-----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, G7dVxkp1yqJQ0oWPYBB8Na7IUdhoNUfJlbmP7iaR55A23x1gEG9aZ48AthOO0v0K Ki2bHIiNADGkyZ9ogsJ2iQ== 0000950131-98-002158.txt : 19980331 0000950131-98-002158.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950131-98-002158 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 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-K405 SEC ACT: SEC FILE NUMBER: 001-05529 FILM NUMBER: 98578901 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-K405 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, 1997 Commission file number: 1-5529 ---------------------------- 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 9-5/8% Senior Subordinated Notes due 2007 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. [X] The aggregate market value of the voting stock of the registrant held by stockholders (not including voting stock held by directors and executive officers of the registrant and affiliates of Merrill Lynch & Co., Inc. (the exclusion of such stock shall not be deemed an admission by the registrant that such person is an affiliate of the registrant)) on March 6, 1998 was approximately $219.9 million. As of March 6, 1998, the registrant had 23,364,931 shares of Common Stock and 249,600 shares of Series I Non-Voting Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated herein by reference into the Part of the Form 10-K indicated. Document Part of Form 10-K into which -------- ---------------------------- incorporated ------------ The Company's annual report to stockholders Parts I, II and IV for the year ended December 31, 1997 The Company's proxy statement for the 1998 Part III annual meeting of stockholders BORG-WARNER SECURITY CORPORATION FORM 10-K YEAR ENDED DECEMBER 31, 1997 INDEX
Item Number Page - ----------- ---- PART I 1. Business 3 2. Properties 9 3. Legal Proceedings 10 4. Submission of Matters to a Vote of Security Holders 12 PART II 5. Market for the Registrant's Common Stock and Related Stockholder Matters 13 6. Selected Financial Data 13 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 7A.Quantitative and Qualitative Disclosures About Market Risk 14 8. Financial Statements and Supplementary Data 14 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 14 PART III 10. Directors and Executive Officers of the Registrant 14 11. Executive Compensation 14 12. Security Ownership of Certain Beneficial Owners and Management 14 13. Certain Relationships and Related Transactions 15 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 15
2 PART I Item 1. Business The Company is the world's largest supplier of contract guard services and is a leading provider of electronic security services. As a result of its significant market presence and breadth of product offerings, the Company is well positioned to service local, multi-location and national accounts and provide total security solutions to its customers. The Company's protective services business is divided into two business units: physical security services and electronic security services. Information concerning the revenues, operating profit or loss and identifiable assets attributable to each of the Company's business units is incorporated herein by reference to Note 11 of the Notes to Consolidated Financial Statements. In January 1997 the Company combined its armored transport business with Loomis Armored Inc. The Company received a 49% equity interest in the combined entity and approximately $105 million (net of transaction expenses, but subject to certain adjustments), and retained casualty and employee liabilities of its armored transport unit incurred prior to closing. The Company accounts for its investment in the combined entity under the equity method. Physical Security Services The Company provides guard services, as well as background screening, contract employment and investigative services, to approximately 16,000 clients in the United States, Canada, the United Kingdom and Colombia. The Company services these clients with approximately 68,000 employees in approximately 294 offices under the Wells Fargo(R), Burns(R), Globe(R) and other service marks. The physical security services unit supplies contract uniformed and plainclothes security officers, who may or may not be armed, to perform a wide variety of tasks. These security officers patrol and monitor commercial, financial, industrial, residential and governmental facilities providing deterrence against crime and breach of governmental security regulations and detection of fire, accidents and other casualties. The security officers also monitor electronic systems and control public and employee access to facilities. Specialized assignments include nuclear and conventional electric power plant security, pre-departure screening of passengers and luggage at airports, access control at health care and educational facilities, mailroom services, staffing services and investigative services, including background investigations of prospective employees. The physical security services unit employs approximately 65,000 security officers. Security officers undergo a standardized pre-employment screening program that features mandatory drug screening, criminal record checks at the county and municipal court level and verification of consumer credit reports, Social Security information and drivers' license records. Security officers receive classroom orientation and field training in safety, first aid and security techniques and in the handling of specific problems applicable to particular industries or situations. 3 The physical security services unit markets guard services through approximately 141 sales representatives nationwide and in Canada, the United Kingdom and Colombia. Sales personnel operate out of local branch and sales offices. The physical security services unit also bids on contracts with governmental agencies. Physical security services contracts generally provide for such services on a continuing basis and generally are terminable by either party upon 30 to 60 days notice. Charges for services are negotiated with customers and are based upon payment of a specified amount per service hour. Typically, such charges are adjusted for any change in any law, ruling or collective bargaining agreement causing a change in work hours, wage rates, working conditions or other costs. Investigative services are generally provided under specific arrangements, with charges varying according to the nature of the assignment. Electronic Security Services The Company provides integrated electronic security systems, including intrusion and fire detection, sprinkler and critical industrial process monitoring, closed circuit television and access control. The Company designs, installs, monitors and services electronic security systems located on the premises of approximately 83,000 commercial and 27,000 residential customers in the United States and Canada under the Wells Fargo(R) and Pony Express(R) service marks. The Company also provides, under the Bel-Air Patrol trade name, an integrated guard, patrol and alarm service to approximately 11,000 customers in Bel Air, Beverly Hills and other Los Angeles communities. The unit has approximately 2,200 employees. Commercial. The Company's electronic security services unit designs, installs, monitors and services electronic detection systems located at customers' premises. These systems are tailored to customers' needs and may include intrusion and fire detection, critical process and sprinkler monitoring, access control and closed-circuit television monitoring systems. The Company's alarm systems and devices may be monitored on the premises of the customer by the customer's own personnel or linked through telephone lines or long range radio to one of 12 central stations operated by the Company in the United States and Canada. The Company also services its installed systems. The electronic security services unit services approximately 83,000 security systems in financial institutions, industrial and commercial businesses and complexes, warehouses, facilities of federal, state and local governments, defense installations, and health care and educational facilities. The majority of the Company's monitoring contracts are for an initial five- year period with automatic renewal for additional one-year terms, unless terminated by either party. Upon installation, a customer pays an installation fee and agrees to pay an annual service charge for ordinary maintenance and monitoring during the life of the contract. It has been the unit's experience that its customers generally continue the service after expiration of the initial term of the contract and enter into new five-year monitoring contracts. 4 The electronic security services unit conducts its sales, installation and service operations from 40 branch offices in the United States and Canada, some of which are on the same premises as a monitoring station, and additional satellite offices. The alarm services unit has a nationwide sales force that is separated into broad-based commercial groups, as well as specialized sales teams that address the specific needs of the financial community, engineered systems market and other high growth segments of the industry. One group, for example, focuses on multi-location companies such as national retail chains and fast food outlets that require a single point of control for planning, servicing, monitoring and reporting for all locations. The Company also makes direct sales of security equipment to government and commercial users (including other companies in the alarm business) and designs, assembles and sells engineered systems for commercial fire suppression. Residential. The electronic security services unit also installs fire and intrusion protection systems for residential customers under the Pony Express(R) service mark. Residential customer sales and service are generally performed from the same facilities as for commercial accounts. Residential systems are installed by the Company with monitoring agreements and often with maintenance agreements. The majority of the residential monitoring contracts are for an initial period of three to five years with automatic renewal for additional one- year terms, unless terminated by either party. The unit services approximately 27,000 residential security systems. Bel-Air Patrol. The Company also provides a complete protective package, including central station alarm service and surveillance systems, security guards and day and night patrols, to residents in Bel Air and Beverly Hills and other nearby communities of Los Angeles. The Company provides these services to approximately 11,000 customers under the trade name Bel-Air Patrol. The electronic security services unit purchases electronic equipment and component parts for systems from a number of suppliers, and is not dependent upon any single source for such equipment or parts. Loomis, Fargo & Co. In January 1997 the Company's armored transport unit contributed substantially all of its assets and assigned certain of its liabilities to Loomis, Fargo & Co. ("Loomis Fargo"), a newly established corporation, in exchange for 49% of Loomis Fargo's outstanding common stock and a cash payment of approximately $105 million (net of transaction costs, but subject to certain adjustments). The shareholders of Loomis Holding Corporation ("Loomis") contributed all of the Loomis common stock to Loomis Fargo in exchange for 51% of Loomis Fargo's outstanding common stock, a $6 million promissory note and a cash payment of approximately $15 million. In addition, Loomis Fargo repaid existing Loomis indebtedness and redeemed outstanding shares of Loomis preferred stock. Among the liabilities of the Company's armored transport unit that were retained are casualty and employee claims incurred prior to the closing. 5 The Company agreed to indemnify Loomis Fargo for environmental liabilities associated with existing underground storage tanks and other known and identified environmental liabilities. Such indemnification obligation will continue until the earlier of December 31, 1998 or the first anniversary of an initial public offering of Loomis Fargo common stock. The Company has also agreed to indemnify Loomis Fargo against certain other claims, including claims relating to receivables and taxes. The Company and the former Loomis shareholders entered into a stockholders agreement providing that Loomis Fargo's board of directors initially will consist of seven directors: three directors nominated by the Company; three directors nominated by the former Loomis shareholders and Loomis Fargo's chief executive officer. The number of directors that may be designated pursuant to the stockholder agreement may adjust if either the Company or the former Loomis shareholders reduce their ownership stake in Loomis Fargo. The stockholder agreement provides that the vote of five of the seven directors is required for Loomis Fargo to engage in certain specified activities. In addition, the stockholder agreement prohibits the transfer of Loomis Fargo common stock by either party for three years following the closing without the prior consent of the other party. After such period Loomis Fargo common stock may be transferred only in accordance with the provisions of the stockholder agreement, which include rights of first refusal and co-sale rights. The current stockholders also have certain preemptive and registration rights with respect to equity issuances by Loomis Fargo. Loomis Fargo operates in all 50 states and Puerto Rico to provide armored ground transportation services, ATM services and cash vault and related services to financial institutions and commercial customers. Employees The Company's business is labor intensive and, accordingly, is affected by the availability of qualified personnel and the cost of labor. Although the protective services industry is characterized generally by high turnover, the Company believes its experience compares favorably with that of the industry. The Company has not experienced any material difficulty in employing suitable numbers of qualified security guards and other employees. The Company considers its relations with its employees to be generally satisfactory. The Company is a party to collective bargaining agreements with various local unions covering approximately 5,700 employees. The collective bargaining agreements expire at various dates from 1998 to 2000 and relate, among other things, to wages, hours and conditions of employment. Under section 9(b)(3) of the National Labor Relations Act, if a union admits to membership, or is affiliated directly or indirectly with a union that admits to membership, employees other than guards, an employer of guards can refuse to bargain with such union and such union cannot be certified as the representative of a unit of guards. As a result, the Company has in many instances refused to 6 recognize or withdrawn recognition of labor organizations that admit as members employees other than guards. Competition The physical security services unit competes with major national firms and numerous smaller regional and local companies providing similar services. Competition in the security guard industry is based on price in relation to the quality of service, the scope of services performed, the extent and quality of guard supervision, recruiting and training and name recognition. The electronic security services unit competes with major national firms and numerous smaller regional and local companies. Competition in the alarm services industry is based on price in relation to the quality of service, the scope of alarm installation and service, and the level of technological and engineering sophistication. Regulation Due to the nature of the Company's business, its operations are subject to a variety of federal, state, county and municipal laws, regulations and licensing requirements. The Company believes that its operations are in substantial compliance with those laws, regulations and requirements. The Company's physical security services operations are subject to a variety of city, county and state firearm and occupational licensing laws. In addition, many states have laws requiring training and registration of security officers, regulating the use of badges, identification cards and uniforms and imposing minimum bond surety and insurance requirements. Federal legislation has been introduced relating to security officer qualification and training. Similar legislation is pending in several states. The Company generally supports the creation of standards for the industry and does not expect that the establishment of such standards will have a material affect on its physical security services operations. The Company's electronic security services operations are subject to regulatory requirements of federal, state and local authorities. In addition, this unit relies upon the use of telephone lines to transmit signals, and the cost of such lines and the type of equipment which may be used are currently regulated by both federal and state governments. In some instances, the Company contracts with the local government to permit it to link a customer's business or home directly into the local police or fire department station for which it may pay a fee to such local government. As a result of a high incidence of false alarms in some communities, some local governments have imposed assessments, fines and penalties on customers based on the number of false alarms reported, or have restricted police response to systems producing excessive false alarms. From time to time, in the ordinary course of business, the Company is subjected to penalties or fines as the result of licensing irregularities or the misconduct of one or more of its agents or employees. In addition, under principles of common law, the Company can generally be held liable 7 for acts or omissions of its agents or employees performed in the course and scope of their employment. In addition, some states have statutes that expressly impose on the Company legal responsibility for the conduct of its employees. Risk Management The nature of the services provided by the Company potentially exposes it to greater risks of liability for employee acts, injuries (including workers' compensation claims) or omissions than may be posed by other service businesses. The Company generally obtains customer indemnification or liability limitations in its contracts to mitigate this risk exposure. The Company carries insurance of various types, including workers' compensation, automobile and general liability coverage. These policies include deductibles per occurrence for which the Company is self-insured. The Company obtains its insurance at rates and upon terms negotiated periodically with various underwriters. The loss experience of the Company and, to some extent, other protective services companies affects premium rates charged to the Company. The Company does not believe that limitations on, or the uncertainty of, insurance coverage for punitive damages in certain states in which it operates is likely to be material, based upon the Company's prior experience with punitive damages claims. The Company also attempts to manage its risk liability through analysis of customer facilities and transportation routes and employee screening, training, supervision and evaluation. Discontinued Operations The Company has treated its courier services unit as a discontinued operation since September 1996. The unit transports time-sensitive packages for commercial businesses and non-negotiable financial documents for Federal Reserve banks and financial institutions in 36 states under the Pony Express(R) service mark. The unit employs approximately 3,600 persons and uses a fleet of approximately 3,000 vehicles, many of which are vehicles provided by the unit's employees. The courier services unit operates both as a common and contract carrier and uses a combination of tariffs and shipping contracts to control the terms, conditions and rates applicable to the transportation of shipments. Rates are dependent upon many factors, including the weight and type of the shipped item, the distance and urgency of the shipment and the geographical location. Trademarks and Patents The Wells Fargo(R), Pony Express(R) and Burns(R) service marks are especially important to the Company's business. The Company believes that its rights in these marks are adequately protected and of unlimited duration. While the Company has patents it considers to be important to the overall conduct of its business, it does not consider any particular patent, or group of related patents, essential to its operations. For both the United States and foreign patents, their expiration, individually or in the aggregate, is not expected to have any material effect on the Company's financial condition or results of operations. 8 Executive Officers Set forth below are the names, ages, positions and certain other information concerning the executive officers of the Company as of March 1, 1998.
Name Age Position with Company J. Joe Adorjan........ 59 Chairman of the Board, Chief Executive Officer and President; Director John D. O'Brien....... 55 Senior Vice President Timothy M. Wood....... 50 Vice President, Finance Robert E.T. Lackey.... 49 Vice President, General Counsel and Secretary
Mr. Adorjan has been a director of the Company since 1993, Chairman of the Board (since January 1996), Chief Executive Officer (since October 1995) and President (since April 1995). Mr. Adorjan was President of Emerson Electric Co., a manufacturer of electronic, electrical and other products, from 1992 to 1995. Mr. Adorjan is also a director of The Earthgrains Company, ESCO Electronics Corporation, Goss Graphic Systems, Inc. and Loomis, Fargo & Co. Mr. O'Brien has been Senior Vice President of the Company since 1993 and was Vice President of the Company from 1987 to 1993. Mr. O'Brien is also President of Borg-Warner Protective Services Corporation and a director of Loomis, Fargo & Co. Mr. Wood has been Vice President, Finance of the Company since 1994 and was Vice President and Controller of the Company from 1987 to 1994 and is also a director of Loomis, Fargo & Co. Mr. Lackey has been Vice President, General Counsel and Secretary of the Company since 1997 and was Vice President, General Counsel and Secretary of Transamerica Commercial Finance Corp. from 1991 to 1995. Each of the executive officers named above was elected by the Board of Directors to serve in the office indicated until his successor is elected and qualified. Item 2. Properties The Company and its subsidiaries maintain central alarm stations, plants and general offices in various cities in the United States, Canada, the United Kingdom and Colombia. At December 31, 1997, the physical security services unit occupied approximately 294 branch and satellite offices, all 9 but one of which were leased. At December 31, 1997, the electronic security services unit operated 12 central stations, of which 5 were leased, 28 additional branch and headquarters offices, 11 of which were owned and 48 additional satellite offices, all of which were leased. The Company leases approximately 57,000 square feet of office space in Chicago, Illinois for its executive offices. The Company believes that its properties are in good condition and are adequate to meet its current and reasonably anticipated needs. Item 3. Legal Proceedings The Company is presently, and is from time to time, subject to claims and suits arising in the ordinary course of its business. In certain of such actions, plaintiffs request punitive or other damages that may not be covered by insurance. In addition, the Company has been subject to claims and suits relating to certain discontinued operations. The most important of these legal proceedings are discussed below. The Company believes that the various asserted claims and litigation in which it is currently involved will not materially affect its financial position or future operating results, although no assurance can be given with respect to the ultimate outcome for any such claim or litigation. The Company believes that it has established adequate provisions for litigation liabilities in its financial statements in accordance with generally accepted accounting principles. These provisions include both legal fees and possible outcomes of legal proceedings (including the environmental matters discussed below). Centaur Litigation Centaur Insurance Company ("Centaur"), a discontinued property and casualty insurance subsidiary, ceased writing insurance in 1984 and has been operating under rehabilitation since September 1987. Rehabilitation is a process supervised by the Illinois Director of Insurance to attempt to compromise claim liabilities at an aggregate level that is not in excess of Centaur's assets. In rehabilitation, Centaur's assets are currently being used to satisfy claim liabilities under direct insurance policies written by Centaur. Any remaining assets will be applied to Centaur's obligations to other insurance companies under reinsurance contracts. The foregoing has resulted in one pending lawsuit against the Company for recovery of alleged damages from the failure of Centaur to satisfy its reinsurance obligations. Certain former officers and directors of the Company's current and former subsidiaries have been named as defendants in such lawsuit and the Company has agreed to indemnify such individuals. Centaur is not a defendant in this lawsuit against the Company. Although the Illinois Director of Insurance has not made any claims against the Company for any of Centaur's liabilities, the Illinois Director of Insurance has requested, and the Company has agreed to, an extension of the statute of limitations for any such claims. As of December 31, 1996, Centaur's total liabilities were $166.9 million and its deficit in net worth was $84.4 million, according to financial statements submitted on behalf of the Illinois Director of Insurance. Such financial statements were presented on a liquidating basis with assets carried at their market value or estimated realizable value and liabilities for direct insurance based on estimates of Centaur's potential exposure and liabilities for reinsurance based on the amount of the reinsurer's 10 claim. Although Centaur is a subsidiary of the Company, the Company does not operate Centaur and has no responsibility for, nor does it participate in the preparation of, such financial statements. Centaur's financial results, assets and liabilities are not reflected in the Company's financial statements. In June 1988, the Insurance Commissioner of the State of California as trustee of Mission Insurance Trust and four other affiliated insurance companies filed a complaint in the Superior Court of the State of California, County of Los Angeles, against the Company and certain of its current and former subsidiaries alleging damages resulting from the failure of Centaur to satisfy its reinsurance obligations. This lawsuit alleges damages to plaintiff, as Trustee of Mission Insurance Company, Mission National Insurance Company, Enterprise Insurance Company, Holland-America Insurance Company and Mission Reinsurance Corporation, based on (i) conduct justifying piercing the corporate veil, (ii) fraud and (iii) negligent misrepresentation. The complaint was amended in 1989 to add 11 former officers and directors of the Company's current and former subsidiaries as defendants and to allege additional causes of action based on (i) breach of fiduciary duty and imposition of personal liability, (ii) fraudulent conveyance, (iii) constructive trust and (iv) conspiracy. Subsequently, seven of the 11 individual defendants were dismissed from the lawsuit. The complaint was amended again in 1995 to allege additional causes of action based on negligence and breach of the covenant of good faith and fair dealing. Plaintiff seeks judgment in excess of $100 million for current losses, future losses and other damages and also seeks punitive damages. In 1992, the Centaur rehabilitator filed a motion to intervene and dismiss the complaint on the grounds that the plaintiff lacked standing and that its claims were not ripe for adjudication. The motion is pending. The parties have agreed to split the trial into two phases; the first phase was to address liability issues and the second phase was to address damages issues. The liability phase of the trial was held in 1996. The court requested post-trial briefs and set a schedule for closing arguments. Before hearing closing arguments, the presiding judge declared a mistrial and recused himself from the case. A new judge has been assigned to the case and a new trial to address liability issues is scheduled to be held in 1998. The Company intends to defend this lawsuit vigorously. The Company believes that any damages for failure to satisfy reinsurance obligations are solely the responsibility of Centaur and that the resolution of the lawsuit relating to Centaur, including the Company's indemnification obligations to former officers and directors, will not have a material adverse effect on its financial position or future operating results; however, no assurance can be given as to the ultimate outcome with respect to such lawsuit. Environmental Proceedings The Company and certain of its current and former subsidiaries have been identified by the U.S. Environmental Protection Agency and certain state environmental agencies as potentially responsible parties ("PRPs") at a number of hazardous waste disposal sites under the Comprehensive Environmental Response, Compensation and Liability Act ("Superfund") and equivalent state laws and, as such, may be liable for the cost of cleanup and other remedial activities at these sites. 11 Responsibility for cleanup and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula. In addition, the Company has or may have liability for environmental matters at properties it presently or previously owned or leased. Based on currently available information, the Company believes that none of these matters individually or in the aggregate will have a material adverse affect on its financial position or future operating results, generally either because the maximum potential liability at a site is not large or because liability will be shared with other PRPs, although no assurance can be given with respect to the ultimate outcome of any such liability. Based on its estimate of allocations of liability among PRPs, the probability that other PRPs, many of whom are large, solvent public companies, will fully pay the costs allocated to them, currently available information concerning the scope of contamination at such sites, estimated remediation costs at such sites, indemnification obligations in favor of the Company from the current owners of certain sold or discontinued operations, estimated legal fees and other factors, the Company has made provisions for indicated environmental liabilities in its financial statements in the aggregate amount of approximately $7 million (relating to environmental matters with respect to discontinued operations of the Company). While estimates of liability for environmental matters can vary over time due to, among other things, changes in laws, technology or available information, the Company believes that such provisions for indicated environmental liabilities have been established on a basis consistent with generally accepted accounting principles. Borg-Warner Automotive The Company has requested that its former subsidiary, Borg-Warner Automotive, Inc., indemnify it against certain past and future costs relating to environmental and financing liabilities associated with certain former automotive operations. At December 31, 1997 such past costs were approximately $3.5 million. Borg-Warner Automotive has contested its indemnification obligation with respect to such liabilities, and the parties submitted the dispute to binding arbitration. In November 1997, the arbitrator found in favor of the Company. In February 1998, an appellate panel upheld the arbitration award. Separately, in January 1998, Borg-Warner Automotive filed suit in Circuit Court of Cook County, Illinois against the Company, Merrill Lynch Capital Partners, Inc. and certain current and former directors, officers and employees of the Company. The lawsuit seeks declaratory, injunctive and other equitable relief, and for the recovery of assets, losses and unspecified compensatory and punitive damages arising from alleged fraudulent misrepresentations, breaches of fiduciary duties, breaches of contract and civil conspiracy relating to the 1993 spin-off of Borg-Warner Automotive to the Company's stockholders. The Company intends to defend this lawsuit vigorously. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to the security holders of the Company during the fourth quarter of 1997. 12 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters As of March 6, 1998, there were approximately 161 holders of record of Common Stock. The Company has neither paid nor declared any cash dividends on its Common Stock during the last two years. The payment of dividends by the Company is prohibited under the terms of the Company's indebtedness. The Company currently intends to retain earnings for acquisitions, working capital, capital expenditures, general corporate purposes and reduction of outstanding indebtedness. Accordingly, the Company does not expect to be able to nor does it expect to pay cash dividends in the foreseeable future. High and low sales prices (as reported on the New York Stock Exchange composite tape) for the Common Stock for each quarter during 1996 and 1997 were:
Quarter ended High Low ------------- ---- --- 1996 March 31 $12 3/4 $10 1/4 June 30 13 1/8 9 5/8 September 30 9 7/8 8 1/4 December 31 11 3/8 9 3/8 1997 March 31 $15 1/8 $10 1/8 June 30 18 13 3/4 September 30 19 9/16 16 1/8 December 31 19 3/4 15 1/4
Item 6. Selected Financial Data The selected financial data for the five years ended December 31, 1997, with respect to the following line items shown under the "Consolidated Statistical Review" (set forth on page 14) in the Annual Report is incorporated herein by reference and made a part of this report: net service revenues; earnings (loss) from continuing operations; earnings (loss) from continuing operations per share; total assets and total debt. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The Management's Discussion and Analysis of Financial Condition and Results of Operations (set forth on pages 16 through 18) in the Annual Report are incorporated herein by reference and made a part of this report. 13 Item 7A. Quantitative and Qualitative Disclosures About Market Risk Inapplicable. Item 8. Financial Statements and Supplementary Data The consolidated financial statements (including the notes thereto) of the Company (set forth on pages 19 through 34) in the Annual Report are incorporated herein by reference and made a part of this report. Supplementary financial information regarding quarterly results of operations (unaudited) for the years ended December 31, 1997 and 1996 is set forth in Note 15 of the Notes to Consolidated Financial Statements. For a list of financial statements and schedules filed as part of this report, see Item 14. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Inapplicable. PART III Item 10. Directors and Executive Officers of the Registrant Information with respect to directors and nominees for election as directors of the Company is incorporated herein by reference to the information under the caption "Election of Directors" on pages 2 and 3 of the Company's proxy statement for the 1998 annual meeting of stockholders. Information with respect to executive officers of the Company is set forth in part I of this report. Information concerning compliance with Section 16(a) of the Exchange Act is incorporated by reference to the information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" on page 6 of the Company's proxy statement for the 1998 annual meeting of stockholders. Item 11. Executive Compensation Information with respect to compensation of executive officers and directors of the Company is incorporated herein by reference to the information under the captions "Executive Compensation" on pages 7 through 9, and "Compensation of Directors" on pages 4 and 5, of the Company's proxy statement for the 1998 annual meeting of stockholders. Item 12. Security Ownership of Certain Beneficial Owners and Management Information with respect to security ownership by persons known to the Company to beneficially own more than five percent of the Company's common stock, by directors and nominees for director of the Company and by all directors and executive officers of the Company as a group is incorporated herein by reference to the information under the caption "Stock Ownership" on pages 5 and 6 of the Company's proxy statement for the 1998 annual meeting of stockholders. 14 Item 13. Certain Relationships and Related Transactions Information with respect to certain relationships and related transactions is incorporated herein by reference to the information under the caption "Certain Relationships and Related Transactions" on pages 12 and 13 of the Company's proxy statement for the 1998 annual meeting of stockholders. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)(1) The following consolidated financial statements of the registrant and its consolidated subsidiaries, set forth on pages 19 through 34 of the Annual Report, and the Independent Auditors' Report, set forth on page 35 of the Annual Report, are incorporated herein by reference: Consolidated Statement of Operations--three years ended December 31, 1997 Consolidated Balance Sheet--December 31, 1997 and 1996 Consolidated Statement of Cash Flows--three years ended December 31, 1997 Consolidated Statement of Shareholders' Equity--three years ended December 31, 1997 Notes to Consolidated Financial Statements (a)(2) The following report of independent auditors and financial statement schedule of the registrant and its consolidated subsidiaries are included herein: Report of Deloitte & Touche LLP, independent auditors II Valuation and Qualifying Accounts Certain schedules for which provisions are made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (a)(3) The exhibits listed in the "Exhibit Index." (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company during the three-month period ended December 31, 1997. 15 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders Borg-Warner Security Corporation We have audited the consolidated financial statements of Borg-Warner Security Corporation (the "Company") as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, and have issued our report thereon dated February 3, 1998; such consolidated financial statements and report are included in your 1997 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the financial statement schedule of Borg-Warner Security Corporation listed in Item 14 of this Annual Report on Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP --------------------- DELOITTE & TOUCHE LLP Chicago, Illinois February 3, 1998 SCHEDULE II BORG-WARNER SECURITY CORPORATION VALUATION AND QUALIFYING ACCOUNTS ($ MILLIONS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - -------- ---------- ----------------------- ---------- ---------- Years Ended December 31, (1) (2) Balance at Charged to Charged to Balance at Beginning Costs and Other Close of Description of Period Expenses Accounts Deductions Period - ----------- --------- ---------- ---------- ---------- ---------- 1995 Allowance for Doubtful Accounts $7.4 $4.4 $2.3 $7.3 $6.8 ========= ========== ========== ========== ========== 1996 Allowance for Doubtful Accounts $6.8 $2.7 $3.1 $6.3 $6.3 ========= ========== ========== ========== ========== 1997 Allowance for Doubtful Accounts $6.3 $1.8 $3.5 $6.7 $4.9 ========= ========== ========== ========== ==========
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BORG-WARNER SECURITY CORPORATION By /s/ J. Joe Adorjan -------------------------------------------- J. Joe Adorjan Chairman of the Board, Chief Executive Officer and President Date: March 20, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on this day of March 20, 1998. Signature Title - --------- ------ /s/ J. Joe Adorjan Chairman of the Board, Chief Executive - -------------------------------- Officer and President and Director (Principal J. Joe Adorjan Executive Officer) /s/ Timothy M. Wood Vice President, Finance - -------------------------------- (Principal Financial and Accounting Officer) Timothy M. Wood /s/ James J. Burke, Jr. Director - -------------------------------- James J. Burke, Jr. /s/ Albert J. Fitzgibbons, III Director - -------------------------------- Albert J. Fitzgibbons, III /s/ Arthur F. Golden Director - -------------------------------- Arthur F. Golden
/s/ Dale W. Lang Director ________________________________ Dale W. Lang /s/ Robert A. McCabe Director - -------------------------------- Robert A. McCabe /s/ Andrew McNally IV - -------------------------------- Andrew McNally IV Director /s/ Alexis P. Michas Director - -------------------------------- Alexis P. Michas /s/ H. Norman Schwarzkopf Director - -------------------------------- H. Norman Schwarzkopf /s/ Donald C. Trauscht Director - -------------------------------- Donald C. Trauscht EXHIBIT INDEX
Exhibit Number Document Description - ------- -------------------- *3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992). *3.2 Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992). *4.1 Credit Agreement dated as of March 24, 1997 among the Company, the lenders party thereto and the agents named therein (incorporated by reference to Exhibit 4.5 to the Company's Registration Statement No. 333-26573). *4.2 Indenture dated as of April 1, 1986 by and between Borg-Warner and Harris Trust and Savings Bank, entered into in connection with the registration of up to $150,000,000 of Debt Securities and Warrants to Purchase Debt Securities for issuance under a shelf registration on Form S-3 (incorporated by reference to Registration Statement No. 33- 4670). *4.3 Indenture dated as of May 3, 1993 by and between the Company and The First National Bank of Chicago (incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1993). *4.4 Indenture dated as of March 24, 1997 by and between the Company and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.3 to Registration Statement No. 333-26573). +*10.1 Borg-Warner Security Corporation Directors Stock Appreciation Rights Plan (incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1988). +*10.2 Borg-Warner Corporation Management Stock Option Plan, as amended through January 19, 1993 (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992).
B-1
Exhibit Number Document Description - ------- -------------------- +10.3 Borg-Warner Security Corporation 1993 Stock Incentive Plan, conformed to include amendments thereto. +10.4 Borg-Warner Security Corporation Performance Share Plan, conformed to include amendments thereto. +10.5 Borg-Warner Security Corporation Executive Officer Incentive Plan. +*10.6 Employment Agreement dated as of March 28, 1995 for J.J. Adorjan (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995). +10.7 Amendment to Employment Agreement dated as of September 5, 1997 for J.J. Adorjan. +10.8 Noncompetition Agreement dated as of September 5, 1997 by and between the Company and J.J. Adorjan. +10.9 Employment Agreement dated September 5, 1997 for J.D. O'Brien. +10.10 Noncompetition Agreement dated as of September 5, 1997 by and between the Company and J.D. O'Brien. +10.11 Employment Agreement dated September 5, 1997 for T.M. Wood. +10.12 Noncompetition Agreement dated as of September 5, 1997 by and between the Company and T.M. Wood. +*10.13 Borg-Warner Security Corporation Retirement Savings Excess Benefit Plan, as amended and restated through January 1, 1995 (incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994). +*10.14 Borg-Warner Security Corporation Supplemental Benefits Compensation Program (incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994). *10.15 Consulting Agreement dated as of September 1, 1993 between the Company and H. Norman Schwarzkopf (incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993).
B-2
Exhibit Number Document Description - ------- -------------------- *10.16 Contribution Agreement dated as of November 28, 1996 by and among the Company, Wells Fargo Armored Service Corporation, Loomis-Wells Corporation (now known as Loomis, Fargo & Co.), Loomis Holding Corporation and Loomis Stockholders Trust (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated February 7, 1997. 13 Portions of the 1997 Annual Report to Stockholders. 21 Subsidiaries of the Company. 23 Consent of Deloitte & Touche LLP. 27 Financial Data Schedule. 99 Cautionary Statement.
- -------- * Incorporated by reference. + Indicates a management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c). B-3 EX-10.3 2 1993 STOCK INCENTIVE PLAN EXHIBIT 10.3 BORG-WARNER SECURITY CORPORATION 1993 STOCK INCENTIVE PLAN (As Amended Through July 8, 1997) SECTION 1. Purpose; Definitions. The purpose of the Plan is to give the Company a significant advantage in attracting, retaining and motivating officers, employees and directors and to provide the Company and its subsidiaries with the ability to provide incentives more directly linked to the profitability of the Company's businesses and increases in stockholder value. For purposes of the Plan, the following terms are defined as set forth below: a. "Affiliate" means a corporation or other entity controlled by the Company and designated by the Committee as such. b. "Award" means a Stock Appreciation Right, Stock Option or Restricted Stock. c. "Board" means the Board of Directors of the Company. d. "Cause" has the meaning set forth in Section 5(i). e. "Change in Control" and "Change in Control Price" have the meanings set forth in Sections 8(b) and (c), respectively. f. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. g. "Commission" means the Securities and Exchange Commission or any successor agency. h. "Committee" means the Committee referred to in Section 2. i. "Company" means Borg-Warner Security Corporation, a Delaware corporation. j. "Disability" means permanent and total disability as determined under procedures established by the Committee for purposes of the Plan. k. "Disinterested Person" shall mean a member of the Board who qualifies as a disinterested person as defined in Rule 16b-3(c)(2), as promulgated by the Commission under the Exchange Act, or any successor definition adopted by the Commission. l. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and any successor thereto. m. "Fair Market Value" means, except as provided in Section 5(j) and 6(b)(ii)(2), as of any given date, the mean between the highest and lowest reported sales prices of the Stock on the New York Stock Exchange Composite Tape or, if not listed on such exchange, on any other national securities exchange on which the Stock is listed or on NASDAQ. If there is no regular public trading market for such Stock, the Fair Market Value of the Stock shall be determined by the Committee in good faith. n. "Incentive Stock Option" means any Stock Option intended to be and designated as an "incentive stock option" within the meaning of Section 422 of the Code. o. "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option. p. "Plan" means the Borg-Warner Security Corporation 1993 Stock Incentive Plan, as set forth herein and as hereinafter amended from time to time. q. "Restricted Stock" means an award granted under Section 7. r. "Retirement" means retirement from active employment under a pension plan of the Company, any subsidiary or Affiliate, or under an employment contract with any of them, or termination of employment at or after age 55 under circumstances which the Committee, in its sole discretion, deems equivalent to retirement. s. "Rule 16b-3" means Rule 16b-3, as promulgated by the Commission under Section 16(b) of the Exchange Act, as amended from time to time. t. "Stock" means Common Stock, par value $.01 per share, of the Company. u. "Stock Appreciation Right" means a right granted under Section 6. v. "Stock Option" means an option granted under Section 5. w. "Termination of Employment" means the termination of any participant's employment with the Company and any subsidiary or Affiliate. A participant employed by a subsidiary or an Affiliate shall also be deemed to incur a Termination of Employment if the subsidiary or Affiliate ceases to be such a subsidiary or Affiliate, as the case may be, and the participant does not immediately thereafter become an employee of the Company or another subsidiary or Affiliate. In addition, certain other terms used herein have definitions given to them in the first place in which they are used. -2- SECTION 2. Administration The Plan shall be administered by the Executive Compensation Committee of the Board or such other committee of the Board, composed of not less than two Disinterested Persons, each of whom shall be appointed by and serve at the pleasure of the Board. If at any time no Committee shall be in office, the functions of the Committee specified in the Plan shall be exercised by the Board. The Committee shall have plenary authority to grant Awards pursuant to the terms of the Plan to officers, employees and directors of the Company and its subsidiaries and Affiliates. Among other things, the Committee shall have the authority, subject to the terms of the Plan: (a) to select the officers, employees and directors to whom Awards may from time to time be granted; provided that awards to non-employee directors may be made only in accordance with Section 13; (b) to determine whether and to what extent Incentive Stock Options, Non- Qualified Stock Options, Stock Appreciation Rights and Restricted Stock or any combination thereof are to be granted hereunder; (c) to determine the number of shares of Stock to be covered by each Award granted hereunder; (d) to determine the terms and conditions of any Award granted hereunder (including, but not limited to, the option price (subject to Section 5(a)), any vesting restriction or limitation and any vesting acceleration or forfeiture waiver regarding any Award and the shares of Stock relating thereto, based on such factors as the Committee shall determine); (e) to modify, amend or adjust the terms and conditions of any Award, at any time or from time to time, including, but not limited to, with respect to performance goals and measurements applicable to performance-based Awards pursuant to the terms of the Plan; (f) to determine to what extent and under what circumstances Stock and other amounts payable with respect to an Award shall be deferred; and (g) to determine under what circumstances a Stock Option may be settled in cash or Stock under Section 5(j). The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable, to interpret the terms and provisions of the Plan and any Award issued under the Plan (and any agreement relating thereto) and to otherwise supervise the administration of the Plan. -3- The Committee may act only by a majority of its members then in office, except that the members thereof may (i) delegate to an officer of the Company the authority to make decisions pursuant to paragraphs (c), (f), (g), (h), and (i) of Section 5 (provided that no such delegation may be made that would cause Awards or other transactions under the Plan to cease to be exempt from Section 16(b) of the Exchange Act) and (ii) authorize any one or more of their number or any officer of the Company to execute and deliver documents on behalf of the Committee. Any determination made by the Committee or pursuant to delegated authority pursuant to the provisions of the Plan with respect to any Award shall be made in the sole discretion of the Committee or such delegate at the time of the grant of the Award or, unless in contravention of any express term of the Plan, at any time thereafter. All decisions made by the Committee or any appropriately delegated officer pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Plan participants. SECTION 3. Stock Subject to Plan. Subject to adjustment as provided herein, the total number of shares of Stock of the Company available for grant under the Plan shall be 1,900,000, provided that no "covered employee" (as such term is defined in Section 162(m) of the Code) shall be granted more than 100,000 shares of Stock in any taxable year. Shares subject to an Award under the Plan may be authorized and unissued shares or may be treasury shares. If any shares of Restricted Stock are forfeited for which the participant did not receive any benefits of ownership (as such phrase is construed by the Commission or its Staff), or if any Stock Option (and related Stock Appreciation Right, if any) terminates without being exercised, or if any Stock Appreciation Right is exercised for cash, shares subject to such Awards shall again be available for distribution in connection with Awards under the Plan. In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, stock split, extraordinary distribution with respect to the Stock or other change in corporate structure affecting the Stock, the Committee or Board may make such substitution or adjustments in the aggregate number and kind of shares reserved for issuance under the Plan, in the number, kind and option price of shares subject to outstanding Stock Options and Stock Appreciation Rights, in the number and kind of shares subject to other outstanding Awards granted under the Plan and/or such other substitution or adjustments in the consideration receivable upon exercise as it may determine to be appropriate in its sole discretion; provided, however, that the number of shares subject to any Award shall always be a whole number. Such adjusted option price shall also be used to determine the amount payable by the Company upon the exercise of any Stock Appreciation Right associated with any Stock Option. -4- SECTION 4. Eligibility. Officers, employees and directors of the Company, its subsidiaries and Affiliates who are responsible for or contribute to the management, growth and profitability of the business of the Company, its subsidiaries and Affiliates are eligible to be granted Awards under the Plan. Except as expressly authorized by Section 13 of the Plan, however, no grant shall be made to a director who is not an officer or a salaried employee. SECTION 5. Stock Options. Stock Options may be granted alone or in addition to other Awards granted under the Plan and may be of two types: Incentive Stock Options and Non- Qualified Stock Options. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. The Committee shall have the authority to grant any optionee Incentive Stock Options, Non-Qualified Stock Options or both types of Stock Options (in each case with or without Stock Appreciation Rights). Incentive Stock Options may be granted only to employees of the Company and its subsidiaries (within the meaning of Section 424(f) of the Code). To the extent that any Stock Option is not designated as an Incentive Stock Option or even if so designated does not qualify as an Incentive Stock Option, it shall constitute a Non-Qualified Stock Option. The Committee may authorize the Chief Executive Officer of the Corporation, who need not be a Disinterested Person, to grant in any calendar year a Non- Qualified Stock Option (with or without Stock Appreciation Rights) for up to 3,000 shares of Stock to any employee of the Company who is not an executive officer of the Company subject to Section 16 of the Exchange Act. The Committee may limit or qualify such authorization in any manner it deems appropriate. Stock Options granted by the Chief Executive Officer shall have the terms and conditions determined by the Committee and the Committee shall periodically review such grants. Stock Options shall be evidenced by option agreements, the terms and provisions of which may differ. An option agreement shall indicate on its face whether it is intended to be an agreement for an Incentive Stock Option or a Non-Qualified Stock Option. The grant of a Stock Option shall occur on the date the Committee by resolution selects an individual to be a participant in any grant of a Stock Option, determines the number of shares of Stock to be subject to such Stock Option to be granted to such individual and specifies the terms and provisions of the Stock Option. The Company shall notify a participant of any grant of a Stock Option, and a written option agreement or agreements shall be duly executed and delivered by the Company to the participant. Such agreement or agreements shall become effective upon execution by the participant. Anything in the Plan to the contrary notwithstanding, no term of the Plan relating to Incentive Stock Options shall be interpreted, amended or altered nor shall any discretion or authority granted under the Plan be exercised so as to disqualify the Plan under Section 422 of the Code or, without -5- the consent of the optionee affected, to disqualify any Incentive Stock Option under such Section 422. Stock Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions as the Committee shall deem desirable: (a) Option Price. The option price per share of Stock purchasable under a Stock Option shall be determined by the Committee and set forth in the option agreement and shall not be less than the Fair Market Value of the Stock subject to the Stock Option on the date of grant. (b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Stock Option shall be exercisable more than 10 years after the date the Stock Option is granted. (c) Exercisability. Except as otherwise provided herein, Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee. If the Committee provides that any Stock Option is exercisable only in installments, the Committee may at any time waive such installment exercise provisions, in whole or in part, based on such factors as the Committee may determine. In addition, the Committee may at any time, in whole or in part, accelerate the exercisability of any Stock Option. (d) Method of Exercise. Subject to the provisions of this Section 5, Stock Options may be exercised, in whole or in part, at any time during the option term by giving written notice of exercise to the Company specifying the number of shares of Stock subject to the Stock Option to be purchased. The option price of Stock to be purchased upon exercise of any Option shall be paid in full in cash (by certified or bank check or such other instrument as the Company may accept) or, if and to the extent set forth in the option agreement, may also be paid by one or more of the following: (i) in the form of unrestricted Stock already owned by the optionee (and, in the case of the exercise of a Non-Qualified Stock Option, Restricted Stock subject to an Award hereunder) based in any such instance on the Fair Market Value of the Stock on the date the Stock Option is exercised; provided, however, that, in the case of an Incentive Stock Option, the right to make a payment in the form of already owned shares of Stock may be authorized only at the time the Stock Option is granted; (ii) by requesting the Company to withhold from the number of shares of Stock otherwise issuable upon exercise of the Stock Option that number of shares having an aggregate fair market value on the date of exercise equal to the exercise price for all of the shares of Stock subject to such exercise; or (iii) by a combination thereof, in each case in the manner provided in the option agreement. In the discretion of the Committee, payment for any shares subject to a Stock Option may also be made by delivering a properly executed exercise notice to the Company, together with a copy of irrevocable instructions to a broker to deliver promptly to the Company the amount of -6- sale or loan proceeds to pay the purchase price. To facilitate the foregoing, the Company may enter into agreements for coordinated procedures with one or more brokerage firms. If payment of the option exercise price of a Non-Qualified Stock Option is made in whole or in part in the form of Restricted Stock, the number of shares of Stock to be received upon such exercise equal to the number of shares of Restricted Stock used for payment of the option exercise price shall be subject to the same forfeiture restrictions to which such Restricted Stock was subject, unless otherwise determined by the Committee. No shares of Stock shall be issued until full payment therefor has been made. Subject to any forfeiture restrictions that may apply if a Stock Option is exercised using Restricted Stock, an optionee shall have all of the rights of a stockholder of the Company holding the Stock that is subject to such Stock Option (including, if applicable, the right to vote the shares and the right to receive dividends), when the optionee has given written notice of exercise, has paid in full for such shares and, if requested, has given the representation described in Section 11(a). (e) Transferability of Stock Options. The Committee may in its discretion authorize all or a portion of the Stock Options to be granted to an optionee to be on terms that permit transfer by such optionee to (i) the spouse, children or grandchildren of the optionee ("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit of such Immediate Family Members or (iii) a partnership in which such Immediate Family Members are the only partners, provided that (x) such transfer shall be by gift with no consideration, (y) the stock option agreement pursuant to which such Stock Options are granted must expressly provide for the transferability of Stock Options in a manner consistent with this Section and (z) no subsequent transfers of Stock Options shall be permitted other than by will or by the laws of descent and distribution. Except as permitted in the first sentence of this section, no Stock Option shall be transferable by the optionee other than (i) by will or by the laws of descent and distribution or (ii) in the case of a Non-Qualified Stock Option, pursuant to a qualified domestic relations order (as defined in the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder). All Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee or by the guardian or legal representative of the optionee or, in the case of a Non-Qualified Stock Option, its alternate payee pursuant to such qualified domestic relations order, it being understood that the terms "holder" and "optionee" include the guardian and legal representative of the optionee named in the option agreement and any person to whom an option is transferred by will or the laws of descent and distribution or, in the case of a Non-Qualified Stock Option, pursuant to a qualified domestic relations order. (f) Termination by Death. If an optionee's employment terminates by reason of death, any Stock Option held by such optionee may thereafter be exercised, to the extent then exercisable, or on such accelerated basis as the Committee may determine, for a period of one year (or such other period as the Committee may specify in the option agreement) from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. In the event of termination of employment due to death, if an Incentive Stock Option is -7- exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (g) Termination by Reason of Disability. If an optionee's employment terminates by reason of Disability, any Stock Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of termination, or on such accelerated basis as the Committee may determine, for a period of three years (or such shorter period as the Committee may specify in the option agreement) from the date of such termination of employment or until the expiration of the stated term of such Stock Option, whichever period is the shorter; provided, however, that if the optionee dies within such three-year period (or such shorter period), any unexercised Stock Option held by such optionee shall, notwithstanding the expiration of such three-year (or such shorter) period, continue to be exercisable to the extent to which it was exercisable at the time of death for a period of 12 months from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. In the event of termination of employment by reason of Disability, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (h) Termination by Reason of Retirement. If an optionee's employment terminates by reason of Retirement, any Stock Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of such Retirement or on such accelerated basis as the Committee may determine, for a period of three years (or such shorter period as the Committee may specify in the option agreement) from the date of such termination of employment or until the expiration of the stated term of such Stock Option, whichever period is the