of each calendar month by dividing (i) the aggregate Outstanding Balance of all Delinquent Receivables as of such date by (ii) the aggregate Outstanding Balance of all Receivables as of such date less Defaulted Receivables as of such date. "Delinquent Receivable" means a Receivable: (i) as to which any payment, or part thereof, remains unpaid for more than 60 days from the billing date for such Receivable and (ii) which is not a Defaulted Receivable. "Designated Financial Officer" means, with respect to any Person, the controller, treasurer, assistant treasurer or chief financial officer of such Person. "Designated Obligor" means, at any time, each Obligor; provided, however, that any Obligor shall cease to be a Designated Obligor effective three Business Days following the giving of notice to the Transferor from the Company, which notice shall contain an explanation in reasonable detail of the reason for such cessation. "Dilution Ratio" means, the ratio (expressed as a percentage) computed as of the last day of each calendar month by dividing (i) the aggregate amount of credits, rebates, discounts, disputes, warranty claims, repossessed or returned goods, charge back allowances and other dilutive factors, and any other billing or other adjustment by the Transferor or the Collection Agent, provided to Obligors in respect of Receivables during 7 such calendar month by (ii) the aggregate Outstanding Balance of all Receivables which arose during the preceding calendar month. "Discount" means, with respect to any Tranche Period: (TR x TNI x AD) -- 360 Where: TR = the Tranche Rate applicable to such Tranche Period. TNI = the portion of the Net Investment allocated to such Tranche Period. AD = the actual number of days during such Tranche Period. provided, however, that no provision of this Agreement shall require the payment or permit the collection of Discount in excess of the maximum permitted by applicable law; and provided, further, that Discount shall not be considered paid by any distribution if at any time such distribution is rescinded or must be returned for any reason. "Discount Reserve" means, at any time, an amount equal to: TD + LY Where: TD = the sum of the unpaid Discount and Program Fee for all Tranche Periods. LY = the Liquidation Yield "Early Collection Fee" means, for any Tranche Period (such Tranche Period to be determined without regard to the last sentence in Section 2.3(a)) during which the portion of the Net Investment that was allocated to such Tranche Period is reduced, the excess, if any, of (i) the additional Discount that would have accrued 8 during such Tranche Period if such reductions had not occurred, minus (ii) the income, if any, received by the Company from investing the proceeds of such reductions. "Eligible Investments" shall mean (a) negotiable instruments or securities represented by instruments in bearer or registered or in book-entry form which evidence (i) obligations fully guaranteed by the United States of America; (ii) time deposits in, or bankers acceptances issued by, any depositary institution or trust company incorporated under the laws of the United States of America or any state thereof and subject to supervision and examination by Federal or state banking or depositary institution authorities; provided, however, that at the time of investment or contractual commitment to invest therein, the certificates of deposit or short-term deposits, if any, or long- term unsecured debt obligations (other than such obligation whose rating is based on collateral or on the credit of a Person other than such institution or trust company) of such depositary institution or trust company shall have a credit rating from Moody's and S&P of at least "P-1" and "A-1", respectively, in the case of the certificates of deposit or short-term deposits, or a rating not lower than one of the two highest investment categories granted by Moody's and by S&P; (iii) certificates of deposit having, at the time of investment or contractual commitment to invest therein, a rating from Moody's and S&P of at least "P-1" and "A-1", respectively; (iv) investments in money market funds rated in the highest investment category or otherwise approved in writing by the applicable rating agencies, (b) demand deposits in any depositary institution or trust company referred to in (a)(ii) above, (c) commercial paper (having original or remaining maturities of no more than 30 days) having, at the time of investment or contractual commitment to invest therein, a credit rating from Moody's and S&P of at least "P-1" and "A-1", respectively, (d) Eurodollar time deposits having a credit rating from Moody's and S&P of at least "P-1" and "A- 1", respectively, and (e) repurchase agreements involving any of the Eligible Investments described in clauses (a)(i), (a)(iii) and (d) hereof so long as the other party to the repurchase agreement has at the time of investment therein, a rating from Moody's and S&P of at least "P-1" and "A-1", respectively. 9 "Eligible Receivable" means, at any time, any Receivable: (i) which has been originated by a Seller and as to which the Seller which originated such Receivable has sold, assigned and conveyed all of its right title and interest therein the Transferor pursuant to the Receivables Purchase Agreement and as to which the Transferor has good title thereto, free and clear of all Adverse Claims; (ii) as to which the Transferor or a Seller has satisfied all obligations to be fulfilled thereunder; (iii) the Obligor of which is a United States resident, is a Designated Obligor at the time of the initial creation of an interest therein hereunder, and is not an Affiliate of any of the parties hereto (for the avoidance of doubt it is acknowledged that neither NationsBank Corporation nor Merrill Lynch & Co. or any of their affiliates should be considered an Affiliate of any of the parties hereto); (iv) which, if the Obligor is a government or a governmental subdivision or agency, no more than (i) 15% of aggregate Outstanding Balance of Eligible Receivables may be Receivables payable by municipal governments and (ii) 5% of aggregate Outstanding Balance of Eligible Receivables may be Receivables payable by the federal government; (v) which is not a Defaulted Receivable at the time of the initial creation of an interest of the Company therein; (vi) which is not a Delinquent Receivable at the time of the initial creation of an interest of the Company therein; (vii) which relates to services which have been performed and have been billed and which, according to the Contract related thereto, are required to be paid in full upon receipt by the Obligor of the billing notice therefor; 10 (viii) which is an "eligible asset" as defined in Rule 3a-7 under the Investment Company Act of 1940, as amended; (ix) a purchase of which with the proceeds of Commercial Paper would constitute a "current transaction" within the meaning of Section 3(a)(3) of the Securities Act of 1933, as amended; (x) which is an "account" or "general intangible" within the meaning of Article 9 of the UCC of all applicable jurisdictions; (xi) which is denominated and payable only in United States dollars in the United States; (xii) which, arises under a Contract that together with the Receivable related thereto, is in full force and effect and constitutes the legal, valid and binding obligation of the related Obligor enforceable against such Obligor in accordance with its terms and is not subject to any offset, counterclaim or other defense at such time; (xiii) which, together with the Contract related thereto, does not contravene in any material respect any laws, rules or regulations applicable thereto (including, without limitation, laws, rules and regulations relating to truth in lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices and privacy) and with respect to which no part of the Contract related thereto is in violation of any such law, rule or regulation in any material respect if such violation would impair the collectibility of such Receivable or would adversely affect the Company's interest in such Receivable; (xiv) which (A) satisfies all applicable requirements of the Credit and Collection Policy and (B) complies with such other non- arbitrary credit related criteria and requirements as the Company may from time to time specify to the Transferor following five days' notice; 11 (xv) which was generated in the ordinary course of a Seller's business and which is subject to a valid sale and assignment from the Seller to the Transferor under the Receivables Purchase Agreement; and (xvi) the Obligor of which has been directed to make all payments to a specified account with respect to which there shall be a Lock-Box Agreement in effect. "Estimated Maturity Period" means, at any time, the period, rounded upward to the nearest whole number of days, equal to the weighted average days until due of the Receivables as calculated by the Collection Agent in good faith and set forth in the most recent Investor Report, such calculation to be based on the assumptions that (a) each Receivable within a particular aging category, (as set forth in the Investor Report) will be paid on the last day of such aging category and (b) the last day of the last such aging category coincides with the last date on which any Outstanding Balance of any Receivables would be written off as uncollectible or charged against any applicable reserve or similar account in accordance with the objective requirements of the Credit and Collection Policy and the Transferor's normal accounting practices applied on a basis consistent with those reflected in the Transferor's financial statements, provided, however, that if the Company shall reasonably disagree with any such calculation, the Company may recalculate the Estimated Maturity Period, and such recalculation, in the absence of manifest error, shall be conclusive. "Eurodollar Rate" means, with respect to any Eurodollar Tranche Period, a rate which is .625% in excess of a rate per annum equal to the sum (rounded upwards, if necessary, to the next higher 1/100 of 1%) of (A) the rate obtained by dividing (i) the applicable LIBOR Rate by (ii) a percentage equal to 100% minus the reserve percentage used for determining the maximum reserve requirement as specified in Regulation D (including, without limitation, any marginal, emergency, supplemental, special or other reserves) that is applicable to the Liquidity Provider during such Eurodollar Tranche Period in respect of eurocurrency or eurodollar funding, lending or liabilities (or, if more than one percentage shall be so applicable, the daily average of such per- 12 centage for those days in such Eurodollar Tranche Period during which any such percentage shall be applicable) plus (B) the then daily net annual assessment rate (rounded upwards, if necessary, to the nearest 1/100 of 1%) as estimated by the Liquidity Provider for determining the current annual assessment payable by the Liquidity Provider to the Federal Deposit Insurance Corporation in respect of eurocurrency or eurodollar funding, lending or liabilities. "Eurodollar Tranche" means a Tranche as to which Discount is calculated at the Eurodollar Rate. "Eurodollar Tranche Period" means, with respect to a Eurodollar Tranche, prior to the Termination Date, a period of up to one month requested by the Transferor and agreed to by the Company or the Liquidity Provider , as the case may be, commencing on a Business Day requested by the Transferor and agreed to by the Company; provided, however, that if such Eurodollar Tranche Period would expire on a day which is not a Business Day, such Eurodollar Tranche Period shall expire on the next succeeding Business Day; provided, further, that if such Eurodollar Tranche Period would expire on (a) a day which is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Eurodollar Tranche Period shall expire on the next preceding Business Day or (b) a Business Day for which there is no numerically corresponding day in the applicable subsequent calendar month, such Eurodollar Tranche Period shall expire on the last Business Day of such month. "Event of Bankruptcy", with respect to any Person, shall mean (i) that such Person shall generally not pay its debts as such debts become due or shall admit in writing its inability to pay its debts generally or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against such Person seeking to adjudicate it as bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or any substantial part of its property or (ii) if such Person is a corporation, such Person or 13 any Subsidiary shall take any corporate action to authorize any of the actions set forth in the preceding clause (i). "Fee Letter" means the letter agreement dated the date hereof between the Transferor and the Company, as amended, modified or supplemented from time to time. "Finance Charges" means, with respect to a Contract, any finance, interest, late or similar charges owing by an Obligor pursuant to such Contract. "Guaranty" of a Person means any agreement by which such Person assumes, guarantees, endorses, contingently agrees to purchase or provide funds for the payment of, or otherwise becomes liable upon, the obligation of any other Person, or agrees to maintain the net worth or working capital or other financial condition of any other Person or otherwise assures any other creditor of such other Person against loss, including, without limitation, any comfort letter, operating agreement or take-or-pay contract and shall include, without limitation, the contingent liability of such Person in connection with any application for a letter of credit. "Incremental Transfer" means a Transfer which is made pursuant to Section 2.2(a). "Indebtedness" of a Person means such Person's (i) obligations for borrowed money, (ii) obligations representing the deferred purchase price of property other than accounts payable arising in the ordinary course of such Person's business on terms customary in the trade, (iii) obligations, whether or not assumed, secured by liens or payable out of the proceeds or production from property now or hereafter owned or acquired by such Person, (iv) obligations which are evidenced by notes, acceptances, or other instruments, (v) Capitalized Lease obligations and (vi) obligations for which such Person is obligated pursuant to a Guaranty. "Indemnified Amounts" has the meaning specified in Section 8.1. "Indemnified Parties" has the meaning specified in Section 8.1. 14 "Interest Coverage Ratio" shall have the meaning specified in Section 7.1(n). "Investor Report" means a report, in substantially the form of Exhibit E or in such other form as is mutually agreed to by the Transferor and the Company, furnished by the Collection Agent to the Company and the Administrative Agent pursuant to Section 2.11. "Law" shall mean any law (including common law), constitution, statute, treaty, regulation, rule, ordinance, order, injunction, writ, decree or award of any Official Body. "Leverage Ratio" shall have the meaning specified in Section 5.3. "LIBOR Rate" shall mean, with respect to any Eurodollar Tranche Period, the rate at which deposits in dollars are offered to the Liquidity Provider in the London interbank market at approximately 11:00 a.m. (London time) two Business Days before the first day of such Eurodollar Tranche Period in an amount approximately equal to the Eurodollar Tranche to which the Eurodollar Rate is to apply and for a period of time approximately equal to the applicable Eurodollar Tranche Period. "Liquidation Yield" means, at any time, an amount equal to: (RVF x LBR x NI) x (EM x 1.5) ---------- 360 Where: RVF = the Rate Variance Factor. LBR = the Base Rate which is applicable to the liquidation period of the Net Investment at such time. NI = the Net Investment. EM = the Estimated Maturity Period of the Receivables. 15 "Liquidity Provider Agreement" means the agreement between the Company and the Liquidity Provider evidencing the obligation of the Liquidity Provider to provide liquidity support to the Company in connection with the issuance by the Company of Commercial Paper. "Liquidity Provider" means the Person or Persons who will provide liquidity support to the Company in connection with the issuance by the Company of Commercial Paper. "Lock-Box Account" means an account maintained by the Collection Agent at a Lock-Box Bank for the purpose of receiving Collections from Receivables. "Lock-Box Agreement" means an agreement among the Collateral Agent, the Collection Agent and a Lock-Box Bank in substantially the form of Exhibit D hereto. "Lock-Box Bank" means each of the banks set forth in Exhibit C hereto and such banks as may be added thereto or deleted therefrom pursuant to Section 2.8. "Loss/Dilution Percentage" means, on any day, the greater of (i) the sum of (a) 6 times the highest Loss-to-Liquidation Ratio for any calendar month over the 12 calendar months preceding the then current month, and (b) 2 times the highest Dilution Ratio for any calendar month over the preceding 12 calendar months, and (c) 10% and (ii) 22 percent. "Loss/Dilution Reserve" means, on any day, an amount equal to: LP x (NI + DR + SFR) Where: LP = the Loss/Dilution Percentage at the close of business of the Collection Agent on such day. NI = the Net Investment at the close of business of the Collection Agent on such day. DR = the Discount Reserve at the close of business of the Collection Agent on such day. 16 SFR = the Servicing Fee Reserve at the close of business of the Collection Agent on such day. Notwithstanding the foregoing, the Loss/Dilution Reserve shall at all times be at least equal to $16,000,000. "Loss-to-Liquidation Ratio" means the ratio (expressed as a percentage) computed as of the last day of each calendar month by dividing (i) the aggregate Outstanding Balance of all Receivables which became Defaulted Receivables during such period by (ii) the aggregate amount of Collections received by the Collection Agent during such period. "Maximum Net Investment" means $130,000,000. "Maximum Percentage Factor" means 100%. "Moody's" means Moody's Investors Service, Inc. "Net Investment" means the sum of the amounts paid to the Transferor for each Incremental Transfer less the aggregate amount of Collections received and applied by the Company to reduce such Net Investment pursuant to Section 2.6 or Section 2.9; provided that the Net Investment shall be restored in the amount of any Collections so received and applied if at any time the distribution of such Collections is rescinded or must otherwise be returned for any reason. "Net Receivables Balance" means at any time the Outstanding Balance of the Eligible Receivables at such time reduced by the sum of (i) the aggregate amount by which the Outstanding Balance of all Eligible Receivables of each Designated Obligor exceeds the Concentration Factor for such Designated Obligor, plus (ii) the aggregate Outstanding Balance of all Eligible Receivables which are Defaulted Receivables, plus (iii) the aggregate Outstanding Balance of all Eligible Receivables which are Delinquent Receivables, plus (iv) the aggregate Outstanding Balance of all Eligible Receivables due from each of the top ten Obligors (that is, those Obligors which together with their Affiliates have the ten largest Eligible Receivable balances) with respect to which 15% or more of such Obligor's Receivables are Defaulted Receivables. 17 "Obligor" means a Person obligated to make payments for the provision of goods and services pursuant to a Contract. "Official Body" shall mean any government or political subdivision or any agency, authority, bureau, central bank, commission, department or instrumentality of either, or any court, tribunal, grand jury or arbitrator, in each case whether foreign or domestic. "Other Transferor" means any Person other than the Transferor that has entered into a receivables purchase agreement or transfer and administration agreement with the Company. "Outstanding Balance" of any Receivable at any time means the then outstanding principal amount thereof including any accrued and outstanding Finance Charges related thereto. "Percentage Factor" means the percentage computed at any time of determination as follows: NI + LR + DR + SFR ------------------- NRB Where: NI = the Net Investment at the time of such computation. LR = the Loss/Dilution Reserve at the time of such computation. DR = the Discount Reserve at the time of such computation. SFR = the Servicing Fee Reserve at the time of such computation. NRB = the Net Receivables Balance at the time of such computation. Notwithstanding the foregoing computation, the Percentage Factor shall not exceed one hundred percent (100%). 18 "Person" means any corporation, natural person, firm, joint venture, partnership, trust, unincorporated organization, enterprise, government or any department or agency of any government. "Potential Termination Event" means an event which but for the lapse of time or the giving of notice, or both, would constitute a Termination Event. "Proceeds" means "proceeds" as defined in Section 9-306(1) of the UCC. "Program Fee" means the fee payable by the Transferor to the Company pursuant to Section 2.7 hereof, the terms of which are set forth in the Fee Letter. "Purchased Interest" means the interest in the Receivables acquired by the Liquidity Provider through purchase pursuant to the terms of the Liquidity Provider Agreement. "Rate Variance Factor" means the number, computed from time to time in good faith by the Company, that reflects the largest potential variance (from minimum to maximum) in selected interest rates over a period of time selected by the Company from time to time, set forth in a written notice by the Company to the Transferor and the Collection Agent. "Receivable" means the indebtedness owed upon creation to the Seller by any Obligor under a Contract whether constituting an account, chattel paper, instrument or general intangible, arising in connection with the provision of services by the Seller, and includes the right to payment of any Finance Charges and other obligations of such Obligor with respect thereto. Notwithstanding the foregoing, once a Receivable has been deemed collected pursuant to Section 2.9 hereof, it shall no longer constitute a Receivable hereunder. "Receivables Purchase Agreement" means that certain Amended and Restated Receivables Purchase Agreement dated as November 21, 1994 between the Seller and the Transferor. "Records" means all Contracts and other documents, books, records and other information (including, 19 without limitation, computer programs, tapes, discs, punch cards, data processing software and related property and rights) maintained with respect to Receivables and the related Obligors. "Related Security" means with respect to any Receivable: (i) all security interests or liens and property subject thereto from time to time, if any, purporting to secure payment of such Receivable, whether pursuant to the Contract related to such Receivable or otherwise, together with all financing statements signed by an Obligor describing any collateral securing such Receivable; (ii) all guarantees, insurance or other agreements or arrangements of any kind from time to time supporting or securing payment of such Receivable whether pursuant to the Contract related to such Receivable or otherwise; and (iii) all Records. "Section 8.2 Costs" has the meaning specified in Section 8.2(d). "Seller" shall mean, collectively, Borg-Warner and the other originators named in the Receivables Purchase Agreement, together with their successors as permitted in the Receivables Purchase Agreement. "Servicing Fee" shall mean the fee payable by the Company to the Collection Agent, with respect to a Tranche, in an amount equal to 1% per annum on the amount of the Net Investment allocated to such Tranche pursuant to Section 2.3. Such fee shall accrue from the date of the initial purchase of an ownership interest in the Receivables to the later of the Termination Date or the date on which the Net Investment is reduced to zero. On or prior to the Termination Date such fee shall be payable only from Collections pursuant to, and subject to the priority of payments set forth in, Section 2.5. After the Termination Date such fee shall be payable only from Collections pursuant to, and subject to the priority of payments set forth in, Section 2.6. 20 "Servicing Fee Reserve" means at any time the sum of an amount equal to the product of (A) the aggregate Outstanding Balance of the Receivables at such time multiplied by the Servicing Fee percentage and (B) a fraction having as the numerator, the sum of (x) the Estimated Maturity Period multiplied by 1.5 plus (y) 30 and the denominator of which is 360. "Standard & Poor's" or "S&P" means Standard & Poor's Ratings Group. "Subsidiary" of a Person means any corporation more than 50% of the outstanding voting securities of which shall at any time be owned or controlled, directly or indirectly, by such Person or by one or more Subsidiaries of such Person or any similar business organization which is so owned or controlled. "Termination Date" means the earliest of (i) that Business Day designated by the Transferor to the Company as the Termination Date at any time following 30 days' written notice to the Company, (ii) the date of termination of the commitment of (A) the Liquidity Provider under the Liquidity Provider Agreement or (B) the Credit Support Provider under the Credit Support Agreement, (iii) the day on which a Termination Event occurs pursuant to Section 7.1, or (v) November 20, 1997. "Termination Event" means an event described in Section 7.1. "Tranche" means a portion of the Net Investment allocated to a Tranche Period pursuant to Section 2.3. "Tranche Period" means a CP Tranche Period, a BR Tranche Period, a CD Tranche Period or a Eurodollar Tranche Period. "Tranche Rate" means either the CP Rate, the Base Rate, the CD Rate or the Eurodollar Rate. "Transaction Costs" has the meaning specified in Section 8.3(a). "Transfer" means a conveyance, transfer and assignment by the Transferor to the Company of an undi- 21 vided percentage ownership interest in Receivables hereunder. "Transfer Certificate" has the meaning given to it in Section 2.2(a). "Transfer Date" means, with respect to each Transfer, the Business Day on which such Transfer is made. "Transfer Price" means with respect to any Incremental Transfer, the amount paid to the Transferor by the Company as described in the Transfer Certificate. "Transferred Interest" means, at any time of determination, an undivided percentage ownership interest in (i) each and every then outstanding Receivable, (ii) all Related Security with respect to each such Receivable, (iii) all Collections with respect thereto, and (iv) other Proceeds of the foregoing, equal to the Percentage Factor at such time, and only at such time (without regard to prior calculations). The Transferred Interest in each Receivable, together with Related Security and Collections with respect thereto, shall at all times be equal to the Transferred Interest in each other Receivable, together with Related Security and Collections. To the extent that the Transferred Interest shall decrease as a result of a recalculation of the Percentage Factor, the Company shall be considered to have reconveyed to the Transferor an undivided percentage ownership interest in each Receivable, together with Related Security and Collections, in an amount equal to such decrease such that in each case the Transferred Interest in each Receivable shall be equal to the Transferred Interest in each other Receivable. "UCC" means, with respect to any state, the Uniform Commercial Code as from time to time in effect in such state. "Unused Facility Fee" means the fee payable by the Transferor to the Company pursuant to Section 2.7 hereof, the terms of which are set forth in the Fee Letter. "Weekly Report" means a report in substantially the form of Exhibit G hereto (with such modification as may be mutually agreed to by the Transferor and the Company) prepared and furnished by the Collection Agent 22 to the Administrative Agent, pursuant to Section 2.11, setting forth the Net Receivable Balance and the calculation of the Percentage Factor. SECTION 1.2 Other Terms. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles. All terms used in Article 9 of the UCC in the State of New York, and not specifically defined herein, are used herein as defined in such Article 9. SECTION 1.3 Computation of Time Periods. Unless otherwise stated in this Agreement, in the computation of a period of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding." 23 ARTICLE II PURCHASES AND SETTLEMENTS SECTION 2.1 Facility. Upon the terms and subject to the conditions herein set forth the Transferor may, at its option, convey, transfer and assign to the Company, and the Company shall accept such conveyance, transfer and assignment from the Transferor, without recourse except as provided herein, undivided percentage ownership interests in the Receivables, together with Related Security and Collections with respect thereto, from time to time. SECTION 2.2 Transfers; Company Certificate; Eligible Receivables (a) Incremental Transfers. Upon the terms and subject to the conditions herein set forth the Transferor may, at its option, convey, transfer and assign to the Company, and the Company shall accept such conveyance, transfer and assignment from the Transferor, without recourse except as provided herein, undivided percentage ownership interests in the Receivables, together with Related Security and Collections with respect thereto (each, an "Incremental Transfer") from time to time prior to the occurrence of a Termination Date for an aggregate Transfer Price not to exceed the Maximum Net Investment; provided that the Company shall not accept any such transfer if it is unable to obtain funds therefor in the commercial paper market or under the Liquidity Provider Agreement. The Transferor shall by notice given by telefax offer to convey, transfer and assign to the Company undivided percentage ownership interests in the Receivables at least two (2) Business Days prior to the proposed date of transfer. Each such notice shall specify the desired Transfer Price (which shall be at least $1,000,000 or integral multiples of $1,000,000 in excess thereof) and the desired date of such Incremental Transfer, together with the desired Tranche Period (or range) related thereto as required by Section 2.3. The Company if it accepts such offer shall accept such offer to convey, transfer and assign undivided percentage ownership interests by notice given to the Transferor by telephone or telefax. Each notice of proposed Transfer shall be irrevocable and binding on the Transferor and the Transferor shall indemnify the Company against any loss or expense incurred by the Company, either directly or 24 through the Liquidity Provider Agreement as a result of any failure by the Transferor to complete such Incremental Transfer including, without limitation, any loss (including loss of anticipated profits) or expense incurred by the Company, either directly or pursuant to the Liquidity Provider Agreement, by reason of the liquidation or reemployment of funds acquired by the Company or the Liquidity Provider (including, without limitation, funds obtained by issuing commercial paper or promissory notes or obtaining deposits as loans from third parties) for the Company to fund such Incremental Transfer. On the date of the initial Incremental Transfer, the Company shall deliver written confirmation to the Transferor of the Transfer Price, the Tranche Period(s) and the Tranche Rate(s) relating to such Transfer and the Transferor shall deliver to the Company the Transfer Certificate in the form of Exhibit F hereto (the "Transfer Certificate"). The Company shall indicate the amount of the initial Incremental Transfer together with the date thereof on the grid attached to the Transfer Certificate. On the date of each subsequent Incremental Transfer, the Company shall send written confirmation to the Transferor of the Transfer Price, the Tranche Period(s), the Transfer Date and the Tranche Rate(s) applicable to such Incremental Transfer. The Company shall indicate the amount of the Incremental Transfer together with the date thereof as well as any decrease in the Net Investment on the grid attached to the Transfer Certificate. The Transfer Certificate shall evidence the Incremental Transfers. Following each Incremental Transfer, the Company shall deposit to the Transferor's account at the location indicated in Section 9.3, in immediately available funds, an amount equal to the Transfer Price for such Incremental Transfer. (b) Reinvestment Transfers. On each Business Day occurring after the initial Incremental Transfer hereunder and prior to the Termination Date, the Transferor hereby agrees to convey, transfer and assign to the Company, and in consideration of Transferor's agreement to maintain at all times prior to the Termination Date a Net Receivables Balance in an amount at least sufficient to maintain the Percentage Factor at an amount not greater than the Maximum Percentage Factor, the Company hereby agrees to purchase from the Transferor undivided percentage ownership interests in each and 25 every Receivable, together with Related Security and Collections with respect thereto, to the extent that Collections are available for such Transfer in accordance with Section 2.5, such that after giving effect to such Transfer, (i) the amount of the Company's Net Investment at the close of the Company's business on such Business Day shall be equal to the amount of the Company's Net Investment at the close of the Company's business on the Business Day immediately preceding such Business Day plus the Transfer Price of any Incremental Transfer made on such day, if any, and (ii) the Company's Transferred Interest in each Receivable, together with Related Security and Collections with respect thereto, shall be equal to its Transferred Interest in each other Receivable, together with Related Security and Collections with respect thereto. (c) All Transfers. Each Transfer shall constitute a purchase of undivided percentage ownership interests in each and every Receivable, together with Related Security and Collections with respect thereto, then existing, as well as in each and every Receivable, together with Related Security and Collections with respect thereto, which arises at any time after the date of such Transfer. The Company's aggregate undivided percentage ownership interest in the Receivables, together with Related Security and Collections with respect thereto, shall equal the Percentage Factor in effect from time to time. (d) Company Certificate. The Transferor shall issue to the Company the Company Certificate, in the form of Exhibit M, on or prior to the date hereof. (e) Percentage Factor. The Percentage Factor shall be calculated by the Collection Agent on the day of the initial Incremental Transfer hereunder. Thereafter, until the Termination Date, the Collection Agent shall daily recompute the Percentage Factor and report such recomputations to the Company weekly in the Weekly Report or as requested by the Company. The Percentage Factor shall remain constant from the time as of which any such computation or recomputation is made until the time as of which the next such recomputation shall be made, notwithstanding any additional Receivables arising, any Incremental Transfer made pursuant to Section 2.2(a) or any reinvestment Transfer made pursuant to Section 26 2.2(b) and 2.5 during any period between computations of the Percentage Factor. The Percentage Factor, as calculated at the close of business on the Business Day immediately preceding the Termination Date, shall remain constant at all times thereafter until such time as the Company shall have received the Aggregate Unpaids, at which time the Percentage Factor shall be recomputed in accordance with Section 2.6. SECTION 2.3 Selection of Tranche Periods and Tranche Rates. (a) At all times hereafter, but prior to the occurrence of a Termination Event, the Transferor shall, subject to the Company's approval and the limitations described below, request Tranche Periods and allocate a portion of the Net Investment to each selected Tranche Period, so that the aggregate amounts allocated to outstanding Tranche Periods at all times shall equal the Net Investment. The Transferor shall give the Company irrevocable notice by telephone of the new requested Tranche Period(s) at least two (2) Business Days prior to the expiration of any then existing Tranche Period; provided, however, that the Company may select, in its sole discretion, any such new Tranche Period if (i) the Transferor fails to provide such notice on a timely basis or (ii) the Company determines, in its sole discretion, that the Tranche Period requested by the Transferor is unavailable or for any reason commercially undesirable. The Company confirms that it is its intention to allocate all or substantially all of the Net Investment to one or more CP Tranche Periods; provided that the Company may determine, from time to time, in its sole discretion, that funding such Net Investment by means of one or more CP Tranche Periods is not desirable for any reason. If the Liquidity Provider acquires a Purchased Interest with respect to the Receivables pursuant to the terms of the Liquidity Provider Agreement, the Liquidity Provider may exercise the right of selection granted to the Company hereby. The Tranche Rate applicable to any such Purchased Interest may be the BR Rate, the CD Rate or the Eurodollar Rate, as determined by the Liquidity Provider. In the case of any Tranche Period outstanding upon the occurrence of a Termination Event, such Tranche Period shall end on the date of such occurrence. 27 (b) At all times on and after the occurrence of a Termination Event, the Company or the Liquidity Provider, as applicable, shall select all Tranche Periods and Tranche Rates applicable thereto. SECTION 2.4 Discount, Fees and Other Costs and Expenses. Notwithstanding the limitation on recourse under Section 2.1, the Transferor shall pay, as and when due in accordance with this Agreement, all fees hereunder, Discount, all amounts payable pursuant to Article VIII hereof, if any, and the Servicing Fee. On the last day of each Tranche Period the Transferor shall pay to the Company an amount equal to the accrued and unpaid Discount for such Tranche Period together with an amount equal to the discount accrued on the Company's Commercial Paper notes to the extent such notes were issued in order to fund the Transferred Interest in an amount in excess of the Transfer Price of an Incremental Transfer. The Transferor shall pay to the Company, on each day on which Commercial Paper is issued by the Company, the Dealer Fee. Discount shall accrue with respect to each Tranche on each day occurring during the Tranche Period related thereto. Nothing in this Agreement shall limit in any way the obligations of the Transferor to pay the amounts set forth in this Section 2.4. SECTION 2.5 Non-Liquidation Settlement and Reinvestment Procedures. On each day after the date of any Incremental Transfer but prior to the Termination Date, the Collection Agent shall out of the Percentage Factor of Collections received on or prior to such day and not previously applied or accounted for: (i) set aside and hold in trust for the Company (or deposit into the Collection Account if so required pursuant to Section 2.12) an amount equal to all Discount and the Servicing Fee accrued through such day and not so previously set aside or paid and (ii) apply the balance of such Percentage Factor of Collections remaining after application of Collections as provided in clause (i) of this Section 2.5 to the Transferor, for the benefit of the Company to the purchase of additional undivided percentage interests in each Receivable pursuant to Section 2.2(b). On the last day of each Tranche Period, from the amounts set aside as described in clause (i) of the first sentence of this Section 2.5, the Collection Agent shall deposit 28 to the Company's account, an amount equal to the accrued and unpaid Discount for such Tranche Period and shall deposit to its account an amount equal to the accrued and unpaid Servicing Fee for such Tranche Period. As provided in Section 6.2(b), the Collection Agent shall remit to the Transferor, as soon as practicable after receipt, such portion of Collections not allocated to the Company. SECTION 2.6 Liquidation Settlement Procedures. If on the Termination Date, the Percentage Factor is greater than the Maximum Percentage Factor, then the Transferor shall immediately pay to the Company from previously received Collections, an amount equal to the amount such that, when applied in reduction of the Net Investment, will result in a Percentage Factor less than or equal to the Maximum Percentage Factor. Such amount shall be applied by the Company to the reduction of the Net Investment of Tranche Periods selected by the Company. On the Termination Date and on each day thereafter, the Collection Agent shall set aside and hold in trust for the Company (or deposit into the Collection Account if so required pursuant to Section 2.12) the Percentage Factor of all Collections received on such day. On the Termination Date, the Collection Agent shall deposit to the Company's account any remaining amounts set aside pursuant to Section 2.5(i) above. On the last day of each Tranche Period to occur on or after the Termination Date, the Collection Agent shall deposit to the Company's account, the amounts set aside pursuant to the preceding sentence, together with any remaining amounts set aside pursuant to Section 2.5(i) prior to the Termination Date but not to exceed the sum of (i) the accrued Discount for such Tranche Period, (ii) the portion of the Net Investment allocated to such Tranche Period, and (iii) the aggregate of all other amounts then owed (whether due or accrued) hereunder by Transferor to the Company. On such day, the Collection Agent shall deposit to its account, from the amounts set aside pursuant to the preceding sentence which remain after payment in full of the aforementioned amounts, the accrued Servicing Fee for such Tranche Period. If there shall be insufficient funds on deposit for the Collection Agent to distribute funds in payment in full of the aforementioned amounts, the Collection Agent shall distribute funds first, in payment of the accrued Discount, second, in payment of all fees and expenses payable to the Company hereunder, third, if the Transferor is not the Collection Agent, to the Collection Agent's account, in payment of the Servicing Fee payable to the Collection Agent, fourth, in reduction of the Net 29 Investment allocated to such Tranche Period, fifth, in payment of all other amounts payable to the Company and sixth, if the Transferor is the Collection Agent, to its account as Collection Agent, in payment of the Servicing Fee payable to the Transferor as Collection Agent. Following the date on which the Net Investment has been reduced to zero, all accrued Discount and Servicing Fees have been paid in full and all other Aggregate Unpaids have been paid in full, (i) the Collection Agent shall recompute the Percentage Factor, (ii) the Company shall be considered to have reconveyed to the Transferor any interest in the Receivables (including the Transferred Interest), (iii) the Collection Agent shall pay to Transferor any remaining Collections set aside and held by the Collection Agent pursuant to the second sentence of this Section 2.6 and (iv) the Company shall execute and deliver to the Transferor, at the Transferor's expense, such documents or instruments as are necessary to terminate the Company's interest in the Receivables. Any such documents shall be prepared by or on behalf of the Transferor. SECTION 2.7 Fees. Notwithstanding any limitation on recourse contained in this Agreement, the Transferor shall pay the following non- refundable fees: (a) On the last day of each month, to the Company,the Program Fee and the Unused Facility Fee. (b) On the date of execution hereof, to the Administrative Agent, the Arrangement Fee. SECTION 2.8 Protection of Ownership Interest of the Company. (a) The Transferor agrees that from time to time, at its expense, it will promptly execute and deliver all instruments and documents and take all actions as may be necessary or as the Company may reasonably request in order to perfect or protect the Transferred Interest or to enable the Company to exercise or enforce any of its rights hereunder. Without limiting the foregoing, the Transferor will, upon the request of the Company, in order to accurately reflect this purchase and sale transaction, execute and file such financing or continuation statements or amendments thereto or assignments thereof (as permitted pursuant to Section 9.6 30 hereof) as may be requested by the Company and mark its master data processing records and other documents with a legend describing the purchase by the Company of the Transferred Interest. The Transferor shall, upon request of the Company, obtain such additional search reports as the Company shall request. To the fullest extent permitted by applicable law, the Company shall be permitted to sign and file continuation statements and amendments thereto and assignments thereof without the Transferor's signature. Carbon, photographic or other reproduction of this Agreement or any financing statement shall be sufficient as a financing statement. The Transferor shall neither change its name, identity or corporate structure (within the meaning of Section 9-402(7) of the UCC as in effect in the States of New York and Illinois) nor relocate its chief executive office or any office where Records are kept unless it shall have: (i) given the Company at least thirty (30) days prior notice thereof and (ii) prepared at Transferor's expense and delivered to the Company all financing statements, instruments and other documents necessary to preserve and protect the Transferred Interest or requested by the Company in connection with such change or relocation. Any filings under the UCC or otherwise that are occasioned by such change in name or location shall be made at the expense of Transferor. (b) The Collection Agent shall cause the Sellers to instruct all Obligors to cause all Collections to be deposited directly with a Lock-Box Bank. Any Lock-Box Account maintained by a Lock-Box Bank pursuant to the related Lock- Box Agreement shall be under the ownership and control of the Collateral Agent. The Collection Agent shall be permitted to give instructions to the Lock-Box Banks for so long as either a Collection Agent default or any other Termination Event has not occurred hereunder. The Collection Agent shall not add any bank as a Lock-Box Bank to those listed on Exhibit C unless such bank has entered into a Lock-Box Agreement. The Collection Agent shall not terminate any bank as a Lock-Box Bank unless the Administrative Agent shall have received fifteen (15) days' prior notice of such termination. If the Transferor or the Collection Agent receives any Collections or the Transferor is deemed to receive any Collections pursuant to Section 2.9, the Transferor or the Collection Agent, as applicable, shall imme- 31 diately, but in any event within forty-eight (48) hours of receipt, remit such Collections to a Lock-Box Account. SECTION 2.9 Deemed Collections; Application of Payments. (a) If on any day the Outstanding Balance of a Receivable is either (x) reduced as a result of any defective, rejected or returned goods or services, any cash discount, credit, rebate, allowance or other dilution factor, any billing adjustment or other adjustment, or (y) reduced or canceled as a result of a setoff or offset in respect of any claim by any Person (whether such claim arises out of the same or a related transaction or an unrelated transaction), the Transferor shall be deemed to have received on such day a collection of such Receivable in the amount of such reduction or cancellation and the Transferor shall pay to the Collection Agent an amount equal to such reduction or cancellation and such amount shall be applied by the Collection Agent as a Collection in accordance with Section 2.5 or 2.6, as applicable. The Net Investment shall be reduced by the amount of such payment actually received by the Company. (b) If on any day any of the representations or warranties in Article III is no longer true with respect to a Receivable, the Transferor shall be deemed to have received on such day a Collection of such Receivable in full and the Transferor shall on such day pay to the Collection Agent an amount equal to the aggregate Percentage Factor of the Outstanding Balance of such Receivable and such amount shall be allocated to the Company and applied by the Collection Agent as a Collection allocable to the Transferred Interest in accordance with Section 2.5 or 2.6, as applicable. The Net Investment shall be reduced by the amount of such payment actually received by the Company. (c) Any payment by an Obligor in respect of any indebtedness owed by it to the Transferor shall, except as otherwise specified by such Obligor or otherwise required by contract or law and unless otherwise instructed by the Company, be applied as a Collection of any Receivable of such Obligor included in the Transferred Interest (starting with the oldest such Receivable) to the extent of any amounts then due and payable thereunder before being applied to any other receivable or other indebtedness of such Obligor. SECTION 2.10 Payments and Computations, Etc. All amounts to be paid or deposited by the Transferor or 32 the Collection Agent hereunder shall be paid or deposited in accordance with the terms hereof no later than 1:00 p.m. (New York City time) on the day when due in immediately available funds; if such amounts are payable to the Company they shall be paid or deposited in accordance with the instructions of the Administrative Agent, until otherwise notified by the Company. The Transferor shall, to the extent permitted by law, pay to the Company upon demand, interest on all amounts not paid or deposited when due to the Company hereunder at a rate equal to 2% per annum plus the Base Rate. All computations of discount, interest and all per annum fees hereunder shall be made on the basis of a year of 360 days for the actual number of days (including the first but excluding the last day) elapsed. Any computations of amounts payable by the Transferor hereunder to the Company, the Liquidity Provider or the Credit Support Provider shall be binding absent manifest error. SECTION 2.11 Reports. (a) Prior to the 18th day of each month, the Collection Agent shall prepare and forward to the Administrative Agent (i) an Investor Report as of the end of the last day of the immediately preceding month and (ii) if requested by the Company or the Administrative Agent, a listing by Obligor of all Receivables together with an aging of such Receivables. The Collection Agent shall prepare and provide to the Administrative Agent such other information as the Company or the Administrative Agent may reasonably request. (b) Beginning on Wednesday November 30, 1994, and on each Wednesday of each week thereafter, prior to 12:00 noon (New York City time), the Collection Agent shall deliver to the Administrative Agent a Weekly Report setting forth the Net Receivable Balance, calculated on the basis of the most recent information available from the Collection Agent's master servicing records (which information shall not be more than three (3) Business Days old), and the calculation of the Percentage Factor as of the preceding day. SECTION 2.12 Collection Account. There shall be established on the day of the initial Incremental Transfer hereunder and maintained, for the benefit of the Company, with the Collateral Agent, a segregated account (the "Collection Account"), bearing a designation clearly indicating that the funds deposited therein are held for 33 the benefit of the Company. The Collection Agent shall remit daily within forty- eight hours of receipt to the Collection Account all Collections received with respect to any Receivables; provided, however, the Collection Agent shall be permitted to make payments to the Company on the last day of each Tranche Period instead of depositing funds into the Collection Account on a daily basis for so long as, and only for so long as no Collection Agent default and no other Termination Event has occurred hereunder. Funds on deposit in the Collection Account (other than investment earnings) shall be invested by the Collateral Agent in Eligible Investments that will mature so that such funds will be available prior to the last day of each successive Tranche Period following such investment. All interest and earnings (net of losses and investment expenses) on funds on deposit in the Collection Account shall be retained in the Collection Account and be available to make any payments required to be made hereunder (including Discount) to the Company. On the date on which the Net Investment is zero and all amounts payable hereunder have been paid to the Company, any funds remaining on deposit in the Collection Account shall be paid to the Transferor. 34 ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.1 Representations and Warranties of the Transferor. The Transferor represents and warrants to the Company that: (a) Corporate Existence and Power. The Transferor is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all corporate power and all material governmental licenses, authorizations, consents and approvals required to carry on its business in each jurisdiction in which its business is now conducted. (b) Corporate and Governmental Authorization; Contravention. The execution, delivery and performance by the Transferor of this Agreement, the Receivables Purchase Agreement, the Fee Letter, the Company Certificate and the Transfer Certificate are within the Transferor's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official (except as contemplated by Section 2.8), and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the Certificate of Incorporation or Bylaws of the Transferor or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Transferor or result in the creation or imposition of any lien on assets of the Transferor or any of its Subsidiaries (except as contemplated by Section 2.8). (c) Binding Effect. Each of this Agreement, the Receivables Purchase Agreement, the Fee Letter and the Company Certificate constitutes and the Transfer Certificate upon payment by the Company of the Transfer Price set forth therein will constitute the legal, valid and binding obligation of the Transferor, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws affecting the rights of creditors. 35 (d) Perfection. Immediately preceding each Transfer hereunder, the Transferor shall be the owner of all of the Receivables, free and clear of all liens, encumbrances, security interests, preferences or other security arrangement of any kind or nature whatsoever. On or prior to each Transfer and each recomputation of the Transferred Interest, all financing statements and other documents required to be recorded or filed in order to perfect and protect the Transferred Interest against all creditors of and purchasers from the Transferor will have been duly filed in each filing office necessary for such purpose and all filing fees and taxes, if any, payable in connection with such filings shall have been paid in full (except to the extent that such perfection may be governed by any federal or state law relating to the perfection of an interest in any Receivable owed by the federal government or a municipality). (e) Accuracy of Information. All written information heretofore furnished by the Transferor (including without limitation, the Investor Reports, the Weekly Reports, any other reports delivered pursuant to Section 2.11 or as part of the Company's due diligence process and the Transferor's financial statements) to the Company or the Administrative Agent for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by the Transferor to the Company or the Administrative Agent will be, true and accurate in every material respect, on the date such information is stated or certified. (f) Tax Status. The Transferor has filed all tax returns (federal, state and local) required to be filed and has paid or made adequate provision for the payment of all taxes, assessments and other governmental charges. (g) Action, Suits. Except as set forth in Exhibit H, there are no actions, suits or proceedings pending, threatened, or to the knowledge of the Transferor, probable of assertion, against or affecting the Transferor or its properties, in or before any court, arbitrator or other body, which question the validity of the transactions contemplated by this Agreement or which may, individually or in the aggregate, be reasonably 36 expected to have a material adverse effect on the financial condition of the Transferor or materially adversely affect the ability of Transferor to perform its obligations under this Agreement or the Receivables Purchase Agreement. (h) Use of Proceeds. No proceeds of any Transfer will be used by the Transferor to acquire any security in any transaction which is subject to Section 13 or 14 of the Securities Exchange Act of 1934, as amended. (i) Place of Business. The chief place of business and chief executive office of the Transferor are located at the address of the Transferor indicated in Section 9.3 hereof and the offices where the Transferor keeps all its Records, are located at the address(es) described on Exhibit I or such other locations notified to the Company in accordance with Section 2.8 in jurisdictions where all action required by Section 2.8 has been taken and completed. (j) Good Title. Upon each Transfer and each recomputation of the Transferred Interest, the Company shall acquire a valid and perfected first priority undivided percentage ownership interest to the extent of the Transferred Interest or a first priority perfected security interest in each Receivable that exists on the date of such Transfer and recomputation and in the Related Security and Collections with respect thereto free and clear of any Adverse Claim. (k) Tradenames, Etc. As of the date hereof: (i) the Transferor's chief executive office is located at the address for notices set forth in Section 9.3 hereof; (ii) the Transferor has only the subsidiaries and divisions listed on Exhibit J hereto; and (iii) the Transferor has, since its formation in 1992, operated only under the tradenames identified in Exhibit J hereto, and, since formation, has not changed its name, merged with or into or consolidated with any other corporation or been the subject of any proceeding under Title 11, United States Code (Bankruptcy). (l) Nature of Receivables. Each Receivable included as an "Eligible Receivable" in any computation or certification required or delivered hereunder 37 did, at such time, in fact, satisfy the definition of "Eligible Receivable". (m) Coverage Requirement. The Percentage Factor does not exceed the Maximum Percentage Factor. (n) Credit and Collection Policy. Since September 27, 1994, there have been no material changes in the Credit and Collection Policy; since such date, no material adverse change has occurred in the overall rate of collection of the Receivables. (o) No Termination Event. No event has occurred and is continuing and no condition exists that, with the giving of notice and/or the passage of time, would constitute a Termination Event. (p) Not an Investment Company. The Transferor is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or is exempt from all provisions of such Act. (q) ERISA. The Transferor is in compliance in all material respects with ERISA and no lien in favor of the Pension Benefit Guaranty Corporation on any of the Receivables shall exist. (r) Receivables. Each Receivable represents all or part of the sales price of services rendered by the Seller. Any document, instrument, certificate or notice delivered to the Company hereunder shall be deemed a representation and warranty by the Transferor. SECTION 3.2 Reaffirmation of Representations and Warranties by the Transferor. On each day that a Transfer is made hereunder, the Transferor, by accepting the proceeds of such Transfer, whether delivered to the Transferor pursuant to Section 2.2(a) or Section 2.5, shall be deemed to have certified that all representations and warranties described in Section 3.1 are correct on and as of such day as though made on and as of such day. Each Incremental Transfer shall be subject to the further condition precedent that prior to the date of such Incremental Transfer, the Collection Agent shall have delivered to the Administrative Agent, in form and 