-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UoRo1YyCTqCfl8gRrap0jk/hQt+GGqrsDXAO2TI/Kf0WmmiGre7JgiM3Gehq2IUD hb2oC2/w9ZDItLuZnIEOpw== 0000950131-97-006831.txt : 19971117 0000950131-97-006831.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950131-97-006831 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BORG WARNER SECURITY CORP CENTRAL INDEX KEY: 0000817945 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-DETECTIVE, GUARD & ARMORED CAR SERVICES [7381] IRS NUMBER: 133408028 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-05529 FILM NUMBER: 97719936 BUSINESS ADDRESS: STREET 1: 200 S MICHIGAN AVE STREET 2: NULL CITY: CHICAGO STATE: IL ZIP: 60604 BUSINESS PHONE: 3123228500 MAIL ADDRESS: STREET 1: 200 S. MICHIGAN AVENUE CITY: CHICAGO STATE: IL ZIP: 60604 FORMER COMPANY: FORMER CONFORMED NAME: BORG WARNER CORP /DE/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: BORG WARNER HOLDINGS CORP DATE OF NAME CHANGE: 19880328 10-Q 1 FORM 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended September 30, 1997 Commission file number: 1-5529 BORG-WARNER SECURITY CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 13-3408028 --------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 200 South Michigan Avenue, Chicago, Illinois 60604 - ------------------------------------------------ --------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (312) 322-8500 --------------- Indicate by check mark whether the 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ________ ------- On October 31, 1997 the registrant had 23,319,556 shares of Common Stock and 249,600 shares of Series I Non-Voting Common Stock outstanding. ================================================================================ -1- BORG-WARNER SECURITY CORPORATION AND CONSOLIDATED SUBSIDIARIES FORM 10-Q SEPTEMBER 30, 1997 INDEX PAGE ---- PART I. FINANCIAL INFORMATION --------------------- Item 1. Financial Statements Condensed Consolidated Balance Sheet at September 30, 1997 and December 31, 1996.................... 2 Consolidated Statement of Operations for the Three Months Ended September 30, 1997 and 1996............. 3 Consolidated Statement of Operations for the Nine Months Ended September 30, 1997 and 1996.............. 4 Condensed Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 1997 and 1996.............. 5 Notes to the Consolidated Financial Statements................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................11 PART II. OTHER INFORMATION ----------------- Item 1. Legal Proceedings................................................14 Item 2. Changes in Securities............................................14 Item 3. Defaults Upon Senior Securities..................................14 Item 4. Submission of Matters to a Vote of Security Holders..............14 Item 5. Other Information................................................14 Item 6. Exhibits and Reports on Form 8-K.................................14 SIGNATURES....................................................................15 -2- PART I. FINANCIAL INFORMATION --------------------- Item 1. Financial Statements BORG-WARNER SECURITY CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) (MILLIONS OF DOLLARS)
September 30, 1997 December 31, 1996 ------------------ ----------------- ASSETS - ----------------------------------------------------- Cash and cash equivalents $ 6.7 $ 17.8 Receivables, net 76.5 100.4 Inventories 8.6 12.1 Other current assets 40.3 36.8 ------ ------ Total current assets 132.1 167.1 Property, plant and equipment, at cost 358.5 442.6 Less accumulated depreciation 210.3 239.5 ------ ------ Net property, plant and equipment 148.2 203.1 Net excess purchase price over net assets acquired 201.6 237.2 Deferred tax asset, net 44.9 46.8 Net assets of discontinued operations 20.3 12.6 Other assets 111.0 94.0 ------ ------ Total assets $658.1 $760.8 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY - ----------------------------------------------------- Notes payable $ 1.6 $ 4.4 Accounts payable and accrued expenses 144.0 173.7 ------ ------ Total current liabilities 145.6 178.1 Long-term debt 343.5 438.2 Other long-term liabilities 113.6 103.3 Capital stock: Common stock 0.2 0.2 Series I non-voting common stock -- -- Other stockholders' equity 55.2 41.0 ------ ------ Total stockholders' equity 55.4 41.2 ------ ------ Total liabilities and stockholders' equity $658.1 $760.8 ====== ======
(The accompanying notes are an integral part of these financial statements) -3- BORG-WARNER SECURITY CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (MILLIONS OF DOLLARS, EXCEPT PER SHARE)
Three Months Ended September 30, --------------------------------- 1997 1996 --------------- ---------------- Net service revenues $390.8 $434.9 Cost of services 313.8 348.2 Selling, general and administrative expenses 45.8 51.8 Depreciation 9.9 11.7 Other expense, net 3.3 3.4 Interest expense and finance charges 10.6 14.1 ------ ------ Earnings before income taxes 7.4 5.7 Provision for income taxes 2.7 2.5 ------ ------ Earnings from continuing operations 4.7 3.2 Loss from discontinued operations, net of income taxes -- (26.4) ------ ------ Net earnings (loss) $ 4.7 $(23.2) ====== ====== Earnings (loss) per common share: Continuing operations $ 0.19 $ 0.14 Discontinued operations -- (1.13) ------ ------ Net earnings (loss) per share $ 0.19 $(0.99) ====== ======