shorter; provided, however, that if the optionee dies within such three-year (or such shorter) period, any unexercised Stock Option held by such optionee shall, notwithstanding the expiration of such three-year (or such shorter) period, continue to be exercisable to the extent to which it was exercisable at the time of death for a period of 12 months from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. In the event of termination of employment by reason of Retirement, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non- Qualified Stock Option. (i) Other Termination. Unless otherwise determined by the Committee, if an optionee incurs a Termination of Employment for any reason other than death, Disability or Retirement, any Stock Option held by such optionee shall thereupon terminate, except that such Stock Option, to the extent then exercisable, or on such accelerated basis as the Committee may determine, may be exercised for the lesser of one year from the date of such Termination of Employment or the balance of such Stock Option's term if such Termination of Employment of the optionee is involuntary and without Cause; provided, however, that if the optionee dies within such one-year period, any unexercised Stock Option held by such optionee shall notwithstanding the -8- expiration of such one-year period, continue to be exercisable to the extent to which it was exercisable at the time of death for a period of 12 months from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. In the event of Termination of Employment for any reason other than death, Disability or Retirement, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. Unless otherwise determined by the Committee, for the purposes of the Plan "Cause" shall mean (i) the conviction of the optionee for committing a felony under Federal law or the law of the state in which such action occurred, (ii) dishonesty in the course of fulfilling the optionee's employment duties or (iii) willful and deliberate failure on the part of the optionee to perform his employment duties in any material respect. (j) Cashing Out of Stock Option. On receipt of written notice of exercise, the Committee may elect to cash out all or part of the portion of the shares of Stock for which a Stock Option is being exercised by paying the optionee an amount, in cash or Stock, equal to the excess of the Fair Market Value of the Stock over the option price times the number of shares of Stock for which to the Option is being exercised on the effective date of such cash out. Cash outs pursuant to this Section 5(j) relating to options held by optionees who are actually or potentially subject to Section 16(b) of the Exchange Act shall comply with the "window period" provisions of Rule 16(b)-3(e), to the extent applicable, and in the case of cash outs of Non-Qualified Stock Options held by such optionees, the Committee may determine Fair Market Value under the pricing rule set forth in Section 6(b)(ii)(2). (k) Change in Control Cash Out. Notwithstanding any other provision of the Plan, during the 60-day period from and after a Change in Control (the "Exercise Period"), unless the Committee shall determine otherwise at the time of grant, an optionee shall have the right, whether or not the Stock Option is fully exercisable and in lieu of the payment of the exercise price for the shares of Stock being purchased under the Stock Option and by giving notice to the Company, to elect (within the Exercise Period) to surrender all or part of the Stock Option to the Company and to receive cash, within 30 days of such notice, in an amount equal to the amount by which the Change in Control Price per share of Stock on the date of such election shall exceed the exercise price per share of Stock under the Stock Option (the "Spread") multiplied by the number of shares of Stock granted under the Stock Option as to which the right granted under this Section 5(k) shall have been exercised; provided, however, that if the Change in Control is within six months of the date of grant of a particular Stock Option held by an optionee who is an officer or director of the Company and is subject to Section 16(b) of the Exchange Act no such election shall be made by such optionee with respect to such Stock Option prior to six months from the date of grant. Notwithstanding any other provision hereof, if the end of such 60-day period from and after a Change in Control is within six months of the date of grant of a Stock Option held by an optionee who is an officer or director of the Company and is subject to Section 16(b) of the Exchange Act, such Stock Option shall be cancelled in exchange for a cash payment to the optionee, effected on the day which is six -9- months and one day after the date of grant of such Option, equal to the Spread multiplied by the number of shares of Stock granted under the Stock Option. SECTION 6. Stock Appreciation Rights. (a) Grant and Exercise. Stock Appreciation Rights may be granted in conjunction with all or part of any Stock Option granted under the Plan. In the case of a Non-Qualified Stock Option, such rights may be granted either at or after the time of grant of such Stock Option. In the case of an Incentive Stock Option, such rights may be granted only at the time of grant of such Stock Option. A Stock Appreciation Right shall terminate and no longer be exercisable upon the termination or exercise of the related Stock Option. A Stock Appreciation Right may be exercised by an optionee in accordance with Section 6(b) by surrendering the applicable portion of the related Stock Option in accordance with procedures established by the Committee. Upon such exercise and surrender, the optionee shall be entitled to receive an amount determined in the manner prescribed in Section 6(b). Stock Options which have been so surrendered shall no longer be exercisable to the extent the related Stock Appreciation Rights have been exercised. (b) Terms and Conditions. Stock Appreciation Rights shall be subject to such terms and conditions as shall be determined by the Committee, including the following: (i) Stock Appreciation Rights shall be exercisable only at such time or times and to the extent that the Stock Options to which they relate are exercisable in accordance with the provisions of Section 5 and this Section 6. (ii) Upon the exercise of a Stock Appreciation Right, an optionee shall be entitled to receive an amount in cash, shares of Stock or both equal in value to the excess of the Fair Market Value of one share of Stock over the option price per share specified in the related Stock Option multiplied by the number of shares in respect of which the Stock Appreciation Right shall have been exercised, with the Committee having the right to determine the form of payment. In the case of Stock Appreciation Rights relating to Stock Options held by optionees who are actually or potentially subject to Section 16(b) of the Exchange Act, the Committee: (1) may require that such Stock Appreciation Rights be exercised for cash only in accordance with the applicable "window period" provisions of Rule 16b-3; and (2) in the case of Stock Appreciation Rights relating to Non- Qualified Stock Options, may provide that any amount to be paid in cash upon exercise of such Stock Appreciation Rights during a Rule 16b-3 "window period" shall be based on the -10- highest of the daily means between the highest and lowest reported sales prices of the Stock on the New York Stock Exchange or other national securities exchange on which the shares are listed or on NASDAQ, as applicable, occurring during such "window period". (iii) Stock Appreciation rights shall be transferable only to permitted transferees of the underlying Stock Option in accordance with Section 5(e). SECTION 7. Restricted Stock. (a) Administration. Shares of Restricted Stock may be awarded either alone or in addition to other Awards granted under the Plan. The Committee shall determine the officers and employees to whom and the time or times at which grants of Restricted Stock will be awarded, the number of shares to be awarded to any participant, the time or times within which such Awards may be subject to forfeiture and any other terms and conditions of the Awards, in addition to those contained in Section 7(c). The Committee may condition the grant of Restricted Stock upon the attainment of specified performance goals of the participant or of the Company or subsidiary, division or department of the Company for or within which the participant is primarily employed or upon such other factors or criteria as the Committee shall determine. The provisions of Restricted Stock Awards need not be the same with respect to each recipient. (b) Awards and Certificates. Shares of Restricted Stock shall be evidenced in such manner as the Committee may deem appropriate, including book-entry registration or issuance of one or more stock certificates. Any certificate issued in respect of shares of Restricted Stock shall be registered in the name of such participant and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Award, substantially in the following form: "The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the 1993 Stock Incentive Plan and a Restricted Stock Agreement. Copies of such Plan and Agreement are on file at the offices of Borg-Warner Security Corporation, 200 South Michigan Avenue, Chicago, Illinois 60604." The Committee may require that the certificates evidencing such shares be held in custody by the Company until the restrictions thereon shall have lapsed and that, as a condition of any Award of Restricted Stock, the participant shall have delivered a stock power, endorsed in blank, relating to the Stock covered by such Award. -11- (c) Terms and Conditions. Shares of Restricted Stock shall be subject to the following terms and conditions: (i) Subject to the provisions of the Plan and the Restricted Stock Agreement referred to in Section 7(c)(vi), during a period set by the Committee, commencing with the date of such Award (the "Restriction Period"), the participant shall not be permitted to sell, assign, transfer, pledge or otherwise encumber shares of Restricted Stock. The Committee may provide for the lapse of such restrictions in installments or otherwise and may accelerate or waive such restrictions, in whole or in part, in each case based on period of service, performance of the participant or of the Company or the subsidiary, division or department for which the participant is employed or such other factors or criteria as the Committee may determine. (ii) Except as provided in this paragraph (ii) and Section 7(c)(i) and the Restricted Stock Agreement, the participant shall have, with respect to the shares of Restricted Stock, all of the rights of a stockholder of the Company holding the class or series of Stock that is the subject of the Restricted Stock, including, if applicable, the right to vote the shares and the right to receive any cash dividends. If so determined by the Committee in the applicable Restricted Stock Agreement and subject to Section 11(f) of the Plan, (1) cash dividends on the shares of Stock that are the subject of the Restricted Stock Award shall be automatically deferred and reinvested in additional Restricted Stock, and (2) dividends payable in Stock shall be paid in the form of Restricted Stock. (iii) Except to the extent otherwise provided in the applicable Restricted Stock Agreement and Sections 7(c)(i), 7(c)(iv) and 8(a)(ii), upon a participant's Termination of Employment for any reason during the Restriction Period, all shares still subject to restriction shall be forfeited by the participant. (iv) Except to the extent otherwise provided in Section 8(a)(ii), in the event of an involuntary Termination of Employment of a participant for any reason (other than for Cause), the Committee shall have the discretion to waive in whole or in part any or all remaining restrictions with respect to any or all of such participant's shares of Restricted Stock. (v) If and when the Restriction Period expires without a prior forfeiture of the Restricted Stock subject to such Restriction Period, unlegended certificates for such shares shall be delivered to the participant. (vi) Each Award shall be confirmed by, and be subject to the terms of, a Restricted Stock Agreement. -12- SECTION 8. Change In Control Provisions. (a) Impact of Event. Notwithstanding any other provision of the Plan to the contrary, in the event of a Change in Control: (i) Any Stock Options and Stock Appreciation Rights outstanding as of the date such Change in Control is determined to have occurred and not then exercisable and vested shall become fully exercisable and vested to the full extent of the original grant. (ii) The restrictions applicable to any Restricted Stock shall lapse, and such Restricted Stock shall become free of all restrictions and become fully vested and transferable to the full extent of the original grant. (b) Definition of Change in Control. For purposes of the Plan, a "Change in Control" shall mean the happening of any of the following events: (i) An acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (1) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (2) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); excluding, however, the following: (1) any acquisition directly from the Company, other than an acquisition by virtue of the exercise of a conversion privilege unless the security being so converted was itself acquired directly from the Company, (2) any acquisition by the Company, (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (4) any acquisition by any Person pursuant to a transaction which complies with clauses (1), (2) and (3) of subsection (iii) of this Section 8(b); or (ii) A change in the composition of the Board such that the individuals who, as of the effective date of the Plan, constitute the Board (such Board shall be hereinafter referred to as the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, for purposes of this Section 8(b), that any individual who becomes a member of the Board subsequent to such effective date, whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso) shall be considered as though such individual were a member of the Incumbent Board; but, provided further, that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or -13- threatened solicitation of proxies or consents by or on behalf of a Person other than the Board shall not be so considered as a member of the Incumbent Board; or (iii) The approval by the shareholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company ("Corporate Transaction"); excluding, however, such a Corporate Transaction pursuant to which (1) all or substantially all of the individuals and entities who are the beneficial owners, respectively, of the outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than 60% of, respectively, the outstanding shares of common stock, and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Corporate Transaction (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction, of the outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (2) no Person (other than the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or such corporation resulting from such Corporate Transaction) will beneficially own, directly or indirectly, 20% or more of, respectively, the outstanding shares of common stock of the corporation resulting from such Corporate Transaction or the combined voting power of the outstanding voting securities of such corporation entitled to vote generally in the election of directors except to the extent that such ownership existed with respect to the Company prior to the Corporate Transaction and (3) individuals who were members of the Incumbent Board will constitute at least a majority of the members of the board of directors of the corporation resulting from such Corporate Transaction; or (iv) The approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. (c) Change in Control Price. For purposes of the Plan, "Change in Control Price" means the higher of (i) the highest reported sales price, regular way, of a share of Stock in any transaction reported on the New York Stock Exchange Composite Tape or other national securities exchange on which such shares are listed or on NASDAQ, as applicable, during the 60-day period prior to and including the date of a Change in Control and (ii) if the Change in Control is the result of a tender or exchange offer or a Corporate Transaction, the highest price per share of Stock paid in such tender or exchange offer or Corporate Transaction; provided, however, that (x) in the case of a Stock Option which (A) is held by an optionee who is an officer or director of the Company and is subject to Section 16(b) of the Exchange Act and (B) was granted within 240 days of the Change in Control, then the Change in Control Price for such Stock Option shall be the Fair Market Value of the Stock on the date such Stock Option -14- is exercised or cancelled and (y) in the case of Incentive Stock Options and Stock Appreciation Rights relating to Incentive Stock Options, the Change in Control Price shall be in all cases the Fair Market Value of the Stock on the date such Incentive Stock Option or Stock Appreciation Right is exercised. To the extent that the consideration paid in any such transaction described above consists all or in part of securities or other non-cash consideration, the value of such securities or other non-cash consideration shall be determined in the sole discretion of the Board. SECTION 9. Term, Amendment and Termination. The Plan will terminate on December 31, 2003. Under the Plan, Awards outstanding as of December 31, 2003 shall not be affected or impaired by the termination of the Plan. The Board may amend, alter, or discontinue the Plan, but no amendment, alteration or discontinuation shall be made which would (i) impair the rights of an optionee under a Stock Option or a recipient of a Stock Appreciation Right or Restricted Stock Award theretofore granted without the optionee's or recipient's consent, except such an amendment made to cause the Plan to qualify for the exemption provided by Rule 16b-3, or (ii) disqualify the Plan from the exemption provided by Rule 16b-3. In addition, no such amendment shall be made without the approval of the Company's stockholders to the extent such approval is required by law or agreement. The Committee may amend the terms of any Stock Option or other Award theretofore granted, prospectively or retroactively, but no such amendment shall impair the rights of any holder without the holder's consent except such an amendment made to cause the Plan or Award to qualify for the exemption provided by Rule 16b-3. The Committee may also substitute new Stock Options for previously granted Stock Options, including previously granted Stock Options having higher option prices. Subject to the above provisions, the Board shall have authority to amend the Plan to take into account changes in law and tax and accounting rules, as well as other developments and to grant Awards which qualify for beneficial treatment under such rules without stockholder approval. SECTION 10. Unfunded Status of Plan. It is presently intended that the Plan constitute an "unfunded" plan for incentive and deferred compensation. The Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or make payments; provided, however, that unless the Committee otherwise determines, the existence of such trusts or other arrangements is consistent with the "unfunded" status of the Plan. -15- SECTION 11. General Provisions. (a) The Committee may require each person purchasing or receiving shares pursuant to an Award to represent to and agree with the Company in writing that such person is acquiring the shares without a view to the distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. All certificates for shares of Stock or other securities delivered under the Plan shall be subject to such stock transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Commission, any stock exchange upon which the Stock is then listed and any applicable Federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (b) Nothing contained in the Plan shall prevent the Company or any subsidiary or Affiliate from adopting other or additional compensation arrangements for its employees. (c) The adoption of the Plan shall not confer upon any employee any right to continued employment nor shall it interfere in any way with the right of the Company or any subsidiary or Affiliate to terminate the employment of any employee at any time. (d) No later than the date as of which an amount first becomes includible in the gross income of the participant for Federal income tax purposes with respect to any Award under the Plan, the participant shall pay to the Company, or make arrangements satisfactory to the Company regarding the payment of, any Federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount. Unless otherwise determined by the Committee, withholding obligations may be settled with Stock, including Stock that is part of the Award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements, and the Company, its Subsidiaries and its Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the participant. The Committee may establish such procedures as it deems appropriate, including the making of irrevocable elections, for the settlement of withholding obligations with Stock. (e) At the time of grant, the Committee may provide in connection with any grant made under the Plan that the shares of Stock received as a result of such grant shall be subject to a right of first refusal pursuant to which the participant shall be required to offer to the Company any shares that the participant wishes to sell at the then Fair Market Value of the Stock, subject to such other terms and conditions as the Committee may specify at the time of grant. (f) The reinvestment of dividends in additional Restricted Stock at the time of any dividend payment shall only be permissible if sufficient shares of Stock are available under Section 3 for such reinvestment (taking into account then outstanding Stock Options and other Awards). -16- (g) The Committee shall establish such procedures as it deems appropriate for a participant to designate a beneficiary to whom any amounts payable in the event of the participant's death are to be paid. (h) The Plan and all Awards made and actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Delaware. SECTION 12. Effective Date of Plan. The Plan shall be effective on the date it is approved by the shareholders of the Company. SECTION 13. Director Stock Options. (a) Each director of the Company who is not otherwise an employee of the Company, any of its subsidiaries or Merrill Lynch Capital Partners, Inc. shall be granted Non-Qualified Stock Options to purchase 10,000 shares of Stock having an exercise price per share equal to the Fair Market Value of the Stock on November 16, 1993. Any person who initially becomes a director after November 16, 1993 shall automatically be awarded a grant of Non- Qualified Stock Options to purchase 10,000 shares of Stock having an exercise price equal to 100% of the Fair Market Value of the Stock as of the date such person becomes a director. All Non-Qualified Stock Options granted pursuant to this paragraph shall be exercisable in accordance with the following schedule, if as of each such date such director is still a director of the Company:
Anniversary Date Cumulative Percentage of Grant Exercisable ---------------- --------------------- First 20 Second 40 Third 60 Fourth 80 Fifth 100
(b) An automatic director Stock Option shall be granted hereunder only if as of each date of grant (or, in the case of any initial grant, from and after the effective date of the Plan) the director (i) is not otherwise an employee of the Company, any Affiliate or Merrill Lynch Capital Partners, Inc., (ii) has not been an employee of the Company or any subsidiary for any part of the preceding fiscal year, and (iii) has served on the Board continuously since the commencement of his term. -17- (c) Each holder of a Stock Option granted pursuant to this Section 13 shall also have the rights specified in Section 5(k). (d) In the event that the number of shares of Stock available for future grant under the Plan is insufficient to make all automatic grants required to be made on such date, then all non-employee directors entitled to a grant on such date shall share ratably in the number of options on shares available for grant under the Plan. (e) The provisions of paragraph (a) of this Section 13 may not be amended more often than once every six months. Except as expressly provided in this Section 13, any Stock Option granted hereunder shall be subject to the terms and conditions of the Plan as if the grant were made pursuant to Section 5 hereof. -18- EX-10.4 3 PERFORMANCE SHARE PLAN EXHIBIT 10.4 BORG-WARNER SECURITY CORPORATION PERFORMANCE SHARE PLAN (As amended through July 8, 1997) TABLE OF CONTENTS - -----------------
I. GENERAL.................................................... 1 1.1 Purpose.............................................. 1 1.2 Effective Date....................................... 1 II. DEFINITIONS................................................ 1 2.1 "Beneficiary"........................................ 1 2.2 "Board of Directors"................................. 1 2.3 "Change in Control".................................. 1 2.4 "Code"............................................... 2 2.5 "Committee".......................................... 2 2.6 "Common Stock"....................................... 2 2.7 "Company"............................................ 3 2.8 "Covered Employee"................................... 3 2.9 "Disability"......................................... 3 2.10 "Disinterested Person"............................... 3 2.11 "Eligibility Period"................................. 3 2.12 "Fair Market Value".................................. 3 2.13 "Normal Retirement".................................. 3 2.14 "Participant"........................................ 3 2.15 "Performance Goals".................................. 3 2.16 "Performance Period"................................. 3 2.17 "Performance Share".................................. 4 2.18 "Plan"............................................... 4 2.19 "Pro-rated" or "Pro-rata"............................ 4 III. ELIGIBILITY AND PARTICIPATION.............................. 4 3.1 Eligibility.......................................... 4 3.2 Participation in Performance Share Awards............ 4 IV. PLAN DESIGN................................................ 5 4.1 Eligibility Period................................... 5 4.2 Performance Period................................... 5 4.3 Performance Share Awards............................. 5 4.4 Performance Goals.................................... 5 4.5 Available Common Stock............................... 6 4.6 Adjustment to Shares................................. 6 4.7 Maximum Award........................................ 6 4.8 Committee Discretion to Adjust Awards................ 7 V. PAYMENT.................................................... 7 5.1 Committee Determination of Common Stock Payable...... 7
i
5.2 Timing and Form of Payment........................... 7 5.3 Distribution upon Termination of Employment.......... 8 5.4 Beneficiary Designation.............................. 9 5.5 Securities Exchange Act of 1934 Restrictions......... 9 VI. ADMINISTRATION............................................. 9 6.1 Committee............................................ 9 6.2 General Rights, Powers, and Duties of Committee...... 9 6.3 Information to be Furnished to Committee............. 10 6.4 Responsibility and Indemnification................... 10 VII. AMENDMENT AND TERMINATION.................................. 10 7.1 Amendment............................................ 10 7.2 Company's Right to Terminate......................... 11 VIII. MISCELLANEOUS.............................................. 11 8.1 No Implied Rights; Rights on Termination of Service.. 11 8.2 No Right to Company Assets........................... 11 8.3 No Employment Rights................................. 11 8.4 Other Benefits....................................... 11 8.5 Offset............................................... 11 8.6 Non-assignability.................................... 12 8.7 Notice............................................... 12 8.8 Governing Laws....................................... 12 8.9 Gender and Number.................................... 12 8.10 Severability......................................... 12