38 substance satisfactory to the Administrative Agent, a completed Weekly Report dated within two (2) days prior to the date of such Incremental Transfer, together with a listing by Obligor, if requested, and such additional information as may be reasonably requested by the Administrative Agent; and the Transferor shall be deemed to have represented and warranted that such conditions precedent have been satisfied. SECTION 3.3 Representations and Warranties of Borg-Warner. Borg- Warner, as Collection Agent, represents and warrants to the Company that: (a) Corporate Existence and Power. Borg-Warner is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all corporate power and all material governmental licenses, authorizations, consents and approvals required to carry on its business in each jurisdiction in which its business is now conducted. (b) Corporate and Governmental Authorization; Contravention. The execution, delivery and performance by Borg-Warner of this Agreement is within Borg-Warner's corporate powers, has been duly authorized by all necessary corporate action, requires no action by or in respect of, or filing with, any governmental body, agency or official (except as contemplated by Section 2.8), and do not contravene, or constitutes a default under, any provision of applicable law or regulation or of the Certificate of Incorporation or Bylaws of Borg-Warner or of any agreement, judgment, injunction, order, decree or other instrument binding upon Borg-Warner or result in the creation or imposition of any lien on assets of Borg-Warner or any of its Subsidiaries (except as contemplated by Section 2.8). (c) Binding Effect. This Agreement constitutes the legal, valid and binding obligation of Borg-Warner, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws affecting the rights of creditors. (d) Accuracy of Information. All written information heretofore furnished by Borg-Warner to the Company or the Administrative Agent for purposes of or in connection with this Agreement or any transaction contem- 39 plated hereby is, and all such information hereafter furnished by Borg-Warner, as Collection Agent, to the Company or the Administrative Agent will be, true and accurate in every material respect, on the date such information is stated or certified. (e) Tax Status. Borg-Warner has filed all tax returns (federal, state and local) required to be filed and has paid or made adequate provision for the payment of all taxes, assessments and other governmental charges. (f) Action, Suits. Except as set forth in Exhibit H, there are no actions, suits or proceedings pending, or to the knowledge of Borg-Warner, threatened, against or affecting Borg-Warner or any Affiliate of Borg-Warner or their respective properties, in or before any court, arbitrator or other body, which question the validity of the transactions contemplated by this Agreement or the Receivables Purchase Agreement, or which may, individually or in the aggregate, be reasonably expected to have a material adverse effect on the financial condition of Borg-Warner and its Subsidiaries taken as a whole or materially adversely affect the ability of Borg-Warner to perform its obligations under this Agreement or the Receivables Purchase Agreement. (g) Place of Business. The chief place of business and chief executive office of each Seller are located at the address of each Seller indicated in Exhibit I and the offices where each Seller keeps all its Records, are located at the address(es) described on Exhibit I or such other locations notified to the Company in accordance with Section 2.8 in jurisdictions where all action required by Section 2.8 has been taken and completed. (h) Tradenames, Etc. As of the date hereof: (i) each Seller's chief executive office is located at the address set forth in Exhibit I; (ii) each Seller has only the subsidiaries listed on Exhibit J hereto; and (iii) each Seller has, since the date four months prior to the date hereof, operated only under the tradenames identified in Exhibit J hereto, and, since the date four months prior to the date hereof, has not changed its name, merged with or into or consolidated with any other corporation or been the subject of any 40 proceeding under Title 11, United States Code (Bankruptcy), except as disclosed in Exhibit J hereto. (i) [Reserved] (j) Credit and Collection Policy. Since September 27, 1994, there have been no material changes in the Credit and Collection Policy; since such date, no material adverse change has occurred in the overall rate of collection of the Receivables. (k) Collections and Servicing. Since June 30, 1994, there has been no material adverse change in the ability of Borg-Warner to service and collect the Receivables. (l) No Termination Event. No event has occurred and is continuing and no condition exists that, with the giving of notice and/or the passage of time, would constitute a Termination Event. (m) ERISA. Borg-Warner is in compliance in all material respects with ERISA and no lien in favor of the Pension Benefit Guaranty Corporation on any of its assets shall exist. (n) Lock-Box Accounts. The names and addresses of all the Lock-Box Banks, together with the account numbers of the Lock-Box Accounts at such Lock- Box Banks, are specified in Exhibit C hereto (or at such other Lock-Box Banks and/or with such other Lock-Box Accounts as have been notified to the Collateral Agent and for which Lock-Box Agreements have been executed in accordance with Section 2.8(b) and delivered to the Administrative Agent). All Obligors have been instructed to make payment to a Lock-Box Account and only Collections are deposited into the Lock-Box Accounts. Any document, instrument, certificate or notice delivered by Borg- Warner to the Company hereunder shall be deemed a representation and warranty by Borg-Warner. 41 ARTICLE IV CONDITIONS PRECEDENT SECTION 4.1 Conditions to Closing. On or prior to the date of execution hereof, the Transferor shall deliver to the Company the following documents, instruments and fees all of which shall be in a form and substance acceptable to the Company: (a) A copy of the Resolutions of the Board of Directors of the Transferor certified by its Secretary or any Assistant Secretary approving the Agreement and the other documents to be delivered by the Transferor hereunder. (b) The Articles of Incorporation of the Transferor certified by the Secretary of State or other similar official of the Transferor's jurisdiction of incorporation. (c) A Good Standing Certificate for the Transferor issued by the Secretary of State or a similar official of the Transferor's jurisdiction of incorporation and certificates of qualification as a foreign corporation issued by the Secretaries of State or other similar officials of each jurisdiction when such qualification is material to the transactions contemplated by this Agreement. (d) A Certificate of the Secretary or any Assistant Secretary of the Transferor certifying (i) the names and signatures of the officers authorized on its behalf to execute this Agreement, the Company Certificate, the Transfer Certificate, the Fee Letter and any other documents to be delivered by it hereunder (on which certificates the Company may conclusively rely until such time as the Company shall receive from the Transferor a revised certificate meeting the requirements of this clause (d)(i)) and (ii) a copy of its By-Laws. (e) A copy of the Resolutions of the Board of Directors of the Collection Agent certified by its Secretary or any Assistant Secretary approving the Agreement and the other documents to be delivered by the Collection Agent hereunder. 42 (f) The Articles of Incorporation of the Collection Agent certified by the Secretary of State or other similar official of the Collection Agent's jurisdiction of incorporation. (g) A Good Standing Certificate for the Collection Agent issued by the Secretary of State or a similar official of the Collection Agent's jurisdiction of incorporation and certificates of qualification as a foreign corporation issued by the Secretaries of State or other similar officials of each jurisdiction when such qualification is material to the transactions contemplated by this Agreement. (h) A Certificate of the Secretary or any Assistant Secretary of the Collection Agent certifying (i) the names and signatures of the officers authorized on its behalf to execute this Agreement, the Company Certificate, the Transfer Certificate, the Fee Letter and any other documents to be delivered by it hereunder (on which certificates the Company may conclusively rely until such time as the Company shall receive from the Collection Agent a revised certificate meeting the requirements of this clause (d)(i)) and (ii) a copy of its By-Laws. (i) A copy of the Resolutions of the Board of Directors of each Seller certified by its Secretary or any Assistant Secretary approving the Agreement and the other documents to be delivered by each Seller hereunder. (j) The Articles of Incorporation of each Seller certified by the Secretary of State or other similar official of each Seller's jurisdiction of incorporation. (k) A Good Standing Certificate for each Seller issued by the Secretary of State or a similar official of each Seller's jurisdiction of incorporation and certificates of qualification as a foreign corporation issued by the Secretaries of State or other similar officials of each jurisdiction when such qualification is material to the transactions contemplated by this Agreement. 43 (l) A Certificate of the Secretary or any Assistant Secretary of each Seller certifying (i) the names and signatures of the officers authorized on its behalf to execute this Agreement, the Company Certificate, the Transfer Certificate, the Fee Letter and any other documents to be delivered by it hereunder (on which certificates the Company may conclusively rely until such time as the Company shall receive from each Seller a revised certificate meeting the requirements of this clause (d)(i)) and (ii) a copy of its By-Laws. (m) [Reserved] (n) Copies of proper financing statements (Form UCC-3), if any, necessary to terminate all security interests and other rights of any person in Receivables previously granted by Transferor. (o) Certified copies of request for information or copies (Form UCC- 11) (or a similar search report certified by parties acceptable to the Company) dated a date reasonably near the date of the initial Incremental Transfer listing all effective financing statements which name the Transferor (under its present name and any previous name) as debtor and which are filed in jurisdictions in which the filings were made pursuant to item (l) above together with copies of such financing statements (none of which shall cover any Receivables or Contracts). (p) Executed copies of the Lock-Box Agreements. (q) An opinion of Mr. Neal Farrell, general counsel of Borg-Warner, covering certain of the corporate matters set forth in Exhibit K hereto. (r) An opinion of Kirkland & Ellis, special counsel to the Transferor, Borg-Warner and the Seller, covering certain of the corporate matters set forth in Exhibit K hereto and certain insolvency matters. (s) A certificate of the Transferor in substantially the form of Exhibit L hereto executed by the Secretary or Assistant Secretary of the Transferor. 44 (t) A computer tape setting forth all Receivables and the Outstanding Balances thereon and such other information as the Company may reasonably request. (u) An executed copy of the Fee Letter. (v) The Transferor Certificate, duly executed by the Transferor. (w) The Company Certificate, duly executed by the Transferor and appropriately completed. (x) The Arrangement Fee in accordance with Section 2.7(b). (y) An Investor Report for October 31, 1994. (z) An executed copy of the Receivables Purchase Agreement. (aa) Such other documents as the Company shall reasonably request. 45 ARTICLE V COVENANTS SECTION 5.1 Affirmative Covenants. At all times from the date hereof to the later to occur of (i) the Termination Date or (ii) the date on which the Company's Transferred Interest shall be equal to zero, unless the Company shall otherwise consent in writing: (a) Financial Reporting. The Transferor and Borg-Warner will maintain, for itself and each Subsidiary, a system of accounting established and administered in accordance with generally accepted accounting principles, and Borg-Warner (or, in the case of the first sentence of clause (iii), clause (iv), and the second sentence of clause (vii), the Transferor) will furnish to the Administrative Agent: (i) Annual Reporting. Within ninety (90) days after the close of each of its fiscal years, audited financial statements, prepared in accordance with generally accepted accounting principles on a consolidated basis for itself and its Subsidiaries, including balance sheets as of the end of such period, related statements of operations, shareholder's equity and cash flows, accompanied by an audit report of a nationally recognized firm of independent certified public accountants (or such other firm of independent certified public accountants acceptable to the Administrative Agent) which report shall be unqualified as to going concern and scope of audit and shall state that such consolidated financial statements present fairly the financial position of Borg-Warner and its Subsidiaries as at the dates indicated and the results of their operations and their cash flow for the periods indicated is in conformity with GAAP and that the examination had been made in accordance with generally accepted auditing standards. (ii) Quarterly Reporting. Within forty-five (45) days after the close of the first three quarterly periods of each of its fiscal years, for itself and its 46 Subsidiaries, consolidated unaudited balance sheets as at the close of each such period and consolidated related statements of operations, shareholder's equity and cash flows for the period from the beginning of such fiscal year to the end of such quarter, all certified by its Designated Financial Officer. (iii) Compliance Certificate. Concurrently with the delivery by Borg-Warner of the financial statements required hereunder, a compliance certificate signed by its Designated Financial Officer stating that no Termination Event or Potential Termination Event exists, or if any Termination Event or Potential Termination Event exists, stating the nature and status thereof. Together with the financial statements hereunder, a compliance certificate signed by a Designated Financial Officer of Borg- Warner showing the computation of, and showing compliance with, each of the quarterly financial tests set forth in Section 7.1(m), (n) and (o). (iv) Notice of Termination Events or Potential Termination Events. As soon as possible and in any event within two (2) days after the occurrence of each Termination Event or each Potential Termination Event, a statement of the Designated Financial Officer of the Transferor setting forth details of such Termination Event or Potential Termination Event and the action which the Transferor proposes to take with respect thereto. (v) Change in Credit and Collection Policy and Debt Ratings. Within ten (10) days after the date any material change in or amendment to the Credit and Collection Policy is made, a copy of the Credit and Collection Policy then in effect indicating such change or amendment. Within five (5) days after the date of any change in Borg-Warner's public or private debt ratings, if any, a written certification of Borg-Warner's public and private debt ratings after giving effect to any such change. 47 (vi) Credit and Collection Policy. Upon request by the Company, a complete copy of the Credit and Collection Policy then in effect. (vii) Other Information. Prompt written notice thereof in the event that any Subsidiary of Borg-Warner becomes a Material Subsidiary (as that term is defined in Exhibit N hereto); and such other information including non-financial information) as the Administrative Agent may from time to time reasonably request. (b) Conduct of Business. The Transferor will and Borg-Warner will (x) carry on and conduct its business in substantially the same manner and in substantially the same or related fields of enterprise as it is presently conducted and do all things necessary to remain duly incorporated, validly existing and in good standing as a domestic corporation in its jurisdiction of incorporation and (y) maintain all requisite authority to conduct its business in each jurisdiction in which its business is conducted. (c) Compliance with Laws. The Transferor will and Borg-Warner will comply in all material respects with all laws, rules, regulations, orders, writs, judgments, injunctions, decrees or awards to which it may be subject. (d) Furnishing of Information and Inspection of Records. The Transferor will furnish to the Company from time to time such information with respect to the Receivables as the Company may reasonably request, including, without limitation, listings identifying the Obligor and the Outstanding Balance for each Receivable. Upon at least two (2) Business Days prior notice, the Transferor and Borg-Warner will during regular business hours permit the Company, or its agents or representatives, (i) to examine and make copies of and abstracts from all Records and (ii) to visit the offices and properties of the Transferor and Borg-Warner for the purpose of examining such Records, and to discuss matters relating to Receivables or the Transferor's or Borg-Warner's performance hereunder with any of the officers, employees or independent public accountants of the Transferor or Borg-Warner having knowledge of such matters. 48 (e) Keeping of Records and Books of Account. The Transferor and Borg-Warner (consistent with its role as Collection Agent) will maintain and implement administrative and operating procedures (including, without limitation, an ability to recreate records evidencing Receivables in the event of the destruction of the originals thereof), and keep and maintain, all documents, books, records and other information reasonably necessary or advisable for the collection of all Receivables (including, without limitation, records adequate to permit the daily identification of each new Receivable and all Collections of and adjustments to each existing Receivable). The Transferor and Borg-Warner will give the Company notice of any material change in the administrative and operating procedures referred to in the previous sentence. (f) Performance and Compliance with Receivables and Contracts. The Transferor and Borg-Warner will at their expense timely and fully perform and comply with all material provisions, covenants and other promises required to be observed by it under the Contracts related to the Receivables. (g) Credit and Collection Policies. Borg-Warner will comply in all material respects with the Credit and Collection Policy in regard to each Receivable and the related Contract. (h) Collections. The Transferor and Borg-Warner shall instruct all Obligors to cause all Collections to be deposited directly to a Lock-Box Account. (i) Collections Received. The Transferor and Borg-Warner shall hold in trust, and deposit, immediately, but in any event not later than forty-eight (48) hours of its receipt thereof, to a Lock-Box Account all Collections received from time to time by them (including without limitation all Collections deemed to have been received by the Transferor under Section 2.9). (j) Sale Treatment. The Transferor shall report the transactions contemplated by the Agreement on its financial statements as a sale of the Transferred Interest to the Company. 49 (k) Separate Business. The Transferor shall at all times (a) to the extent the Transferor's office is located in the offices of Borg-Warner or any Affiliate of Borg-Warner, pay fair market rent for its executive office space located in the offices of Borg-Warner or any Affiliate of Borg-Warner, (b) maintain the Transferor's books, financial statements, accounting records and other corporate documents and records separate from those of Borg-Warner or any other entity, (c) not commingle the Transferor's assets with those of Borg- Warner or any other entity; (d) act solely in its corporate name and through its own authorized officers and agents, (e) make investments directly or by brokers engaged and paid by the Transferor or its agents (provided that if any such agent is an Affiliate of the Transferor it shall be compensated at a fair market rate for its services), (f) separately manage the Transferor's liabilities from those of Borg-Warner or any Affiliates of Borg-Warner and pay its own liabilities, including all administrative expenses, from its own separate assets, and (g) pay from the Transferor's assets all obligations and indebtedness of any kind incurred by the Transferor. The Transferor shall abide by all corporate formalities, including the maintenance of current minute books, and the Transferor shall cause its financial statements to be prepared in accordance with generally accepted accounting principles in a manner that indicates the separate existence of the Transferor and its assets and liabilities. The Transferor shall (i) pay all its liabilities, (ii) not assume the liabilities of Borg-Warner or any Affiliate of Borg-Warner, and (iii) not guarantee the liabilities of Borg-Warner or any Affiliate of Borg-Warner. The officers and directors of the Transferor (as appropriate) shall make decisions with respect to the business and daily operations of the Transferor independent of and not dictated by any controlling entity. (l) Corporate Documents. The Transferor shall only amend, alter, change or repeal Articles Third, Fourth(b), Sixth, and the last paragraph of Article Tenth of its Certificate of Incorporation as in effect on the date hereof with the prior written consent of the Administrative Agent. SECTION 5.2 Negative Covenants. During the term of this Agreement, unless the Company shall otherwise consent in writing: 50 (a) No Sales, Liens, Etc. Except as otherwise provided herein, neither the Transferor or Borg-Warner will sell, assign (by operation of law or otherwise) or otherwise dispose of, or create or suffer to exist any Adverse Claim upon (or the filing of any financing statement) or with respect to, any inventory or goods (other than sales in the ordinary course of business), the sale of which may give rise to a Receivable or any Receivable or related Contract, or upon or with respect to any account which concentrates in a Lock- Box Bank to which any Collections of any Receivable are sent, or assign any right to receive income in respect thereof. (b) No Extension or Amendment of Receivables. Except as otherwise permitted in Section 6.2, neither the Transferor nor Borg-Warner will extend, amend or otherwise modify the terms of any Receivable, or amend, modify or waive any term or condition of any Contract related thereto. (c) No Amendment of Receivables Purchase Agreement. The Transferor shall not amend or otherwise modify the Receivables Purchase Agreement without the prior written consent of the Company. (d) No Change in Business or Credit and Collection Policy. Neither the Transferor nor Borg-Warner will make any change in the character of its business or in the Credit and Collection Policy (in the case of Borg-Warner), which change would, in either case, impair the collectibility of any Receivable. (e) Sale of Assets, Etc. Neither the Transferor nor Borg-Warner will sell, lease or transfer all or substantially all of its assets to any other person. (f) Change in Payment Instructions to Obligors. Neither the Transferor nor any Seller nor the Collection Agent will add or terminate any bank as a Lock-Box Bank or any account as a Lock-Box Account to or from those listed in Exhibit C hereto or make any change in its instructions to Obligors regarding payments to be made to any Lock-Box Account, unless (i) such instructions are to deposit such payments to another existing Lock-Box Account or (ii) the Administrative Agent shall have 51 received written notice of such addition, termination or change at least 30 days prior thereto and the Administrative Agent shall have received a Lock-Box Agreement executed by each new Lock-Box Bank or an existing Lock-Box Bank with respect to each new Lock-Box Account, as applicable. (g) Deposits to Lock-Box Accounts. Neither the Transferor nor Borg- Warner will deposit or otherwise credit, or cause or permit to be so deposited or credited, to any Lock-Box Account cash or cash proceeds other than Collections of Receivables. (h) Change of Name, Etc. The Transferor will not change its name, identity or structure or its chief executive office, unless at least 10 days prior to the effective date of any such change the Transferor delivers to the Collateral Agent (i) UCC financing statements, executed by the Transferor necessary to reflect such change and to continue the perfection of the Company's ownership interests or security interests in the Receivables and (ii) the Lock- Box Agreements and, in the case of the Lock-Box Agreements, the Lock-Box Banks necessary to reflect such change and to continue to enable the Collateral Agent to exercise its rights contained in Section 2.8. 52 ARTICLE VI ADMINISTRATION AND COLLECTIONS SECTION 6.1 Appointment of Collection Agent. The servicing, administering and collection of the Receivables shall be conducted by such Person (the "Collection Agent") so designated from time to time in accordance with this Section 6.1. Until the Company gives notice to Borg-Warner of the designation of a new Collection Agent, Borg-Warner is hereby designated as, and hereby agrees to perform the duties and obligations of, the Collection Agent pursuant to the terms hereof. The Company may, upon the occurrence of a Collection Agent default or any other Termination Event designate as Collection Agent any Person (including itself) to succeed Borg-Warner or any successor Collection Agent, on the condition in each case that any such Person so designated shall agree to perform the duties and obligations of the Collection Agent pursuant to the terms hereof. After the occurrence of a Termination Event, the Company may notify any Obligor of the Transferred Interest. The Collection Agent may delegate to any Affiliate any portion of its obligation hereunder in the ordinary course of its business; provided that no such delegation shall relieve the Collection Agent of any liability hereunder. SECTION 6.2 Duties of Collection Agent. (a) The Collection Agent shall take or cause to be taken all such action as may be necessary or advisable to collect each Receivable from time to time, all in accordance with applicable laws, rules and regulations, with reasonable care and diligence, and in accordance with the Credit and Collection Policy. Each of the Transferor and the Company hereby appoints as its agent the Collection Agent, from time to time designated pursuant to Section 6.1, to enforce its respective rights and interests in and under the Receivables, the Related Security and the Contracts. The Collection Agent shall set aside for the account of the Transferor and the Company their respective allocable shares of the Collections of Receivables in accordance with Sections 2.5 and 2.6. The Collection Agent shall segregate and deposit to the Company's account the Company's allocable share of Collections of Receivables when required pursuant to 53 Article II hereof. So long as no Termination Event shall have occurred and be continuing, the Collection Agent may, in accordance with the Credit and Collection Policy, adjust the Outstanding Balance of a Receivable as the Transferor may determine to be appropriate to maximize Collections thereof; provided, however, that such adjustment shall not alter the status of such Receivable as a Delinquent Receivable or a Defaulted Receivable. The Transferor shall deliver to the Collection Agent and the Collection Agent shall hold in trust for the Transferor and the Company in accordance with their respective interests, all Records which evidence or relate to Receivables or Related Security. Notwithstanding anything to the contrary contained herein, the Company shall have the absolute and unlimited right to direct the Collection Agent (whether the Collection Agent is the Transferor or any other Person) to commence or settle any legal action to enforce collection of any Receivable or to foreclose upon or repossess any Related Security; provided that no such direction may be given unless a Termination Event has occurred and is continuing hereunder. (b) The Collection Agent shall hold for the benefit of the Transferor Collections received minus the Percentage Factor of such Collections. On the last day of each Tranche Period, the Collection Agent shall deduct from such Collections and pay to the Company in reduction of the Net Investment any amounts due under Section 2.9 hereof and unpaid from the Transferor and turn the remainder of such Collections over to the Transferor. In addition, the Collection Agent shall, as soon as practicable following receipt thereof, turn over to the Transferor any collections of any indebtedness of any Obligor which is not a Receivable. If Borg-Warner is not the Collection Agent, the Collection Agent, by giving three Business Days' prior written notice to the Company, may revise the percentage used to calculate the Servicing Fee so long as the revised percentage will not result in a Servicing Fee that exceeds 110% of the reasonable and appropriate out-of-pocket costs and expenses of such Collection Agent incurred in connection with the performance of its obligations hereunder as documented to the reasonable satisfaction of the Company. The Collection Agent, if other than the Transferor, shall as soon as practicable upon demand, deliver to the Transferor all Records in its possession which evidence or relate to indebtedness of an Obligor which is not a Receivable. 