(The accompanying notes are an integral part of these financial statements) -4- BORG-WARNER SECURITY CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (MILLIONS OF DOLLARS, EXCEPT PER SHARE)
Nine Months Ended September 30, -------------------------------- 1997 1996 ------ ------ Net service revenues $1,151.8 $1,267.3 Cost of services 918.6 1,010.0 Selling, general and administrative expenses 146.0 156.7 Depreciation 29.5 35.6 Other expense, net 6.7 10.1 Interest expense and finance charges 31.4 42.7 -------- -------- Earnings before income taxes 19.6 12.2 Provision for income taxes 6.8 4.5 -------- -------- Earnings from continuing operations 12.8 7.7 Loss from discontinued operations, net of income taxes -- (28.5) -------- -------- Net earnings (loss) $ 12.8 $ (20.8) ======== ======== Earnings (loss) per common share: Continuing operations $ 0.53 $ 0.33 Discontinued operations -- (1.21) -------- -------- Net earnings (loss) per share $ 0.53 $ (0.88) ======== ========
(The accompanying notes are an integral part of these financial statements) -5- BORG-WARNER SECURITY CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (IN MILLIONS OF DOLLARS)
Nine Months Ended September 30, ------------------------------- 1997 1996 ------ ------ OPERATING: Earnings from continuing operations $ 12.8 $ 7.7 Adjustments to reconcile net earnings to net cash provided by operating activities: Non-cash charges to earnings: Depreciation and amortization 37.8 45.7 Other, net (0.9) 2.2 Changes in assets and liabilities: Decrease (increase) in current assets 2.6 (9.8) Decrease (increase) in deferred tax assets 1.9 (9.5) (Decrease) increase in accounts payable (14.8) 2.1 Decrease in other accrued expenses (21.2) (10.8) Net change in other long-term assets and liabilities 5.4 (6.4) ------- ------- Total cash flows provided by continuing operations 23.6 21.2 Net loss from discontinued operations -- (28.5) Other cash related to discontinued operations (7.7) 25.3 ------- ------- Net cash used in discontinued operations (7.7) (3.2) ------- ------- Net cash provided by operating activities 15.9 18.0 ------- ------- INVESTING: Proceeds from sale of assets of armored services unit 95.5 -- Capital expenditures, excluding sales-type leases (6.0) (11.7) Investment in sales-type leases (27.4) (24.3) Proceeds from sales-type leases 12.6 12.6 Other (0.1) 0.9 ------- ------- Net cash provided by (used in) investing activities 74.6 (22.5) ------- ------- FINANCING: Net decrease in notes payable (2.3) (0.7) Net decrease in debt outstanding under revolving credit facility (20.7) (21.1) Net (decrease) increase in receivables sold (6.7) 25.5 Issuance of long-term debt 125.0 100.0 Retirement of long-term debt (198.0) (100.0) Sales of treasury common stock 1.1 0.1 Other, net -- (1.4) ------- ------- Net cash (used in) provided by financing activities (101.6) 2.4 ------- ------- NET DECREASE IN CASH AND CASH EQUIVALENTS (11.1) (2.1) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 17.8 19.4 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6.7 $ 17.3 ======= =======
(The accompanying notes are an integral part of these financial statements) -6- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) The financial statements of Borg-Warner Security Corporation and consolidated subsidiaries ("Company") have been prepared in accordance with the instructions to Form 10-Q. The statements are unaudited, but include all adjustments, consisting of normal recurring items, except as noted, which the Company considers necessary for a fair presentation of the information set forth herein. The results of operations for the three and nine month periods ended September 30, 1997 are not necessarily indicative of the results to be expected for the entire year. Certain 1996 amounts have been reclassified to conform with the 1997 presentation. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results may differ from those estimates. (2) Since September 30, 1996, the Company's courier unit has been treated as a discontinued operation. The assets, liabilities, results of operations and adjustments to carrying values of net assets and cash flows of the courier unit have been segregated and reported as discontinued operations for all periods presented, and previously reported results have been restated. At September 30, 1997, the net assets of the discontinued operation consist mainly of customer receivables, property, plant and equipment and accounts payable. Net service revenues for the third quarter of 1997 and 1996 were $40.3 million and $34.3 million, respectively. Third quarter loss from operations in 1997 and 1996 was $0.2 million (net of $0.1 million tax expense) and $1.4 million (net of $0.8 million tax benefit), respectively. Net service revenues for the nine months