ii I. GENERAL 1.1. Purpose. The purposes of the Plan are to retain officers and other key employees, to support the achievement of the Company's strategic business objectives, and to encourage increased ownership of Company stock by officers and other key employees by providing to such persons competitive long-term incentive opportunities that are linked to the profitability of the Company's business and increases in stockholder value. 1.2. Effective Date. The Plan shall become effective as of January 1, 1996, subject to its approval by the Company's stockholders. II. DEFINITIONS 2.1 "Beneficiary" means the person or persons so designated by a Participant pursuant to Section 5.4. 2.2 "Board of Directors" means the Board of Directors of the Company. 2.3 A "Change in Control" of the Company shall be deemed to have occurred upon the happening of any of the following events: (i) An acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either (1) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (2) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); excluding, however, the following: (1) any acquisition directly from the Company, other than an acquisition by virtue of the exercise of a conversion privilege unless the security being so converted was itself acquired directly from the Company, (2) any acquisition by the Company, (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (4) any acquisition by any Person pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii) hereof; or (ii) A change in the composition of the Board such that the individuals who, as of July 8, 1997, constitute the Board (such Board shall be hereinafter referred to as the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, for purposes of this definition, that any individual who becomes a member of the Board subsequent to such date, whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso) shall be considered as though such individual were a member of the Incumbent Board; but, provided further, that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board shall not be so considered as a member of the Incumbent Board; or (iii) The approval by the shareholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company ("Corporate Transaction"); excluding, however, such a Corporate Transaction pursuant to which (A) all or substantially all of the individuals and entities who are the beneficial owners, respectively, of the outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than 60% of, respectively, the outstanding shares of common stock, and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Corporate Transaction (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction, of the outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (other than the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or such corporation resulting from such Corporate Transaction) will beneficially own, directly or indirectly, 20% or more of, respectively, the outstanding shares of common stock of the corporation resulting from such Corporate Transaction or the combined voting power of the outstanding voting securities of such corporation entitled to vote generally in the election of directors except to the extent that such ownership existed with respect to the Company prior to the Corporate Transaction and (C) individuals who were members of the Incumbent Board will constitute at least a majority of the members of the board of directors of the corporation resulting from such Corporate Transaction; or (iv) The approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 2.4 "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. 2.5 "Committee" means the committee referred to in Section 6.1. 2.6 "Common Stock" means common stock, par value $.01 per share, of the Company. -2- 2.7 "Company" means Borg-Warner Security Corporation, a Delaware corporation. 2.8 "Covered Employee" means any Participant who is or may be a "covered employee," within the meaning of Section 162(m)(3) of the Code, in the year in which the payment of any shares of Common Stock in satisfaction of a Performance Share award will be taxable to such Participant. 2.9 "Disability" shall have the same meaning as under the Company-sponsored long-term disability plan under which the applicable Participant is then eligible to participate. 2.10 "Disinterested Person" means a member of the Board of Directors who qualifies as (i) a "disinterested person," as defined in Rule 16b-3(c)(2), as promulgated by the Securities Exchange Commission under the Exchange Act, or any successor definition adopted by the Securities Exchange Commission, and as (ii) an "outside director," as defined in Section 1.162-27(e)(3) of the Treasury Regulations issued under Section 162(m) of the Code, or any successor definition adopted by the Department of the Treasury. 2.11 "Eligibility Period" means a period, as determined by the Committee pursuant to Section 4.1. 2.12 "Fair Market Value" means as of any given date the mean between the highest and lowest reported sales prices of Common Stock on the New York Stock Exchange Composite Tape or, if not listed on such exchange, on any other national securities exchange on which such Common Stock is listed or on NASDAQ. If there is no regular public trading market for such Common Stock, the Fair Market Value of such Common Stock shall be determined by the Committee in good faith. 2.13 "Normal Retirement" means termination of employment after attainment of age 65. However, the Committee, within its discretion, may determine that a Participant who terminates employment prior to age 65 has terminated by virtue of Normal Retirement. 2.14 "Participant" means a person who is designated, pursuant to Article III, to be eligible to receive benefits under the Plan. 2.15 "Performance Goals" means the performance standards established by the Committee pursuant to Section 4.4. 2.16 "Performance Period" means a period of service, as determined pursuant to Section 4.2, over which the extent of achievement of established Performance Goals will be measured. For purposes of applying to Covered Employees the various rules of the performance-based compensation exemption under Section 162(m)(4)(C) of the Code and the Treasury Regulations issued thereunder, the Performance Period shall be the "period of service to which the Performance Goals relate" (as defined in Treasury Regulation Section 1.162-27(e)(2)). -3- 2.17 "Performance Share" means an award, designated in terms of a share of Common Stock, granted pursuant to the Plan. 2.18 "Plan" means this Borg-Warner Security Corporation Performance Share Plan, as amended from time to time. 2.19 "Pro-rated" or "Pro-rata" means, for purposes of determining the amount of Common Stock payable to a Participant whose eligibility to participate in the Plan with respect to an Eligibility Period ceases prior to the end of such Eligibility Period for any of the reasons described in Section 3.2 or subsection (a), (b), or (c) of Section 5.3, the percentage to be applied to the Common Stock that would have been payable at the end of the Performance Period to such Participant if he had been eligible to participate for the entire Eligibility Period. Such percentage shall equal the number of months (rounded to the nearest whole month) of the Eligibility Period during which the Participant was designated by the Committee as eligible to participate in the Plan divided by the number of months (rounded to the nearest whole month) in such Eligibility Period. A Participant who, pursuant to Section 3.2, is designated as eligible to participate in the Plan after the applicable Eligibility Period has commenced, shall, for purposes of this Section 2.18, be deemed to have been eligible as of the beginning of such Eligibility Period; provided, however, that the Committee shall, in accordance with its authority under Section 4.8, have the discretion to reduce the Pro-rated Common Stock award that is otherwise payable to such Participant to account for such late commencement of participation. III. ELIGIBILITY AND PARTICIPATION 3.1 Eligibility. Participation in the Plan shall be limited to officers and other key employees of the Company or any of its subsidiaries or other affiliates who are designated to be eligible by the Committee. 3.2 Participation in Performance Share Awards. The Committee will determine the persons who will participate for each Eligibility Period under the Plan. Subject to Section 4.3, after an Eligibility Period has commenced, persons may be designated as eligible to participate in the Plan with respect to such Eligibility Period. Persons who have been selected for participation in a given Eligibility Period may subsequently be designated as ineligible to participate in the Plan for the remainder of such Eligibility Period. Such persons may remain eligible to receive Pro-rated distributions of Common Stock with respect to such Eligibility Period, as determined by the Committee in its sole discretion. The grant of Performance Shares with respect to a Performance Period contained in any Eligibility Period does not guarantee participation in subsequent Eligibility Periods. -4- IV. PLAN DESIGN 4.1 Eligibility Period. An Eligibility Period is a certain period of time, as determined by the Committee, over which eligibility to receive benefits under the Plan shall be measured. The initial Eligibility Period under the Plan shall begin on January 1, 1996 and terminate on December 31, 1998. Subsequent Eligibility Periods under the Plans shall commence and terminate as determined by the Committee in its sole discretion. 4.2 Performance Period. Each Eligibility Period under the Plan shall include a Performance Period which shall be a specified period of service over which the achievement of applicable Performance Goals will be measured. The initial Performance Period under the Plan shall begin on January 1, 1998 and terminate on December 31, 1998. Subsequent Performance Periods shall commence and terminate as determined by the Committee; provided that each such Performance Period shall commence coincident with or after the commencement of the corresponding Eligibility Period and shall terminate coincident with or prior to the termination of the corresponding Eligibility Period. 4.3 Performance Share Awards. On or about the commencement of each Eligibility Period under the Plan, the Committee shall establish and grant Performance Shares to each Participant in the Plan for such Eligibility Period. The Committee may also grant Performance Shares to persons determined to be eligible for participation after the commencement of any Eligibility Period. Notwithstanding the foregoing, no Performance Shares shall be granted to Covered Employees on or after the 90th day of the Performance Period contained within the applicable Eligibility Period or, if earlier, after 25% of such Performance Period has elapsed. Performance Shares must be granted to Covered Employees at a time when the outcome of the Performance Goals established or to be established for the applicable Performance Period is substantially uncertain. The Performance Shares granted to any Covered Employee and the terms and conditions applicable to such Performance Shares must be finalized in writing by the Committee on or prior to the applicable adjustment deadline described in the preceding sentences. Each grant of Performance Shares under the Plan shall be evidenced by a written "Notice of Award," which shall be signed by an authorized officer of the Company and by the Participant and shall contain such terms and conditions as are approved by the Committee. Such terms and conditions need not be the same in all cases. 4.4 Performance Goals. (a) Performance Goals with respect to each Performance Period shall be established by the Committee. The Committee may in its discretion adjust the terms of such Performance Goals; provided that Performance Goals applied to Covered Employees ("Covered Employees' Performance Goals") shall not be adjusted on or after the 90th day of the applicable Performance Period or, if earlier, after 25% of the applicable Performance Period has elapsed. No Covered Employees' Performance Goals shall be adjusted at a time when the outcome of such Performance Goals is no longer substantially uncertain. -5- Covered Employees' Performance Goals must be finalized in writing by the Committee on or prior to the applicable adjustment deadline described in the preceding sentences. (b) The Performance Goals set by the Committee shall be based on specified criteria as determined by the Committee, which shall specify the manner in which such Performance Goals shall be calculated. Covered Employees' Performance Goals shall be based on objective business criteria, which shall include one or more of the following: earnings per share, total shareholder return, return on equity, return on capital, market share, stock price, sales, costs, net income, cash flow, retained earnings, results of customer satisfaction surveys, customer retention, employee retention, aggregate product price and other product price measures, safety record, service reliability, and operating and maintenance cost management. Performance Goals also may be based upon the attainment of specified levels of performance of the Company under one or more of the measures described above relative to the performance of other corporations. (c) All of the provisions of this Section 4.4 are subject to the requirement that all Covered Employees' Performance Goals shall be objective performance goals satisfying the requirement for "performance-based compensation" within the meaning of Section 162(m)(4) of the Code and the Treasury Regulations issued thereunder. (d) Nothwithstanding any other provision of the Plan to the contrary, in the event of a Change in Control, any award of Performance Shares outstanding as of the date such Change in Control is determined to have occurred and not then exercisable and vested shall become fully exercisable and vested to the fullest extent of the original grant as though all Performance Goals had been satisfied. 4.5 Available Common Stock. The maximum number of shares of Common Stock which shall be available for distribution in satisfaction of awards under the Plan during its term shall not exceed 400,000, subject to adjustment as provided in Section 4.6. The shares of Common Stock available for issuance under the Plan may be authorized and unissued shares or treasury shares. 4.6 Adjustment to Shares. In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, stock split, extraordinary distribution with respect to Common Stock or other change in corporate structure affecting such Common Stock, the Committee may make such substitution or adjustments in the aggregate number and kind of shares reserved for issuance under the Plan or in the number and kind of shares subject to outstanding Performance Share grants under the Plan. The Committee shall make such substitutions or adjustments as in its discretion it determines to be appropriate and equitable to prevent dilution or enlargement of rights hereunder; provided, however, that the number of shares of Common Stock subject to any Performance Share award shall always be a whole number. 4.7 Maximum Award. The maximum number of shares of Common Stock that may be issued to any Covered Employee with respect to any Eligibility Period pursuant to any Performance -6- Share award is 95,000 (subject to adjustment as provided in Section 4.6). This limit includes any portion or amount of Common Stock that is withheld for taxes (as described in Section 5.2). 4.8 Committee Discretion to Adjust Awards. At any time prior to the time the Committee determines, pursuant to Section 5.1, the amount of shares of Common Stock that are to be paid to any Participant in satisfaction of a Performance Share award hereunder, the Committee shall have the authority to modify, amend, or adjust the terms and conditions of such Performance Share award, the terms and conditions of the corresponding Performance Goals, and/or the amount of Common Stock payable. However, the Committee shall have no authority to increase directly or indirectly or to otherwise adjust upwards the amount of Common Stock payable to a Covered Employee with respect to a particular Performance Share award or to take any other action to the extent that such action or the Committee's ability to take such action would cause any payment under the Plan to any Covered Employee to fail to qualify as "performance-based compensation" within the meaning of Code Section 162(m)(4) and the Treasury Regulations issued thereunder. V. PAYMENT 5.1 Committee Determination of Common Stock Payable. After a Performance Period has ended, each Participant who has been granted Performance Shares and satisfied the Performance Goals with respect to such Performance Period shall be entitled to receive a specified percentage of the value thereof in shares of Common Stock as determined by the Committee. The Committee shall determine the extent to which the Performance Goals set pursuant to Section 4.4 have been met, the applicable percentage (which may exceed 100%) to be applied, and applying such percentage, the number of shares of Common Stock to be received by the Participant (as Pro-rated in accordance with Sections 2.18, 3.2, and/or 5.3, if applicable). With respect to Performance Shares granted to Covered Employees, no payment of Common Stock shall be made hereunder prior to written certification by the Committee that the applicable Performance Goal or Goals have been satisfied to a particular extent for the Performance Period, and no Common Stock shall be awarded unless a preestablished minimum level of achievement of the Performance Goals has been met. The date on which the Committee determines the number of shares of Common Stock payable to a Participant shall be the date on which such Participant will become the owner of such shares, regardless of when the underlying stock certificate or certificates are actually delivered to such Participant, and such Participant will enjoy all rights of ownership of such shares of Common Stock as of that date (the "Ownership Date"). 5.2 Timing and Form of Payment. Shares of Common Stock payable to Participants pursuant to Section 5.1 shall be distributed as follows: -7- (a) Shares of Common Stock to be distributed shall be converted to a dollar amount equal to the number of such shares multiplied by the Fair Market Value of Common Stock on the Ownership Date. (b) The Company shall have the right to deduct from all Common Stock distributions hereunder any federal, state, or local taxes required by law to be withheld with respect to such distributions. Accordingly, the amount of federal, state, and/or local taxes required to be withheld by the Company with respect to the dollar amount determined pursuant to subsection (a) above shall, for purposes of satisfying these withholding obligations, be deducted from this dollar amount and paid by the Company to the appropriate taxing authorities. (c) The remainder of this dollar amount shall be paid to the Participant in shares of Common Stock as soon as practicable following the end of the Performance Period. The number of shares distributed shall be determined by dividing the remaining dollar amount by the Fair Market Value of Common Stock on the Ownership Date. 5.3 Distribution upon Termination of Employment. (a) Death. If a Participant in the Plan dies before the end of an Eligibility Period for which Performance Shares have been granted to him, such Participant's Beneficiary will be eligible for a Pro-rated portion of the shares of Common Stock that would have otherwise been payable to the Participant after the end of the applicable Performance Period. This distribution, if any is payable, will be made to the Beneficiary in the same form and at the same time that all other Participants under the Plan receive their distributions with respect to that Performance Period. (b) Disability. If a Participant in the Plan, upon becoming Disabled, terminates employment with the Company before the end of an Eligibility Period for which Performance Shares have been granted to him, the Participant will be eligible for a Pro-rated portion of the shares of Common Stock that would have otherwise been payable to him after the end of the applicable Performance Period. This distribution, if any is payable, will be made to the Participant in the same form and at the same time that all other Participants under the Plan receive their distributions with respect to that Performance Period. (c) Normal Retirement. If a Participant in the Plan terminates employment upon attaining Normal Retirement before the end of an Eligibility Period for which Performance Shares have been granted to him, the Participant will be eligible for a Pro-rated portion of the shares of Common Stock that would have otherwise been payable to him after the end of the applicable Performance Period. This distribution, if any is payable, will be made to the Participant in the same form and at the same time that all other Participants under the Plan receive their distributions with respect to that Performance Period. -8- (d) Other Termination of Employment. If, before the end of an Eligibility Period for which Performance Shares have been granted to him, a Participant in the Plan incurs a termination of employment for any reason other than those specified in subsections (a)-(c) of this Section 5.3, whether voluntary or involuntary, he shall forfeit all rights to receive any payment of shares of Common Stock with respect to such Eligibility Period. 5.4. Beneficiary Designation. A Participant may designate a Beneficiary who is to receive, upon his death, the distributions that otherwise would have been paid to him. All designations shall be in writing and shall be effective only if and when delivered to the Director of the Compensation Department of the Company during the lifetime of the Participant. If a Participant designates a Beneficiary without providing in the designation that the Beneficiary must be living at the time of each distribution, the designation shall vest in all of the distribution whether payable before or after the Beneficiary's death, and any distributions remaining upon the Beneficiary's death shall be made to the Beneficiary's estate. A Participant may from time to time during his lifetime change his Beneficiary by a written instrument delivered to the Director of the Compensation Department of the Company. In the event a Participant shall not designate a Beneficiary as aforesaid, or if for any reasons such designation shall be ineffective, in whole or in part, the distribution that otherwise would have been paid to such Participant shall be paid to his estate, and in such event the term "Beneficiary" shall include his estate. 5.5. Securities Exchange Act of 1934 Restrictions. Notwithstanding any other provisions of the Plan, to the extent necessary to exempt Common Stock distributions under the Plan from the short-swing liability provisions of Section 16(b) of the Securities Exchange Act of 1934 by complying with Rule 16b-3 or any other applicable rule or regulation thereunder, Common Stock acquired by Participants in satisfaction of Performance Share awards hereunder must not be sold for at least six months after its acquisition, except in the case of the acquisition of such Common Stock hereunder upon the Disability or death of a Participant. VI. ADMINISTRATION 6.1 Committee. The Plan shall be administered by the Compensation Committee of the Board of Directors, or such other Committee of the Board of Directors, composed exclusively of not less than two Disinterested Persons, each of whom shall be appointed by and serve at the pleasure of the Board of Directors. The Committee may designate person(s) who are Company employees to oversee the day to day administration of the Plan. 6.2 General Rights, Powers, and Duties of Committee. The Committee shall be responsible for the management, operation, and administration of the Plan. Subject to the limitations contained in Section 4.8 and to the remaining terms of the Plan, the Committee shall, in addition to those provided elsewhere in the Plan, have the following powers, rights, and duties: -9- (a) To maintain records concerning the Plan sufficient to prepare reports, returns and other information required by the Plan or by law; (b) To direct the payment of benefits under the Plan, and to give such other directions and instructions as may be necessary for the proper administration of the Plan; and (c) To be responsible for the preparation, filing and disclosure on behalf of the Plan of such documents and reports as are required by any applicable federal or state law. The Committee shall also have the authority to adopt, alter, and repeal such administrative rules, guidelines, and practices governing the Plan as it shall, from time to time, deem advisable, to interpret the terms and provisions of the Plan and any award issued under the Plan (and any Notice of Award or other agreement relating thereto), and to otherwise supervise the administration of the Plan. Any determination made by the Committee pursuant to the provisions of the Plan with respect to any grants, payments, or other transactions under the Plan shall be made in the sole discretion of the Committee at the time of the grant, payment, or other transaction or, unless in contravention of any express term of the Plan, at any time thereafter. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Plan Participants. 6.3 Information to be Furnished to Committee. Participants and their Beneficiaries shall furnish to the Committee such evidence, data, or information and execute such documents as the Committee requests. 6.4 Responsibility and Indemnification. No member of the Committee or of the Board of Directors or any person who is designated to oversee the day to day administration of the Plan (as provided in Section 6.1) shall be liable to any person for any action taken or omitted in connection with the administration of this Plan unless attributable to his own fraud or willful misconduct; nor shall the Company be liable to any person for any such action unless attributable to fraud or willful misconduct on the part of a director, officer, or employee of the Company within the scope of his Company duties. Each member of the Committee shall be indemnified and held harmless by the Company for any liability arising out of the administration of the Plan, to the maximum extent permitted by law. VII. AMENDMENT AND TERMINATION 7.1 Amendment. The Plan may be amended in whole or in part by the Company, by action of the Board of Directors, at any time. The Committee reserves the unilateral right to change any rule under the Plan if it deems such a change necessary to avoid the application of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), to the Plan. No amendment -10- shall be made without the approval of the Company's stockholders to the extent such approval is required by law or by agreement. 7.2 Company's Right to Terminate. The Company reserves the sole right to terminate the Plan, by action of the Board of Directors, at any time. VIII. MISCELLANEOUS 8.1 No Implied Rights; Rights on Termination of Service. Neither the establishment of the Plan nor any amendment thereof shall be construed as giving any Participant, Beneficiary, or any other person any legal or equitable right unless such right shall be specifically provided for in the Plan or conferred by specific action of the Committee in accordance with the terms and provisions of the Plan. Except as expressly provided in this Plan, the Company shall not be required or be liable to make any payment under the Plan. 8.2 No Right to Company Assets. Neither the Participant nor any other person shall acquire, by reason of the Plan, any right in or title to any assets, funds or property of the Company whatsoever including, without limiting the generality of the foregoing, any specific funds, assets, or other property which the Company, in its sole discretion, may set aside in anticipation of a liability hereunder. Any benefits which become payable hereunder shall be paid from the general assets of the Company. The Participant shall have only a contractual right to the amounts, if any, payable hereunder unsecured by any asset of the Company. Nothing contained in the Plan constitutes a guarantee by the Company that the assets of the Company shall be sufficient to pay any benefit to any person. 8.3 No Employment Rights. Nothing herein shall constitute a contract of employment or of continuing service or in any manner obligate the Company to continue the services of the Participant, shall obligate the Participant to continue in the service of the Company, or shall serve as a limitation of the right of the Company to discharge any of its employees, with or without cause. Nothing herein shall be construed as fixing or regulating the compensation payable to the Participant. 8.4 Other Benefits. No Common Stock paid under the Plan shall be considered compensation for purposes of computing benefits under any "employee benefit plan" (as defined in Section 3(3) of ERISA) of the Company nor affect any benefits or compensation under any other benefit or compensation plan of the Company now or subsequently in effect (except as provided to the contrary in such Company plan). 8.5 Offset. If, at the time payments are to be made hereunder, the Participant or the Beneficiary or both are indebted or obligated to the Company, then the payments under the Plan remaining to be made to the Participant or the Beneficiary or both may, at the discretion of the Company, be reduced by the amount of such indebtedness or obligation, provided, however, that an -11- election by the Company not to reduce any such payment or payments shall not constitute a waiver of its claim for such indebtedness or obligation. 8.6 Non-assignability. Neither the Participant nor any other person shall have any voluntary or involuntary right to commute, sell, assign, pledge, anticipate, mortgage, or otherwise encumber, transfer, hypothecate, or convey in advance of actual receipt the amounts, if any payable hereunder or any part thereof, which are expressly declared to be unassignable and non-transferable. No part of the amounts payable prior to actual payment shall be subject to seizure or sequestration for the payment of any debts, judgments, alimony, or separate maintenance owed by the Participant or any other person, or be transferable by operation of law in the event of the Participant's or any other person's bankruptcy or insolvency. 8.7 Notice. Any notice required or permitted to be given under the Plan shall be sufficient if in writing and hand delivered, sent by registered or certified mail, or sent by facsimile to the Company at its principal office, directed to the attention of the Committee c/o the Director of the Compensation Department of the Company. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail or facsimile, as of the date shown on the postmark, facsimile, or the receipt for registration or certification. 8.8 Governing Laws. The Plan and all awards made and actions taken under the Plan shall be governed and construed according to the laws of the State of Delaware. 8.9 Gender and Number. Where appropriate, references in this Plan to the masculine shall include the feminine, and references to the singular shall include the plural. 8.10 Severability. In the event any provision of the Plan shall be held legally invalid for any reasons, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. -12- EX-10.5 4 EXECUTIVE OFFICER INCENTIVE PLAN EXHIBIT 10.5 BORG-WARNER SECURITY CORPORATION EXECUTIVE OFFICER INCENTIVE PLAN (Effective January 1, 1997) ARTICLE I GENERAL 1.1. Purpose. The purpose of the Plan is to motivate and reward executive participants competitively for the attainment of specific annual performance objectives. The Plan is intended to attract and retain high-quality executive participants by linking a significant portion of their annual compensation to the accomplishment of financial and strategic goals of the Company. 1.2. Effective Date. The Plan shall become effective as of January 1, 1997, subject to its approval by the Company's stockholders. ARTICLE II DEFINITIONS 2.1. "Annual Incentive Award" means the cash amounts established by the Committee pursuant to Section 4.1. 2.2. "Board of Directors" means the Board of Directors of the Company. 2.3. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. 2.4. "Commission" means the Securities and Exchange Commission or any successor agency. 2.5. "Committee" means the committee referred to in Section 6.1. 2.6. "Company" means Borg-Warner Security Corporation, a Delaware corporation. 2.7. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and any successor thereto. 2.8. "Fair Market Value" means, as of any given date, the mean between the highest and lowest reported sales prices of the Stock on the New York Stock Exchange Composite Tape or, if not listed on such exchange, on any other national securities exchange on which the Stock is listed or on NASDAQ. If there is no regular public trading market for such Stock, the Fair Market Value of the Stock shall be determined by the Committee in good faith. 2.9. "Participant" means a person who is designated, pursuant to Section 3.1, to be eligible to receive benefits under the Plan. 2.10. "Performance Goals" means the performance standards established by the Committee pursuant to Section 4.2. 2.11. "Performance Period" means for each Participant, the period beginning on the first day of the applicable calendar year that said Participant was designated by the Company to participate in the Plan and ending on December 31st of that calendar year. For purposes of applying to Covered Employees (as defined in the Code) the various rules of the performance-based compensation exemption under Section 162(m)(4)(C) of the Code and the Treasury Regulations issued thereunder, the Performance Period shall be the "period of service to which the Performance Goals relate" (as defined in Treasury Regulation Section 1.162-27(e)(2)). 2.12. "Plan" means this Borg-Warner Security Corporation Executive Officer Incentive Plan, as amended from time to time. 2.13. "Stock" means common stock, par value $.01 per share, of the Company. 2.14. "Stock Option" means a non-qualified stock option granted under Article V. ARTICLE III ELIGIBILITY AND PARTICIPATION 3.1. Eligibility. Participation in the Plan shall be limited to executive officers of the Company who are designated to be eligible by the Committee. ARTICLE IV ANNUAL INCENTIVE AWARDS 4.1. Annual Incentive Award. (a) On or about the commencement of each Performance Period under the Plan, the Committee shall establish an Annual Incentive Award for each Participant for such Performance Period. Each Annual Incentive Award may have multiple potential award payouts. Each such award payout will correspond with a different Performance Goal. The level of attainment of a Participant's Performance Goals determines the amount of the award that the Company will pay such Participant. Only one Annual Incentive Award shall be established for any one Participant in any Performance Period. (b) All Annual Incentive Awards and corresponding Performance Goals shall be established: (i) For persons designated by the Company to participate in the Plan on or before the first day of the respective calendar year, before April 1st of the Performance Period. (ii) For persons designated by the Company to participate in the Plan after the first day of the respective calendar year, before the day representing one-fourth of the number of days from the day said Participant was first so designated by the Company during the respective calendar year to the subsequent December 31st. In all cases, at such time that the Annual Incentive Awards are established, the outcome of the corresponding Performance Goals must be substantially uncertain. Performance Goals must be finalized in writing by the Committee on or prior to the applicable deadline described in the preceding sentences. -2- 4.2. Performance Goals. (a) The Performance Goals set by the Committee shall be based on specified criteria, as determined by the Committee and shall be based on objective business criteria. The Committee shall establish specific performance targets with respect to the chosen business criteria. The business criteria shall include one or more of the following: earnings per share, total shareholder return, return on equity, return on capital, market share, stock price, sales, costs, net income, cash flow, retained earnings, results of customer satisfaction surveys, shareholder value, aggregate product price and other product price measures, safety record, service reliability, operating and maintenance cost management, and other quantifiable business criteria. Performance Goals also may be based upon the attainment of specified levels of performance of the Company under one or more of the measures described above relative to the performance of other corporations. At the time of establishing Performance Goals, the Committee shall specify the manner in which such Performance Goals shall be calculated. In so doing, the Committee may exclude the impact of certain specified events from the calculation of the Performance Goal. (b) For all Covered Employees, all of the provisions of this Section 4.2 are subject to the requirement that all Performance Goals shall be objective performance goals satisfying the requirement for "performance-based compensation" within the meaning of Section 162(m)(4) of the Code and the Treasury Regulations issued thereunder. 