54 (c) On or before 90 days after the end of each fiscal year of the Collection Agent, beginning with the fiscal year ending December 31, 1994, the Collection Agent shall cause a firm of independent public accountants (who may also render other services to the Collection Agent or the Transferor) to furnish a report to the Company to the effect that they have (i) compared the information contained in the Investor Reports delivered during such fiscal year with the information contained in the Contracts and the Collection Agent's records and computer systems for such period, and that, on the basis of such examination and comparison, such firm is of the opinion that the information contained in the Investor Reports reconciles with the information contained in the Contracts and the Collection Agent's records and computer system and that the servicing of the Receivables has been conducted in compliance with this Agreement, (ii) confirmed the Net Receivables Balance as reported on each Investor Report and Weekly Report delivered during such fiscal year, and (iii) verified that the Receivables treated by the Collection Agent as Eligible Receivables in fact satisfied the requirements of the definition thereof contained herein except, in each case for (a) such exceptions as such firm shall believe to be immaterial (which exceptions need not be enumerated) and (b) such other exceptions as shall be set forth in such statement. (d) Notwithstanding anything to the contrary contained in this Article VI, the Collection Agent shall have no obligation to collect, enforce or take any other action described in this Article VI with respect to any Receivable that is not included in the Transferred Interest other than to deliver to the Transferor the Collections and documents with respect to any such Receivable as described in Section 6.2(b). SECTION 6.3 Rights After Designation of New Collection Agent. At any time following the designation of a Collection Agent (other than Borg-Warner) pursuant to Section 6.1: (i) The Company may direct that payment of all amounts payable under any Receivable be made directly to the Company or its designee. 55 (ii) Borg-Warner shall, at the Company's request and at Borg- Warner's expense, give notice of the Company's interest in the Receivables to each Obligor and direct that payments be made directly to the Company or its designee. (iii) Borg-Warner shall, at the Company's request, (A) assemble all of the Records, and shall make the same available to the Company at a place selected by the Company or its designee, and (B) segregate all cash, checks and other instruments received by it from time to time constituting Collections of Receivables in a manner acceptable to the Company and shall, promptly upon receipt, remit all such cash, checks and instruments, duly endorsed or with duly executed instruments of transfer, to the Company or its designee. (iv) Upon the occurrence and during the continuation of a Termination Event, the Transferor hereby authorizes the Company to take any and all steps in the Transferor's name and on behalf of the Transferor necessary or desirable, in the determination of the Company, to collect all amounts due under any and all Receivables, including, without limitation, endorsing the Transferor's name on checks and other instruments representing Collections and enforcing such Receivables and the related Contracts. SECTION 6.4 Responsibilities of the Transferor. Anything herein to the contrary notwithstanding, the Transferor shall (i) perform all of its obligations under the Contracts related to the Receivables to the same extent as if interests in such Receivables had not been transferred hereunder and the exercise by the Company of its rights hereunder shall not relieve the Transferor from such obligations and (ii) pay when due any taxes, including without limitation, any sales taxes payable in connection with the Receivables and their creation and satisfaction. The Company shall not have any obligation or liability with respect to any Receivable or related Contracts, nor shall it be obligated to perform any of the obligations of the Transferor thereunder. 56 ARTICLE VII TERMINATION EVENTS SECTION 7.1 Termination Events. The occurrence of any one or more of the following events shall constitute a Termination Event: (a) (i) the Collection Agent or Transferor shall fail to perform or observe any term, covenant or agreement hereunder (other than as referred to in clause (ii) of this Section 7.1(a)) and such failure shall remain unremedied for ten (10) days, or (ii) either the Collection Agent, any Seller or the Transferor shall fail to make any payment or deposit to be made by it hereunder or under the Receivables Purchase Agreement when due or the Collection Agent shall fail to observe or perform any term, covenant or agreement on the Collection Agent's part to be performed under Section 2.8(b) hereof; or (b) any representation, warranty, certification or statement made by the Transferor or the Collection Agent in this Agreement or by any Seller in the Receivables Purchase Agreement or in any other document delivered pursuant hereto or thereto shall prove to have been incorrect in any material respect when made or deemed made; provided that with respect to any representation, warranty, certification or statement made pursuant to Section 3.1(m) which shall prove to have been incorrect in any material respect when made or deemed made, a Termination Event shall occur if such representation, warranty, certification or statement remains incorrect for more than one (1) day; or (c) the Transferor or Borg-Warner, shall default in the performance of any payment or undertaking (other than those covered by clause (a) above) (i) to be performed or observed by it under Sections 5.1(a)(iv), 5.1(a)(v), 5.1(b)(x), 5.1(f), 5.1(g), 5.1(h), 5.1(i), 5.1(k), 5.1(l), 5.2(a), (c), (d), (e), (f) or (h)(ii) hereof or under Sections 7.1(e), 7.1(g), 7.1(h), 7.3(a), 7.3(c), 7.3(d), 7.3(e), 7.3(f) or 8.2(a) of the Receivables Purchase Agreement or (ii) to be performed or observed under any other provision hereof or under the Receivables Purchase Agreement and such default in the 57 case of this clause (ii) shall continue for ten (10) days; or (d) (i) failure of Borg-Warner or any of its Subsidiaries to pay when due (x) any principal or interest on any Indebtedness (as such term is defined in Exhibit N hereto) in an individual principal amount of $4,000,000 or items of Indebtedness with an aggregate principal amount of $8,000,000 or more or (y) any Contingent Obligation (as such term is defined in Exhibit N hereto) in an individual principal amount of $4,000,000 or more or Contingent Obligations with an aggregate principal amount of $8,000,000 or more, in each case beyond the end of any period prior to which the obligee is prohibited from accelerating payment thereunder; or (ii) breach or default of Borg-Warner or any of its Subsidiaries with respect to any other material term of (x) any evidence of any Indebtedness in an individual principal amount of $4,000,000 or more or items of Indebtedness with an aggregate principal amount of $8,000,000 or more or any Contingent Obligation in an individual principal amount of $4,000,000 or more or Contingent Obligations with an aggregate principal amount of $8,000,000 or more; (y) any loan agreement, mortgage, indenture or other agreement relating thereto, if the effect of such failure, default or breach is to cause, or to permit the holder or holders of that Indebtedness or Contingent Obligation (or a trustee on behalf of such holder or holders) then to cause, that Indebtedness or Contingent Obligation to become or be declared due prior to its stated maturity (or the stated maturity of any underlying obligation, as the case may be); or (e) any Event of Bankruptcy shall occur with respect to the Transferor, the Collection Agent, any Seller or any Material Subsidiary (as such term is defined in Exhibit N hereto) of Borg-Warner; or (f) the Transferor shall, for any reason, fail to have a valid ownership interest in the Receivables at the time of Transfer, or the Company shall, for any reason, fail to have a valid and perfected first priority security interest in the Receivables; or (g) either of the Transferor, Borg-Warner or any Seller shall enter into any transaction or merger whereby it is not the surviving entity; provided however, 58 that if such transaction or merger involves Borg-Warner, and the Company's written approval is obtained for the assumption by a Subsidiary of Borg- Warner of Borg-Warner's obligations hereunder in its individual capacity and under the Receivables Purchase Agreement as a Seller, such event shall not constitute a Termination Event; provided further, that any Seller may merge or consolidate with another Seller; provided further, that any Seller (other than Borg-Warner) may voluntarily liquidate and convey all or substantially all of its assets to another Seller; and provided further, that any Seller may be acquired by merger or otherwise by another Person if the Net Receivables Balance calculated solely by reference to Receivables originated by such Seller constitutes less than 10% of the aggregate Net Receivables Balance, and all Receivables generated by such Seller are removed upon such a sale from the aggregate Net Receivables Balance (upon such acquisition, such Seller shall be removed from, and shall no longer be a party to, the Receivables Purchase Agreement) without causing a Termination Event, such sale shall not constitute a Termination Event; or (h) any material adverse change in the operations of any Seller, Borg-Warner, the Transferor or the Collection Agent shall occur or any other event shall occur which materially affects any Seller's, Borg- Warner's, the Transferor's or the Collection Agent's ability to either collect the Receivables or to perform under this Agreement or the Receivables Purchase Agreement; or (i) the Percentage Factor as calculated in any Weekly Report exceeds the Maximum Percentage Factor; or (j) the Dilution Ratio, averaged for three consecutive months, exceeds 1.5%; or (k) the Loss to Liquidation Ratio, averaged for three consecutive months, exceeds 1.5%; or (l) the Delinquency Ratio, averaged for three consecutive months, exceeds 10%; or (m) Borg-Warner permits the ratio of (x) Funded Debt to (y) Consolidated EBITDA (as such terms are defined in Exhibit N hereto) over any four consecutive 59 fiscal quarter period to be greater than the ratio set forth below for the respective fiscal quarter (such quarter being the last fiscal quarter in such four fiscal quarter period):
Fourth Quarter, 1994 3.40 to 1.0 First Quarter, 1995 3.40 to 1.0 Second Quarter, 1995 3.30 to 1.0 Third Quarter, 1995 3.20 to 1.0 Fourth Quarter, 1995 3.20 to 1.0 First Quarter, 1996 3.10 to 1.0 Second Quarter, 1996, and each quarter thereafter, 3.00 to 1.0; or
(n) Borg-Warner permits the ratio of (x) Consolidated EBITDA minus Consolidated Capital Expenditures to (y) Consolidated Interest Expense (as such terms are defined in Exhibit N hereto) over any four consecutive fiscal quarter period to be less than the ratio set forth below for the respective fiscal quarter (such quarter being the last fiscal quarter in such four fiscal quarter period):
Fourth Quarter, 1994 1.60 to 1.0 First Quarter, 1995 1.60 to 1.0 Second Quarter, 1995 1.60 to 1.0 Third Quarter, 1995 1.60 to 1.0 Fourth Quarter, 1995, and each quarter thereafter, 1.75 to 1.0; or
(o) Borg-Warner's Consolidated Net Worth at (i) the fiscal year ended December 31, 1994 shall be less than $50 million and (ii) the end of each fiscal quarter thereafter shall be less than the sum of (x) 50% of Consolidated Net Income (such number not to be less than zero) for such fiscal quarter plus (y) 100% of any subsequent equity issue plus (z) the minimum amount of Consolidated Net Worth as calculated for the immediately preceding fiscal quarter; or (p) Borg-Warner's senior unsecured debt is rated below B- by Standard & Poor's or B3 by Moody's, or its subordinated unsecured debt is rated below CCC+ by Standard & Poor's or CCC1 by Moody's. 60 SECTION 7.2 Termination. (a) If a Termination Event occurs, the Company may, by notice to the Transferor, declare all outstanding Tranche Periods to be ended and designate the Base Rate plus 2% to be applicable to the Net Investment. (b) In addition, if any Termination Event occurs the Company and the Collateral Agent shall have all of the rights and remedies provided to a secured creditor or a purchaser of accounts under the UCC by applicable law in respect thereto. 61 ARTICLE VIII INDEMNIFICATION; EXPENSES; RELATED MATTERS SECTION 8.1 Indemnities by the Transferor. Without limiting any other rights which the Company may have hereunder or under applicable law, the Transferor hereby agrees to indemnify the Company, the Liquidity Provider and the Credit Support Provider and any permitted assigns and their respective officers, directors and employees (collectively, "Indemnified Parties") from and against any and all damages, losses, claims, liabilities, costs and expenses, including reasonable attorneys' fees (which such attorneys may be employees of the Liquidity Provider, the Credit Support Provider or the Company) and disbursements (all of the foregoing being collectively referred to as "Indemnified Amounts") awarded against or incurred by any of them arising out of or as a result of this Agreement or the ownership, either directly or indirectly, by the Company of the Transferred Interest excluding, however, (i) Indemnified Amounts to the extent resulting from gross negligence or willful misconduct on the part of an Indemnified Party or (ii) recourse (except as otherwise specifically provided in this Agreement) for uncollectible Receivables. Without limiting the generality of the foregoing, the Transferor shall indemnify each Indemnified Party for Indemnified Amounts relating to or resulting from: (i) reliance on any representation or warranty made by the Transferor (or any officers of the Transferor) under or in connection with this Agreement, any Investor Report or any other information or report delivered by the Transferor pursuant hereto, which shall have been false or incorrect in any material respect when made or deemed made; (ii) the failure by the Transferor to comply with any applicable law, rule or regulation with respect to any Receivable or the related Contract, or the nonconformity of any Receivable or the related Contract with any such applicable law, rule or regulation; 62 (iii) the failure to vest and maintain vested in the Company an undivided percentage ownership interest, to the extent of the Transferred Interest, in the Receivables included in the Transferred Interest, free and clear of any Adverse Claim; (iv) the failure to file, or any delay in filing, financing statements, continuation statements, or other similar instruments or documents under the UCC of any applicable jurisdiction or other applicable laws with respect to any Receivable included in the Transferred Interest and the failure to perfect the Company's interest in the Receivables including any such failure in respect of any Receivable the Obligor of which is the federal government or a municipality; (v) any dispute, claim, offset or defense (other than discharge in bankruptcy) of the Obligor to the payment of any Receivable included in the Transferred Interest (including, without limitation, a defense based on such Receivable or the related Contract not being legal, valid and binding obligation of such Obligor enforceable against it in accordance with its terms), or any other claim resulting from the sale of merchandise or services related to such Receivable or the furnishing or failure to furnish such merchandise or services; (vi) any failure of Borg-Warner, as Collection Agent, to perform its duties or obligations in accordance with the provisions of Article VI; or (vii) any products liability claim or personal injury or property damage suit or other similar or related claim or action of whatever sort arising out of or in connection with merchandise or services which are the subject of any Receivable; provided, however, that if the Company enters into agreements for the purchase of interests in receivables from one or more Other Transferors, the Company shall allocate such Indemnified Amounts which are in connection with the Liquidity Provider Agreement, the Credit Support Agreement or the credit support furnished by the Credit Support Provider to the Transferor and each Other Trans- 63 feror; and provided, further, that if such Indemnified Amounts are attributable to the Transferor and not attributable to any Other Transferor, the Transferor shall be solely liable for such Indemnified Amounts or if such Indemnified Amounts are attributable to Other Transferors and not attributable to the Transferor, such Other Transferors shall be solely liable for such Indemnified Amounts. SECTION 8.2 Indemnity for Taxes, Reserves and Expenses. (a) If after the date hereof, the adoption of any Law or bank regulatory guideline or any amendment or change in the interpretation of any existing or future Law or bank regulatory guideline by any Official Body charged with the administration, interpretation or application thereof, or the compliance with any directive of any Official Body (in the case of any bank regulatory guideline, whether or not having the force of Law): (i) shall subject any Indemnified Party to any tax, duty or other charge with respect to this Agreement, the Transferred Interest, the Receivables or payments of amounts due hereunder, or shall change the basis of taxation of payments to any Indemnified Party of amounts payable in respect of this Agreement, the Transferred Interest, the Receivables or payments of amounts due hereunder or its obligation to advance funds under the Liquidity Provider Agreement or the credit support furnished by the Credit Support Provider or otherwise in respect of this Agreement, the Transferred Interest or the Receivables (except for changes in the rate of general corporate, franchise, net income or other income tax imposed on such Indemnified Party by the jurisdiction in which such Indemnified Party's principal executive office is located); (ii) shall impose, modify or deem applicable any reserve, special deposit or similar requirement (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System) against assets of, deposits with or for the account of, or credit extended by, any Indemnified Party or shall impose on any Indemnified Party or on the United States 64 market for certificates of deposit or the London interbank market any other condition affecting this Agreement, the Transferred Interest, the Receivables or payments of amounts due hereunder or its obligation to advance funds under the Liquidity Provider Agreement or the credit support provided by the Credit Support Provider or otherwise in respect of this Agreement, the Transferred Interest or the Receivables; or (iii) imposes upon any Indemnified Party any other expense (including, without limitation, reasonable attorneys' fees and expenses, and expenses of litigation or preparation therefor in contesting any of the foregoing) with respect to this Agreement, the Transferred Interest, the Receivables or payments of amounts due hereunder or its obligation to advance funds under the Liquidity Provider Agreement or the credit support furnished by the Credit Support Provider or otherwise in respect of this Agreement, the Transferred Interests or the Receivables, and the result of any of the foregoing is to increase the cost to such Indemnified Party with respect to this Agreement, the Transferred Interest, the Receivables, the obligations hereunder, the funding of any purchases hereunder, the Liquidity Provider Agreement or the Credit Support Agreement, by an amount deemed by such Indemnified Party to be material, then, within ten (10) days after demand by the Company, the Transferor shall pay to the Company such additional amount or amounts as will compensate such Indemnified Party for such increased cost or reduction. (b) If any Indemnified Party shall have determined that after the date hereof, the adoption of any applicable Law or bank regulatory guideline regarding capital adequacy, or any change therein, or any change in the interpretation thereof by any Official Body, or any directive regarding capital adequacy (in the case of any bank regulatory guideline, whether or not having the force of law) of any such Official Body, has or would have the effect of reducing the rate of return on capital of such Indemnified Party (or its parent) as a conse- 65 quence of such Indemnified Party's obligations hereunder or with respect hereto to a level below that which such Indemnified Party (or its parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Indemnified Party to be material, then from time to time, within ten (10) days after demand by the Company, the Transferor shall pay to the Company such additional amount or amounts as will compensate such Indemnified Party (or its parent) for such reduction. (c) The Company will promptly notify the Transferor of any event of which it has knowledge, occurring after the date hereof, which will entitle an Indemnified Party to compensation pursuant to this Section. A notice by the Company claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, the Company may use any reasonable averaging and attributing methods. (d) Anything in this Section 8.2 to the contrary notwithstanding, if the Company enters into agreements for the acquisition of interests in receivables from one or more Other Transferors, the Company shall allocate the liability for any amounts under this Section 8.2 ("Section 8.2 Costs") to the Transferor and each Other Transferor; and provided, further, that if such Section 8.2 Costs are attributable to the Transferor and not attributable to any Other Transferor, the Transferor shall be solely liable for such Section 8.2 Costs or if such Section 8.2 Costs are attributable to Other Transferors and not attributable to the Transferor, such Other Transferors shall be solely liable for such Section 8.2 Costs. SECTION 8.3 Other Costs, Expenses and Related Matters. (a) The Transferor agrees, upon receipt of a written invoice, to pay or cause to be paid, and to save the Company and the Administrative Agent harmless against liability for the payment of, all reasonable out-of-pocket expenses (including, without limitation, attorneys', accountant's and other third parties' fees and expenses, any filing fees and expenses incurred by officers or employees of the Company) incurred by or on 66 behalf of the Company and the Administrative Agent (i) in connection with the negotiation, execution, delivery and preparation of this Agreement and any documents or instruments delivered pursuant hereto and the transactions contemplated hereby (including, without limitation, the perfection or protection of the Transferred Interest) and (ii) from time to time (a) relating to any amendments, waivers or consents under this Agreement, (b) arising in connection with the Company's or its agent's enforcement or preservation of rights (including, without limitation, the perfection and protection of the Transferred Interest under this Agreement), or (c) arising in connection with any audit, dispute, disagreement, litigation or preparation for litigation involving this Agreement (all of such amounts, collectively, "Transaction Costs"). (b) Transferor shall pay the Company on demand any Early Collection Fee due on account of the reduction of a Tranche on a day prior to the last day of its Tranche Period. SECTION 8.4 Reconveyance Under Certain Circumstances. Transferor agrees to accept the reconveyance from the Company of the Transferred Interest if the Company notifies Transferor of a material breach of any representation or warranty made or deemed made pursuant to Article III of this Agreement and Transferor shall fail to cure such breach within 15 days (or, in the case of the representations and warranties in Sections 3.1(d) and 3.1(j), 3 days) of such notice. The reconveyance price shall be paid by the Transferor to the Company in immediately available funds on such 15th day (or 3rd day, if applicable) in an amount equal to the Aggregate Unpaids. 67 ARTICLE IX MISCELLANEOUS SECTION 9.1 Term of Agreement. This Agreement shall terminate following the Termination Date when the Net Investment has been reduced to zero, all accrued Discount has been paid in full and all other Aggregate Unpaids have been paid in full; provided, however, that (i) the rights and remedies of the Company with respect to any representation and warranty made or deemed to be made by Transferor pursuant to this Agreement, (ii) the indemnification and payment provisions of Article VIII, and (iii) the agreement set forth in Section 9.9, shall be continuing and shall survive any termination of this Agreement. SECTION 9.2 Waivers; Amendments. No failure or delay on the part of the Company in exercising any power, right or remedy under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or remedy preclude any other further exercise thereof or the exercise of any other power, right or remedy. The rights and remedies herein provided shall be cumulative and nonexclusive of any rights or remedies provided by law. Any provision of this Agreement may be amended if, but only if, such amendment is in writing and is signed by the Transferor and the Company. SECTION 9.3 Notices. Except as provided below, all communications and notices provided for hereunder shall be in writing (including bank wire, telex, telecopy or electronic facsimile transmission or similar writing) and shall be given to the other party at its address or telecopy number set forth below or at such other address or telecopy number as such party may hereafter specify for the purposes of notice to such party. Each such notice or other communication shall be effective (i) if given by telecopy, when such telecopy is transmitted to the telecopy number specified in this Section and confirmation is received, (ii) if given by mail 3 Business Days following such posting, or (iii) if given by any other means, when received at the address specified in this Section. However, anything in this Section to the contrary notwithstanding, the Transferor hereby authorizes 68 the Company to effect Transfers, Tranche Period and Tranche Rate selections based on telephonic notices made by any Person which the Company in good faith believes to be acting on behalf of the Transferor. The Transferor agrees to deliver promptly to the Company a written confirmation of each telephonic notice signed by an authorized officer of Transferor. However, the absence of such confirmation shall not affect the validity of such notice. If the written confirmation differs in any material respect from the action taken by the Company, the records of the Company shall govern absent manifest error. If to the Company: Enterprise Funding Corporation c/o Merrill Lynch Money Markets Inc. World Financial Center--South Tower 225 Liberty Street New York, New York 10218 Telephone: (212) 236-7200 Telecopy: (212) 236-7584 (with a copy to the Administrative Agent) If to the Transferor: BPS Financial Services, Inc. 200 South Michigan Avenue Chicago, Illinois 60604 Telephone: (312)322-8500 Telecopy: (312)322-8712 Payment Information: Bank of America Illinois ABA #071000039 Account #71-79669 If to the Collection Agent: Borg-Warner Security Corporation 200 South Michigan Avenue Chicago, Illinois 60604 Attention: Scott R. Veldman Telephone: (312) 322-8722 Telephone: (312) 322-8712 69 If to the Collateral Agent: NationsBank of North Carolina, N.A. NationsBank Corporate Center--7th Floor Charlotte, North Carolina 28255 Attention: Michelle M. Heath-- Investment Banking Telephone: (704) 386-7922 Telecopy: (704) 388-9169 If to the Administrative Agent: NationsBank of North Carolina, N.A. NationsBank Corporate Center--7th Floor Charlotte, North Carolina 28255 Attention: Michelle M. Heath-- Investment Banking Telephone: (704) 386-7922 Telecopy: (704) 388-9169 SECTION 9.4 Governing Law; Submission to Jurisdiction; Integration. (a) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. THE TRANSFEROR HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN THE CITY OF NEW YORK FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. The Transferor hereby irrevocably waives, to the fullest extent it may effectively do so, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. Nothing in this Section 9.4 shall affect the right of the Company to bring any action or proceeding against the Transferor or its property in the courts of other jurisdictions. (b) This Agreement contains the final and complete integration of all prior expressions by the parties hereto with respect to the subject matter hereof and shall constitute the entire Agreement among the parties hereto with respect to the subject matter hereof superseding all prior oral or written understandings. 