ended September 30, 1997 and 1996 were $109.8 million and $106.5 million, respectively. Loss from operations for the nine months ended September 30, 1997 and 1996 was $2.9 million (net of $1.4 million tax benefit) and $3.5 million (net of $1.9 million tax benefit), respectively. The Company has an active program in place to find a buyer of the unit and contemplates that the unit will be sold in the near future. (3) The allowance for doubtful accounts was $4.5 million at September 30, 1997 and $6.3 million at December 31, 1996. The accumulated amortization on excess purchase price over net assets acquired was $72.7 million at September 30, 1997 and $74.2 million at December 31, 1996. The Company has an agreement to sell a $120 million undivided interest in a revolving pool of customer receivables. This sold interest is reflected as a reduction of "Receivables, net" in the accompanying Condensed Consolidated Balance Sheet at September 30, 1997 and December 31, 1996. The Company retains, on a subordinated basis, an undivided interest in the pool of receivables. The Company's retained interest at September 30, 1997 and December 31, 1996 was $30.3 million and $36.7 million, respectively. "Other current assets" at September 30, 1997 and December 31, 1996 include interest-bearing cash deposits of $16.5 million and $9.8 million, respectively, held in trust under the terms of the accounts receivable facility. The deposits represent collections held back by the trustee based on the amount of eligible receivables in the revolving receivables pool. The Company's retained interest in the receivables and cash deposits is generally restricted. The full amount of the -7- allowance for losses has been retained because the Company has retained substantially the same risk of credit loss as if the receivables had not been sold. The discount related to the sale of receivables is included with "Interest expense and finance charges" in the Consolidated Statement of Operations. Net cash payments for interest and income taxes were as follows (millions of dollars):
Nine Months Ended September 30, ----------------- 1997 1996 ------- ------- Interest paid $29.6 $40.7 Income taxes paid 3.2 2.2
(4) The Company's provisions for income taxes for the three and nine month periods ended September 30, 1997 and 1996 reflect estimated annual tax rates for the year applied to federal, state and foreign income. (5) The following tables summarize the capitalization of the Company at September 30, 1997 and December 31, 1996 (millions of dollars):
September 30, 1997 December 31, 1996 Current Long-Term Current Long-Term ------- --------- -------- --------- DEBT Bank term loan due 1998 (at an average rate of 8.9% in 1996) $ -- $ -- $ -- $196.8 Bank revolving commitment loan due through 2002 (at an average rate of 8.0% in 1997 and 8.5% in 1996; and 7.4% at September 30, 1997) -- 66.1 -- 86.8 Unsecured notes (at an average rate of 7.6% in 1997 and 7.3% in 1996; and 7.7% at September 30, 1997) 0.5 -- 2.0 0.1 Capital lease liability (at an average rate of 9.3% in 1997 and 10.2% in 1996; and 9.4% at September 30, 1997) 1.1 4.0 2.4 5.3 9-1/8% senior subordinated notes (face amount of $150 million due 2003) -- 149.2 -- 149.2 9-5/8% senior subordinated notes (face amount of $125 million due 2007) -- 124.2 -- -- --------- -------- -------- ------- Total notes payable and long-term debt $1.6 $343.5 $4.4 $438.2 ========= ======== ======== =======
-8-
September 30, December 31, STOCKHOLDERS' EQUITY 1997 1996 --------------- ------------- (millions of dollars) Common stock $ 0.2 $ 0.2 Capital in excess of par value 29.3 29.0 Retained earnings 33.4 20.6 Notes receivable - management stock purchase -- (0.3) Cumulative translation adjustment 0.2 0.5 --------- -------- 63.1 50.0 Less treasury common stock, 2,506,400 shares in 1997 and 1,862,311 shares in 1996, at cost (7.7) (8.8) --------- -------- Total stockholders' equity $ 55.4 $ 41.2 ========= =========
September 30, December 31, CAPITAL STOCK - NUMBER OF SHARES 1997 1996 --------- --------- (thousands of shares) Common Stock, $.01 par value: Authorized 50,000.0 50,000.0 Issued 23,353.3 22,446.1 Outstanding 23,317.3 22,154.2 Series I non-voting common stock, $.01 par value: Authorized 25,000.0 25,000.0 Issued 2,720.0 2,720.0 Outstanding 249.6 1,149.6 Preferred stock, $.01 par value: Authorized 5,000.0 5,000.0 Issued and Outstanding -- --
-9- (6) Earnings per common share are based on average outstanding common shares and common share equivalents. Common share equivalents recognize the dilutive effects of common shares which may be issued in the future upon exercise of certain stock options. The number of shares used in the computation of earnings per share were as follows (thousands of shares):
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1997 1996 1997 1996 ------ ------ ------ ------ Average common shares outstanding 23,538 23,264 23,446 23,255 Common share equivalents 713 186 677 247 ------ ------ ------ ------ Total used for computation of per share earnings 24,251 23,450 24,123 23,502 ====== ====== ====== ======