4.3. Maximum Cash Payment Under an Annual Incentive Award. The maximum Annual Incentive Award cash payment that may be made to any Participant with respect to any Performance Period pursuant to this Plan is two times the Participant's gross base salary for the Performance Period. 4.4. Committee Discretion to Adjust Awards. At any time prior to the time the Committee determines, pursuant to Section 4.6, the amount of the Annual Incentive Award to be paid to a Participant hereunder, the Committee shall have the authority to modify, amend, or adjust the terms and conditions of such Annual Incentive Awards, the terms and conditions of the corresponding Performance Goals, the manner in which such Performance Goals are calculated and/or the amount of Annual Incentive Awards payable. However, the Committee shall have no authority to increase directly or indirectly or to otherwise adjust upwards the amount of Annual Incentive Awards payable to a Covered Employee or to take any other action to the extent that such action or the Committee's ability to take such action would cause any payment under the Plan to fail to qualify as "performance-based compensation" within the meaning of Code Section 162(m)(4) and the Treasury Regulations issued thereunder. 4.5. Conflict with Employment Agreements. If the Plan conflicts with any employment agreement between the Company and a Participant, then the terms of the Plan shall control. 4.6. Committee Determination of Annual Incentive Awards Payable. After a Performance Period has ended, each Participant shall be entitled to receive the Annual Incentive Award as -3- determined by the Committee. The Committee shall determine the extent to which (i) the Performance Goals set pursuant to Section 4.2 have been met and (ii) any Annual Incentive Awards are payable. No cash payment shall be made hereunder prior to written certification by the Committee that the applicable Performance Goal(s) have been satisfied to a particular extent for the Performance Period. 4.7. Settlement of Annual Incentive Award. The Company shall pay to each Participant the cash amount determined by the Committee pursuant to Section 4.6 as soon as practicable following such determination; provided that the Company shall have the right to deduct from all payments of Annual Incentive Awards hereunder any federal, state, or local taxes required by law to be withheld with respect to such distributions and pay the applicable amounts to the appropriate taxing authorities. 4.8. Distribution upon Termination of Employment. If a Participant's employment terminates prior to the end of the Performance Period, such Participant will be eligible for a pro-rated portion of the Annual Incentive Award that would have otherwise been payable to the Participant after the end of the applicable Performance Period based upon the number of days that Participant is employed during the applicable Performance Period. Any such distribution will be made to the Participant in the same form and at the same time that all other Participants under the Plan receive their distributions with respect to that Performance Period unless otherwise determined by the Committee. ARTICLE V STOCK OPTION AWARDS 5.1. Stock Options Subject to Plan. (a) Subject to adjustment as provided herein, the total number of shares of stock options of the Company available for grant under the Plan shall be 150,000, provided that no "Covered Employee" (as such term is defined in Section 162(m) of the Code) shall be granted more than 136,800 stock options in any taxable year. Shares subject to an award under the Plan may be authorized and unissued shares or may be treasury shares. (b) If any Stock Option terminates without being exercised, shares subject to such Awards shall again be available for distribution in connection with Awards under the Plan. (c) In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, stock split, extraordinary distribution with respect to the Stock or other change in corporate structure affecting the Stock, the Committee or Board of Directors may make such substitution or adjustments in the aggregate number and kind of shares reserved for issuance under the Plan, in the number, kind and option price of shares subject to outstanding Stock Options granted under the Plan and/or such other substitution or adjustments in the consideration receivable upon exercise as it may determine to be appropriate in its sole discretion; provided, however, that the number of shares subject to any Stock Option shall always be a whole number. -4- (d) Stock Options may be granted alone or in addition to other Annual Incentive Awards granted under the Plan. 5.2. Stock Option Agreements. Stock Options shall be evidenced by option agreements, the terms and provisions of which may differ. The grant of a Stock Option shall occur on the date the committee by resolution selects an individual to be a participant in any grant of a Stock Option, determines the number of shares of Stock to be subject to such Stock Option to be granted to such individual and specifies the terms and provisions of the Stock Option. The Company shall notify a participant of any grant of a Stock Option, and a written option agreement or agreements shall be duly executed and delivered by the Company to the participant. Such agreement or agreements shall become effective upon execution by the participant. Stock Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions as the Committee shall deem desirable: (a) Option Price. The option price per share of Stock purchasable under a Stock Option shall be determined by the Committee and set forth in the option agreement and shall not be less than the Fair Market Value of the Stock subject to the Stock Option on the date of grant. (b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Stock Option shall be exercisable more than 10 years after the date the Stock Option is granted. ARTICLE VI ADMINISTRATION 6.1. Committee. The Plan shall be administered by the Compensation Committee of the Board of Directors, or such other Committee of the Board of Directors, composed exclusively of not less than two outside directors, as such term is used in section 162(m) of the Code, and non-employee directors, as such term is defined in Rule 16b-3(b)(3) promulgated by the Commission under the Exchange Act (or any successor definition promulgated by the Commission), each of whom shall be appointed by and serve at the pleasure of the Board of Directors. The Committee may designate person(s) who are Company employees to oversee the day to day administration of the Plan. 6.2. General Rights, Powers, and Duties of Committee. The Committee will be responsible for the management, operation, and administration of the Plan. Subject to the limitations contained in Section 4.4 and to the remaining terms of the Plan, the Committee will have the following powers, rights and duties in addition to those provided elsewhere in the Plan: -5- (a) To maintain records concerning the Plan sufficient to prepare reports, returns and other information required by the Plan or by law; (b) To direct the payment of awards under the Plan, and to give such other directions and instructions as may be necessary for the proper administration of the Plan; and (c) To be responsible for the preparation, filing and disclosure on behalf of the Plan of such documents and reports as are required by any applicable federal or state law. The Committee will also have the authority to adopt, alter and repeal such administrative rules, guidelines, and practices governing the Plan as it may, from time to time, deem advisable, to interpret the terms and provisions of the Plan and any award issued under the Plan (and any other agreement relating thereto), and to otherwise supervise the administration of the Plan. Any determination made by the Committee pursuant to the provisions of the Plan with respect to any grants, payments or other transactions under the Plan shall be made in the sole discretion of the Committee at the time of the grant, payment or other transaction or, unless in contravention of any express term of the Plan, at any time thereafter. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Participants. 6.3. Information to be Furnished to Committee. Participants and their beneficiaries shall furnish to the Committee such necessary evidence, data or information and execute such documents as the Committee requests. 6.4. Responsibility and Indemnification. No member of the Committee or of the Board of Directors or any person who is designated to oversee the day to day administration of the Plan (as provided in Section 6.1) shall be liable to any person for any action taken or omitted in connection with the administration of this Plan unless attributable to his own fraud or willful misconduct; nor shall the Company be liable to any person for any such action unless attributable to fraud or willful misconduct on the part of a director, officer, or employee of the Company within the scope of his Company duties. Each member of the Committee shall be indemnified and held harmless by the Company for any liability arising out of the administration of the Plan, to the maximum extent permitted by law. ARTICLE VII AMENDMENT AND TERMINATION 7.1. Amendment. The Plan may be amended in whole or in part by the Company, by action of the Board of Directors, at any time. The Committee reserves the unilateral right to change any rule under the Plan if it deems such a change necessary to avoid the application of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), to the Plan. No amendment shall be made without the approval of the Company's stockholders to the extent such approval is required by law or by agreement. -6- 7.2. Company's Right to Terminate. The Company reserves the sole right to terminate the Plan, by action of the Board of Directors, at any time. ARTICLE VIII MISCELLANEOUS 8.1. No Implied Rights; Rights on Termination of Service. Neither the establishment of the Plan nor any amendment thereof shall be construed as giving any Participant or any other person any legal or equitable right unless such right shall be specifically provided for in the Plan or conferred by specific action of the Committee in accordance with the terms and provisions of the Plan. Except as expressly provided in this Plan, the Company shall not be required or be liable to make any payment under the Plan. 8.2. No Right to Company Assets. No Participant or any other person shall acquire, by reason of the Plan, any right in or title to any assets, funds or property of the Company whatsoever including, without limiting the generality of the foregoing, any specific funds, assets, or other property which the Company, in its sole discretion, may set aside in anticipation of a liability hereunder. Any benefits which become payable hereunder shall be paid from the general assets of the Company. A Participant shall have only a contractual right to the amounts, if any, payable hereunder unsecured by any asset of the Company. Nothing contained in the Plan constitutes a guarantee by the Company that the assets of the Company shall be sufficient to pay any benefit to any person. 8.3. No Employment Rights. Nothing herein shall constitute a contract of employment or of continuing service or in any manner obligate the Company to continue the services of any Participant, shall obligate any Participant to continue in the service of the Company, or shall serve as a limitation of the right of the Company to discharge any of its employees, with or without cause. Nothing herein shall be construed as fixing or regulating the compensation payable to any Participant. 8.4. Other Benefits. No payment made under the Plan shall be considered compensation for purposes of computing benefits under any "employee benefit plan" (as defined in Section 3(3) of ERISA) of the Company nor affect any benefits or compensation under any other benefit or compensation plan of the Company now or subsequently in effect (except as provided to the contrary in such Company plan). 8.5. Offset. If, at the time payments are to be made hereunder, a Participant is indebted or obligated to the Company, then the payments under the Plan remaining to be made to the Participant may, at the discretion of the Company, be reduced by the amount of such indebtedness or obligation, provided, however, that an election by the Company not to reduce any such payment or payments shall not constitute a waiver of its claim for such indebtedness or obligation. 8.6. Non-assignability. No Participant or any other person shall have any voluntary or involuntary right to commute, sell, assign, pledge, anticipate, mortgage, or otherwise encumber, -7- transfer, hypothecate, or convey in advance of actual receipt the amounts, if any payable hereunder or any part thereof, which are expressly declared to be unassignable and non-transferable. No part of the amounts payable prior to actual payment shall be subject to seizure or sequestration for the payment of any debts, judgments, alimony, or separate maintenance owed by any Participant or any other person, or be transferable by operation of law in the event of any Participant's or any other person's bankruptcy or insolvency. 8.7. Notice. Any notice required or permitted to be given under the Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, and if given to the Company, delivered to the principal office of the Company, directed to the attention of the Committee, c/o the Director of the Compensation Department of the Company. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark or the receipt for registration or certification. 8.8. Governing Laws. The Plan and all awards made and actions taken under the Plan shall be governed and construed according to the laws of the State of Delaware. 8.9. Gender and Number. Where appropriate, references in this Plan to the masculine shall include the feminine, and references to the singular shall include the plural. 8.10. Severability. In the event any provision of the Plan shall be held legally invalid for any reasons, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. -8- EX-10.7 5 AMENDMENT TO EMPLOYMENT AGREEMENT (JJ ADORJAN) EXHIBIT 10.7 AMENDMENT TO EMPLOYMENT AGREEMENT AMENDMENT dated as of September 5, 1997 by and between Borg-Warner Security Corporation, a Delaware corporation (the "Company"), and J.J. Adorjan (the "Executive") to the Employment Agreement dated as of March 28, 1995 (as amended by letter dated August 28, 1995 and memorandum dated December 21, 1995, the "Employment Agreement"). W I T N E S S E T H : WHEREAS, the parties hereto have heretofore entered into the Employment Agreement; and WHEREAS, the parties hereto desire to amend the Employment Agreement; NOW, THEREFORE, the parties hereto agree as follows: Section 1. Definitions; References. Unless otherwise specifically defined herein, each term used herein that is defined in the Employment Agreement shall have the meaning assigned to such term in the Employment Agreement. Section 2. Amendment to Section 3(d) of the Employment Agreement. Section 3(d) of the Employment Agreement is hereby amended by adding the following clause (iv) at the end thereof: "(iv) Notwithstanding the foregoing, upon a Change in Control of the Company (as defined in Section 4(c)), the shares in the Trust, together with any dividends and other distributions made or scheduled to be made with respect thereto to the trustee of the Trust, and the amount of any Special Deferred Compensation that has not yet been paid, shall be delivered to the Executive immediately." Section 3. Amendment to Section 4(c) of the Employment Agreement. Section 4(c)(i)(D) of the Employment Agreement is hereby amended by deleting it in its entirety and replacing it with the following: "D. should there be a Change in Control of the Company (as defined below), a termination by the Executive, at his own initiative, for any reason during the 30-day period immediately following the end of the three month period (or such shorter transition period to which the Company may in its discretion consent) immediately following the date of the Change in Control." SECTION 4. Amendment to Section 5(a) of the Employment Agreement. Section 5(a) of the Employment Agreement is hereby amended by deleting it in its entirety and replacing it with the following: "(a) Other Than for Cause, Death or Disability; Good Reason. If, during the Employment Period, the Company terminates the Executive's employment other than for Cause or Disability, or the Executive terminates his employment for Good Reason, the Company shall pay the amounts described in subparagraph (i) below to the Executive in a lump sum in cash within 30 days after the Date of Termination and shall provide the benefits described in subparagraph (ii) below. The payments provided pursuant to this Section 5(a) are intended as liquidated damages for a termination of the Executive's employment by the Company other than for Cause or Disability or for the actions of the Company leading to a termination of the Executive's employment by the Executive for Good Reason, and shall be the sole and exclusive remedy therefor. (i) The amounts to be paid in a lump sum as described above are: A. The Executive's accrued but unpaid cash compensation (the "Accrued Obligations"), which shall equal the sum of (l) any portion of the Executive's Annual Base Salary and supplemental benefit compensation payable pursuant to Section 3(g) of this Agreement through the Date of Termination that has not yet been paid; (2) an amount (reduced, in the case of a termination of employment following a Change in Control, by the Change in Control Bonus (as defined in Section 5(d))) equal to the product of the Annual Bonus the Executive would have received for the year of termination if all goals had been achieved at the "expected" level (as such term is used to calculate bonuses under the Company's annual bonus plan) 2 (the "Severance Bonus") times a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination and the denominator of which is 365; (3) any compensation previously deferred by the Executive pursuant to Section 3(c) of this Agreement (together with any accrued interest or earnings thereon) that has not yet been paid; and (4) any accrued but unpaid Annual Bonuses and vacation pay; and B. Severance pay equal to (1) the sum of (I) the Annual Base Salary, (II) the Severance Bonus and (III) the annual supplemental benefit compensation which, absent termination, would have been payable pursuant to Section 3(g) of this Agreement for the twelve month period following the Date of Termination at the rate in effect at the Date of Termination; (2) the assets then held in the Trust (if any) together with any dividends and other distributions then scheduled to be made to the trustee of the Trust; and (3) the amount of any Special Deferred Compensation that has not yet been paid. (ii) The benefits to be provided are benefits to the Executive and/or the Executive's family at least as favorable as those that would have been provided to them under Section 3(f) and clause (ii) of Section 3(h) of this Agreement if the Executive's employment had continued through the end of the second anniversary of the Date of Termination; provided, however, that during any period when the Executive is eligible to receive such benefits under another employer- provided plan, the benefits provided by the Company under this Section 5(a)(ii) may be made secondary to those provided under such other plan. In addition, effective as of the second anniversary of the Date of Termination, the Executive shall be provided with post-retirement benefits on the same terms and conditions as provided to retirees and their beneficiaries pursuant to the Borg-Warner Security Corporation Retiree Health Care Plan and any other plans maintained for retirees, without regard to the Executive's age or years of service. (iii) In the event that the Executive becomes entitled to the payments and benefits provided above and/or any other payments or benefits in connection with a change in control or termination of the Executive's employment with the Company (whether pursuant 3 to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a change in control or any person affiliated with the Company or such person) (collectively, the "Payments"), if any of the Payments will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code, the Company shall pay the Executive, at least 30 days prior to the time payment of any such Excise Tax is due, an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax and any federal and state and local income tax imposed on the Gross-Up Payment, shall be equal to the Excise Tax imposed on the Payments. For purposes of determining whether any of the Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) the Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Company's independent auditors and acceptable to the Executive the Payments (in whole or in part) do not constitute parachute payments or excess parachute payments or are otherwise not subject to the Excise Tax, (B) the amount of the Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (i) the total amount of the Payments or (ii) the amount of excess parachute payments within the meaning of Section 280G(b)(1) (after applying clause (A) above), and (C) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Section 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calenday year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of employment, the Executive shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up 4 Payment attributable to the Excise Tax and federal and state and local income tax imposed on the Gross-Up Payment being repaid by the Executive if such repayment results in a reduction in Excise Tax and/or a federal and state and local income tax deduction) plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest payable with respect to such excess) at the time that the amount of such excess is finally determined." SECTION 5. Amendment to Section 5 of the Employment Agreement. Section 5 of the Employment Agreement is hereby amended by deleting the heading in its entirety and replacing it with "Obligations of the Company Upon Termination and/or a Change in Control" and adding the following at the end thereof: "(d) Change in Control. Within 60 days following a Change in Control of the Company, the company shall pay the Executive a pro rata annual bonus for the year in which such Change in Control occurs, based on the Company's performance for the period ending upon such Change in Control, as determined by the Compensation Committee prior to the Change in Control (the "Change in Control Bonus"). SECTION 6. No Waiver. Except as expressly provided herein, this Amendment shall not operate as a waiver or amendment of any right, power or privilege of the parties under the Employment Agreement. Except as expressly modified hereby, all of the terms and conditions of the Employment Agreement shall remain unaltered and in full force and effect. SECTION 7. Counterparts; Effectiveness. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Amendment shall become effective as of the date hereof when the Company shall have received a duly executed counterpart hereof signed by the Executive. 5 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. BORG-WARNER SECURITY CORPORATION By: /s/ Robert A. McCabe ----------------------------- Name: Robert A. McCabe Title: Director /s/ J. Joe Adorjan --------------------------------- J.J. Adorjan 6 EX-10.8 6 NONCOMPETITION AGREEMENT (JJ ADORJAN) EXHIBIT 10.8 NONCOMPETITION AGREEMENT AGREEMENT by and between Borg-Warner Security Corporation, a Delaware corporation (the "Company"), and J. J. Adorjan (the "Executive"), dated as of September 5, 1997. WHEREAS, the Executive is currently serving as the President and Chief Executive Officer of the Company pursuant to an Employment Agreement between the Company and the Executive dated as of March 25, 1995, as amended by Amendment No. 1 dated as of September 5, 1997 (the "Employment Agreement"); WHEREAS, due to the highly competitive nature of the business of the Company, the Company has determined that it is desirable to enter into a non- competition agreement with the Executive on the terms and conditions set forth in this Agreement; and WHEREAS, the Executive is willing to enter into such non-competition agreement upon such terms and conditions; NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Noncompetition. (a) In the event the Executive's employment under the Employment Agreement is terminated by the Company without Cause or by the Executive for Good Reason (as so defined): (i) During the Noncompetition Period (as defined below), the Executive shall not, without the prior written consent of the Board of Directors of the Company (the "Board"), engage in or become associated with a Competitive Activity. (ii) During the one year period beginning on the termination of the Executive's Employment under the Employment Agreement, the Executive will not directly or indirectly induce any employee of the Company to engage in any activity in which the Executive is prohibited from engaging by paragraph (i) above or to terminate his employment with the Company, and will not directly or indirectly employ or offer employment to any person who is employed by the Company. (iii) For purposes of Section 1(a)(i): (x) the "Noncompetition Period" means the period beginning on such termination of the Executive's employment under the Employment Agreement the third anniversary of the Executive's termination of employment under the Employment Agreement; (y) a "Competitive Activity" means any service business or other endeavor that provides guard and investigative services, alarm systems installation and monitoring services, armored transport or automated teller machine (ATM) services or overnight or same day courier delivery services; and (z) the Executive shall be considered to have become "associated with a Competitive Activity" if he becomes 2 directly or indirectly involved as an owner, employee, officer, director, independent contractor, agent, partner, advisor, or in any other capacity calling for the rendition of the Executive's personal services, with any individual, partnership, corporation or other organization that is engaged in a Competitive Activity. Notwithstanding the foregoing, the Executive may make and retain investments during the Noncompetition Period and thereafter in not more than five percent of the equity of any entity engaged in a Competitive Activity, if such equity is listed on a national securities exchange or regularly traded in an over-the-counter market. (b) Immediately upon the termination of the Executive's employment by the Company without Cause or by the Executive for Good Reason (each as defined in the Employment Agreement), in consideration of the Executive's entering into this Agreement, the Company shall pay the Executive an amount equal to the sum of (I) the Annual Base Salary (as defined in the Employment Agreement), (II) the Severance Bonus (as defined in the Employment Agreement) and (III) the annual supplemental benefit compensation which, absent termination, would have been payable pursuant to Section 3(g) of the Employment Agreement for the twelve month period following such termination at the rate in effect at the date of the Executive's termination of employment. 3 (c) The Executive acknowledges and agrees that his obligations under this Section 1 are of a special, unique and extraordinary character and that a failure to perform any such obligation or a violation thereof may cause irreparable injury to the Company, the amount of which will be impossible to estimate or determine and which cannot be adequately compensated. Therefore, the Executive agrees that the Company shall be entitled, as a matter of course, to an injunction, restraining order, writ of mandamus or other equitable relief from any court of competent jurisdiction, including relief in the form of specific performance, restraining any violation or threatened violation of any term of this Section 1, or requiring compliance with or performance of any obligation under this Section 1 by the Executive and such other persons as the court shall order. The rights and remedies provided the Company hereunder are cumulative and shall be in addition to the rights and remedies otherwise available to the Company under any other agreement or applicable law. In addition, the Executive agrees that if he breaches any provision of this Section 1, the Executive shall remit to the Company any amounts paid to him pursuant to paragraph (b) above. The Executive acknowledges and agrees that the provisions of this paragraph (c) are reasonable and necessary for the protection of the Company. 2. Arbitration; Attorneys' Fees. Except as provided in Section 1(c) above, any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in the State of Illinois, in accordance with the rules of the American Arbitration Association then in effect, 4 and judgment may be entered on the arbitrator's award in any court having jurisdiction. If the Executive shall prevail, in whole or in part, as to any material issue in any contest (whether initiated by the Executive or by the Company) as to the validity, enforceability or interpretation of any provision of this Agreement, the Company shall pay all reasonable expenses incurred by the Executive with respect to such contest, including, without limitation, his reasonable attorney's fees. 3. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean both the Company as defined above and any such successor that assumes and agrees to perform this Agreement, by operation of law or otherwise. 5 4. Miscellaneous. (a) This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified except by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications under this Agreement shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: J. J. Adorjan 223 North Bemiston Clayton, Missouri 63105 If to the Company: Borg-Warner Security Corporation 200 South Michigan Avenue Chicago, Illinois 60604 Attention: General Counsel or to such other address as either party furnishes to the other in writing in accordance with this Section 4(b). Notices and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. If any provision of this Agreement shall be held invalid or 6 unenforceable in part, the remaining portion of such provision, together with all other provisions of this Agreement, shall remain valid and enforceable and continue in full force and effect to the fullest extent consistent with law. (d) Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable under this Agreement all federal, state, local and foreign taxes that are required to be withheld by applicable laws or regulations. (e) The failure of the Executive or the Company to insist upon strict compliance with any provision of, or to assert any right under, this Agreement shall not be deemed to be a waiver of such provision or right or of any other provision of or right under this Agreement. (f) This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and which together shall constitute one instrument. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization of the Board, the Company has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. 7 /s/ J. Joe Adorjan ------------------ J. J. Adorjan BORG-WARNER SECURITY CORPORATION By: /s/ Robert E.T. Lackey ---------------------- Name: Robert E.T. Lackey Title: Vice President and General Counsel 8 EX-10.9 7 EMPLOYMENT AGREEMENT (JD O'BRIEN) EXHIBIT 10.9 BORG-WARNER SECURITY CORPORATION 200 South Michigan Avenue Chicago, Illinois 60604-2499 September 5, 1997 John D. O'Brien c/o Borg-Warner Security Corporation 200 South Michigan Chicago, Illinois 60604 Dear John: Borg-Warner Security Corporation (the "Company") considers it essential to the best interest of its stockholders to foster the continuous employment of key management personnel. The Company has previously entered into a letter agreement with you providing for certain severance benefits in the event your employment with the Company is terminated. In order to induce you to continue employment with, and to remain in the employ of the Company, the Company wishes to amend the letter agreement (as so amended, the "Agreement"). In the event your employment with the Company is terminated under the circumstances described below you shall receive the severance benefits described in this Agreement. 1. Term. The term of your employment with the Company under this Agreement shall continue in effect until the termination of your employment pursuant to this Agreement. 2. Termination. You shall be entitled to the benefits provided in Subsection 3(c) hereof upon the termination of your employment, unless such termination is (A) because of your death, (B) because of your "Disability" or "Retirement" (as defined in Subsection 2(a)), (C) by the Company for "Cause" (as defined in Subsection 2(b)), or (D) by you other than for "Good Reason" (as defined in Subsection 2(c)). (a) Disability; Retirement. If, as a result of your incapacity due to physical or mental illness or infirmity, you shall have been absent from the full- time performance of your duties with the Company for six (6) consecutive months, and within thirty (30) days after written notice of intended termination is given you shall not have returned to the full-time performance of your duties, your employment may be terminated for "Disability". Termination by the Company or you of your employment based on "Retirement" shall mean termination of employment after attainment of age 65. (b) Cause. Termination by the Company of your employment for "Cause" shall mean termination upon (i) the willful and continued failure by you to perform substantially your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness or infirmity or any such actual or anticipated failure after the issuance of a "Notice of Termination", as defined in Subsection 2(d) or by you for Good Reason) within a reasonable period of time after a written demand for substantial performance is delivered to you by the Board of Directors of the Company (the "Board") which demand specifically identifies the manner in which the Board believes that you have not substantially performed your duties, or (ii) the willful engaging by you in conduct which is demonstrably and materially injurious to the Company, momentarily or otherwise. For purposes of this Subsection, no act, or failure to act, on your part shall be deemed "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interest of the Company. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of conduct set forth above in clauses (i) or (ii) of the first sentence of this Subsection and specifying the particulars thereof in detail. (c) Good Reason. You shall be entitled to terminate your employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without your express written consent, the occurrence of any of the following circumstances unless such circumstances are fully corrected prior to the Date of Termination specified in the Notice of Termination, as defined in Subsections 2(e) and 2(d), respectively, given in respect thereof: (i) the assignment to you of any duties inconsistent with your position and status as a senior executive officer of the Company or a substantial adverse alteration in the nature or status of your employment responsibilities from those in existence on the date hereof; 2 (ii) a reduction by the Company in your base salary to less than the sum of $325,000 plus the amount of increases from time to time after the date hereof in your base salary (hereinafter called the "Base Guarantee"); (iii) the relocation of your office or job location to a location not within fifty miles of your present office or job location, except for required travel on the Company's business to an extent substantially consistent with your present business travel obligations; (iv) the failure by the Company, without your consent, to pay to you any portion of your current compensation, or to pay to you any portion of an installment of deferred compensation under any deferred compensation program of the Company, within ten (10) business days of the date such compensation is due; (v) a reduction in the life insurance, medical, dental, health, accident or disability benefits provided to you by the Company or a reduction in your entitlement to paid vacation days under the Company's vacation policy; (vi) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 4 hereof; or (vii) any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Subsection (d) below (and, if applicable, the requirements of Subsection (b) above); provided that for purposes of this Agreement, no such purported termination shall be effective. In addition, termination by you of your employment within the 30-day period following the first anniversary of the date a Change-in-Control has occurred shall constitute termination of your employment for Good Reason. A Change-in- Control shall be deemed to have occurred if: (A) there is an acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of the combined voting power of the then outstanding voting securities of 3 the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities") (an "Acquisition"); excluding, however, the following: (a) any Acquisition by Merrill Lynch & Co., Inc. and its affiliates who collectively on January 1, 1991 were a "beneficial owner" of approximately 51% of the Outstanding Company Voting Securities, (b) any Acquisition by a corporation or partnership controlled by a majority of the persons holding the title of Managing Partner of the Company on January 1, 1991, (c) any Acquisition by a trustee or other fiduciary holding securities under an employee benefit plan of the Company, (d) any Acquisition by which a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportion as their ownership of the Outstanding Voting Securities becomes the beneficial owner, directly or indirectly, of Outstanding Voting Securities representing 25% or more of the Outstanding Voting Securities or (e) any Acquisition, where the percentage of the Outstanding Voting Securities owned by such Person following such Acquisition is less than the percentage of Outstanding Company Voting Securities beneficially owned in the aggregate by Merrill Lynch & Co., Inc. and its affiliates; provided that if, after an Acquisition, the Outstanding Company Voting Securities owned by Merrill Lynch & Co., Inc. and/or its affiliates decreases such that if such Acquisition had occurred immediately after such decrease, such Acquisition would have been a Change in Control, then such decrease shall constitute a Change in Control; (B) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in paragraphs (A) or (C) of this Section) whose election by the Board of Directors of the Company or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (C) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or 4 consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or through the surviving entity) at least 70% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. Your right to terminate your employment pursuant to this Subsection shall not be affected by your incapacity due to physical or mental illness or infirmity. Your continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder. (d) Notice of Termination. Any purported termination of your employment by the Company or by you shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 6 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. (e) Date of Termination, Etc. "Date of Termination" shall mean (i) if your employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the full-time performance of your duties during such thirty (30) day period), and (ii) if your employment is terminated pursuant to Subsection (b) or (c) above or for any other reason (other than death or Disability), the date specified in the Notice of Termination (which, in the case of a termination pursuant to Subsection (b) above shall not be less than thirty (30) days, and in the case of a termination pursuant to Subsection (c) above shall not be less than fifteen (15) nor more than sixty (60) days, respectively, from the date such Notice of Termination is given); provided that if prior to the Date of Termination (as determined without regard to this provision), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party 5 giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Company will continue to pay you your full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue you as a participant in all compensation, benefit and insurance plans in which you were participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this Subsection. Amounts paid under this Subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 3. Compensation in connection with Termination and/or a Change in Control. You shall be entitled to the following: (a) During any period that you fail to perform your full-time duties with the Company as a result of incapacity due to physical or mental illness or infirmity, you shall continue to receive your base salary at the rate in effect at the commencement of any such period, together with all amounts payable to you and insurance to which you are entitled under any compensation and insurance plan of the Company during such period, until your employment under this Agreement is terminated pursuant to Section 2(a) hereof. Thereafter, or in the event your employment shall be terminated by the Company or by you for Retirement or by reason of your death, your compensation and benefits shall be determined under the Company's retirement, insurance and other compensation programs then in effect in accordance with the terms of such programs. (b) If your employment shall be terminated by the Company for Cause or by you other than for Good Reason, Disability, death or Retirement, the Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus all other amounts to which you are entitled under any compensation or insurance plan of the Company at the time such payments are due, and the Company shall have no further obligations to you under this Agreement. (c) If your employment by the Company shall be terminated (i) by the Company other than for Cause, Disability or Retirement or (ii) by you for Good Reason, then you shall be entitled to the benefits provided below: (i) the Company shall pay you (A) your full base salary and supplemental benefit compensation through the Date of Termination at the rate in effect at the time Notice of Termination is given, (B) an amount (reduced, in the case of a termination of employment following a Change in Control, by 6 the Change in Control Bonus (as defined in Section 3(f)) equal to the product of the annual bonus you would have received for the year of termination if all goals had been achieved at the "expected" level (as such term is used to calculate bonuses under the Company's annual bonus plan) (the "Severance Bonus") times a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365, plus (C) all other amounts to which you are entitled under any compensation or insurance plan of the Company through the Date of Termination, at the time such payments are due, except as otherwise provided below; (ii) in lieu of any further salary or bonus payment to you for periods subsequent to the Date of Termination, the Company shall pay to you a lump-sum severance payment (together with the payments provided in paragraphs (iii) through (vi) below) equal to the product of (A) the sum of (x) the Base Guarantee, (y) the Severance Bonus and (z) the amount of your annual supplemental benefit compensation which, absent termination, would have been payable to you for the twelve month period following the Date of Termination; (iii) the Company shall pay to you in cash any deferred compensation; (iv) the Company shall provide you with life, medical, dental, health, accident and disability insurance coverage substantially similar to the coverage you are receiving from the Company immediately prior to the occurrence of the circumstance cited as the reason for termination in the Notice of Termination (and if you have elected the Optional Health Insurance Plan coverage or the Supplemental Dental and Vision Plan coverage, or both, subject to your continuing to pay for such coverage or coverages at the same contribution rate as was in effect immediately prior to the occurrence of the circumstance cited as the reason for termination in the Notice of Termination) for a period of two years after your termination, or until your death or Retirement, whichever is the shorter period, provided that benefits otherwise receivable by you pursuant to this paragraph (iv) shall be reduced to the extent comparable benefits are actually received by you during this period. You agree that you shall immediately report to the Company any such comparable benefits actually received by you. Following the termination of such benefit continuation period you shall be entitled to post-retirement benefits on the same terms and conditions as provided to retirees and their beneficiaries pursuant to the Borg-Warner Security Corporation Retiree Health Care Plan and any other plan maintained for retirees, without regard to your age or years of service; 7 (v) the Company shall pay to you an amount equal to your unpaid accrued benefit under the Borg-Warner Excess Retirement Benefit Plan; (vi) the Company shall pay to you all legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), to any payment or benefit provided hereunder); and (vii) the payments provided for in paragraphs (i), (ii), (iii) and (v) above shall be made not later than the thirtieth day following the Date of Termination. (d) You shall not be required to mitigate the amount of any payment provided for in this Section 3 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 3 be reduced by any compensation earned by you as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by you to the Company or otherwise except as specifically provided in this Section 3. (e) In addition to all other amounts payable to you under this Section 3, following the termination of your employment you shall be entitled to receive all benefits payable to you under any plan or agreement relating to retirement benefits. (f) Within 60 days following a Change in Control of the Company, the Company shall pay you (i) a pro rata annual bonus for the year in which such Change in Control occurs, based on the Company's performance for the period ending upon such Change in Control, as determined by the Compensation Committee prior to the Change in Control (the "Change in Control Bonus") and (ii) an amount equal to your accrued benefit under the Borg-Warner Excess Retirement Benefit Plan. (g) In the event that you become entitled to the payments and benefits provided under subsection 3(c) or (f) above and/or any other payments or benefits in connection with a change in control or termination of your employment with the Company (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a change in control or any person affiliated with the Company or such person) (collectively, the "Payments"), if any of the Payments will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code, the Company shall pay to you, at least 30 days prior to the time payment of any such Excise Tax is due, an additional amount (the "Gross-Up Payment") such that the net amount retained by 8 you, after deduction of any Excise Tax and any federal and state and local income tax imposed on the Gross-Up Payment, shall be equal to the Excise Tax imposed on the Payments. For purposes of determining whether any of the Severance Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) the Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Company's independent auditors and acceptable to you the Payments (in whole or in part) do not constitute parachute payments or excess parachute payments or are otherwise not subject to the Excise Tax, (B) the amount of the Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (i) the total amount of the Payments or (ii) the amount of excess parachute payments within the meaning of Section 280G(b)(l) (after applying clause (A) above), and (C) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Section 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, you shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of your residence on the Date of Termination, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of your employment, you shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal and state and local income tax imposed on the Gross-Up Payment being repaid by you if such repayment results in a reduction in Excise Tax and/or a federal and state and local income tax deduction) plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of your employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest payable with respect to such excess) at the time that the amount of such excess is finally determined. 4. Successors; Binding Agreement. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and 9 to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled to hereunder if you terminated your employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (b) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your "Beneficiary" as designated and defined under the 1981 Contingent Compensation Plan under the Borg-Warner Corporation Management Incentive Program unless superceded, in which case payment shall be made in accordance with the most recent beneficiary designation which you may have executed and delivered to the Company after the date of this Agreement. (c) If your employment is continued with a successor (whether directly or indirectly) to all or substantially all of the business and assets of the Company and such successor assumes the obligations of the Company under this Agreement, you will not be entitled to any severance benefits under this Agreement solely by reason of the assumption of this Agreement and the technical termination of your employment with the Company in connection with such succession; provided that this Subsection 4(c) shall in no way diminish your right to terminate your employment for Good Reason pursuant to Section 2(c) and to receive severance in connection with such a termination. 5. Non-Compete; Confidentiality. (a) You agree that while you are employed by the Company, you will not directly or indirectly, whether as owner, partner, officer, employee, agent or consultant, engage in or be employed in any way by any business engaged in the design, manufacture, marketing or servicing of products which constituted 10% or more of the annual sales of the Company provided, however, that in no event shall this Section 5 preclude you from owning less than 5% of the outstanding voting stock of any publicly-traded corporation. (b) You shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company 10 or any of its affiliated companies, and their respective businesses, which shall have been obtained by you during your employment by the Company and which shall not be public knowledge. While employed by the Company and for three years from the Date of Termination, if you are receiving or have received payments under Section 3(c), you shall not, without prior written consent of the Company, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it; except the foregoing prohibition shall not apply to the extent such information, knowledge or data (a) was publicly known at the time of disclosure to you, (b) becomes publicly known or available thereafter other than by any means in violation of this Agreement, or (c) is required to be disclosed by you as a matter of law or pursuant to any court or regulatory order. (c) You hereby acknowledge and agree that your obligations under this Section 5 are of a special, unique and extraordinary character and that a failure to perform any such obligation or a violation thereof may cause irreparable injury to the Company, the amount of which will be impossible to estimate or determine and which cannot be adequately compensated. Therefore, you agree that the Company shall be entitled, as a matter of course, to an injunction, restraining order, writ of mandamus or other equitable relief from any court of competent jurisdiction, including relief in the form of specific performance, restraining any violation or threatened violation of any term of this Section 5, or requiring compliance with or performance of any obligation under this Section 5 by you and such other persons as the court shall order. The rights and remedies provided the Company hereunder are cumulative and shall be in addition to the rights and remedies otherwise available to the Company under any other agreement or applicable law. 6. Notice. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notice to the Company shall be directed to the attention of the Board of Directors, with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change in address shall be effective only upon receipt. 7. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or 11 dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Illinois. All references to sections of the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state, or local law. 8. No Vested Interest. Neither you nor your Beneficiary shall have any right, title or interest in any benefit under this Agreement prior to the occurrence of the right to the payment thereof, or in any property of the Company or its subsidiaries or affiliates. 9. Prior Agreements. This Agreement contains the entire understanding between the parties hereto with respect to severance benefits and supercedes any such prior agreement between the Company (or any predecessor of the Company) and you. If there is any discrepancy or conflict between this Agreement and any plan, policy or program of the Company regarding any term or condition of severance benefits, the language of this Agreement shall govern. 10. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 11. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 12. Arbitration. Except as provided in Section 5(c), any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in the State of Illinois, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that you shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 12 If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, BORG-WARNER SECURITY CORPORATION By /s/ J. Joe Adorjan ----------------------- Agreed to and Accepted September 5, 1997 /s/ John D. O'Brien - ----------------------- 13 EX-10.10 8 NONCOMPETITION AGREEMENT (JD O'BRIEN) EXHIBIT 10.10 NONCOMPETITION AGREEMENT AGREEMENT by and between Borg-Warner Security Corporation, a Delaware corporation (the "Company"), and John D. O'Brien (the "Executive"), dated as of September 5, 1997. WHEREAS, the Executive is currently serving as the Senior Vice President and President of Protected Services of the Company pursuant to an Amended and Restated Letter Agreement between the Company and the Executive dated as of September 5, 1997 (the "Letter Agreement"); WHEREAS, due to the highly competitive nature of the business of the Company, the Company has determined that it is desirable to enter into a non- competition agreement with the Executive on the terms and conditions set forth in this Agreement; and WHEREAS, the Executive is willing to enter into such non-competition agreement upon such terms and conditions; NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Noncompetition. (a) In the event the Executive's employment under the Letter Agreement is terminated by the Company without Cause or by the Executive for Good Reason (as so defined): (i) During the Noncompetition Period (as defined below), the Executive shall not, without the prior written consent of the Board of Directors of the Company (the "Board"), engage in or become associated with a Competitive Activity. (ii) During the one year period beginning on the termination of the Executive's Employment under the Letter Agreement, the Executive will not directly or indirectly induce any employee of the Company to engage in any activity in which the Executive is prohibited from engaging by paragraph (i) above or to terminate his employment with the Company, and will not directly or indirectly employ or offer employment to any person who is employed by the Company. (iii) For purposes of Section 1(a)(i): (x) the "Noncompetition Period" means the period beginning on such termination of the Executive's employment under the Letter Agreement the third anniversary of the Executive's termination of employment under the Letter Agreement; (y) a "Competitive Activity" means any service business or other endeavor that provides guard and investigative services, alarm systems installation and monitoring services, armored transport or automated teller machine (ATM) services or overnight or same day courier delivery services; and (z) the Executive shall be considered to have become "associated with a Competitive Activity" if he becomes directly 2 or indirectly involved as an owner, employee, officer, director, independent contractor, agent, partner, advisor, or in any other capacity calling for the rendition of the Executive's personal services, with any individual, partnership, corporation or other organization that is engaged in a Competitive Activity. Notwithstanding the foregoing, the Executive may make and retain investments during the Noncompetition Period and thereafter in not more than five percent of the equity of any entity engaged in a Competitive Activity, if such equity is listed on a national securities exchange or regularly traded in an over-the-counter market. (b) Immediately upon the termination of the Executive's employment by the Company without Cause or by the Executive for Good Reason (each as defined in the Letter Agreement), in consideration of the Executive's entering into this Agreement, the Company shall pay the Executive an amount equal to the sum of (I) the Base Guarantee (as defined in the Letter Agreement), (II) the Severance Bonus (as defined in the Letter Agreement) and (III) the annual supplemental benefit compensation which, absent termination, would have been payable for the twelve month period following such termination at the rate in effect at the date of the Executive's termination of employment. 3 (c) The Executive acknowledges and agrees that his obligations under this Section 1 are of a special, unique and extraordinary character and that a failure to perform any such obligation or a violation thereof may cause irreparable injury to the Company, the amount of which will be impossible to estimate or determine and which cannot be adequately compensated. Therefore, the Executive agrees that the Company shall be entitled, as a matter of course, to an injunction, restraining order, writ of mandamus or other equitable relief from any court of competent jurisdiction, including relief in the form of specific performance, restraining any violation or threatened violation of any term of this Section 1, or requiring compliance with or performance of any obligation under this Section 1 by the Executive and such other persons as the court shall order. The rights and remedies provided the Company hereunder are cumulative and shall be in addition to the rights and remedies otherwise available to the Company under any other agreement or applicable law. In addition, the Executive agrees that if he breaches any provision of this Section 1, the Executive shall remit to the Company any amounts paid to him pursuant to paragraph (b) above. The Executive acknowledges and agrees that the provisions of this paragraph (c) are reasonable and necessary for the protection of the Company. 2. Arbitration; Attorneys' Fees. Except as provided in Section 1(c) above, any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in the State of Illinois, in 4 accordance with the rules of the American Arbitration Association then in effect, and judgment may be entered on the arbitrator's award in any court having jurisdiction. If the Executive shall prevail, in whole or in part, as to any material issue in any contest (whether initiated by the Executive or by the Company) as to the validity, enforceability or interpretation of any provision of this Agreement, the Company shall pay all reasonable expenses incurred by the Executive with respect to such contest, including, without limitation, his reasonable attorney's fees. 3. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean both the Company as defined 5 above and any such successor that assumes and agrees to perform this Agreement, by operation of law or otherwise. 4. Miscellaneous. (a) This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified except by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications under this Agreement shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: John D. O'Brien 892 Timber Lane Lake Forest, Illinois 60045 If to the Company: Borg-Warner Security Corporation 200 South Michigan Avenue Chicago, Illinois 60604 Attention: General Counsel or to such other address as either party furnishes to the other in writing in accordance with this Section 4(b). Notices and communications shall be effective when actually received by the addressee. 6 (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. If any provision of this Agreement shall be held invalid or unenforceable in part, the remaining portion of such provision, together with all other provisions of this Agreement, shall remain valid and enforceable and continue in full force and effect to the fullest extent consistent with law. (d) Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable under this Agreement all federal, state, local and foreign taxes that are required to be withheld by applicable laws or regulations. (e) The failure of the Executive or the Company to insist upon strict compliance with any provision of, or to assert any right under, this Agreement shall not be deemed to be a waiver of such provision or right or of any other provision of or right under this Agreement. (f) This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and which together shall constitute one instrument. 7 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization of the Board, the Company has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. /s/ John D. O'Brien ------------------- John D. O'Brien BORG-WARNER SECURITY CORPORATION By: /s/ J. Joe Adorjan Name: ------------------ Title: 8 EX-10.11 9 EMPLOYMENT AGREEMENT (TM WOOD) EXHIBIT 10.11 BORG-WARNER SECURITY CORPORATION 200 South Michigan Avenue Chicago, Illinois 60604-2499 September 5, 1997 Timothy M. Wood c/o Borg-Warner Security Corporation 200 South Michigan Chicago, Illinois 60604 Dear Tim: Borg-Warner Security Corporation (the "Company") considers it essential to the best interest of its stockholders to foster the continuous employment of key management personnel. The Company has previously entered into a letter agreement with you providing for certain severance benefits in the event your employment with the Company is terminated. In order to induce you to continue employment with, and to remain in the employ of the Company, the Company wishes to amend the letter agreement (as so amended, the "Agreement"). In the event your employment with the Company is terminated under the circumstances described below you shall receive the severance benefits described in this Agreement. 1. Term. The term of your employment with the Company under this Agreement shall continue in effect until the termination of your employment pursuant to this Agreement. 