70 SECTION 9.5 Severability; Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same Agreement. Any provisions of this Agreement which are prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 9.6 Successors and Assigns. (a) This Agreement shall be binding on the parties hereto and their respective successors and assigns; provided, however, that the Transferor may not assign any of its rights or delegate any of its duties hereunder without the prior written consent of the Company. No provision of this Agreement shall in any manner restrict the ability of the Company to assign, participate, grant security interests in, or otherwise transfer any portion of the Transferred Interest. (b) The Transferor hereby agrees and consents to the assignment by the Company from time to time of all or any part of its rights under, interest in and title to this Agreement and the Transferred interest to any Liquidity Provider. In addition, the Transferor hereby agrees and consents to the complete assignment by the Company of all of its rights under, interest in and title to this Agreement and the Transferred Interest to the Collateral Agent. SECTION 9.7 Waiver of Confidentiality. The Transferor hereby consents to the disclosure of any non-public information with respect to it received by the Company or the Administrative Agent to any of the Company, any nationally recognized rating agency rating the Company's commercial paper, the Administrative Agent, the Liquidity Provider or the Credit Support Provider in relation to this Agreement (only if such non-public information is accompanied by a statement that such 71 Person agrees, by receipt of such information, to maintain the confidentiality of such information). SECTION 9.8 Confidentiality Agreement. The Transferor hereby agrees that it will not disclose the contents of this Agreement, the Fee Letter or any other proprietary or confidential information of the Company, the Collateral Agent, the Administrative Agent, the Liquidity Provider or the Credit Support Provider to any other Person except (i) its auditors and attorneys, employees or financial advisors (other than any commercial bank) and any nationally recognized rating agency, provided such auditors, attorneys, employees, financial advisors or rating agencies are informed of the highly confidential nature of such information or (ii) as otherwise required by applicable law or order of a court of competent jurisdiction or (iii) to the extent such information is otherwise publicly available. SECTION 9.9 No Bankruptcy Petition Against the Company. The Transferor hereby covenants and agrees that, prior to the date which is one year and one day after the payment in full of all outstanding Commercial Paper or other indebtedness of the Company, it will not institute against, or join any other Person in instituting against, the Company any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings or other similar proceeding under the laws of the United States or any state of the United States. SECTION 9.10 No Recourse Against Stockholders, Officers or Directors. No recourse under any obligation, covenant or agreement of the Company contained in this Agreement shall be had against Merrill Lynch Money Markets Inc. (or any affiliate thereof), or any stockholder, officer or director of the Company, as such, by the enforcement of any assessment or by any legal or equitable proceeding, by virtue of any statute or otherwise; it being expressly agreed and understood that this Agreement is solely a corporate obligation of the Company, and that no personal liability whatever shall attach to or be incurred by Merrill Lynch Money Markets Inc. (or any affiliate thereof), or the stockholders, officers or directors of the buyer, as such, or any of them, under or by reason of any of the obligations, covenants or agreements of the Company contained in this Agreement, or implied therefrom, and that any and all personal liabili- 72 ty for breaches by the Company of any of such obligations, covenants or agreements, either at common law or at equity, or by statute or constitution, of Merrill Lynch Money Markets Inc. (or any affiliate thereof) and every such stockholder, officer or director is hereby expressly waived as a condition of and consideration for the execution of this Agreement. SECTION 9.11 Characterization of the Transactions Contemplated by the Agreement; Assignment of Rights Under Receivables Purchase Agreement. It is the intention of the parties that the transactions contemplated hereby constitute the sale of the Transferred Interest, conveying good title thereto free and clear of any Adverse Claims to the Company and that the Transferred Interest not be part of the Transferor's estate in the event of an insolvency. If, notwithstanding the foregoing, the transactions contemplated hereby should be deemed a financing, the parties intend that the Transferor shall be deemed to have granted to the Company, and the Transferor hereby grants to the Company, a first priority perfected security interest in all of the Transferor's right, title and interest in, to and under the Receivables, together with Related Security and Collections with respect thereto, and together with all of the Transferor's rights under the Receivables Purchase Agreement with respect to the Receivables and with respect to any obligations thereunder of the Sellers with respect to the Receivables, and that this Agreement shall constitute a security agreement under applicable law. The Transferor hereby assigns to the Company all of its rights under the Receivables Purchase Agreement with respect to the Receivables and with respect to any obligations thereunder of the Sellers with respect to the Receivables. The Transferor agrees that neither it nor the Collection Agent shall give any consent or waiver required or permitted to be given under the Receivables Purchase Agreement without the prior consent of either the Company or the Administrative Agent. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 73 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Transfer and Administration Agreement as of the date first written above. ENTERPRISE FUNDING CORPORATION, as Company By: ------------------------- Name: Title: BPS FINANCIAL SERVICES, INC. as Transferor By: ------------------------- Name: Title: BORG-WARNER SECURITY CORPORATION, individually and as Collection Agent By: _______________________ Name: Title: 74 EXHIBIT N --------- The following terms used in Article VII shall have the following meanings: "Asset Sale" means the sale, lease, assignment or other transfer for value by Company or any of its Subsidiaries to any Person, whether in a single transaction or a series of related transactions (other than to Company or any of its Subsidiaries) of (i) any of the stock of any of Company's Subsidiaries; (ii) all or substantially all of the assets of any division or line of business of Company or any of its Subsidiaries; or (iii) any other assets or rights (including, without limitation, any assets that do not constitute substantially all of the assets or rights of any division or line of business of Company or any of its Subsidiaries) having a book value or market value in excess of $2,000,000 or more, other than in each case (A) the sale in the ordinary course of business of personal property held for resale in the ordinary course of business of Company or any of its Subsidiaries, (B) the sale or discount of receivables permitted pursuant to subsection 6.9 of the Credit Agreement, and (C) the Spin-Off. "Automotive" means Borg-Warner Automotive, Inc. "Borg-Warner Subsidiaries" means the Subsidiaries of Company which are listed on Schedule A annexed hereto, as such Schedule may be supplemented from time to time as mutually agreed upon by Borg-Warner and the Administrative Agent. "BW-Other Corporation" means BW-Other Corporation, a Delaware corporation and a wholly-owned direct Subsidiary of Company, and all of its Subsidiaries, including without limitation Borg-Warner Equities Corporation and Centaur Insurance Company. "Capital Lease", as applied to any Person, means any lease of any property (whether real, personal or mixed) by that Person as lessee that, in conformity with GAAP, is accounted for as a capital lease on the balance sheet of that Person. N-1 "Company" means Borg-Warner Security Corporation. "Consolidated Capital Expenditures" means, for any period, the aggregate of all expenditures (whether in cash or accrued as liabilities) by Company and its Consolidated Subsidiaries during such period that, in conformity with GAAP, are included or required to be included in the property, plant or equipment reflected in the consolidated balance sheet of Company and its Consolidated Subsidiaries. "Consolidated EBITDA" means, for any period, the sum of the amounts for such period of (i) Consolidated Net Income excluding extraordinary items, (ii) provisions for taxes based on income, (iii) Consolidated Interest Expense, (iv) to the extent Consolidated Net Income has been reduced thereby, amortization expense, depreciation expense and other non-cash expenses, and (v) other non-cash items reducing Consolidated Net Income less non-cash items increasing Consolidated Net Income, all as determined on a consolidated basis for Company and its Consolidated Subsidiaries in conformity with GAAP. "Consolidated Interest Expense" means, for any period, total interest expense (including that portion attributable to Capital Leases in accordance with GAAP) of Company and its Consolidated Subsidiaries on a consolidated basis with respect to all outstanding Indebtedness of Company and its Consolidated Subsidiaries, including, without limitation, all commissions, discounts and other fees and charges owed with respect to letters of credit and with respect to any sale, discount or other financing of receivables and net costs under any interest rate agreements. "Consolidated Net Income" means, for any period, the net income (or loss) of Company and its Consolidated Subsidiaries on a consolidated basis for such period taken as a single accounting period determined in conformity with GAAP; provided that there shall be excluded (i) the income (or loss) of any Person (other than a Subsidiary of Company) in which any other Person (other than Company or any of its Subsidiaries) has a joint interest, except to the extent of the amount of dividends or other distributions actually paid to Company or any of its Subsidiaries by such Person during such period, (ii) the income (or N-2 loss) of any Person accrued prior to the date it becomes a Subsidiary of Company or is merged into or consolidated with Company or any of its Subsidiaries or that Person's assets are acquired by Company or any of its Subsidiaries, (iii) the income of any Subsidiary of Company to the extent that the declaration or payment of dividends or similar distributions by that Subsidiary of that income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary, and (iv) any after-tax gains or losses attributable to Asset Sales or returned surplus assets of any Pension Plan. "Consolidated Net Worth" means, as at any date of determination, the sum of the capital stock and additional paid-in capital plus retained earnings (or minus accumulated deficit) of Company and its Consolidated Subsidiaries on a consolidated basis calculated in conformity with GAAP, excluding all effects of foreign currency exchange adjustments under FASB No. 52. "Consolidated Subsidiaries" means all Subsidiaries of Company other than BW-Other Corporation and those Subsidiaries of Company whose principal place of business is located in Latin America that are not consolidated with Company as of the date of this Agreement. "Contingent Obligation", as applied to any Person, means any direct or indirect liability, contingent or otherwise, of that Person (i) with respect to any indebtedness, lease, dividend or other obligation of another if the primary purpose or intent thereof by the Person incurring the Contingent Obligation is to provide assurance to the obligee of such obligation of another that such obligation of another will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such obligation will be protected (in whole or in part) against loss in respect thereof, (ii) with respect to any letter of credit issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings, or (iii) under Currency Agreements or Interest Rate Agreements. Contingent Obligations shall include, without limitation, (a) the direct or indirect guaranty, endorsement (otherwise than for collection or deposit in the ordinary course of business), co-making, discounting with N-3 recourse or sale with recourse by such Person of the obligation of another, and (b) any liability of such Person for the obligations of another through any agreement (contingent or otherwise) (x) to purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), (y) to maintain the solvency or any balance sheet item, level of income or financial condition of another, or (z) to make take-or-pay or similar payments if required regardless of non-performance by any other party or parties to an agreement, if in the case of any agreement described under subclauses (x) or (y) of this sentence the primary purpose or intent thereof is as described in the preceding sentence. The amount of any Contingent Obligation shall be equal to the amount of the obligation so guaranteed or otherwise supported. "Credit Agreement" means the Credit Agreement dated as of January 27, 1993, as it may be amended, supplemented or otherwise modified from time to time. "Currency Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect Company or any of its Consolidated Subsidiaries against fluctuations in currency values. "Employee Benefit Plan" means any "employee benefit plan" as defined in Section 3(3) of ERISA which is, or was at any time, maintained or contributed to by any Loan Party or any of its ERISA Affiliates. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time and any successor statute. "ERISA Affiliate", as applied to any Person, means (i) any corporation which is a member of a controlled group of corporations within the meaning of Section 414(b) of the Internal Revenue Code of which that Person is a member; (ii) any trade or business (whether or not incorporated) which is a member of a group of trade or businesses under common control within the meaning of Section 414(c) of the Internal Revenue Code of which that Person is a member; and (iii) any member of an affiliated N-4 service group within the meaning of Section 414(m) or (o) of the Internal Revenue Code of which that Person, any corporation described in clause (i) above or any trade or business described in clause (ii) above is a member. On and after the Spin-Off, Automotive and its Subsidiaries shall not be ERISA Affiliates with respect to events occurring after the Spin-Off unless the Company is liable under the Code or ERISA with respect to such event. "Funded Debt", as applied to any Person, means all indebtedness of that Person that by its terms or by the terms of any instrument, or agreement relating thereto matures more than one year from, or is directly renewable or extendable at the option of the debtor to a date more than one year from (including an option of the debtor under a revolving credit or similar agreement obligating the lender or lenders to extend credit over a period of one year or more from), the date of the creation thereof. "GAAP" means, subject to the limitations on application thereof set forth in subsection 1.2 of the Credit Agreement, generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, that are applicable to the circumstances as of the date of determination. "Indebtedness", as applied to any Person, means (i) all indebtedness for borrowed money, whether or not evidenced by a promissory note, draft or similar instrument, (ii) that portion of obligationS with respect to Capital Leases that is properly classified as a liability on a balance sheet in conformity with GAAP, (iii) notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money, (iv) any obligation owed for all or any part of the deferred purchase price of property or services, which purchase price is (y) due more than six months from the date of incurrence of the obligation in respect thereof, or (z) evidenced by a note or similar written instrument, and (v) all indebtedness secured by any Lien on any property or asset owned or held by that Person regardless N-5 of whether the indebtedness secured thereby shall have been assumed by that Person or is nonrecourse to the credit of that Person. "Interest Rate Agreement" means any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or other similar agreement or arrangement designed to protect Company or any of its Subsidiaries against fluctuations in interest rates; provided that the calculation of payments for early termination shall be made on a reasonable basis in accordance with customary industry practices; and provided further that all such payments (guarantied and unguaranteed) shall constitute Indebtedness. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended to the date hereof and from time to time hereafter. "Lender" and "Lenders" means the persons identified as "Lenders" and listed on the signature pages of the Credit Agreement, together with their successors and permitted assigns. "Lien" means any lien, mortgage, deed of trust, deed to secure debt, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, and any agreement to give any security interest). "Loan Parties" means the Company and the Borg-Warner Subsidiaries, collectively. "Material Subsidiary" means (i) each Subsidiary of Borg-Warner identified as a "Material Subsidiary" on Schedule A annexed hereto; (ii) any other Subsidiary of Borg-Warner now existing or hereafter acquired or formed by Borg-Warner which (x) for the most recent fiscal year of Borg-Warner commencing on or after January 1, 1994 accounted for more than 3% of the consolidated revenues of Borg-Warner, or (y) as at the end of such fiscal year, was the owner of more than 3% of the consolidated assets, all as shown on the consolidated financial statements of Borg-Warner for such fiscal year; and (iii) any other Subsidiary mutually agreed upon by Borg-Warner and the Administrative Agent, or so designated by Borg-Warner by an N-6 Officers' Certificate delivered to the Administrative Agent. "Multiemployer Plan" means a "multiemployer plan" as defined in Section 3(37) of ERISA to which Company or any of its ERISA Affiliates is contributing or ever has contributed or to which Company or any of its ERISA Affiliates has, or ever has had, an obligation to contribute. "Pension Plan" means any Employee Benefit Plan, other than a Multiemployer Plan, which is subject to Section 412 of the Internal Revenue Code or Section 302 of ERISA. "Person" means and includes natural persons, corporations, limited partnerships, general partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments and agencies and political subdivisions thereof. "Spin-Off" means a tax-free reorganization in which Company pays to its shareholders a stock dividend consisting of all of the outstanding shares of Automotive. "Subsidiary" means, with respect to any Person, any corporation, association or other business entity of which more than 50% of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof. N-7 EX-10.21 8 RET. BENEFIT PLAN EXHIBIT 10.21 BORG-WARNER SECURITY CORPORATION RETIREMENT SAVINGS EXCESS BENEFIT PLAN (AS AMENDED AND RESTATED EFFECTIVE AS OF JANUARY 1, 1995) 1. Purpose of the Plan ------------------- The Borg-Warner Security Corporation Retirement Savings Plan (the "RSP") was established by Borg-Warner Security Corporation (the "Corporation") to provide its employees with a method of long-term savings. The Borg-Warner Security Corporation Retirement Savings Excess Benefit Plan (the "RSEBP") was established to provide benefits to certain employees whose participation in and benefits under the RSP were limited by provisions in the Internal Revenue Code of 1986, as amended (the "Code"), including, without limitation, Sections 401(a)(17), 401(k)(3), 401(m), 402(j) and 415 of the Code. Effective as of January 1, 1995 the RSEBP was amended and restated. 2. Definitions ----------- For purposes of this RSEBP, the use of terms defined in the RSP shall have the same meaning when used herein, and the following terms, when used herein, shall have the following meanings, unless, in either case, the context clearly indicates otherwise. 2.01 Participant. The term "Participant" means any person for which a Supplementary Company Retirement Account and/or Supplementary Employee Retirement Account was maintained as of January 1, 1995. 2.02 Beneficiary. The term "Beneficiary" means the person, persons or a trust, designated in writing by the Participant, to whom a distribution shall be made in the event of his death prior to the full receipt of his interest under the RSEBP. 2.03 Plan Year. The term "Plan Year" means the accounting year of the RSP, which is maintained on a January 1 through December 31 basis. 2.04 Supplementary Company Retirement Account. The term "Supplementary Company Retirement Account" means the account maintained for a Participant adjusted as determined under Section 5 hereof. 2.05 Supplementary Employee Retirement Account. The term "Supplementary Employee Retirement Account" means the account maintained for a Participant adjusted as determined under Section 5 hereof. 2.06 Valuation Date. The term "Valuation Date" means the last day of each calendar month and such other dates as so designated by the Committee. 3. Administration -------------- This RSEBP shall be administered by a committee which may be the Employee Benefits Committee established by the Corporation to administer the RSP (the "Committee"). The Committee shall administer the RSEBP in a manner consistent with the administration of the RSP as from time to time amended and in effect, except that this RSEBP shall be administered as an unfunded plan which is not intended to meet the qualification requirements of Section 401 of the Code. The Committee shall have full power and authority to interpret and construe this RSEBP and the Committee's administration, interpretations and construction -2- thereof, and actions thereunder, including the amount or recipient of any payment to be made therefrom, shall be binding and conclusive on all persons for all purposes. 4. Distribution of Benefits ------------------------ 4.01 Except as provided herein, distributions from a Participant's Supplementary Company Retirement Account and his Supplementary Employee Retirement Account shall be made only when, and if, the Participant is entitled to benefits under the RSP, and shall be made as determined by the Committee in its sole and complete discretion. 4.02 No in-service withdrawals or Participant loans are available under the RSEBP. The Committee, within its sole and complete discretion, is empowered to accelerate the payment of a Participant's Supplementary Company Retirement Account balance and his Supplementary Employee Retirement Account balance, to the extent vested, to such Participant or his Beneficiary, whether before or after the Participant's termination of service, in the event of unanticipated emergencies caused by events beyond the control of the Participant or his Beneficiary which would result in severe financial hardship to the individual if early withdrawal were not permitted, with the amount of the early withdrawal limited to the amount necessary to meet the emergency. 4.03 The Committee may also accelerate payments in the event of changes in the tax laws or accounting principles adversely affecting the RSEBP and its effect on the Corporation, the Participants or their Beneficiaries. Nothing contained herein shall enable the Committee to accelerate payments because of the financial condition of the Corporation. 4.04 Effective as of January 1, 1995, if the value of a Participant's Supplemental Company Retirement Account and Supplemental Employee Retirement Account, in the -3- aggregate as of December 31, 1994 was less than $5,000, the Committee in its discretion can require that a lump sum distribution be made to the Participant without his or her consent. 5. Investments ----------- As of each Valuation Date, for each Participant, the Corporation shall credit the Participant's Supplementary Company Retirement Account and Supplementary Employee Retirement Account for the period ending on the Valuation Date to reflect (i) earnings or expenses and recognized gains or losses of the Investment Contracts Fund since the preceding Valuation Date and (ii) any adjustments reflecting a revaluation in the total fair market value of the Investment Contracts Fund that have been made by the Trustee under the RSP. 6. Participant's Rights -------------------- 6.01 All benefits payable under this RSEBP to or on behalf of Participants who were employed by the Corporation shall be paid from the general assets of the Corporation and all benefits payable to or on behalf of Participants who were employed by any Company which has adopted this RSEBP shall be paid from the general assets of such Company. The Corporation may, in its sole discretion, establish a separate fund or account to make payments of benefits to a Participant or his Beneficiary or Beneficiaries hereunder. If the Corporation in its sole discretion, establishes such a fund or account, no Participant, his Beneficiary or Beneficiaries, or any other person shall have, under any circumstances, any interest whatever in any particular property or assets of the Corporation by virtue of this RSEBP, and the rights of the Participant, his Beneficiary or Beneficiaries or any other person who may claim a right to receive benefits under this RSEBP shall be no greater than the rights of a general unsecured creditor of the Corporation. The Participant shall not be entitled to any payments -4- from the trust fund maintained under the RSP on the basis of any benefits to which he may be entitled under this RSEBP. 6.02 Except as required for Federal income tax withholding purposes or pursuant to a "qualified domestic relations order" under Section 401(a)(13) of the Code, assignment of benefits under the RSEBP or their pledge or encumbrance in any manner shall not be permitted or recognized under any circumstances, nor shall such benefits be subject to attachment or other legal process for the debts (including payments for alimony or support) of any Participant, former Participant or Beneficiary. This Section shall not apply to any default or indebtedness to the Corporation. 6.03 If the Committee shall find that a Participant, former Participant or Beneficiary is unable to care for his affairs because of illness or accident, or is a minor, or has died, the Committee may direct that any payment due him, unless claim therefor shall have been made by a duly appointed legal representative, shall be paid to his spouse, a child, a parent or other blood relative or to a person with whom he resides, and any such payment so made shall be in complete discharge of the liabilities of RSEBP therefor. 6.04 Subject to all applicable laws relating to unclaimed property, if the Committee mails by registered or certified mail, postage prepaid, to the last known address of a Participant or Beneficiary, a notification that he is entitled to a distribution hereunder, and if the notification is returned by the United States Postal Service as being undeliverable because the addressee cannot be located at the address indicated and if the Committee has no knowledge of such Participant's or Beneficiary's whereabouts within 3 years from the date the notification was mailed, or if within 3 years from the date the notification was mailed to such -5- Participant or Beneficiary he does not respond thereto by informing the Committee of his whereabouts, then, and in either of said events, upon the December 31 coincident with or next succeeding the third anniversary of the mailing of such notification, the undistributed amount in the Supplementary Company Retirement Account of such Participant or Beneficiary shall be paid to the person or persons who would have been entitled to take such share in the event of the death of the Participant or Beneficiary whose whereabouts are unknown, assuming that such death occurred as of the December 31 coincident with or next succeeding the third anniversary of the mailing of such notification. 6.05 No Participant, former Participant or Beneficiary or any other person shall have any interest in or right under the RSEBP in any part of the assets or earnings held in the RSP Trust or in any other trust established by the Corporation. 6.06 Whenever in the administration of the RSEBP action is required, such action shall be uniform in nature as applied to all persons similarly situated, and no such action shall be taken which shall discriminate in favor of Employees who are officers, shareholders or highly compensated Employees. 6.07 Any action by the Committee pursuant to the provisions of the RSEBP may be evidenced by written instrument executed by any person authorized by the Committee to take such action, and any fiduciaries shall be fully protected in acting in accordance with any such written instrument received by them. 6.08 In case any provisions of this RSEBP shall be held unlawful or invalid for any reason, the illegality or invalidity shall not affect the remaining parts, and the RSEBP shall be construed and enforced as if the unlawful or invalid provisions had never been inserted. -6- 6.09. Any claim for benefit under the RSEBP shall be administered in accordance with Section 2(f) of the Borg-Warner Security Corporation Retirement Savings Excess Benefit Plan Trust. 7. Amendment and Discontinuance ---------------------------- The Committee may at any time amend or discontinue this RSEBP. However, if this RSEBP should be amended and discontinued, the Corporation shall be liable for any benefits accrued under this RSEBP as of the date of such action for Participants who are or have been employed by the Corporation. Such accrued benefits shall be the vested portion of the Participant's Supplementary Company Retirement Account balance as of such date of amendment or discontinuance which each Participant or his Beneficiary or Beneficiaries is receiving under this RSEBP or, with respect to Participants who are in the employment of the Corporation on such date, which each such Participant would have received as of such date under this RSEBP if his employment had terminated as of the date of amendment or discontinuance. 8. Restriction on Assignment ------------------------- The benefits provided hereunder are intended for the personal security of persons entitled to payment under this RSEBP and are not subject in any manner to the debts or other obligations of the persons to whom they are payable. The interest of any Participant or his Beneficiary or Beneficiaries may not be sold, transferred, assigned, or encumbered in any manner, either voluntarily or involuntarily, and any attempt so to anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge the same shall be null and void; neither shall the benefits hereunder be liable for or subject to the debts, contracts, liabilities, engagements, or -7- torts of any person to whom such benefits or funds are payable, nor shall they be subject to garnishment, attachment, or other legal or equitable process, nor shall they be an asset in bankruptcy. If a Participant or any other person entitled to a benefit under this RSEBP becomes bankrupt or makes an assignment for the benefit of creditors or in any way suffers a lien or judgment against his personal assets, or in any way attempts to anticipate, alienate, sell, assign, pledge, encumber or charge a benefit, right or account, then such benefits, right or account in the discretion of the Committee may cease and terminate. 9. Continued Employment -------------------- Nothing contained in this RSEBP shall be construed as conferring upon a Participant the right to continue in the employment of the Corporation or any Company in any capacity or as otherwise affecting the employment relationship. 10. Liability of the Committee -------------------------- No member of the Committee shall be liable for any loss unless resulting from his own fraud or willful misconduct, and no member shall be personally liable upon or with respect to any agreement, act, transaction or omission executed, committed or suffered to be committed by himself as a member of the Committee or by any other member, agent, representative or employee of the Committee. The Committee and any individual member of the Committee and any agent thereof shall be fully protected in relying upon the advice of the following professional consultants or advisors employed by the Corporation or the Committee: any attorney insofar as legal matters are concerned, any accountant insofar as accounting matters are concerned, and any actuary insofar as actuarial matters are concerned. -8- 11. Indemnification --------------- The Corporation hereby indemnifies and agrees to hold harmless and indemnify the members of the Committee and all directors, officers, and employees of the Corporation against any and all parties whomsoever, and all losses therefrom, including without limitation, costs or defense and attorneys' fees, based upon or arising out of any act or omission relating to, or in connection with this RSEBP other than losses resulting from such person's fraud or willful misconduct. 12. Termination of Service for Dishonesty ------------------------------------- If a Participant's service with the Corporation is terminated because of dishonest conduct injurious to the Corporation or if dishonest conduct injurious to the Corporation committed by a Participant is determined by the Corporation within one year after his service with the Corporation is terminated, the Committee may terminate such Participant's remaining interest and benefits under this RSEBP. The dishonest conduct committed by a Participant that is injurious to the Corporation shall be determined and decided by the Committee only after a full investigation of such alleged dishonest conduct and an opportunity has been given the Participant to appear before the Committee to present his case. The decision made by the Committee in such cases shall be final and binding on all Participants and other persons affected by such decision. -9- 13. Binding on the Corporation, Company, Participants and Their Successors ---------------------------------------------------------------------- This RSEBP shall be binding upon and inure to the benefit of the Corporation which has adopted this RSEBP, their successors and assigns and the Participants and their heirs, executors, administrators, and duly appointed legal representatives. 14. Law Governing ------------- This RSEBP shall be construed in accordance with and governed by the laws of the State of Illinois. -10- EX-11 9 STATEMENTS RE: PER SHARE EXHIBIT 11 BORG WARNER SECURITY CORPORATION STATEMENT RE COMPUTATION OF PER SHARE EARNINGS Years Ended December 31, 1992, 1993, and 1994 Shares used in computation of per share earnings (Thousands) 1992 1993 1994 ------ ------ ------ Average common shares outstanding 18,847 22,272 22,893 Common stock equivalents 800 586 277 ------ ------ ------ Shares used for computation of per share earnings 19,647 22,858 23,170 ====== ====== ====== EX-13 10 ANNUAL REPORT TO SHAREHO CONSOLIDATED STATISTICAL REVIEW The following table sets forth selected financial information for Borg-Warner Security Corporation (the "Company"). Such information is derived from the audited financial statements of the Company and treats Borg-Warner Automotive, Inc. ("BW-Automotive"), which was spun off in January 1993 (the "Spin-Off"), as discontinued operations. The selected financial data should be read in connection with the 1994 consolidated financial statements and accompanying notes. STATEMENT OF OPERATIONS DATA