(7) The Company's discontinued property and casualty insurance subsidiary ("Centaur") ceased writing insurance in 1984 and has been operating under rehabilitation since September 1987. Rehabilitation is a process supervised by the Illinois Director of Insurance to attempt to compromise claim liabilities at an aggregate level that is not in excess of Centaur's assets. In rehabilitation, Centaur's assets are being used to satisfy claim liabilities under direct insurance policies written by Centaur. Any remaining assets will be applied to Centaur's obligations to other insurance companies under reinsurance contracts. If all of Centaur's obligations are not satisfied through rehabilitation, it is possible that satisfaction could be sought from the Company for Centaur's liabilities. The foregoing has resulted in one pending lawsuit against the Company, certain of its current and former subsidiaries, and directors and officers of certain current and former subsidiaries for recovery of alleged damages incurred because of Centaur's failure to satisfy its reinsurance obligations. The lawsuit seeks in excess of $100 million for current losses, future losses and other damages and also seeks punitive damages. While the Company has recognized provisions in its financial statements for potential claims related to the Centaur litigation, it 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 -10- material adverse effect on its financial position or future operating results, generally either because the maximum potential liability at a site is not large or because liability will be shared with other PRPs, although no assurance can be given with respect to the ultimate outcome of any such liability. Based on its estimate of allocations of liability among PRPs, the probability that other PRPs, many of whom are large, solvent public companies, will fully pay the costs allocated to them, currently available information concerning the scope of contamination at such sites, estimated remediation costs at such sites, indemnification obligations in favor of the Company from the current owners of certain sold or discontinued operations, estimated legal fees and other factors, the Company has made provisions for indicated environmental liabilities in the aggregate amount of approximately $8 million (relating to environmental matters with respect to discontinued operations of the Company). The Company has requested that its discontinued automotive subsidiary, Borg-Warner Automotive, indemnify it against certain past and future costs relating to environmental and financing liabilities associated with certain former automotive operations. At September 30, 1997 such past costs were approximately $3.2 million. Borg-Warner Automotive has contested its indemnification obligation with respect to such liabilities. The Company believes that the various asserted claims and litigation in which it is involved will not materially affect its financial position, future operating results or cash flows, although no assurance can be given with respect to the ultimate outcome of any such claim or litigation. (8) On January 24, 1997, the Company's armored services unit contributed substantially all of its assets and assigned certain of its liabilities to Loomis, Fargo & Co. ("Loomis Fargo") in exchange for (i) 4,900,000 shares of Loomis Fargo common stock and (ii) a cash payment of approximately $105 million which includes amounts paid to satisfy intercompany indebtedness assumed by Loomis Fargo. Since that date, $9.5 million has been expended to settle working capital adjustments and for payments of retained liabilities. The cash proceeds received were net of transaction costs and subject to certain adjustments. The armored services unit generated a $8.1 million segment operating profit for the first nine months of 1996 and $0.9 million for the first 23 days of 1997. The Company accounts for its interest in Loomis Fargo as a 49% owned equity investment. The excess of proceeds received over carrying value of net assets contributed in the Loomis Fargo combination was substantially deferred and offset by purchase price adjustments and provisions for other contingent liabilities related to the contributed assets and liabilities of the armored services unit. For the three months ended September 30, 1997, the Company recorded a loss of $.6 million relating to its investment in Loomis Fargo. For the first nine months of 1997, equity income in Loomis Fargo, together with the portion of the net gain recognized by the Company on the combination, was $1.9 million. The Company does not guarantee the indebtedness of Loomis Fargo nor is it required to fund Loomis Fargo's future operations. -11- ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - --------------------- On January 24, 1997, the Company combined its armored transport business with Loomis Armored Inc. to form a new company, Loomis, Fargo & Co. (the "Loomis Fargo Combination"). The Company received a 49% equity interest in the combined company and approximately $105 million, net of transaction expenses, but subject to certain adjustments