2. Termination. You shall be entitled to the benefits provided in Subsection 3(c) hereof upon the termination of your employment, unless such termination is (A) because of your death, (B) because of your "Disability" or "Retirement" (as defined in Subsection 2(a)), (C) by the Company for "Cause" (as defined in Subsection 2(b)), or (D) by you other than for "Good Reason" (as defined in Subsection 2(c)). (a) Disability; Retirement. If, as a result of your incapacity due to physical or mental illness or infirmity, you shall have been absent from the full- time performance of your duties with the Company for six (6) consecutive months, and within thirty (30) days after written notice of intended termination is given you shall not have returned to the full-time performance of your duties, your employment may be terminated for "Disability". Termination by the Company or you of your employment based on "Retirement" shall mean termination of employment after attainment of age 65. (b) Cause. Termination by the Company of your employment for "Cause" shall mean termination upon (i) the willful and continued failure by you to perform substantially your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness or infirmity or any such actual or anticipated failure after the issuance of a "Notice of Termination", as defined in Subsection 2(d) or by you for Good Reason) within a reasonable period of time after a written demand for substantial performance is delivered to you by the Board of Directors of the Company (the "Board") which demand specifically identifies the manner in which the Board believes that you have not substantially performed your duties, or (ii) the willful engaging by you in conduct which is demonstrably and materially injurious to the Company, momentarily or otherwise. For purposes of this Subsection, no act, or failure to act, on your part shall be deemed "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interest of the Company. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of conduct set forth above in clauses (i) or (ii) of the first sentence of this Subsection and specifying the particulars thereof in detail. (c) Good Reason. You shall be entitled to terminate your employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without your express written consent, the occurrence of any of the following circumstances unless such circumstances are fully corrected prior to the Date of Termination specified in the Notice of Termination, as defined in Subsections 2(e) and 2(d), respectively, given in respect thereof: (i) the assignment to you of any duties inconsistent with your position and status as a senior executive officer of the Company or a substantial adverse alteration in the nature or status of your employment responsibilities from those in existence on the date hereof; 2 (ii) a reduction by the Company in your base salary to less than the sum of $290,000 plus the amount of increases from time to time after the date hereof in your base salary (hereinafter called the "Base Guarantee"); (iii) the relocation of your office or job location to a location not within fifty miles of your present office or job location, except for required travel on the Company's business to an extent substantially consistent with your present business travel obligations; (iv) the failure by the Company, without your consent, to pay to you any portion of your current compensation, or to pay to you any portion of an installment of deferred compensation under any deferred compensation program of the Company, within ten (10) business days of the date such compensation is due; (v) a reduction in the life insurance, medical, dental, health, accident or disability benefits provided to you by the Company or a reduction in your entitlement to paid vacation days under the Company's vacation policy; (vi) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 4 hereof; or (vii) any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Subsection (d) below (and, if applicable, the requirements of Subsection (b) above); provided that for purposes of this Agreement, no such purported termination shall be effective . In addition, termination by you of your employment within the 30-day period following the first anniversary of the date a Change-in-Control has occurred shall constitute termination of your employment for Good Reason. A Change-in- Control shall be deemed to have occurred if: (A) there is an acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of the combined voting power of the then outstanding voting securities of 3 the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities") (an "Acquisition"); excluding, however, the following: (a) any Acquisition by Merrill Lynch & Co., Inc. and its affiliates who collectively on January 1, 1991 were a "beneficial owner" of approximately 51% of the Outstanding Company Voting Securities, (b) any Acquisition by a corporation or partnership controlled by a majority of the persons holding the title of Managing Partner of the Company on January 1, 1991, (c) any Acquisition by a trustee or other fiduciary holding securities under an employee benefit plan of the Company, (d) any Acquisition by which a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportion as their ownership of the Outstanding Voting Securities becomes the beneficial owner, directly or indirectly, of Outstanding Voting Securities representing 25% or more of the Outstanding Voting Securities or (e) any Acquisition, where the percentage of the Outstanding Voting Securities owned by such Person following such Acquisition is less than the percentage of Outstanding Company Voting Securities beneficially owned in the aggregate by Merrill Lynch & Co., Inc. and its affiliates; provided that if, after an Acquisition, the Outstanding Company Voting Securities owned by Merrill Lynch & Co., Inc. and/or its affiliates decreases such that if such Acquisition had occurred immediately after such decrease, such Acquisition would have been a Change in Control, then such decrease shall constitute a Change in Control; (B) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in paragraphs (A) or (C) of this Section) whose election by the Board of Directors of the Company or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (C) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or 4 consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or through the surviving entity) at least 70% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. Your right to terminate your employment pursuant to this Subsection shall not be affected by your incapacity due to physical or mental illness or infirmity. Your continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder. (d) Notice of Termination. Any purported termination of your employment by the Company or by you shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 6 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. (e) Date of Termination, Etc. "Date of Termination" shall mean (i) if your employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the full-time performance of your duties during such thirty (30) day period), and (ii) if your employment is terminated pursuant to Subsection (b) or (c) above or for any other reason (other than death or Disability), the date specified in the Notice of Termination (which, in the case of a termination pursuant to Subsection (b) above shall not be less than thirty (30) days, and in the case of a termination pursuant to Subsection (c) above shall not be less than fifteen (15) nor more than sixty (60) days, respectively, from the date such Notice of Termination is given); provided that if prior to the Date of Termination (as determined without regard to this provision), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party 5 giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Company will continue to pay you your full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue you as a participant in all compensation, benefit and insurance plans in which you were participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this Subsection. Amounts paid under this Subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 3. Compensation in connection with Termination and/or a Change in Control. You shall be entitled to the following: (a) During any period that you fail to perform your full-time duties with the Company as a result of incapacity due to physical or mental illness or infirmity, you shall continue to receive your base salary at the rate in effect at the commencement of any such period, together with all amounts payable to you and insurance to which you are entitled under any compensation and insurance plan of the Company during such period, until your employment under this Agreement is terminated pursuant to Section 2(a) hereof. Thereafter, or in the event your employment shall be terminated by the Company or by you for Retirement or by reason of your death, your compensation and benefits shall be determined under the Company's retirement, insurance and other compensation programs then in effect in accordance with the terms of such programs. (b) If your employment shall be terminated by the Company for Cause or by you other than for Good Reason, Disability, death or Retirement, the Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus all other amounts to which you are entitled under any compensation or insurance plan of the Company at the time such payments are due, and the Company shall have no further obligations to you under this Agreement. (c) If your employment by the Company shall be terminated (i) by the Company other than for Cause, Disability or Retirement or (ii) by you for Good Reason, then you shall be entitled to the benefits provided below: (i) the Company shall pay you (A) your full base salary and supplemental benefit compensation through the Date of Termination at the rate in effect at the time Notice of Termination is given, (B) an amount (reduced, in the case of a termination of employment following a Change in Control, by 6 the Change in Control Bonus (as defined in Section 3(f)) equal to the product of the annual bonus you would have received for the year of termination if all goals had been achieved at the "expected" level (as such term is used to calculate bonuses under the Company's annual bonus plan) (the "Severance Bonus") times a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365, plus (C) all other amounts to which you are entitled under any compensation or insurance plan of the Company through the Date of Termination, at the time such payments are due, except as otherwise provided below; (ii) in lieu of any further salary or bonus payment to you for periods subsequent to the Date of Termination, the Company shall pay to you a lump-sum severance payment (together with the payments provided in paragraphs (iii) through (vi) below) equal to the product of (A) the sum of (x) the Base Guarantee, (y) the Severance Bonus and (z) the amount of your annual supplemental benefit compensation which, absent termination, would have been payable to you for the twelve month period following the Date of Termination; (iii) the Company shall pay to you in cash any deferred compensation; (iv) the Company shall provide you with life, medical, dental, health, accident and disability insurance coverage substantially similar to the coverage you are receiving from the Company immediately prior to the occurrence of the circumstance cited as the reason for termination in the Notice of Termination (and if you have elected the Optional Health Insurance Plan coverage or the Supplemental Dental and Vision Plan coverage, or both, subject to your continuing to pay for such coverage or coverages at the same contribution rate as was in effect immediately prior to the occurrence of the circumstance cited as the reason for termination in the Notice of Termination) for a period of two years after your termination, or until your death or Retirement, whichever is the shorter period, provided that benefits otherwise receivable by you pursuant to this paragraph (iv) shall be reduced to the extent comparable benefits are actually received by you during this period. You agree that you shall immediately report to the Company any such comparable benefits actually received by you. Following the termination of such benefit continuation period you shall be entitled to post-retirement benefits on the same terms and conditions as provided to retirees and their beneficiaries pursuant to the Borg-Warner Security Corporation Retiree Health Care Plan and any other plan maintained for retirees, without regard to your age or years of service; 7 (v) the Company shall pay to you an amount equal to your unpaid accrued benefit under the Borg-Warner Excess Retirement Benefit Plan; (vi) the Company shall pay to you all legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), to any payment or benefit provided hereunder); and (vii) the payments provided for in paragraphs (i), (ii), (iii) and (v) above shall be made not later than the thirtieth day following the Date of Termination. (d) You shall not be required to mitigate the amount of any payment provided for in this Section 3 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 3 be reduced by any compensation earned by you as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by you to the Company or otherwise except as specifically provided in this Section 3. (e) In addition to all other amounts payable to you under this Section 3, following the termination of your employment you shall be entitled to receive all benefits payable to you under any plan or agreement relating to retirement benefits. (f) Within 60 days following a Change in Control of the Company, the Company shall pay you (i) a pro rata annual bonus for the year in which such Change in Control occurs, based on the Company's performance for the period ending upon such Change in Control, as determined by the Compensation Committee prior to the Change in Control (the "Change in Control Bonus") and (ii) an amount equal to your accrued benefit under the Borg-Warner Excess Retirement Benefit Plan. (g) In the event that you become entitled to the payments and benefits provided under subsection 3(c) or (f) above and/or any other payments or benefits in connection with a change in control or termination of your employment with the Company (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a change in control or any person affiliated with the Company or such person) (collectively, the "Payments"), if any of the Payments will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code, the Company shall pay to you, at least 30 days prior to the time payment of any such Excise Tax is due, an additional amount (the "Gross-Up Payment") such that the net amount retained by 8 you, after deduction of any Excise Tax and any federal and state and local income tax imposed on the Gross-Up Payment, shall be equal to the Excise Tax imposed on the Payments. For purposes of determining whether any of the Severance Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) the Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Company's independent auditors and acceptable to you the Payments (in whole or in part) do not constitute parachute payments or excess parachute payments or are otherwise not subject to the Excise Tax, (B) the amount of the Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (i) the total amount of the Payments or (ii) the amount of excess parachute payments within the meaning of Section 280G(b)(l) (after applying clause (A) above), and (C) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Section 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, you shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of your residence on the Date of Termination, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of your employment, you shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal and state and local income tax imposed on the Gross-Up Payment being repaid by you if such repayment results in a reduction in Excise Tax and/or a federal and state and local income tax deduction) plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of your employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest payable with respect to such excess) at the time that the amount of such excess is finally determined. 4. Successors; Binding Agreement. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and 9 to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled to hereunder if you terminated your employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (b) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your "Beneficiary" as designated and defined under the 1981 Contingent Compensation Plan under the Borg-Warner Corporation Management Incentive Program unless superceded, in which case payment shall be made in accordance with the most recent beneficiary designation which you may have executed and delivered to the Company after the date of this Agreement. (c) If your employment is continued with a successor (whether directly or indirectly) to all or substantially all of the business and assets of the Company and such successor assumes the obligations of the Company under this Agreement, you will not be entitled to any severance benefits under this Agreement solely by reason of the assumption of this Agreement and the technical termination of your employment with the Company in connection with such succession; provided that this Subsection 4(c) shall in no way diminish your right to terminate your employment for Good Reason pursuant to Section 2(c) and to receive severance in connection with such a termination. 5. Non-Compete; Confidentiality. (a) You agree that while you are employed by the Company, you will not directly or indirectly, whether as owner, partner, officer, employee, agent or consultant, engage in or be employed in any way by any business engaged in the design, manufacture, marketing or servicing of products which constituted 10% or more of the annual sales of the Company provided, however, that in no event shall this Section 5 preclude you from owning less than 5% of the outstanding voting stock of any publicly-traded corporation. (b) You shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company 10 or any of its affiliated companies, and their respective businesses, which shall have been obtained by you during your employment by the Company and which shall not be public knowledge. While employed by the Company and for three years from the Date of Termination, if you are receiving or have received payments under Section 3(c), you shall not, without prior written consent of the Company, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it; except the foregoing prohibition shall not apply to the extent such information, knowledge or data (a) was publicly known at the time of disclosure to you, (b) becomes publicly known or available thereafter other than by any means in violation of this Agreement, or (c) is required to be disclosed by you as a matter of law or pursuant to any court or regulatory order. (c) You hereby acknowledge and agree that your obligations under this Section 5 are of a special, unique and extraordinary character and that a failure to perform any such obligation or a violation thereof may cause irreparable injury to the Company, the amount of which will be impossible to estimate or determine and which cannot be adequately compensated. Therefore, you agree that the Company shall be entitled, as a matter of course, to an injunction, restraining order, writ of mandamus or other equitable relief from any court of competent jurisdiction, including relief in the form of specific performance, restraining any violation or threatened violation of any term of this Section 5, or requiring compliance with or performance of any obligation under this Section 5 by you and such other persons as the court shall order. The rights and remedies provided the Company hereunder are cumulative and shall be in addition to the rights and remedies otherwise available to the Company under any other agreement or applicable law. 6. Notice. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notice to the Company shall be directed to the attention of the Board of Directors, with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change in address shall be effective only upon receipt. 7. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or 11 dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Illinois. All references to sections of the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state, or local law. 8. No Vested Interest. Neither you nor your Beneficiary shall have any right, title or interest in any benefit under this Agreement prior to the occurrence of the right to the payment thereof, or in any property of the Company or its subsidiaries or affiliates. 9. Prior Agreements. This Agreement contains the entire understanding between the parties hereto with respect to severance benefits and supercedes any such prior agreement between the Company (or any predecessor of the Company) and you. If there is any discrepancy or conflict between this Agreement and any plan, policy or program of the Company regarding any term or condition of severance benefits, the language of this Agreement shall govern. 10. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 11. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 12. Arbitration. Except as provided in Section 5(c), any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in the State of Illinois, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that you shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 12 If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, BORG-WARNER SECURITY CORPORATION By /s/ J. Joe Adorjan --------------------------------- Agreed to and Accepted September 5, 1997 /s/ Timothy M. Wood - ----------------------------- 13 EX-10.12 10 NONCOMPETITION AGREEMENT (TM WOOD) EXHIBIT 10.12 NONCOMPETITION AGREEMENT AGREEMENT by and between Borg-Warner Security Corporation, a Delaware corporation (the "Company"), and Timothy M. Wood (the "Executive"), dated as of September 5, 1997. WHEREAS, the Executive is currently serving as the Vice President--Chief Financial Officer of the Company pursuant to an Amended and Restated Letter Agreement between the Company and the Executive dated as of September 5, 1997 (the "Letter Agreement"); WHEREAS, due to the highly competitive nature of the business of the Company, the Company has determined that it is desirable to enter into a non- competition agreement with the Executive on the terms and conditions set forth in this Agreement; and WHEREAS, the Executive is willing to enter into such non-competition agreement upon such terms and conditions; NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Noncompetition. (a) In the event the Executive's employment under the Letter Agreement is terminated by the Company without Cause or by the Executive for Good Reason (as so defined) (i) During the Noncompetition Period (as defined below), the Executive shall not, without the prior written consent of the Board of Directors of the Company (the "Board"), engage in or become associated with a Competitive Activity. (ii) During the one year period beginning on the termination of the Executive's Employment under the Letter Agreement, the Executive will not directly or indirectly induce any employee of the Company to engage in any activity in which the Executive is prohibited from engaging by paragraph (i) above or to terminate his employment with the Company, and will not directly or indirectly employ or offer employment to any person who is employed by the Company. (iii) For purposes of Section 1(a)(i): (x) the "Noncompetition Period" means the period beginning on such termination of the Executive's employment under the Letter Agreement the third anniversary of the Executive's termination of employment under the Letter Agreement; (y) a "Competitive Activity" means any service business or other endeavor that provides guard and investigative services, alarm systems installation and monitoring services, armored transport or automated teller machine (ATM) services or overnight or same day courier delivery services; and (z) the Executive shall be considered to have become "associated with a Competitive Activity" if he becomes directly or indirectly involved as an owner, employee, officer, director, independent contractor, agent, partner, advisor, or in any other capacity 2 calling for the rendition of the Executive's personal services, with any individual, partnership, corporation or other organization that is engaged in a Competitive Activity. Notwithstanding the foregoing, the Executive may make and retain investments during the Noncompetition Period and thereafter in not more than five percent of the equity of any entity engaged in a Competitive Activity, if such equity is listed on a national securities exchange or regularly traded in an over-the-counter market. (b) Immediately upon the termination of the Executive's employment by the Company without Cause or by the Executive for Good Reason (each as defined in the Letter Agreement), in consideration of the Executive's entering into this Agreement, the Company shall pay the Executive an amount equal to the sum of (I) the Base Guarantee (as defined in the Letter Agreement), (II) the Severance Bonus (as defined in the Letter Agreement) and (III) the annual supplemental benefit compensation which, absent termination, would have been payable for the twelve month period following such termination at the rate in effect at the date of the Executive's termination of employment. (c) The Executive acknowledges and agrees that his obligations under this Section 1 are of a special, unique and extraordinary character and that a failure to perform any such obligation or a violation thereof may cause irreparable injury to the Company, the amount of which will be impossible to estimate or determine 3 and which cannot be adequately compensated. Therefore, the Executive agrees that the Company shall be entitled, as a matter of course, to an injunction, restraining order, writ of mandamus or other equitable relief from any court of competent jurisdiction, including relief in the form of specific performance, restraining any violation or threatened violation of any term of this Section 1, or requiring compliance with or performance of any obligation under this Section 1 by the Executive and such other persons as the court shall order. The rights and remedies provided the Company hereunder are cumulative and shall be in addition to the rights and remedies otherwise available to the Company under any other agreement or applicable law. In addition, the Executive agrees that if he breaches any provision of this Section 1, the Executive shall remit to the Company any amounts paid to him pursuant to paragraph (b) above. The Executive acknowledges and agrees that the provisions of this paragraph (c) are reasonable and necessary for the protection of the Company. 2. Arbitration; Attorneys' Fees. Except as provided in Section 1(c) above, any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in the State of Illinois, in accordance with the rules of the American Arbitration Association then in effect, and judgment may be entered on the arbitrator's award in any court having jurisdiction. If the Executive shall prevail, in whole or in part, as to any material issue in any contest (whether initiated by the Executive or by the Company) as to 4 the validity, enforceability or interpretation of any provision of this Agreement, the Company shall pay all reasonable expenses incurred by the Executive with respect to such contest, including, without limitation, his reasonable attorney's fees. 3. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean both the Company as defined above and any such successor that assumes and agrees to perform this Agreement, by operation of law or otherwise. 4. Miscellaneous. (a) This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, without reference to principles of conflict of laws. The captions of this Agreement are not part of the 5 provisions hereof and shall have no force or effect. This Agreement may not be amended or modified except by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications under this Agreement shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Timothy M. Wood 6733 LeRoy Lincolnwood, Illinois 60646 If to the Company: Borg-Warner Security Corporation 200 South Michigan Avenue Chicago, Illinois 60604 Attention: General Counsel or to such other address as either party furnishes to the other in writing in accordance with this Section 4(b). Notices and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. If any provision of this Agreement shall be held invalid or unenforceable in part, the remaining portion of such provision, together with all other provisions of this Agreement, shall remain valid and enforceable and continue in full force and effect to the fullest extent consistent with law. 6 (d) Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable under this Agreement all federal, state, local and foreign taxes that are required to be withheld by applicable laws or regulations. (e) The failure of the Executive or the Company to insist upon strict compliance with any provision of, or to assert any right under, this Agreement shall not be deemed to be a waiver of such provision or right or of any other provision of or right under this Agreement. (f) This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and which together shall constitute one instrument. 7 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization of the Board, the Company has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. /s/ Timothy M. Wood ------------------- Timothy M. Wood BORG-WARNER SECURITY CORPORATION By: /s/ J. Joe Adorjan ------------------ Name: Title: 8 EX-13 11 PORTIONS OF THE 1997 ANNUAL REPORT TO STOCKHOLDERS Borg-Warner Security Corporation Innovation "Wells Fargo Alarm Services provides electronic security services at more than 30 Caterpillar facilities nationwide. We chose Wells Fargo Alarm because they offered innovative service options and advanced technology solutions on a national level. Each of our locations presents a unique challenge and Wells Fargo Alarm was able to customize each installation to meet those challenges." . In 1997 we accelerated our investment in developing new products and services that offer customers more complete and more reliable protection of life and property. . Wells Fargo Alarm's newest product, SecurVision/R/, represents a break-through in the electronic security industry. SecurVision is a video recognition system that uses neural net technology to distinguish between human and non-human movement. Confirmed intrusions are then encrypted and transmitted as live video to a control center for evaluation and response, thereby reducing the incidence of costly false alarms. . At Borg-Warner Protective Services, our major investments in technology have provided us with the most modern and efficient physical security services available. Touch-ToCo/R/, a security officer tour-confirmation system; and PoCo/R/, a security officer post- confirmation system are only two examples of technology that are adding value and reliability to our physical security services. . Our customers depend on Borg-Warner Security to provide them with the latest advances available in the area of security technology and we remain committed to meeting this challenge. [PHOTO] Ron Smith, Corporate Security Services Systems Administrator, Caterpillar Inc. 13 The following table sets forth selected financial information for Borg-Warner Security Corporation (the "Company"). The information is derived from the audited financial statements of the Company. Previously reported results have been restated to reflect the discontinued operations of the Company's courier services unit in September 1996. In addition, the Company's armored security services unit entered into a business combination with Loomis Armored in January 1997. The combined company, known as Loomis, Fargo & Co. ("Loomis, Fargo"), is accounted for under the equity method. The business combination impacts 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 1997. The selected financial data should be read in connection with the 1997 Consolidated Financial Statements and accompanying notes.