Year Ended December 31, ------------------------------------------------------------------------------------------------------------------- (millions of dollars, except share data) 1990 1991 1992 1993 1994 ------------------------------------------------------------------------------------------------------------------- Net service revenues $1,413.8 $1,555.4 $1,620.6 $1,764.6 $1,792.9 Provision (benefit) for income taxes (1) 5.6 9.4 (19.7) 22.2 (3.0) Earnings (loss) from continuing operations (2) 20.3 25.2 57.7 (215.1) 13.1 Earnings (loss) from continuing operations per share $1.02 $1.28 $2.94 ($9.41) $0.56 Average common shares outstanding in thousands (3) 19,940 19,698 19,647 22,858 23,170 BALANCE SHEET DATA (at end of period) ------------------------------------------------------------------------------------------------------------------- Net assets of discontinued BW-Automotive operations $ 742.2 $ 743.5 $ 728.2 $ -- $ -- Total assets 1,891.0 1,866.3 1,758.1 790.5 830.3 Total debt 897.3 872.9 746.6 457.5 468.5 Stockholders' equity 659.0 668.3 676.7 27.5 43.8
STOCK PRICES 1994 quarters First Second Third Fourth ------------------------------------------------------------------------------------------------------------------- High $22 $16-7/8 $12-3/4 $11-1/8 Low $16-3/8 $10-3/4 $10-5/8 $8-1/4 1993 quarters First Second Third Fourth ------------------------------------------------------------------------------------------------------------------- High $22-5/8 $22-1/4 $22-7/8 $20-1/2 Low $19-5/8 $19-5/8 $18 $18-1/4
(1) Effective January 1, 1991 the Company changed its method of accounting for income taxes to conform to SFAS 109. Income taxes for the years ended December 31, 1992 and 1994 reflect certain adjustments related to changes in tax bases. See Note 11 to the Consolidated Financial Statements. (2) Following the Spin-Off of BW-Automotive, $250 million of excess purchase price over net assets acquired not directly attributed to the protective services business was written off as a charge to earnings in the first quarter of 1993. (3) The average common shares outstanding include 3,795,000 shares sold through an initial public offering on January 27, 1993. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview The Company's protective services business is divided into four business units: guard services, alarm services, armored services and courier services. The Company's consolidated net service revenue increased 2% in 1994 and 9% in 1993. The primary source of the 1994 increase was internal growth, while the primary source of the 1993 revenue increase was acquisitions, principally in the guard unit. Operating profit, which is pretax earnings before interest expense and unallocated corporate expenses, decreased 30% in 1994 following a 4% increase in 1993. For several years competitive market conditions have limited the Company's ability to increase prices. In 1994 each of the Company's units continued to experience price pressure and higher direct costs, which has adversely affected margins. Historically, the Company has grown through acquisitions. In 1994 the price/ cost pressures facing the Company and the entire protective services industry made acquisitions less attractive. While the Company will continue to pursue acquisitions when attractive opportunities arise, each unit intends to focus on internal growth through greater customer retention, expanded service offerings and greater selling efforts. At the same time, each unit will continue its efforts to reduce costs, including applying technology to improve customer service. Results of Operations The following table sets forth the net service revenues and operating profit for each unit for the three years ended December 31, 1994: Year Ended December 31, -------------------------------------------------------------------------------- (millions of dollars) 1992 1993 1994 -------------------------------------------------------------------------------- Net service revenues: Guard $1,098.0 $1,198.0 $1,209.4 Alarm 203.5 213.2 206.2 Armored 156.4 180.9 211.2 Courier 162.7 172.5 166.1 -------------------------------------------------------------------------------- Total $1,620.6 $1,764.6 $1,792.9 ================================================================================ Operating profit: Guard $55.4 $58.5 $54.5 Alarm 29.7 31.1 14.9 Armored 10.6 13.3 6.7 Courier 10.3 7.4 1.1 -------------------------------------------------------------------------------- Total $106.0 $110.3 $77.2 ================================================================================ Guard services Guard service revenue increased slightly in 1994, following a 9% increase in 1993. The 1994 increase was due to internal growth and improved customer retention. The primary source of revenue growth in 1993 was acquisitions, particularly the acquisition of certain assets of Security Bureau, Inc. in December 1992. Operating profit for the guard unit declined slightly from 1992 to 1994 as competitive market conditions placed downward pressure on prices and margins. In certain geographic areas the unit is experiencing a contraction of the labor market, which has increased direct costs through higher wages and increased amounts of unbilled overtime. Because the market has constrained price increases, the Company has not been able to pass on such cost increases to customers and margins have declined. 14 Management's Discussion and Analysis of Financial Condition and Results of Operations The guard unit was reorganized in February 1994 by combining the administrative functions and establishing nine regional offices. The Company expects that the guard market will remain competitive in 1995. The unit will seek to increase revenue through customer retention and expanded service offerings. The Company will seek to improve gross margins by selected price increases and controlling costs, including through improved guard recruitment, retention and training to control unbilled overtime costs. The Company will continue to focus on technological developments aimed at improving performance and customer retention. Alarm services Alarm service revenue decreased 3% in 1994, following a 5% increase in 1993. Revenues from key commercial, banking and defense industry customers have declined due to consolidation occurring in those industries. In addition, customer cancellation rates were above targeted levels during the period. In 1993 revenue included a one-time supplemental billing. There were no special billings in 1994. Operating profit for the alarm unit declined 52% in 1994, following a 5% increase in 1993. The 1994 decline was due to reduced revenues over a largely fixed cost base. In addition, the Company has invested in systems to improve service quality and other costs are increasing. Intense price competition has also applied downward pressure on operating margins in 1994 and 1993. The alarm unit was reorganized in November 1994 by establishing nine regional offices. The Company expects that the regional offices will manage most of the administrative functions of the alarm unit, while branch offices devote full attention to sales and service issues. Because the commercial market has constrained price increases for monitoring services, the alarm unit intends to focus on customer retention to increase revenue and improve margins. Programs to improve customer retention include pursuing technological advancements and providing consistent, high quality, responsive service. The unit will attempt to diversify its largely commercial customer base by continuing its efforts to penetrate the residential security market. Armored services Armored service revenue increased 17% in 1994, following a 16% increase in 1993. The 1994 increase resulted primarily from acquisitions, including the acquisition of the assets of Shields Business Machines, Inc., an ATM servicer in January, and from increased volume in the ATM service and cash management operations. The traditional armored transport business has been adversely affected by consolidation in the banking industry. To counter this, the unit has expanded into additional areas of service, including ATM and cash management services. Operating profit for the armored unit declined 50% in 1994, following a 25% increase in 1993. During 1994 an escalating rate of violent attacks against armored car and ATM servicing personnel increased security costs and insurance premiums. The rate of cargo losses attributable to external theft in 1994 increased substantially from historical levels. In addition, increases in direct labor costs and administrative expenses have eroded margins. To offset the impact of the increased security and insurance costs resulting from the higher cargo losses, the armored unit has increased prices and expanded its programs to reduce cargo losses. Such programs include lowering the profile of the unit's vehicles, increasing security training, improving security measures through technology and route structure and eliminating certain high- risk services. The unit's risk management department coordinates efforts with local and federal law enforcement authorities to investigate all cargo losses. In addition, the unit is attempting to reduce costs by integrating the field operations of the ATM cash replenishment business with the armored cash delivery business. 15 Management's Discussion and Analysis of Financial Condition and Results of Operations Courier services Courier service revenue decreased 4% in 1994, following a 6% increase in 1993. The 1994 decrease resulted primarily from the work stoppage initiated by the International Brotherhood of Teamsters during the third quarter. The unit's traditional business of transporting non-negotiable financial documents among financial institutions also has been adversely affected by consolidation in the banking industry. Such business is subject to severe competitive price pressure. The unit has increased emphasis on time-sensitive delivery of small packages and commodities. Operating profit for the courier unit declined significantly in 1994, following a 28% decline in 1993. The 1994 decline was due principally to the reduced revenues and increased costs associated with the labor unrest, while the 1993 decline was due primarily to competitive price pressure. The courier unit will seek to improve operating margins in future periods through increased operating efficiencies and increased market penetration in the package delivery business. Foreign The percentage of the Company's revenues in 1994 derived from non-U.S. operations, primarily guard services, was 6% in 1994 and 1993, compared with 7% in 1992. The Company operates in Canada, the United Kingdom and Colombia. Operating margins also declined slightly from 1992 to 1994. Other Earnings Factors General corporate expenses increased to $26.5 million in 1994 from $4.8 million in 1993, and were $37.3 million in 1992. Corporate expenses for 1994 include an increase of approximately $25 million over 1993 related to non-cash accruals for self-insurance reserves and, to a lesser extent, other corporate allowances. The decrease in operating expenses in 1993 from 1992 was due to lower amortization of excess purchase price over net assets acquired, greater corporate headquarters expense reimbursement received from BW-Automotive and a favorable settlement of a corporate liability. Amortization of excess purchase price over net assets acquired was $16.1 million and $16.5 million in 1994 and 1993, respectively, down from $21.4 million in 1992 due to the non-recurring elimination of excess purchase price of $250 million. This was recorded in the first quarter of 1993 to eliminate excess purchase price which was not directly related to the protective services operations. Other income in 1994 included a gain of $9.9 million related to the sale of trademarks and other rights to BW-Automotive. Gains on the sale of various assets in 1993 and 1992 were $1.9 million and $6.5 million, respectively. Other income in 1992 also included a gain of $7.5 million related to the collection of a partially reserved receivable. Interest expense in 1994 was $50.4 million compared with $51.5 million and $47.9 million in 1993 and 1992, respectively. The improved terms resulting from the Company's 1993 restructuring were offset by higher interest rates. In 1992 interest expense was net of an allocation to BW-Automotive based on its relative capital investment to the Company's total capital investment. The Company's effective tax rates have varied significantly from the federal tax rate. Despite reported income before taxes, the Company recorded a net income tax benefit in 1992 and 1994 primarily because of adjustments to deferred income taxes of $30.6 million and $7.0 million, respectively. These adjustments resulted from changes in the tax bases of certain assets and liabilities as a result of sales and settlements. In 1993 the Company had a $22.2 million provision for income taxes despite a pre-tax loss of $192.9 million primarily due to a $250 16 Management's Discussion and Analysis of Financial Condition and Results of Operations million non-deductible charge to eliminate excess purchase price. Excluding the impact of the foregoing items, the Company's effective tax rate would have been 29%, 39% and 40% in 1992, 1993 and 1994, respectively. Discontinued Operations The loss from discontinued operations in 1992 and 1993 reflects the results of BW-Automotive operations up to the time of the Spin-Off in January 1993. These results include an allocation of corporate headquarters and interest expenses. Results for 1992 also include a pre-tax charge of approximately $28 million related to excess capacity at various BW-Automotive facilities. Extraordinary Items Earnings for 1993 reflect a loss of $9.1 million, net of tax, from the early extinguishment of $216.7 million principal amount of 13% Junior Subordinated Discount Debentures and $15.2 million principal amount of 12.75% Senior Subordinated Debentures. Earnings for 1992 reflect a $7.1 million loss, net of tax, from the early extinguishment of $155 million principal amount of the Company's 13% Junior Subordinated Discount Debentures and $58 million principal amount of the Company's 14% Senior Subordinated Discount Debentures. Cumulative Effect of Initial Application of New Accounting Standards The Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," effective January 1, 1993, and elected immediate recognition of the $15 million obligation. The cumulative effect was a charge of $8.3 million, net of tax. In the fourth quarter of 1993, the Company changed the method of selecting the rate used to discount the retained portion of insurance costs related to its various deductible policies. The Company previously used a rate based on its overall cost of capital. Consistent with the Securities and Exchange Commission Staff Accounting Bulletin No. 92, the rate was changed to a rate based on risk- free monetary asset yields for securities with similar maturities. This change resulted in a reduction in the discount rate from 10% to 4%. The cumulative effect of this change was a charge of $9.4 million, net of tax. Neither of the above changes in accounting had a material impact on earnings from continuing operations in the respective years of implementation. Impact of Recapitalization on Operations The impact of the 1993 restructuring on the results of operations for 1992 and 1993 is reflected on a pro forma basis in the Pro Forma Financial Information (Unaudited) contained in the Notes to Consolidated Financial Statements. On a pro forma basis, after making the adjustments for interest and amortization, as well as the elimination of non-recurring gains and expenses, earnings before taxes for 1992 would have been $46.9 million. Pro forma earnings before taxes for 1993 were $57.1 million after removing the non-recurring elimination of excess purchase price of $250.0 million. 17 Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition and Liquidity Current liabilities exceeded current assets at December 31, 1994 and 1993 due to the sale of receivables with the proceeds used to reduce long-term debt. The outstanding balance of sold receivables was $112 million and $124 million at December 31, 1994 and 1993, respectively. Receivables at December 31, 1993 also included $10.7 million for refundable income taxes. The levels of receivables, inventory and current liabilities are partly seasonal in nature and are influenced by the timing of billings, collections and payrolls. The Company's policy is to keep working capital at as low a level as is operationally feasible to minimize related carrying costs. During 1994, net cash provided by operating activities increased slightly to $54.0 million from $52.3 million in 1993. The current year included a $3.2 million tax refund and a $22.0 million increase in receivables primarily due to lower sales under the Company's receivable transfer facility. The prior year reflected the settlement of certain liabilities (including an $8 million payment relating to the Company's former Centaur operation) and costs associated with the 1993 restructuring. Historically, the Company's capital expenditures, principally for vehicles and subscribers' installations, have been at a rate slightly in excess of depreciation. Capital expenditures were $70.2 million, $68.8 million and $67.0 million in 1992, 1993 and 1994, respectively. Pursuant to the terms of the Company's amended credit facilities, capital expenditures are limited to $55 million in 1995. The Company does not have any material commitments for capital expenditures and believes that it will be able to continue to invest in its business as required, within the limits set forth under its amended credit facilities. From time to time, the Company makes acquisitions of companies in the protective services industry. Cash expenditures for businesses acquired (which were not included in the Company's capital expenditures) were $34.7 million, $4.8 million and $9.0 million in 1992, 1993 and 1994, respectively. While the Company will continue to pursue acquisitions when attractive opportunities arise, it intends to focus on internal growth through greater customer retention, expanded service offerings and greater selling efforts. The Company expects that continuing operations, together with existing credit facilities and replacements thereof, will generate sufficient cash to fund current operating requirements and capital expenditures. To avoid potential non-compliance with the covenants contained in it revolving credit and letter of credit facilities resulting from 1994 financial performance, the Company has obtained waivers and amendments. In June 1994 the Company amended such credit facilities, principally to reduce pricing and amend covenants related to leverage, fixed charge coverage and net worth. In December 1994 the Company negotiated waivers to certain financial covenants under such facilities. In March 1995 the Company again amended such facilities, principally to change pricing and amend covenants related to earnings, leverage, fixed charge coverage, net worth, capital expenditures and acquisitions. 18 Management's Discussion and Analysis of Financial Condition and Results of Operations In November 1994 the Company replaced its previous $150 million receivables purchase facility with a $130 million receivables transfer facility. The new facility provided more favorable pricing than the prior facility and altered, among other things, eligibility and reserve requirements. In connection with the renegotiation of financial covenants required to be maintained by such facility, the Company has agreed to increase reserve requirements and certain other changes. In addition, the maturity date of such facility has been changed to September 30, 1995 from November 1997. The Company has begun discussions with other financial institutions concerning the replacement of the existing accounts receivable facility. Any amendment or replacement of such facility will require the consent of the Company's lenders under its amended credit facilities. The Company anticipates that the $100 million principal amount of 8% notes due 1996 will require refinancing. The Company has conducted preliminary discussions concerning borrowings under private or public debt facilities to refinance such debt. Although there can be no assurance, the Company expects that it will be able to replace its accounts receivable facility and refinance its outstanding 8% notes. 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. Further information concerning such claims and litigation is contained in Note 6 of the Notes to Consolidated Financial Statements. 19 Borg-Warner Security Corporation Consolidated Statement of Operations
Year Ended December 31, ------------------------------------------------------------------------------------------------------------------------ (millions of dollars, except per share) 1992 1993 1994 ------------------------------------------------------------------------------------------------------------------------ Net service revenues $1,620.6 $1,764.6 $1,792.9 Cost of services 1,258.9 1,390.3 1,437.3 Selling, general and administrative expenses 220.1 197.0 231.2 Depreciation 51.5 55.3 57.6 Amortization of excess purchase price over net assets acquired 21.4 16.5 16.1 Other income, net -- Note 10 (17.2) (3.1) (9.8) Non-recurring elimination of excess purchase price over net assets acquired - 250.0 - Interest expense and finance charges 47.9 51.5 50.4 ------------------------------------------------------------------------------------------------------------------------ Earnings (loss) before taxes 38.0 (192.9) 10.1 Provision (benefit) for income taxes -- Note 11 (19.7) 22.2 (3.0) ------------------------------------------------------------------------------------------------------------------------ Earnings (loss) from continuing operations 57.7 (215.1) 13.1 Loss from discontinued operations (12.1) (1.5) - ------------------------------------------------------------------------------------------------------------------------ Earnings (loss) before extraordinary items and cumulative effect of accounting change 45.6 (216.6) 13.1 Extraordinary items: Loss from early extinguishment of debt, net of tax effects ($4.2 million benefit in 1992 and $5.3 million benefit in 1993) -- Note 5 (7.1) (9.1) - Cumulative effect of initial application of new accounting standards -- Note 1 - (17.7) - ------------------------------------------------------------------------------------------------------------------------ Net earnings (loss) $ 38.5 ($243.4) $ 13.1 ======================================================================================================================== Earnings (loss) per common share: Continuing operations $ 2.94 $ (9.41) $ 0.56 Discontinued operations (0.61) (0.07) - Extraordinary items (0.37) (0.40) - Cumulative effect of initial application of new accounting standards - (0.77) - ------------------------------------------------------------------------------------------------------------------------ Net earnings (loss) per share $ 1.96 ($10.65) $ 0.56 ========================================================================================================================
(See accompanying notes to financial statements) 20 Borg-Warner Security Corporation Consolidated Balance Sheet
December 31, ---------------------------------------------------------------------------------------------------------- (millions of dollars) 1993 1994 ---------------------------------------------------------------------------------------------------------- Assets ---------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 11.2 $ 15.8 Receivables, net 82.7 106.7 Inventories 10.8 12.2 Other current assets 23.5 24.8 ---------------------------------------------------------------------------------------------------------- Total current assets 128.2 159.5 Property, plant and equipment Land and buildings 53.0 50.7 Machinery and equipment 98.3 79.3 Subscribers' installations 353.2 365.2 Capital leases 44.4 37.0 Construction in progress 3.4 5.5 ---------------------------------------------------------------------------------------------------------- 552.3 537.7 Less accumulated depreciation 261.0 242.6 ---------------------------------------------------------------------------------------------------------- Net property, plant and equipment 291.3 295.1 Net excess purchase price over net assets acquired 288.8 286.5 Deferred tax asset, net 37.4 50.8 Other assets 44.8 38.4 ---------------------------------------------------------------------------------------------------------- Total other assets 371.0 375.7 ---------------------------------------------------------------------------------------------------------- $790.5 $830.3 ========================================================================================================== Liabilities and Stockholders' Equity ---------------------------------------------------------------------------------------------------------- Notes payable $ 10.7 $ 14.5 Accounts payable and accrued expenses 171.8 181.8 ---------------------------------------------------------------------------------------------------------- Total current liabilities 182.5 196.3 Long-term debt 446.8 454.0 Other long-term liabilities 133.7 136.2 Capital stock: Common stock, issued 22,235,700 shares in 1993 and 22,435,700 shares in 1994 0.2 0.2 Series I non-voting common stock, issued 2,720,000 shares - - Capital in excess of par value 28.2 30.9 Retained earnings 15.9 29.7 Notes receivable -- management stock purchase (1.8) (1.0) Cumulative translation adjustment 1.3 (0.5) ---------------------------------------------------------------------------------------------------------- 43.8 59.3 Treasury common stock, at cost, 2,151,108 shares in 1993 and 2,237,344 shares in 1994 (16.3) (15.5) ---------------------------------------------------------------------------------------------------------- Total stockholders' equity 27.5 43.8 ---------------------------------------------------------------------------------------------------------- $790.5 $830.3 ==========================================================================================================
(See accompanying notes to financial statements) 21 Borg-Warner Security Corporation Consolidated Statement of Cash Flows