and retained liabilities. After adjustments and payment of retained liabilities, net cash received through September 30, 1997 from the Loomis Fargo Combination was $95.5 million. The Company accounts for its investment in the new company under the equity method. The Loomis Fargo Combination will affect the comparison of the Company's 1997 results to prior periods because the armored services unit was included in the Company's results of operations for only 23 days in the 1997 first quarter. Consolidated net service revenues for the three and nine months ended September 30, 1997 decreased 10.1% and 9.1% respectively from the comparable 1996 periods. Excluding the armored services business, core security services revenues for the three and nine months ended September 30, 1997 increased 5.0%, and 4.7% respectively compared to 1996. The net service revenues were as follows (in millions of dollars):
Three Months Ended Nine Months Ended September 30, September 30, ------------------ --------------------- 1997 1996 1997 1996 ------ ------ -------- -------- Physical Security Services $319.9 $301.4 $ 927.4 $ 873.0 Electronic Security Services 70.9 70.9 209.1 212.0 ------ ------ -------- -------- Core Security Services 390.8 372.3 1,136.5 1,085.0 Armored Security Services -- 62.6 15.3 182.3 ------ ------ -------- -------- Net Service Revenues $390.8 $434.9 $1,151.8 $1,267.3 ====== ====== ======== ========
Physical security services revenues for the three and nine months ended September 30, 1997 increased 6.1% and 6.2% respectively compared to 1996. The unit has increased its average guard hours-in-force by adding new business and retaining a higher percentage of its existing customers compared to 1996. Electronic security services revenue for the nine months ended September 30, 1997 decreased 1.4% compared to 1996 primarily due to the impact of bank consolidations on customer retention. The electronic security services unit recognizes leased equipment under sales-type leases for contracts dated after January 1, 1994 and operating leases for major contracts. At September 30, 1997, sales-type leases represented 42.3% of the lease base, as compared with 25.0% at December 31, 1996. Revenue from sales-type leases represented 8.7% and 8.5% of total revenue for the nine months ended September 30, 1997 and 1996, respectively. The annual aggregate retention rate for all subscriber installation leases was 88.3% at September 30, 1997. -12- Cost of services for the three and nine months ended September 30, 1997 decreased 9.9% and 9.0% respectively compared to the 1996 periods due principally to the Loomis Fargo Combination. As a percentage of revenues, gross profit for the three and nine months ended September 30, 1997 was 19.7% and 20.2%, respectively, compared with 19.9% and 20.3% for the three and nine months ended September 30, 1996, respectively. The decline in gross profit margin is primarily a result of increased labor and material costs. Selling, general & administrative expenses for the three and nine months ended September 30, 1997 decreased 11.6% and 6.8% respectively compared to 1996. Again, this was in large part due to the Loomis Fargo Combination. Such expenses were 11.7% and 12.7% of revenues respectively for the three and nine months ended September 30, 1997 compared with 11.9% and 12.4% for the three and nine months ended September 30, 1996. The Company has incurred significant costs in 1997 for sales and marketing programs, new product development and information systems. In 1997, the Company received cash proceeds of approximately $3.0 million from the sale of non-operating assets. This sale resulted in a gain which was largely offset by increases in operating expense accruals. Depreciation expense for the three and nine months ended September 30, 1997 decreased 15.4% and 17.1% respectively compared to the 1996 periods principally due to reduced electronic security equipment under operating leases and the Loomis Fargo Combination. Interest expense for the three and nine months ended September 30, 1997 decreased 24.8% and 26.5% respectively compared to 1996 due to reduced debt levels and lower interest rates. During the third quarter, the Company took several steps toward its long-term objective of shifting from defined benefit to defined contribution pension plans. The Company recorded after-tax income of approximately $1.8 million resulting from plan changes which was largely offset by reserve adjustments and losses attributable to the investment in Loomis Fargo. FINANCIAL CONDITION & LIQUIDITY - ------------------------------- In January 1997 the Company applied the $105 million net proceeds received as part of the Loomis Fargo Combination to reduce amounts outstanding under its bank credit facilities. Since that date, $9.5 million has been expended to settle working capital adjustments and for payments of retained liabilities. On March 24, 1997, the Company completed a refinancing pursuant to which it sold $125 million principal amount of 9 5/8% Senior Subordinated Notes due 2007 and replaced its existing term loan, revolving credit and letter of credit facilities with a new credit facility consisting of up to a $155 million revolving facility and up to a $155 million letter of credit facility subject to an overall limit on the aggregate amount outstanding under both facilities of $285 million. The new credit facility matures on March 31, 2002 with mandatory semiannual reductions in the total commitments totaling $10 million in 1999, $20 million in 2000 and $30 million in 2001. -13- The Company's policy is to keep working capital as low as is operationally feasible to minimize related carrying costs. The levels of receivables and current liabilities are influenced by the timing of billings, collections and payrolls. In November 1995, the Company entered into a three-year agreement to sell a $120 million undivided interest in a revolving pool of customer receivables. Other current assets at September 30, 1997 and December 31, 1996 included interest-bearing cash deposits of $16.5 million and $9.8 million, respectively, that were held in trust under the terms of the accounts receivable facility. These deposits represent collections held back based on the amount of eligible receivables in the revolving receivables pool. Net cash provided by operating activities was $15.9 million and $18.0 million in the first nine months of 1997 and 1996, respectively. The decrease in cash provided by operating activities was primarily related to timing of payments for accounts payable and accrued expenses. Capital expenditures and investment in sales-type leases totaled $33.4 million and $36.0 million in the first nine months of 1997 and 1996, respectively. Excluding the armored services business, core security services capital expenditures and investment in sales-type leases totaled $33.2 million and $30.0 million in the first nine months of 1997 and 1996, respectively. In March 1996, the Company began selling equipment payment rights due under customer leases of certain electronic security installations. The Company received approximately $5 million under this program for the first nine months of 1997. For cost and administrative reasons, the Company has suspended such sales and is investigating alternative methods of financing its sales-type leases. Total financing, including debt and off-balance sheet facilities, declined to $445.6 million at September 30, 1997 from $549.8 million at December 31, 1996. The Company believes that cash generated from future operations and capital resources will enable it to maintain its current level of operations and its planned operations, including capital expenditures, for the foreseeable future. As discussed more fully in Note 7 of the Notes to the Consolidated Financial Statements, various complaints seeking substantial dollar amounts have been filed against the Company. The Company believes that it has established adequate provisions for litigation liabilities in its financial statements in accordance with generally accepted accounting principles. The Company believes that none of these matters individually or in the aggregate will have a material adverse effect on its financial position or future operating results, although no assurance can be given with respect to the ultimate outcome of any such proceeding. -14- PART II. OTHER INFORMATION ----------------- Item 1. Legal Proceedings ----------------- As previously reported in the Company's Annual Report on Form 10-K for the year ended December 31, 1996, Centaur Insurance Company ("Centaur"), the Company's discontinued property and casualty insurance subsidiary, has been operating under rehabilitation since 1987. Rehabilitation is a process supervised by the Illinois Director of Insurance to attempt to compromise Centaur's liabilities at an aggregate level that is not in excess of its assets. The foregoing has resulted in one pending lawsuit against the Company for recovery of alleged damages incurred as a result of Centaur's failure to satisfy its reinsurance obligations. After conducting the liability phase of the trial but before hearing closing arguments, the presiding judge declared a mistrial and recused himself from the proceedings. The Company intends to defend this lawsuit vigorously. Item 2. Changes in Securities --------------------- Inapplicable. Item 3. Defaults Upon Senior Securities ------------------------------- Inapplicable. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None. Item 5. Other Information ----------------- None. Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits: 27- Financial Data Schedule. (b) Reports on Form 8-K: None. -15- SIGNATURES Pursuant to the requirements 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 -------------------------------- (Registrant) By /s/ Timothy M. Wood --------------------------------- (Signature) Timothy M. Wood Vice President, Finance (Principal Financial and Accounting Officer) Date: November 14, 1997 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 7 0 81 5 9 132 358 210 658 146 343 0 0 0 55 658 0 1152 0 919 36 1 31 20 7 13 0 0 0 13 .53 .53
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