Year Ended December 31, ------------------------------------------------------------------------------------------------------------- (millions of dollars) 1992 1993 1994 ------------------------------------------------------------------------------------------------------------- Operating: Continuing operations: Net earnings (loss) $ 57.7 ($215.1) $ 13.1 Adjustments to reconcile net earnings (loss) to net cash flows provided by continuing operations: Non-cash charges to earnings: Depreciation and amortization 72.9 71.8 73.7 Non-recurring elimination of excess purchase price over net assets acquired - 250.0 - Amortization of debt discounts 31.8 2.0 2.1 Changes in assets and liabilities: (Increase) in receivables (20.1) (4.7) (22.0) (Increase) decrease in other current assets (4.6) 2.1 (1.1) Increase (decrease) in accounts payable and accrued expenses 13.9 (0.4) 10.0 Net change in other long-term assets and liabilities (6.7) (38.9) (11.1) Gain on sales of businesses and other assets (37.1) (1.8) (8.5) ------------------------------------------------------------------------------------------------------------- Net cash flows provided by continuing operations 107.8 65.0 56.2 Discontinued operations: Net loss (12.1) (1.5) - Other cash flows related to discontinued operations 15.2 (11.2) (2.2) ------------------------------------------------------------------------------------------------------------- Net cash flows provided by (used in) discontinued operations 3.1 (12.7) (2.2) ------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 110.9 52.3 54.0 Investing: Capital expenditures (70.2) (68.8) (67.0) Payments related to businesses acquired (34.7) (4.8) (9.0) Proceeds from sales of fixed and other assets 181.0 5.7 16.9 ------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 76.1 (67.9) (59.1) Financing: Net (decrease) increase in notes payable (16.0) (19.3) 3.8 Increases in long-term debt 102.6 149.5 77.7 Reductions in long-term debt (31.6) (189.3) (72.6) Net proceeds from the issuance of common stock - 63.5 - Cash outflows related to early extinguishment of debt (224.5) (246.4) - BW-Automotive repayment/assumption of Company indebtedness - 249.9 - Sales of treasury common stock 3.7 3.2 0.8 Purchases of treasury common stock (13.5) (0.1) - ------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (179.3) 11.0 9.7 Effect of exchange rate changes on cash and cash equivalents (1.2) - - ------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 6.5 (4.6) 4.6 Cash and cash equivalents at beginning of year 9.3 15.8 11.2 ------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 15.8 $ 11.2 $ 15.8 ============================================================================================================= Supplemental cash flow information: Interest paid $ 48.9 $ 61.1 $ 46.0 Income taxes paid (refunded) 26.4 21.3 (3.2)
(See accompanying notes to financial statements) 22 Borg-Warner Security Corporation Consolidated Statement of Stockholders' Equity
Years Ended December 31, 1992 1993 1994 ------------------------------------------------------------------------------------------------------------------- (millions of dollars, except share data) Shares Amount Shares Amount Shares Amount ------------------------------------------------------------------------------------------------------------------- Common Stock Beginning balance 20,000,700 $ 0.2 20,000,700 $ 0.2 24,955,700 $ 0.2 Shares issued in initial public offering - - 3,795,000 - - - Conversion of Series I non-voting shares to common shares - - 1,160,000 - 200,000 - ------------------------------------------------------------------------------------------------------------------- Balance at December 31 20,000,700 0.2 24,955,700 0.2 25,155,700 0.2 =================================================================================================================== Capital in Excess of Par Value Beginning balance 195.4 187.3 28.2 Shares issued in initial public offering - 63.5 - Shares issued under stock option and related plans (8.1) (2.1) 0.2 Spin-Off of BW-Automotive - (230.0) - Tax benefit from trust distribution and exercise of stock options - 9.5 2.5 ------------------------------------------------------------------------------------------------------------------- Balance at December 31 187.3 28.2 30.9 ------------------------------------------------------------------------------------------------------------------- Retained Earnings Beginning balance 496.4 520.6 15.9 Net earnings (loss) 38.5 (243.4) 13.1 Spin-Off of BW-Automotive - (259.9) - Adjustment for deferred pension experience loss (14.3) (1.4) 0.7 ------------------------------------------------------------------------------------------------------------------- Balance at December 31 520.6 15.9 29.7 ------------------------------------------------------------------------------------------------------------------- Notes receivable--management stock purchase Beginning balance (2.2) (2.1) (1.8) Net activity 0.1 0.3 0.8 ------------------------------------------------------------------------------------------------------------------- Balance at December 31 (2.1) (1.8) (1.0) ------------------------------------------------------------------------------------------------------------------- Cumulative Translation Adjustment Beginning balance 20.5 9.3 1.3 Spin-Off of BW-Automotive - (7.7) - Cumulative translation adjustment (11.2) (0.3) (1.8) ------------------------------------------------------------------------------------------------------------------- Balance at December 31 9.3 1.3 (0.5) ------------------------------------------------------------------------------------------------------------------- Investment Valuation Allowance Beginning balance (5.1) - - Baker Hughes, Inc. investment value adjustment 5.1 - - ------------------------------------------------------------------------------------------------------------------- Balance at December 31 0.0 0.0 0.0 ------------------------------------------------------------------------------------------------------------------- Treasury Stock Beginning balance 1,164,400 (36.9) 1,188,316 (38.6) 2,151,108 (16.3) Acquired shares 397,331 (13.5) 6,083 (0.1) - - Shares issued under stock option and related plans (373,415) 11.8 (203,291) 3.2 (113,764) 0.8 Conversion of Series I non-voting shares to common shares - - 1,160,000 - 200,000 - Spin-Off of BW-Automotive - - - 19.2 - - ------------------------------------------------------------------------------------------------------------------- Balance at December 31 1,188,316 (38.6) 2,151,108 (16.3) 2,237,344 (15.5) =================================================================================================================== Total Stockholders' Equity $676.7 $ 27.5 $ 43.8 ===================================================================================================================
(See accompanying notes to financial statements) 23 Borg-Warner Security Corporation Notes to Consolidated Financial Statments Note 1 Summary of Accounting Policies The following paragraphs briefly describe significant accounting policies. Certain 1992 and 1993 amounts have been reclassified to conform with the 1994 presentation. Prior to an initial public offering in January 1993, the name of the Company was changed from Borg-Warner Corporation to Borg-Warner Security Corporation. Principles of consolidation The consolidated financial statements include all significant subsidiaries. In January 1993 the Company distributed to its shareholders ("Spin-Off") all of the stock of Borg-Warner Automotive, Inc. ("BW-Automotive"). Therefore, BW- Automotive is treated as a discontinued operation for all periods presented. (See Note 3). Cash and cash equivalents Cash and cash equivalents consists primarily of cash and certificates of deposit with original maturities of three months or less. Inventories Inventories are valued at the lower of cost or market. Cost of substantially all inventories is determined by the first-in, first-out (FIFO) method. Property, plant and equipment and depreciation Property, plant and equipment is valued 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 a straight-line basis over the estimated useful lives of related assets. The costs of alarm subscribers' installations are capitalized and depreciated over useful lives ranging from 8-15 years. Income taxes Income taxes are determined using the liability method, under which deferred tax assets and liabilities are determined based on the differences between the financial accounting and tax 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 11). Retirement benefit plans A number of eligible salaried and hourly employees participate in contributory or noncontributory defined benefit or defined contribution plans. Funding policy is based upon independent actuarial valuations and is within the limits required by ERISA for U.S. defined benefit plans. The benefits provided to certain salaried employees covered under various defined benefit plans are based on years of service and final average pay and utilize the projected unit credit method for cost allocation. The benefits provided to certain hourly employees under various defined benefit plans are based on years of service and utilize the unit credit method for cost allocation. A number of employees in the U.S. participate in defined contribution plans. Depending on the plan, contributions by the Company or its subsidiaries sponsoring the plans are based on the employees' salary, age, years of service, and/or a fixed schedule. These contributions are charged to earnings as they are made to the various plans. Postretirement benefits Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106") and elected immediate recognition of the $15.0 million obligation and recorded a charge of $8.3 million (net of the related income tax benefit of $5.1 million) or $0.37 per share to reflect the cumulative effect of the change in accounting for periods prior to 1993. This new standard requires that the expected cost of retiree health benefits be charged to expense during the years that the employees render service rather than the Company's past practice of recognizing these costs on a cash basis. 24 Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued 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. Consistent with Securities and Exchange Commission Staff Accounting Bulletin Number 92, in 1993 the Company changed the method of selecting the discount rate from an overall cost of capital based rate to a rate based on risk-free monetary asset yields for securities with similar maturities. This change resulted in a reduction in the discount rate from 10% to 4% and a change in method of estimating the future cash flows related to this obligation. The cumulative effect was a charge to earnings of $9.4 million (net of applicable taxes of $6.0 million) or $0.40 per share. This amount, included in "Cumulative effect of initial application of new accounting standards" in the Statement of Operations, was recorded in the fourth quarter of 1993. This accounting change did not have a material impact on earnings from continuing operations. In 1994 the discount rate used to value the future obligation was increased to 7%. Amortization of excess purchase price over net assets acquired Excess purchase price over net assets acquired is being amortized on a straight- line basis over five to forty years, with the majority being amortized over forty years. The Company periodically reviews its operations to determine whether there has been a diminution in value of its excess purchase price over net assets acquired. If the review indicates a decline in the carrying value, the Company would adjust the amortization accordingly. Intercompany allocations and transactions with BW-Automotive Interest expense through the Spin-Off date has been allocated to the discontinued BW-Automotive operations on the basis of BW-Automotive's relative capital investment. Interest and taxes paid as shown on the Consolidated Statement of Cash Flows include the amounts related to both the continuing operations and discontinued BW-Automotive operations. Costs incurred at corporate headquarters in 1992 have been charged to BW-Automotive on the basis of a calculation of the estimated cost incurred related solely to the BW- Automotive operations. Such cost was charged to BW-Automotive in 1993 and 1994 based on a service agreement with the Company. Income taxes have been allocated to the BW-Automotive operations based on a calculation of the BW-Automotive operations' relative share of the combined operations' income taxes. To the extent the BW-Automotive operations operated at a loss, the tax benefit of such a loss was limited to the amount offset by the profits for the rest of the Company for that year. In those taxing jurisdictions in which the BW-Automotive operations operate independent of the Company's other units, taxes have been calculated independently on such operations. The Company and BW-Automotive have entered into a tax sharing agreement which calls for BW-Automotive to pay the Company for any operating loss carryforward apportioned to it as part of the Spin-Off at such time as the benefits related to such carryforward are realized by BW-Automotive. Revenue recognition Revenue is recognized at the time services are provided. In certain circumstances this can result in revenue recognition prior to customer billing and revenue deferral from advance billings. Earnings per common share Earnings per common share are based on average outstanding common shares and common share equivalents. Common share equivalents recognize the dilutive effects of common shares that may be issued in the future upon exercise of certain stock options. 25 Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued Note 2-Balance Sheet Information Detailed balance sheet data are as follows:
December 31, --------------------------------------------------------------- (millions of dollars) 1993 1994 --------------------------------------------------------------- Receivables: Customers $78.4 $111.6 Refundable income taxes 10.7 - Other 2.4 2.8 -------------------------------------------------------------- 91.5 114.4 Less allowance for losses 8.8 7.7 -------------------------------------------------------------- Net receivables $82.7 $106.7 ============================================================== Accounts payable and accrued expenses: Trade payables $23.1 $29.8 Payroll and related 53.2 57.7 Casualty insurance 40.5 43.9 Interest 8.3 7.6 Liabilities to former shareholders 11.5 10.5 Deferred income 11.3 11.2 Other 23.9 21.1 -------------------------------------------------------------- Total accounts payable and accrued expenses $171.8 $181.8 ==============================================================
In November 1994, the Company replaced its previous $150 million receivables purchase facility with a $130 million receivables transfer facility expiring September 1995. The outstanding balance of receivables sold to the transfer facility at December 31, 1994 was $112 million, compared with $124 million sold at December 31, 1993. Receivables are sold without recourse to the Company. Selling, general and administrative expenses include provisions for losses on receivables of $4.4 million in 1992, $3.7 million in 1993, and $5.5 million in 1994. Receivables are recorded at expected realizable value, net of allowances. Accumulated amortization related to capital leases amounted to $23.5 million at December 31, 1993 and $15.6 million at December 31, 1994. Accumulated amortization related to excess of purchase price over net assets acquired amounted to $75.3 million at December 31, 1993 and $78.5 million at December 31, 1994. 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 $3.8 million at December 31, 1993 and $18.3 million at December 31, 1994. The non-current portion of the casualty insurance liability, included in other long-term liabilities, was $32.8 million and $44.2 million at December 31, 1993 and 1994, respectively. The total discounted insurance accrual, including the portion reflected in accounts payable and accrued liabilities, was $73.3 million and $88.1 million at December 31, 1993 and 1994, respectively. The estimated aggregate undiscounted insurance liability was $81.0 million and $99.6 million at December 31, 1993 and 1994, respectively. 26 Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued Note 3-Discontinued Operations On January 27, 1993 all of the outstanding common stock of BW-Automotive was distributed to the Company's stockholders. Following the distribution, the Company does not have any operations apart from the protective services business. Therefore, the remaining $250 million of excess of purchase price over net assets acquired not directly attributed to the protective services business was written off as a charge to earnings in the first quarter of 1993. BW-Automotive has been treated as discontinued in the consolidated financial statements for all periods presented, and previously reported results have been restated. Net revenues for previously consolidated BW-Automotive operations were $926.0 million and $66.5 million for 1992 and 1993, respectively. Net losses from the discontinued BW-Automotive operations were $12.1 million and $1.5 million, for 1992 and 1993, respectively. The revenues and net loss for 1993 are for the period from January 1 to January 27, 1993. BW-Automotive earnings reflect allocated interest of $44.8 million and $3.1 million in 1992 and 1993, respectively. BW-Automotive income tax expense of $2.7 million for 1992 and a $0.4 million benefit in 1993 have been calculated based on BW-Automotive's share of combined operations and participation in consolidated returns. BW-Automotive earnings also reflect a charge for costs incurred at corporate headquarters of $4.2 million in 1992. This charge was based on the estimated costs incurred related solely to the BW-Automotive operations. The Company and BW-Automotive have entered into agreements to provide for the allocation of certain corporate overhead expenses. During 1993 and 1994, BW- Automotive paid the Company $8.6 million and $2.8 million, respectively, for office space and services rendered under the agreements. BW-Automotive also paid the Company $1 million in 1993 under a Trademark and Trade Name License Agreement. In 1994 BW-Automotive paid $10 million to the Company for the purchase of certain trademarks and other rights. In 1993 the Company paid BW- Automotive $1.2 million under a tax sharing agreement related to settlement of 1992 federal income tax liabilities. Note 4-Commitments The Company is committed to pay rents on non-cancelable leases with terms exceeding one year. Rental amounts committed in future years are summarized at December 31, 1994 as follows: (millions of dollars) ------------------------------------------------------------------------------ Fiscal Operating Leases Capital Leases Total ------------------------------------------------------------------------------ 1995 $20.0 $11.3 $31.3 1996 16.8 7.6 24.4 1997 12.6 2.7 15.3 1998 8.6 0.8 9.4 1999 5.5 0.6 6.1 2000 and after 5.7 4.4 10.1 ------------------------------------------------------------------------------ Total $69.2 $27.4 $96.6 ============================================================================== Total rental expense amounted to $20.4 million in 1992, $25.3 million in 1993 and $25.6 million in 1994. Future capital lease rental payments include executory costs of $1.0 million, interest expense of $4.2 million and principal payments of $22.2 million. The 1995 principal payments of $9.2 million are included in notes payable. 27 Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued 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.
Debt December 31, 1993 December 31, 1994 ---------------------------------------------------------------------------------------------------- (millions of dollars) Current Long-Term Current Long-Term ---------------------------------------------------------------------------------------------------- Bank borrowings (at an average rate of 4.4% in 1993 and 5.4% in 1994) $ -- $119.7 $ -- $88.0 Bank revolving commitment loan due through 1999 (at an average rate of 6.9% in 1993 and 7.6% in 1994) -- 65.0 -- 105.2 8% notes (face amount of $100 million due 1996) -- 95.5 -- 97.5 Unsecured notes (at an average rate of 10.4% in 1993 and 5.9% in 1994) 1.8 0.9 5.3 1.3 Capital lease liability (at an average rate of 9.5% in 1993 and 9.2% in 1994) 8.9 16.8 9.2 13.0 91/8% senior subordinated notes (face amount of $150 million due 2003) -- 148.9 -- 149.0 ---------------------------------------------------------------------------------------------------- Total notes payable and long-term debt $10.7 $446.8 $14.5 $454.0 ====================================================================================================
Maturities of long-term debt, including unamortized discount of $3.5 million, are as follows: 1996, $118.1 million; 1997, $55.3 million; 1998, $87.6 million; 1999, $43.0 million; and after 1999, $153.5 million. At December 31, 1994, the Company had a $190 million bank revolving credit facility, available until 1999. The committed amount under this facility reduces semi-annually during the remaining commitment period. Available future commitments at December 31 are as follows: 1995, $166 million; 1996, $138 million; 1997, $95 million; and 1998, $43 million. Unused commitments at December 31, 1994 were $84.8 million. Included in long-term debt at December 31, 1994 is $38.0 million of borrowings under short-term bank lines which are supported by the unutilized portion of the revolving credit facility and are therefore classified as long-term debt. Interest under the revolving credit facility is charged at various prime-and LIBOR-based interest rate options. Compensating cash balances are not required but facility fees and commitment fees are paid under the revolving credit agreement. The revolving credit facility contains numerous financial and operating covenants including, among others, covenants requiring the Company to maintain certain financial ratios and restricting its ability to incur additional indebtedness, to create or permit to exist certain liens or to pay dividends. In addition, the Company pledged the stock of certain of its subsidiaries under this agreement. In June 1994, the Company amended its revolving credit and letter of credit facilities, principally to reduce pricing and amend covenants related to leverage, fixed charge coverage and net worth tests. In December 1994, the Company negotiated waivers to certain financial covenants under its credit facilities. There was no impact to the Company's liquidity as a result of the revised covenant limits, and the Company was in compliance with all applicable covenants at December 31, 1994. In March 1995, the Company amended its credit facilities principally to change pricing and to amend covenants related to earnings, leverage, fixed charge coverage, net worth, capital expenditures and acquisitions. In May 1993, the Company issued $150 million principal amount of 91/8% senior subordinated debentures due 2003, discounted to yield 91/4%. Interest is payable semi-annually. These notes are unsecured and subordinated as to right of payment to other borrowings. The notes may be redeemed on or after May 1, 1998 at various premiums. 28 Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued In 1993, a net of tax loss of $9.1 million was realized as an extraordinary item. This loss related to the redemption of $216.7 million principal amount of 13% Junior Subordinated Discount Debentures and $15.2 million principal amount of 12-3/4% Senior Subordinated Debentures. A net of tax loss of $7.1 million was realized as an extraordinary item in 1992 related to the redemption of $155.0 million principal amount of 13% Junior Subordinated Discount Debentures and $58.2 million principal amount of 14% Senior Subordinated Discount Debentures. Note 6-Contingent Liabilities The Company's discontinued property and casualty insurance subsidiary ("Centaur") ceased writing insurance in 1984 and has been operating under rehabilitation since September 1987. Rehabilitation is a process supervised by the Illinois Director of Insurance to attempt to compromise claim liabilities at an aggregate level that is not in excess of Centaur's assets. In rehabilitation, Centaur's assets are currently being used to satisfy claim liabilities under direct insurance policies written by Centaur. Any remaining assets will be applied to Centaur's obligations to other insurance companies under reinsurance contracts. If all of Centaur's obligations are not satisfied through rehabilitation, it is possible that satisfaction could be sought from the Company for Centaur's liabilities. The foregoing has resulted in one pending lawsuit against the Company, certain of its current and former subsidiaries, and directors and officers of certain current and former subsidiaries for recovery of alleged damages incurred because of Centaur's failure to satisfy its reinsurance obligations. The lawsuit seeks an aggregate of $24 million for current losses, $66 million for future losses and $270 million for punitive damages. The Company believes that any damages for failure to satisfy reinsurance obligations are solely the responsibility of Centaur and that the resolution of the lawsuit relating to Centaur, including the Company's indemnification obligations to certain former officers and directors, will not have a material adverse effect on its financial position or future operating results; however, no assurance can be given as to the ultimate outcome with respect to such lawsuit. The Company and certain of its current and former subsidiaries have been identified by the U.S. Environmental Protection Agency and certain state environmental agencies as potentially responsible parties ("PRPs") at several hazardous waste disposal sites under the Comprehensive Environmental Response, Compensation and Liability Act ("Superfund") and equivalent state laws and, as such, may be liable for the cost of cleanup and other remedial activities at these sites. Responsibility for cleanup and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula. The Company believes that none of these matters individually or in the aggregate will have a material adverse effect on its financial position or future operating results, generally either because the maximum potential liability at a site is not large or because liability will be shared with other PRPs, although no assurance can be given with respect to the ultimate outcome of any such liability. Based on its estimate of allocations of liability among PRPs, the probability that other PRPs, many of whom are large, solvent public companies, will fully pay the costs allocated to them, currently available information concerning the scope of contamination at such sites, estimated remediation costs at such sites, estimated legal fees and other factors, the Company has aggregate amount of approximately $11 million (relating to environmental matters with respect to discontinued operations of the Company). If any environmental liability claim relating to the Company's former chemical and plastics business is made, the Company is indemnified by the purchaser of such business, General Electric Company. Since the disposition, the Company has notified General Electric Company of various claims made with respect to the Company's former chemical and plastics business and General Electric Company has assumed all of such claims and has not contested its indemnification obligations. There is no dollar limitation on the General Electric Company's indemnification obligations and 29 Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued there are no other material limitations or exclusions with respect thereto. If any environmental liability claim relating to the operations of the Company's discontinued automotive subsidiary is made, the Company will be indemnified by such former subsidiary. The Company believes that the various asserted claims and litigation in which it is involved will not materially affect its financial position or future operating results, although no assurance can be given with respect to the ultimate outcome of any such claim or litigation. The Company has guaranteed borrowings of $2.0 million of affiliates and discontinued operations as of December 31, 1994. Note 7-Retirement Benefits The Company has various defined benefit and defined contribution plans which cover eligible employees. Retirement benefit expense amounted to $4.0 million, $4.8 million and $5.8 million in 1992, 1993 and 1994, respectively. This expense includes postretirement life insurance and medical benefits of $1.0 million, $0.4 million and $0.2 million for 1992, 1993 and 1994, respectively. Also included are defined contribution plan expenses of $1.6 million, $1.4 million and $1.6 million in 1992, 1993 and 1994, respectively. The following table sets forth the funded status of the defined benefit plans:
Funded Status December 31, 1993 December 31, 1994 -------------------------------------------------------------------------------------- (millions of dollars) Over Under Over Under -------------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefits $40.1 $44.4 $37.8 $39.5 Non-vested benefits 0.9 1.8 1.1 1.9 -------------------------------------------------------------------------------------- Accumulated benefit obligations 41.0 46.2 38.9 41.4 Effect of projected future compensation levels 7.5 - 5.1 - -------------------------------------------------------------------------------------- Projected benefit obligation 48.5 46.2 44.0 41.4 Plan assets at fair value 45.0 30.9 44.4 27.9 -------------------------------------------------------------------------------------- Assets in excess of (less than) projected benefit obligation (3.5) (15.3) 0.4 (13.5) Unrecognized net loss 11.5 11.6 6.4 10.2 Unrecognized prior service cost (2.0) 3.4 (1.9) 3.0 -------------------------------------------------------------------------------------- Net asset (liability) before minimum liability 6.0 (0.3) 4.9 (0.3) Adjustment required to recognize minimum liability - (15.0) - (13.2) -------------------------------------------------------------------------------------- Net asset (liability) on balance sheet $6.0 ($15.3) $4.9 ($13.5) ======================================================================================
Assets held in trust for the defined benefit plans are comprised of marketable equity and fixed income securities. Net periodic pension expense for the defined benefit plans was comprised as follows: Year Ended December 31, ---------------------------------------------------------------------------- (millions of dollars) 1992 1993 1994 ---------------------------------------------------------------------------- Service cost $2.0 $2.2 $3.0 Interest cost 4.2 6.7 6.7 Actual return on assets (4.3) (8.5) 1.1 Net amortization and deferrals (0.5) 2.6 (6.9) ---------------------------------------------------------------------------- Net periodic pension cost $1.4 $3.0 $3.9 ============================================================================ 30 Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued The Company's assumptions used as of December 31, 1992, 1993 and 1994 in determining the pension cost and pension liability shown above were as follows:
(percent) 1992 1993 1994 -------------------------------------------------------------------- Discount rate 8.5 7.5 8.5 Rate of salary progression 4.5 4.0 4.0 Long-term rate of return on assets 9.5-10 9.5-10 9.5
The Company also has postretirement benefits covering certain existing and former employees, including employees of certain businesses which have been divested by the Company. The Company adopted SFAS 106 on January 1, 1993, which resulted in an after-tax charge of $8.3 million and is included on the Statement of Operations under the caption "Cumulative effect of initial application of new accounting standards." In 1993, SFAS 106 did not have a material impact on the Company's results from continuing operations. The liabilities for these benefits as of December 31, 1994 and 1993 are $12.9 million and $14.7 million, respectively, and are included in "Other long-term liabilities." The discount rate used in determining this liability was 8.5% and assumed medical expense increases of 9.5% per year for 1995 grading to 5.5% per year by 1999. Note 8--Stock Options and Management Stock Purchases Stock Option Plan The Company has two plans which authorize the grant of options to purchase 3,000,000 shares of the Company's common stock. All options granted to date carry exercise prices ranging from $5.00 to $21.19 per share. These prices correspond to the fair market value (as defined in the plans) of the Company's common stock at the time of grant. In 1992, 1993 and 1994 there were no options canceled or converted. Common shares under option for the years ended December 31, 1992, 1993 and 1994 are summarized as follows:
Number of Shares Aggregate Option Price ----------------------------------------------------------------------------------------------- (shares in thousands, dollars in millions) 1992 1993 1994 1992 1993 1994 ----------------------------------------------------------------------------------------------- Shares under option at January 1 1,541 1,339 1,472 $12.6 $13.9 $19.9 Granted 251 385 593 4.1 8.0 9.7 Exercised (372) (203) (114) (1.9) (1.3) (1.1) Forfeited (81) (49) (108) (0.9) (0.7) (1.8) ----------------------------------------------------------------------------------------------- Shares under option at end of period 1,339 1,472 1,843 $13.9 $19.9 $26.7 =============================================================================================== Options exercisable 954 907 881 ===================================================================== Shares available for future grants 8 172 186 =====================================================================
Of the 1,843,465 options outstanding at December 31, 1994, 880,989 are presently exercisable and the remaining 962,476 will vest over the next three-year period based upon periods of employment. In connection with the Spin-Off, each outstanding option was exchanged for (i) an adjusted option to purchase the same number of post-Spin-Off shares of common stock at a price equal to 50% of the pre-Spin-Off exercise price, and (ii) an option to purchase the same number of shares of common stock of BW-Automotive at a price equal to 50% of the pre-Spin-Off exercise price. Thus, the exercise price of an option held prior to the Spin-Off equals the sum of the exercise prices of the two options for which it was exchanged. Notes Receivable--Management Stock Purchase Included among the Company's equity holders are members of management. Purchases of shares by management have been funded in part by loans from the Company. These loans, which totalled approximately $1.8 million at December 31, 1993 and $1.0 million at December 31, 1994, bear interest of approximately 6% and are offset against stockholders' equity in the Consolidated Balance Sheets at such dates. 31 Borg--Warner Security Corporation Notes to Consolidated Financial Statements, continued Note 9-Business Segment Information The Company's operations have been classified into four business segments: guard, alarm, armored and courier services. The guard segment provides contract security officers to patrol client facilities, monitor electronic systems and control public and employee access. The alarm segment primarily designs, installs, monitors and services sophisticated electronic security systems and fire and intrusion detection systems. The armored segment transports currency, securities and other valuables. Additionally, this segment provides full-service automated teller machine operations and cash management services such as deposit verification and currency processing. The courier segment provides transportation of time-sensitive, non-negotiable financial documents and small packages. Intersegment sales are not significant. Operating profit by business segment represents total revenues less operating expenses, depreciation and amortization, and excludes interest income, interest expense, income taxes and net unallocated corporate expenses. Identifiable assets are those assets employed in each segment's operation, including an allocated value to each segment of cost in excess of net assets acquired. Corporate assets consist principally of cash and cash equivalents, certain corporate receivables and other assets. Summarized financial information by business segment for 1992, 1993 and 1994 is as follows:
Year Ended December 31, ----------------------------------------------------------------------------- (millions of dollars) 1992 1993 1994 ----------------------------------------------------------------------------- Net sales: Guard services $1,098.0 $1,198.0 $1,209.4 Alarm services 203.5 213.2 206.2 Armored services 156.4 180.9 211.2 Courier services 162.7 172.5 166.1 ----------------------------------------------------------------------------- Total net sales $1,620.6 $1,764.6 $1,792.9 ============================================================================= Operating profit: Guard services $55.4 $58.5 $54.5 Alarm services 29.7 31.1 14.9 Armored services 10.6 13.3 6.7 Courier services 10.3 7.4 1.1 ----------------------------------------------------------------------------- Total operating profit 106.0 110.3 77.2 ----------------------------------------------------------------------------- Corporate expenses (37.3) (4.8) (26.5) Other income 17.2 3.1 9.8 Interest expense (47.9) (51.5) (50.4) Non-recurring elimination of excess purchase price over net assets acquired - (250.0) - ----------------------------------------------------------------------------- Earnings (loss) before taxes 38.0 (192.9) 10.1 Tax (provision) benefit 19.7 (22.2) 3.0 ----------------------------------------------------------------------------- Earnings (loss) from continuing operations $57.7 ($215.1) $13.1 ============================================================================= Depreciation: Guard services $6.5 $7.0 $7.4 Alarm services 33.6 36.5 38.0 Armored services 6.0 6.7 7.0 Courier services 4.8 4.7 4.8 Corporate 0.6 0.4 0.4 ----------------------------------------------------------------------------- Total depreciation $51.5 $55.3 $57.6 =============================================================================
32 Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued
Year Ended December 31, ---------------------------------------------------------------- (millions of dollars) 1992 1993 1994 ---------------------------------------------------------------- Amortization of excess purchase price over net assets acquired: Guard services $9.0 $11.5 $11.1 Alarm services 2.6 2.2 2.3 Armored services 1.0 1.3 1.3 Courier services 1.4 1.3 1.3 Corporate 7.4 0.2 0.1 ---------------------------------------------------------------- Total amortization $21.4 $16.5 $16.1 ================================================================ Capital expenditures: Guard services $7.5 $6.8 $8.6 Alarm services 46.1 49.8 44.6 Armored services 12.0 5.7 6.2 Courier services 4.6 6.5 7.6 ---------------------------------------------------------------- Total capital expenditures $70.2 $68.8 $67.0 ================================================================ Identifiable assets: Guard services $228.4 $235.0 Alarm services 340.0 361.2 Armored services 76.1 90.4 Courier services 39.4 46.3 Corporate 106.6 97.4 ---------------------------------------------------------------- Total identifiable assets $790.5 $830.3 ================================================================
Note 10--Other Income, Net Items included in other income consist of:
Year Ended December 31, ---------------------------------------------------------------- (millions of dollars) 1992 1993 1994 ---------------------------------------------------------------- Interest income $1.3 $0.2 $0.1 Gain on sales of assets, net 6.5 1.9 8.5 Other, including dividend income 9.4 1.0 1.2 ---------------------------------------------------------------- Total $17.2 $3.1 $9.8 ================================================================
In 1992, other income includes a $7.5 million gain on the settlement of a note related to a prior divestiture. In 1994, gain on sales of assets includes a $9.9 million gain on the sale of certain trademarks and other rights to BW- Automotive. 33 Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued Note 11-Income Taxes Earnings (loss) before income taxes from continuing operations and provision (benefit) for income taxes consist of:
1992 1993 1994 ----------------------------------------------------------------------------------------------------------- (millions of dollars) U.S. Non-U.S. Total U.S. Non-U.S. Total U.S. Non-U.S. Total ----------------------------------------------------------------------------------------------------------- Earnings (loss) before income taxes $32.2 $5.8 $38.0 ($197.4) $ 4.5 ($192.9) $7.4 $2.7 $10.1 =========================================================================================================== Income taxes: Current: Federal/Foreign $0.6 $3.7 $4.3 $4.1 $1.6 $5.7 $3.8 $1.7 $5.5 State 5.0 - 5.0 3.0 - 3.0 0.9 - 0.9 ----------------------------------------------------------------------------------------------------------- 5.6 3.7 9.3 7.1 1.6 8.7 4.7 1.7 6.4 Deferred (21.0) - (21.0) 13.5 - 13. 5 (9.4) - (9.4) ----------------------------------------------------------------------------------------------------------- (15.4) 3.7 (11.7) 20.6 1.6 22.2 (4.7) 1.7 (3.0) Business tax credits (8.0) - (8.0) - - - - - - ----------------------------------------------------------------------------------------------------------- Provision (benefit) for income taxes ($23.4) $3.7 ($19.7) $20.6 $1.6 $22.2 ($4.7) $1.7 ($3.0) ===========================================================================================================
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) 1992 1993 1994 ------------------------------------------------------------------------------ Income taxes at U.S. statutory rate of 34% in 1992, and 35% in 1993 and 1994 $12.9 ($67.5) $3.5 Increases (decreases) resulting from: Non-recurring elimination of excess purchase price over net assets acquired - 87.5 - Change in tax basis (30.6) - (7.0) State income taxes 4.1 2.0 0.6 Business tax credits, net (8.0) - - Impact of AMT generated tax liability 2.7 - - Non-temporary differences (2.1) 0.2 1.0 Net operating loss carryforward benefit (0.8) - - Other, net 2.1 - (1.1) ------------------------------------------------------------------------------ Income taxes reported ($19.7) $22.2 ($3.0) ============================================================================== Following are the gross components of the deferred tax (asset) liability as of December 31, 1993 and 1994: (millions of dollars) 1993 1994 ----------------------------------------------------------------------- Deferred tax liabilities $96.8 $88.0 Deferred tax assets $76.9 $73.9 Net operating loss carryforward 18.5 20.9 Tax credit carryforwards 55.0 55.8 Valuation allowance (16.2) (11.8) ----------------------------------------------------------------------- $134.2 $138.8 ----------------------------------------------------------------------- ($37.4) ($50.8) ======================================================================= 34 Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued Significant elements of the gross deferred tax liability at December 31, 1993 and 1994 were as follows: (millions of dollars) 1993 1994 -------------------------------------------------------------------------------- Excess of financial accounting basis over tax basis: Fixed assets $52.8 $54.6 Investments 12.8 13.1 Significant elements of the gross deferred tax asset at December 31, 1993 and 1994 were as follows: (millions of dollars) 1993 1994 -------------------------------------------------------------------------------- Pension liabilities $8.0 $5.4 Liabilities for casualty insurance 28.6 34.9 Liabilities related to discontinued operations 13.0 13.2 Deferred tax assets for future benefits of tax credit carryforwards at December 31, 1993 and 1994 were as follows: (millions of dollars) 1993 1994 -------------------------------------------------------------------------------- General business credit $21.5 $26.5 Minimum tax credit 26.8 27.0 Foreign tax credit 6.7 2.3 The foreign tax credit carryforward has been fully considered in the valuation allowance at both December 31, 1993 and 1994 while an additional allowance of $9.5 million at both December 31, 1993 and 1994 has been established against the other credits. The general business credit carryforward will expire in years 2004-2009, the net operating loss carryforward will expire in 2009, while the minimum tax credit can be carried forward indefinitely. Note 12--Capital Stock The following table summarizes the Company's capital stock at December 31, 1993 and 1994: December 31, ----------------------------------------------------------------------------- (thousands of shares) 1993 1994 ----------------------------------------------------------------------------- Common stock, $.01 par value: Authorized 50,000.0 50,000.0 Issued 22,235.7 22,435.7 Outstanding 21,444.6 21,758.4 Series I non-voting common stock, $.01 par value: Authorized 25,000.0 25,000.0 Issued 2,720.0 2,720.0 Outstanding 1,360.0 1,160.0 Preferred stock, $.01 par value: Authorized 5,000.0 5,000.0 Issued and outstanding - - 35 Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued Note 13--Fair Value of Financial Instruments The methods and assumptions used to estimate the fair value of each class of financial instrument are as follows: Cash and cash equivalents, receivables, notes payable and accounts payable The carrying amounts approximate fair value because of the short maturity of these instruments. Long-term debt The carrying amounts of the Company's bank borrowings under its short-term bank lines and revolving credit agreement approximate fair value because the interest rates are reset periodically to reflect current market rates. The fair values of the Company's other long-term debt either approximate carrying value or are estimated based on quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The carrying amounts and fair values of long-term debt at December 31, 1993 and 1994 are as follows: December 31, --------------------------------------------------------------- (millions of dollars) 1993 1994 --------------------------------------------------------------- Carrying amount $430.0 $441.0 Fair value 440.1 419.3 Letters of credit The Company utilizes third-party letters of credit to guarantee certain self- insurance activities. The letters of credit reflect fair value as a condition of their underlying purpose and are subject to fees competitively determined in the marketplace. The contract value/fair value of the letters of credit at December 31, 1993 and 1994 was $144.1 million and $130.7 million, respectively. To monitor the counterparties' ability to perform, these letters of credit are only executed with major financial institutions, and full performance is anticipated. 36 Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued Note 14--Interim Financial Information (Unaudited) The following information includes all adjustments, consisting only of normal recurring items, which the Company considers necessary for a fair presentation of 1993 and 1994 interim results of operations.
1993 Quarter Ended 1994 Quarter Ended ----------------------------------------------------------------------------------------------------------------------------------- (millions of dollars, except per share) March 31 June 30 Sept. 30 Dec. 31 Year 1993 March 31 June 30 Sept. 30 Dec. 31 Year 1994 ----------------------------------------------------------------------------------------------------------------------------------- Net service revenues $425.5 $431.6 $437.6 $469.9 $1,764.6 $439.1 $444.1 $450.7 $459.0 $1,792.9 Cost of services 334.3 338.9 341.5 375.6 1,390.3 349.6 354.6 361.0 372.1 1,437.3 Selling, general and administrative expenses 51.8 48.1 50.1 47.0 197.0 52.7 51.4 52.8 74.3 231.2 Depreciation 13.3 13.7 14.1 14.2 55.3 14.3 14.3 14.4 14.6 57.6 Amortization of excess purchase price over net assets acquired 4.0 4.1 4.2 4.2 16.5 4.1 4.2 4.0 3.8 16.1 Other income (0.8) (0.1) (1.0) (1.2) (3.1) (0.5) (0.4) (0.2) (8.7) (9.8) Non-recurring elimination of excess purchase price over net assets acquired 250.0 - - - 250.0 - - - - - Interest expense and finance charges 12.4 14.1 12.9 12.1 51.5 11.9 12.3 13.0 13.2 50.4 ----------------------------------------------------------------------------------------------------------------------------------- Earnings (loss) before taxes (239.5) 12.8 15.8 18.0 (192.9) 7.0 7.7 5.7 (10.3) 10.1 Provision (benefit) for income taxes 4.0 4.9 6.4 6.9 22.2 2.8 3.1 2.3 (11.2) (3.0) ----------------------------------------------------------------------------------------------------------------------------------- Earnings (loss) from continuing operations (243.5) 7.9 9.4 11.1 (215.1) 4.2 4.6 3.4 0.9 13.1 Loss from discontinued operations (1.5) - - - (1.5) - - - - - ----------------------------------------------------------------------------------------------------------------------------------- Earnings (loss) before extra- ordinary items and cumulative effect of accounting change (245.0) 7.9 9.4 11.1 (216.6) 4.2 4.6 3.4 0.9 13.1 Extraordinary items: Loss from early extinguishment of debt (6.6) - (2.5) - (9.1) - - - - - Cumulative effect of initial application of new accounting standards (8.3) - - (9.4) (17.7) - - - - - ----------------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) ($259.9) $7.9 $6.9 $1.7 ($243.4) $4.2 $4.6 $3.4 $0.9 $13.1 =================================================================================================================================== Earnings (loss) per common share: Continuing operations ($11.06) $0.34 $0.40 $0.48 ($9.41) $0.18 $0.20 $0.15 $0.03 $0.56 Discontinued operations (0.07) - - - (0.07) - - - - - Extraordinary items (0.30) - (0.10) - (0.40) - - - - - Cumulative effect of initial application of new accounting standards (0.37) - - (0.40) (0.77) - - - - - ----------------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) per share ($11.80) $0.34 $0.30 $0.08 ($10.65) $0.18 $0.20 $0.15 $0.03 $0.56 ===================================================================================================================================
37 Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued Note 15-Pro Forma Financial Information (Unaudited) The following pro forma financial information of the Company consists of Pro Forma Consolidated Statements of Operations for the years ended December 31, 1993 and 1992. There is no Pro Forma Condensed Consolidated Balance Sheet because the Consolidated Balance Sheet already reflects all transactions for which pro forma adjustments have been made. The Pro Forma Consolidated Statement of Operations for the year ended December 31, 1993 was prepared to illustrate the results of operations in the absence of the non-recurring elimination of excess purchase price. There is no adjustment to interest expense because the additional interest paid for the period prior to the Spin-Off was offset by the allocation of interest to the discontinued automotive operations. There is no tax impact because the elimination of excess purchase price was not deductible for federal income tax purposes. The Pro Forma Consolidated Statement of Operations for the year ended December 31, 1992 was prepared to illustrate the estimated effects of (a) the Spin-Off and resulting elimination of amortization of excess purchase price not directly attributed to the protective services business, (b) the adjustment to interest expense and finance charges for the repayment of debt from the proceeds of the Baker Hughes transaction, the effect of the Spin-Off, the public offering and the refinancing of bank indebtedness, (c) adjustment of corporate expenses to reflect the Company on a stand-alone basis, (d) elimination of certain non-recurring transactions, principally related to asset dispositions, and (e) the tax effect of the foregoing. Average shares outstanding for both periods were adjusted as if the shares had been issued at the beginning of the periods. The Pro Forma Consolidated Statements of Operations for the years ended December 31, 1993 and 1992 were prepared as if such transactions had occurred at the beginning of the periods presented. The historical information contained in such statements reflects the treatment of BW-Automotive as a discontinued operation. The adjustments are based upon currently available information and upon certain assumptions that the Company believes are reasonable in the circumstances. The pro forma information does not purport to represent what the Company's results of operations would actually have been if such transactions had occurred on such date or at the beginning of periods indicated or to project the Company's results of operations at any future date or for any future period. The Pro Forma Consolidated Statements of Operations and accompanying notes should be read in conjunction with the historical Consolidated Financial Statements appearing elsewhere in this report. 38 Borg-Warner Security Corporation Notes to Consolidated Financial Statements, continued Pro Forma Consolidated Statement of Operations (Unaudited)
Year Ended December 31, 1993 --------------------------------------------------------------------------------------- (millions of dollars, except per share) Historical Adjustments Pro Forma --------------------------------------------------------------------------------------- Net service revenues $1,764.6 $1,764.6 Cost of services 1,390.3 1,390.3 Selling, general and administrative expenses 197.0 197.0 Depreciation 55.3 55.3 Amortization of excess purchase price over net assets acquired 16.5 16.5 Other income (3.1) (3.1) Non-recurring elimination of excess purchase price 250.0 $(250.0)(a) -- Interest expense and finance charges 51.5 51.5 --------------------------------------------------------------------------------------- Earnings (loss) before income taxes (192.9) 250.0 57.1 Provision for income taxes 22.2 22.2 --------------------------------------------------------------------------------------- Earnings (loss) from continuing operations $ (215.1) $ 250.0 $ 34.9 ======================================================================================= Earnings (loss) per share from continuing operations $ (9.41) $ 10.91 $ 1.50 ======================================================================================= Average shares outstanding (in millions) 22.9 0.4 23.3 =======================================================================================
Pro Forma Consolidated Statement of Operations (Unaudited)
Year Ended December 31, 1992 --------------------------------------------------------------------------------------- (millions of dollars, except per share) Historical Adjustments Pro Forma --------------------------------------------------------------------------------------- Net service revenues $1,620.6 $1,620.6 Cost of services 1,258.9 1,258.9 Selling, general and administrative expenses 220.1 $(19.1)(c) 201.0 Depreciation 51.5 51.5 Amortization of excess purchase price over net assets acquired 21.4 (7.3)(a) 14.1 Other income (17.2) 16.2 (d) (1.0) Interest expense and finance charges 47.9 1.3 (b) 49.2 --------------------------------------------------------------------------------------- Earnings before income taxes 38.0 8.9 46.9 Provision (benefit) for income taxes (19.7) 36.1 (e) 16.4 --------------------------------------------------------------------------------------- Earnings (loss) from continuing operations $ 57.7 $(27.2) 30.5 ======================================================================================= Earnings (loss) per share from continuing operations $ 2.94 $(1.64) $ 1.30 ======================================================================================= Average shares outstanding (in millions) 19.6 3.8 23.4 =======================================================================================
39 Borg-Warner Security Corportion Notes to Consolidated Financial Statements, continued The following table sets forth the Statement of Operations adjustments by period individually and summarizes the totals shown in the adjustment column on the Pro Forma Consolidated Statements of Operations:
Year Ended December 31, ---------------------------------------------------------------------------------------------- 1992 1993 ---------------------------------------------------------------------------------------------- (millions of dollars) Amount Letter Amount Letter ---------------------------------------------------------------------------------------------- Selling, general and administrative expenses: Eliminate non-recurring expenses including headquarters cost ($19.1) (c) Amortization of excess purchase price (7.3) (a) Eliminate non-recurring elimination of excess purchase price ($250.0) (a) Other income: Eliminate non-recurring gains on sales 14.3 (d) Eliminate BHI dividend 1.9 (d) ---------------------------------------------------------------------------------------------- 16.2 Interest expense and finance charges 1.3 (b) Provision for income taxes 36.1 (e)
40 Independent Auditors' Report The Board of Directors and Stockholders Borg-Warner Security Corporation We have audited the consolidated balance sheets of Borg-Warner Security Corporation and subsidiaries as of December 31, 1993 and 1994 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. 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, 1993 and 1994 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. As discussed in Note 1, the Company changed its method of accounting for postretirement benefits other than pensions and the method of selecting the discount rate to discount its casualty insurance liabilities in 1993. Sig. of Deloitte & Touche LLP Deloitte & Touche LLP Chicago, Illinois February 10, 1995, except as to the fourth sentence of the fifth paragraph of Note 5, for which the date is March 15, 1995. 41 EX-21 11 SUBSIDIARIES OF THE REGI EXHIBIT 21 % Owned Subsidiary By Parent ---------- --------- Baker Insurance Company (Illinois) 100 Borg-Warner Equities Corporation (Delaware) 100 Borg-Warner Equities Corporation of California (California) 100 Borg-Warner Equities of Monterey, Inc. (California) 100 Borg-Warner Insurance Holding Corporation (Delaware) 100 Centaur Insurance Company (Illinois) 100 NAL II, Ltd. (Delaware) 100 Borg-Warner International Corporation (Delaware) 100 Borg-Warner Protective Services Corporation (Delaware) 100 Borg-Warner Information Services, Inc. (Delaware) 100 Burns International Security Services, Inc. (American Samoa) 100 Burns Special Services, Inc. (Delaware) 100 Wells Fargo Guard Service, Inc. of Florida (Florida) 100 Wells Fargo Guard Services, Inc. (Delaware) 100 Wells Fargo Special Services, Inc. (Delaware) 100 BW - Canada Alarm (Wells Fargo) Corporation (Delaware) 100 Wells Fargo Alarm Services of Canada Limited (Ontario) 100 Pony Express Residential Security Ltd. (Canada) (Provincial) 100 BW - Canadian Guard Corporation (Delaware) 100 Burns International Security Services, Ltd. (Ont.) (Ontario) 100 Les Services de Protection Burns International Ltee. (Quebec) 97 BW - Colombia Guard Corporation (Delaware) 100 Newerco, Inc. (Delaware) 100 BII, Inc. (Delaware) 100 Seguridad Burns de Colombia, S.A. (Colombia) 99 The William J. Burns International Detective Agency, Inc. (Delaware) 100 BW - U.K. Guard Corporation (Delaware) 100 Burns International Security Services, Ltd. (U.K.) (United Kingdom) 100 Globe Aviation Services Corporation (Delaware) 100 Globe Airport Security Services, Inc. (Delaware) 100 Globe Aviation Services Corporation of Puerto Rico (Delaware) 100 Globe Aviation Services of Canada, Limited (Ontario) 100 Pony Express Courier Corp. (Delaware) 100 Pony Express Courier Corporation of Texas (Texas) 100 Pyro Chem, Inc. (New Jersey) 100 Wells Fargo Alarm Services, Inc. (Delaware) 100 BPS Financial Services, Inc. (Delaware) 100 BW-Chemicals Corporation 100 Wells Fargo Armored Service Corporation (Delaware) 100 Wells Fargo Armcar, Inc. (Ontario) 100 Wells Fargo Armored Service Corporation of Puerto Rico (Tennessee) 100 Wells Fargo Armored Service Corporation of Texas (Texas) 100 EX-23 12 CONSENTS OF EXPERTS AND EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-23046) and the Registration Statement on Form S-3 (No. 33-60294) of our reports dated February 10, 1995 and February 10, 1995 (except as to the fourth sentence of the fifth paragraph of Note 5, for which the date is March 15, 1995) appearing in and incorporated by reference, respectively, in the Annual Report on Form 10-K for the year ended December 31, 1994 filed by Borg-Warner Security Corporation. DELOITTE & TOUCHE LLP Chicago, Illinois March 30, 1995 EX-27 13 FINANCIAL DATA SCHEDULES
5 1,000 YEAR DEC-31-1994 JAN-01-1994 DEC-31-1994 15,800 0 114,400 7,700 12,200 159,500 537,700 242,600 830,300 196,300 454,000 200 0 0 43,600 830,300 0 1,792,900 0 1,437,300 73,700 5,500 50,400 10,100 (3,000) 13,100 0 0 0 13,100 0.560 0.560