Statement of Operations Data Year Ended December 31, (millions of dollars, except per share) 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- Net service revenues $1,548.0 $1,711.2 $1,708.5 $1,626.8 $1,592.1 Earnings before interest and income taxes 72.0 80.0 71.2 59.4 (148.8) Earnings (loss) before income taxes 30.0 23.4 15.3 10.6 (198.7) Provision (benefit) for income taxes (1) 11.0 9.5 6.9 (3.2) 19.5 Earnings (loss) from continuing operations (2) 19.0 13.9 8.4 13.8 (218.2) Earnings (loss) from continuing operations per share - basic(3) 0.81 0.60 0.36 0.60 (9.80) Earnings (loss) from continuing operations per share - diluted(3) $ 0.79 $ 0.59 $ 0.36 $ 0.59 $ (9.54) Average common shares - basic (in thousands)(4) 23,475 23,266 23,097 22,893 22,272 Average common shares and equivalents outstanding - diluted (in thousands)(4) 24,075 23,517 23,399 23,170 22,858 Balance Sheet Data (at end of year) - --------------------------------------------------------------------------------------------------------------------------- Total assets $ 659.6 $ 760.8 $ 838.5 $ 811.6 $ 773.5 Total debt 344.9 442.6 484.5 459.9 450.3 Shareholders' equity 65.0 41.2 49.7 43.8 27.5 Net assets of discontinued operations $ 15.4 $ 12.6 $ 36.8 $ 32.5 $ 35.1 Stock Prices First Second Third Fourth - --------------------------------------------------------------------------------------------------------------------------- 1997 Quarters High $ 15 1/8 $18 $19 9/16 $19 3/4 Low $ 10 1/8 $13 3/4 $16 1/8 $15 1/4 1996 Quarters High $ 12 3/4 $13 1/8 $ 9 7/8 $11 3/8 Low $ 10 1/4 $ 9 5/8 $ 8 1/4 $ 9 3/8
(1) Income taxes for the year ended December 31, 1994 reflect certain adjustments related to changes in tax bases. (2) $250 million of excess purchase price over net assets acquired not directly attributed to the protective services business was written off as a charge to earnings in the first quarter of 1993. (3) Earnings (loss) from continuing operations per share have been restated for adoption of Statement of Financial Accounting Standards No. 128. (4) The average common shares outstanding include 3,795,000 shares sold through an initial public offering on January 27, 1993. 14 Management's Responsibility for Consolidated Financial Statements Borg-Warner Security Corporation The information in this report is the responsibility of management. Borg-Warner Security Corporation has in place reporting guidelines and policies designed to ensure that the statements and other information contained in this report present a fair and accurate financial picture of the Company. In fulfilling this management responsibility, we make informed judgments and estimates conforming with generally accepted accounting principles. The accompanying financial statements have been audited by Deloitte & Touche LLP, independent auditors. Management has made available all of the Company's financial records and related information deemed necessary by Deloitte & Touche LLP. Furthermore, management believes that all representations made by it to Deloitte & Touche LLP during their audit were valid and appropriate. Management is responsible for maintaining a comprehensive system of internal control through its operations that provides reasonable assurance that assets are protected from improper use, that material errors are prevented or detected within a timely period and that records are sufficient to produce reliable financial reports. The system of internal control is supported by written policies and procedures that are updated by management as necessary. The system is reviewed and evaluated regularly by the Company's internal auditors, as well as by the independent auditors in connection with their annual audit of the financial statements. The independent auditors conduct their audit in accordance with generally accepted auditing standards and perform such tests of transactions and balances as they deem necessary. Management considers the recommendations of its internal auditors and independent auditors concerning the Company's system of internal control and takes the necessary actions that are cost-effective in the circumstances. Management believes that, as of December 31, 1997, the Company's system of internal control was adequate to accomplish the objectives set forth in the previous paragraph. An audit committee composed entirely of directors of the Company, who are not employees, meets periodically with the Company's management and independent auditors to review financial results and procedures, internal financial controls, and internal and external audit plans and recommendations. To guarantee independence, the audit committee and the independent auditors have unrestricted access to each other with or without the presence of management representatives. /s/ J. Joe Adorjan J. Joe Adorjan Chairman, President and Chief Executive Officer /s/ Timothy M. Wood Timothy M. Wood Vice President and Chief Financial Officer 15 Results of Operations Net Revenues
1997 vs. 1996 (millions of dollars) 1997 1996 1995 Percent Change - ------------------------------------------------------------------------------- Physical Security Services $1,289.3 $1,223.8 $1,222.8 5.4% Electronic Security Services 243.4 241.1 254.7 1.0% Armored Security Services 15.3 246.3 231.0 (93.8%) - ------------------------------------------------------------------------------- Total Revenues $1,548.0 $1,711.2 $1,708.5 (9.5%) ===============================================================================
The Company's physical security services unit is the world's largest provider of contract security personnel and related services with approximately 73,000 employees serving 14,000 customers in the United States, Canada, the United Kingdom and Colombia. Revenue increased in 1997 principally due to new business growth, higher billing rates and improved customer retention. Physical security 1996 revenues were essentially flat compared to 1995 primarily due to management's decision to prune higher risk, low margin business during the year. The Company's electronic security services unit is a leading full service provider of integrated electronic security systems in the United States and Canada, including intrusion and fire detection, closed circuit television and access control. The unit has approximately 126,000 customers and 2,200 employees. The unit's revenues in 1997 increased modestly compared to 1996 as higher direct sales of commercial installations and higher service revenue on residential operations were principally offset by the negative impact of bank consolidations. The electronic security services unit primarily recognizes leased equipment under sales-type leases for certain contracts dated after January 1, 1995 and as operating leases for prior periods. At December 31, 1997, sales-type leases represented 46.4 percent of the lease base, compared to 25.0 percent and 15.6 percent at December 31, 1996 and 1995, respectively. The annual aggregate retention rate, excluding the impact of bank consolidations, for all subscriber installation leases was 90 percent in 1997 versus 89 percent in 1996 and 88 percent in 1995. In January 1997, Wells Fargo Armored entered into a business combination with Loomis Armored. The combined company, known as Loomis, Fargo & Co., is owned 51 percent by the former Loomis shareholders and 49 percent by the Company. The combination created a leading armored transportation and ATM services company with broad geographic coverage. This transaction also allowed the Company to reduce its debt by approximately $93 million through December 31, 1997. The excess of proceeds received over carrying value of net assets contributed in the 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. The Company accounts for its investment in the new company under the equity method. The business combination impacts 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 1997. Armored security 1996 revenues increased versus 1995 mainly due to higher volume in ATM services. Costs and Expenses Cost of services as a percent of revenue was 79.6 percent, 79.5 percent and 79.6 percent in 1997, 1996 and 1995, respectively. Gross profit margins remained constant despite increased labor costs, as a result of the Company's commitment to improve account profitability and internal productivity programs. Depreciation expense was $39.1 million in 1997, down from $47.0 million in 1996 and $52.1 million in 1995. The 1997 decrease resulted principally from the Loomis, Fargo combination, while the 1996 decrease resulted primarily from the change to sales-type lease accounting for subscriber installations. Selling, general and administrative (SG&A) expenses were $194.6 million, $210.6 million and $212.5 million in 1997, 1996 and 1995, respectively. As a percent of net sales, SG&A costs were 12.6 percent, 12.3 percent and 12.4 percent in 1997, 1996 and 1995, respectively. The 1997 increase as a percentage of sales was principally due to investments in new product development, information systems and marketing programs. The 1997 decreased spending primarily reflects the Loomis, Fargo combination. The Company also received cash proceeds of approximately $3.0 million from the sale of non-operating assets. This sale resulted in a gain that was more than offset by the increases noted above. Operating Profit Operating profit decreased to $80.3 million in 1997 from $93.1 million in 1996 and $85.9 million in 1995. Operating profit margin decreased to 5.2 percent in 1997 from 5.4 percent in 1996 and 5.0 percent in 1995. Operating profit from physical security services increased to $64.9 million in 1997 from $62.1 million in 1996 and $56.4 million in 1995. Physical security services operating profit margins were 5.0 percent, 5.1 percent and 4.6 percent in 1997, 1996 and 1995, respectively. Electronic security services 16 Borg-Warner Security Corporation operating profit decreased to $14.5 million in 1997 from $18.9 million in 1996 and $15.8 million in 1995. Electronic security services operating profit margins were 6.0 percent, 7.8 percent and 6.2 percent in 1997, 1996 and 1995, respectively. The decrease reflects the up-front cost of increased investment in systems, sales and marketing and new product development. It also reflects the lapse of certain purchase accounting credits related to the acquisition of Borg- Warner in 1987. Armored security services operating profit was $0.9 million in 1997 compared with $12.1 million in 1996 and $13.7 million in 1995. The decrease resulted from the Loomis, Fargo combination. During 1997, the Company took several steps toward its long-term objective of shifting from defined benefit to defined contribution retirement plans. The Company recorded pre-tax income of approximately $3.7 million resulting from defined pension benefit plan changes. Other Income/Expense Other expense in 1997 was $10.0 million versus $13.4 million in 1996 and 1995. The 1997 decrease principally reflects a net gain of $2.2 million and reduced amortization resulting from the Loomis, Fargo combination. Interest Expense and Finance Charges Interest expense, including the amortization of financing costs, decreased to $42.0 million in 1997 from $56.6 million in 1996 and $55.9 million in 1995. The 1997 decrease from 1996 is principally due to the lower borrowing levels resulting from the proceeds from the Loomis, Fargo combination and improved terms under the subsequent refinancing of bank borrowings. The increase in 1996 from 1995 resulted from higher costs associated with the issuance and renegotiation of certain bank lines of credit and borrowing facilities. This was partially offset by the benefits of lower short-term market rates of interest and lower average debt levels outstanding. Income Taxes Income taxes were $11.0 million, $9.5 million and $6.9 million in 1997, 1996 and 1995, respectively. The Company's effective tax rate in 1997 was 36.7 percent, down from 40.6 percent in 1996 and 45.1 percent in 1995. The effective tax rate generally exceeds the statutory rate because of non-deductible excess purchase price amortization. The decreased 1997 effective tax rate principally relates to Loomis, Fargo income which is included in the Company's financial statements after-tax. Net Earnings Earnings from continuing operations for 1997 were $19.0 million, versus $13.9 million in 1996 and $8.4 million in 1995. Net earnings for 1997 were $19.0 million compared with a net loss of $14.6 million in 1996, which included the impact of treating the courier services unit as a discontinued operation. Net earnings of $1.2 million in 1995 included a charge of $4.7 million, net of tax, from the early extinguishment of debt in connection with the amendment of the Company's credit facilities. International Operations Revenues for 1997 were $122.7 million compared with $116.7 million in 1996 and $109.4 million in 1995. Operations are primarily in Canada, the United Kingdom and Colombia and principally involve the employment of contract guard personnel. Discontinued Operations As of September 30, 1996, the Company's courier services unit has been treated as a discontinued operation. The Company incurred an after-tax charge of $25 million, $1.06 per share, in 1996 to reflect the future realizable value of this business. Cash Flow The Company generated cash flow from continuing operations of $47.4 million in 1997, compared to $57.7 million and $66.3 million in 1996 and 1995, respectively. The decreased cash flow in 1997 was due primarily to increased working capital requirements. Capital expenditures and investments in sales-type leases totaled $47.9 million, $47.4 million and $52.7 million in 1997, 1996 and 1995, respectively. Core security services capital expenditures and investments in sales-type leases totaled $47.7 million, $39.3 million and $49.0 million in 1997, 1996 and 1995, respectively. Increased 1997 spending, despite improved spending controls, is due to higher electronic security installations. In March 1996, the Company began selling equipment payment rights due under customer leases of certain electronic security installations. Net proceeds received by the Company were approximately $2 million in 1997 and $10 million in 1996. For cost and administrative reasons, the Company has suspended such sales and is investigating alternative methods of financing its sales-type leases. Liquidity Total debt declined to $344.9 million at December 31, 1997 from $442.6 million at December 31, 1996, a reduction of $97.7 million. This reduction resulted primarily from the proceeds realized from the Loomis, Fargo combination. 17 On March 24, 1997, the Company completed a refinancing pursuant to which it issued $125 million principal amount of 9 5/8% senior subordinated notes due in 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 credit 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. At year-end 1997, $63.9 million was outstanding under the revolving credit facility and letters of credit totaling $110.8 million were issued and outstanding. The Company has an accounts receivable facility providing for the sale of a $120 million undivided interest in a revolving pool of customer receivables. Other current assets at December 31, 1997 and December 31, 1996 included interest bearing cash deposits of $17.6 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. The Company presently intends to replace this facility with a similar facility. 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 and investment in sales-type leases, for the foreseeable future. Additionally, the Company has initiated programs to review its computer systems and applications for compatibility with the year 2000. Expenditures specifically related to modifications for year 2000 compatibility are not expected to be material. As discussed more fully in Note 8 of the Notes to Consolidated Financial Statements, various complaints seeking substantial dollar amounts have been filed against the Company. The Company believes that it has established adequate provisions for litigation liabilities in its financial statements in accordance with generally accepted accounting principles. The Company believes that none of these matters individually or in the aggregate will have a material adverse effect on its financial position or future operating results, although no assurance can be given with respect to the ultimate outcome of any such proceeding. 18 Consolidated Statement of Operations Borg-Warner Security Corporation
Year Ended December 31, (millions of dollars, except per share) 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------- Net service revenues $1,548.0 $1,711.2 $1,708.5 Cost of services 1,232.3 1,360.2 1,359.3 Selling, general and administrative expenses 194.6 210.6 212.5 Depreciation 39.1 47.0 52.1 Other expense, net 10.0 13.4 13.4 Interest expense and finance charges 42.0 56.6 55.9 - -------------------------------------------------------------------------------------------------------------- Earnings before income taxes 30.0 23.4 15.3 Provision for income taxes-Note 12 11.0 9.5 6.9 - -------------------------------------------------------------------------------------------------------------- Earnings from continuing operations 19.0 13.9 8.4 Loss from discontinued operations, net of income taxes-Note 4 -- (28.5) (2.5) - -------------------------------------------------------------------------------------------------------------- Earnings (loss) before extraordinary item 19.0 (14.6) 5.9 Extraordinary item: Loss from early extinguishment of debt, net of $3.2 tax benefit-Note 5 -- -- (4.7) - -------------------------------------------------------------------------------------------------------------- Net earnings (loss) $19.0 $(14.6) $ 1.2 ============================================================================================================== Earnings (loss) per common share - basic: Continuing operations $0.81 $ 0.60 $ 0.36 Discontinued operations -- (1.23) (0.11) Extraordinary item -- -- (0.20) - -------------------------------------------------------------------------------------------------------------- Net earnings (loss) per share $0.81 $(0.63) $ 0.05 ============================================================================================================== Earnings (loss) per common share - diluted: Continuing operations $0.79 $ 0.59 $ 0.36 Discontinued operations -- (1.21) (0.11) Extraordinary item -- -- (0.20) - -------------------------------------------------------------------------------------------------------------- Net earnings (loss) per share $0.79 $(0.62) $ 0.05 ==============================================================================================================
(See accompanying notes to consolidated financial statements) 19 Consolidated Balance Sheet
December 31, (millions of dollars, except share data) 1997 1996 - --------------------------------------------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 8.7 $ 17.8 Receivables, net 52.2 63.7 Inventories 11.0 12.1 Other current assets 72.3 73.5 - --------------------------------------------------------------------------------------------------------------------- Total current assets 144.2 167.1 Property, plant and equipment Land and buildings 30.4 46.9 Machinery and equipment 39.9 67.6 Subscribers' installations 278.5 312.8 Capital leases 2.8 14.3 Construction in progress 0.6 1.0 - --------------------------------------------------------------------------------------------------------------------- 352.2 442.6 Less accumulated depreciation 210.9 239.5 - --------------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 141.3 203.1 Net excess purchase price over net assets acquired 198.9 237.2 Deferred tax asset, net 39.1 46.8 Net assets of discontinued operations 15.4 12.6 Other assets 120.7 94.0 - --------------------------------------------------------------------------------------------------------------------- Total other assets 374.1 390.6 - --------------------------------------------------------------------------------------------------------------------- $659.6 $760.8 ===================================================================================================================== Liabilities and Shareholders' Equity Notes payable $ 2.4 $ 4.4 Accounts payable and accrued expenses 145.5 173.7 - --------------------------------------------------------------------------------------------------------------------- Total current liabilities 147.9 178.1 Long-term debt 342.5 438.2 Other long-term liabilities 104.2 103.3 Capital stock: Common stock, issued 23,362,806 shares in 1997 and 22,446,100 shares in 1996 0.2 0.2 Series I non-voting common stock, issued 2,720,000 shares in 1997 and 1996 -- -- Capital in excess of par value 30.8 29.0 Retained earnings 41.7 20.6 Notes receivable-management stock purchase -- (0.3) Cumulative translation adjustment -- 0.5 - --------------------------------------------------------------------------------------------------------------------- 72.7 50.0 Treasury common stock, at cost, 2,506,400 shares in 1997 and 1,862,311 shares in 1996 (7.7) (8.8) - --------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 65.0 41.2 - --------------------------------------------------------------------------------------------------------------------- $659.6 $760.8 =====================================================================================================================
(See accompanying notes to consolidated financial statements) 20
Consolidated Statement of Cash Flows Borg-Warner Security Corporation Year ended December 31, (millions of dollars) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Operating: Continuing operations: Earnings from continuing operations $ 19.0 $ 13.9 $ 8.4 Adjustments to reconcile net earnings to net cash provided by continuing operations: Non-cash charges to earnings: Depreciation and amortization 50.2 60.4 65.5 Provision for losses on receivables 1.8 2.7 4.4 Deferred income taxes 7.7 6.0 (2.0) Amortization of debt discount -- 0.6 2.1 Principal reduction in sales-type leases 13.0 9.9 4.6 Changes in assets and liabilities: (Increase) decrease in receivables (20.9) 7.3 10.9 (Increase) decrease in other current assets 4.1 (17.7) (21.7) (Decrease) increase in accounts payable and accrued expenses (9.8) (11.9) 13.8 Net change in other long-term assets and liabilities (15.5) (13.5) (19.7) Gain on sale of assets of armored services unit (2.2) -- -- - ------------------------------------------------------------------------------------------------------------------- Net cash provided by continuing operations 47.4 57.7 66.3 Discontinued operations: Net loss -- (28.5) (2.5) Other cash related to discontinued operations (2.8) 24.2 (4.3) - ------------------------------------------------------------------------------------------------------------------- Net cash used in discontinued operations (2.8) (4.3) (6.8) - ------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 44.6 53.4 59.5 Investing: Capital expenditures, excluding sales-type leases (8.9) (14.5) (10.9) Investment in sales-type leases (39.0) (32.9) (41.8) Net outsourcing of sales-type leases 1.7 9.6 -- Proceeds from sale of assets of armored services unit 92.9 -- -- Other, net 0.9 1.9 (1.1) - ------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 47.6 (35.9) (53.8) Financing: (Decrease) increase in notes payable (1.5) 0.8 (6.1) (Decrease) increase in debt outstanding under revolving credit facility (22.9) (37.8) 19.4 (Decrease) increase in receivables sold (7.8) 21.3 (23.1) Issuance of long-term debt 125.0 100.0 100.0 Retirement of long-term debt (196.8) (105.5) (90.8) Sales of treasury common stock 1.1 0.3 1.0 Other, net 1.6 1.8 (2.0) - ------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (101.3) (19.1) (1.6) - ------------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (9.1) (1.6) 4.1 Cash and cash equivalents at beginning of year 17.8 19.4 15.3 - ------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 8.7 $ 17.8 $ 19.4 =================================================================================================================== Supplemental cash flow information: Interest paid $ 40.8 $ 57.7 $ 54.2 Income taxes paid 9.4 2.8 0.7
(See accompanying notes to consolidated financial statements) 21
Year Ended December 31, 1997 1996 1995 (millions of dollars, except share data) Shares Amount Shares Amount Shares Amount - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock Issued Beginning balance 25,166,100 $ 0.2 25,166,100 $ 0.2 25,155,700 $ 0.2 Shares issued under stock option and related plans 16,706 -- -- -- -- -- Conversion of Series I non-voting shares to common shares 900,000 -- -- -- 10,400 -- - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31 26,082,806 0.2 25,166,100 0.2 25,166,100 0.2 - ------------------------------------------------------------------------------------------------------------------------------------ Capital in Excess of Par Value Beginning balance 29.0 28.1 30.9 Shares issued under stock option and related plans 1.0 0.4 (5.4) Tax benefit from trust distribution and exercise of stock options 0.8 0.5 2.6 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31 30.8 29.0 28.1 - ------------------------------------------------------------------------------------------------------------------------------------ Retained Earnings Beginning balance 20.6 31.2 29.7 Net earnings (loss) 19.0 (14.6) 1.2 Adjustment for deferred pension experience loss 2.1 4.0 0.3 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31 41.7 20.6 31.2 - ------------------------------------------------------------------------------------------------------------------------------------ Notes Receivable-Management Stock Purchase Beginning balance (0.3) (0.3) (1.0) Net activity 0.3 -- 0.7 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31 -- (0.3) (0.3) - ------------------------------------------------------------------------------------------------------------------------------------ Cumulative Translation Adjustment Beginning balance 0.5 (0.4) (0.5) Current year adjustment (0.5) 0.9 0.1 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31 -- 0.5 (0.4) - ------------------------------------------------------------------------------------------------------------------------------------ Treasury Stock Beginning balance 1,862,311 (8.8) 1,928,861 (9.1) 2,237,344 (15.5) Shares issued under stock option and related plans (255,911) 1.1 (66,550) 0.3 (318,883) 6.4 Conversion of Series I non-voting shares to common shares 900,000 -- -- -- 10,400 -- - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31 2,506,400 (7.7) 1,862,311 (8.8) 1,928,861 (9.1) ==================================================================================================================================== Total Shareholders' Equity $65.0 $ 41.2 $49.7 ====================================================================================================================================
(See accompanying notes to consolidated financial statements) 22 Notes to Consolidated Financial Statements Borg-Warner Security Corporation Note 1 -- Summary of Significant Accounting Policies The following paragraphs briefly describe significant accounting policies. Certain 1996 and 1995 amounts have been reclassified to conform with the 1997 presentation. Principles of Consolidation The consolidated financial statements include all significant subsidiaries. As of September 30, 1996, the Company's courier services unit has been treated as a discontinued operation. The assets, liabilities, results of operations and adjustments to carrying values of net assets and cash flows of the courier unit have been segregated and reported as discontinued operations for all periods presented, and previously reported results have been restated (see Note 4). On January 24, 1997, the Company's armored services unit entered into a business combination with Loomis Armored. The combined company, known as Loomis, Fargo & Co., is owned 51 percent by the former Loomis shareholders and 49 percent by the Company. The Company accounts for its investment in Loomis, Fargo under the equity method. The business combination impacts the comparison of the Company's 1997 results to prior periods because the armored unit was included in the Company's results of operations for only 23 days in 1997 (see Note 3). Use of Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results may differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents consists primarily of cash and certificates of deposit with original maturities of three months or less. Inventories Inventories are valued at the lower of cost or market. Cost of substantially all inventories is determined by the first-in, first-out method. Property, Plant and Equipment and Depreciation Property, plant and equipment is carried at cost less accumulated depreciation. Expenditures for maintenance, repairs and renewals of relatively minor items are generally charged to expense as incurred. Renewals of significant items are capitalized. Depreciation is computed generally on the straight-line method over the following estimated useful lives: Buildings and improvements 15 to 50 years Machinery and equipment 3 to 12 years Subscribers' installations 8 to 15 years Property under capital leases 3 to 7 years Amortization of Excess Purchase Price Over Net Assets Acquired Excess of purchase price over net assets acquired is being amortized on a straight-line basis over 5 to 40 years, with the majority being amortized over 40 years. The Company periodically reviews its operations to determine whether there has been a diminution in value of its excess purchase price over net assets acquired. Derivative Financial Instruments The Company uses interest rate swap agreements to manage exposure to interest rate fluctuations. The Company does not use derivative instruments for speculative purposes. The differential paid or received on interest rate swap agreements is recognized as an adjustment to interest expense in the period incurred or earned. The Company has no interest rate swap agreements outstanding (see Note 6). Casualty Insurance Liabilities The Company has accrued a discounted liability for the retained portion of insurance costs related to its various deductible policies. This insurance liability is determined by the Company based on claims filed and an estimate of claims incurred but not yet reported (see Note 2). Revenue Recognition Revenue is recognized at the time services are provided. In certain circumstances this can result in revenue recognition prior to customer billing and revenue deferral from advance billings. Transactions with Borg-Warner Automotive Under a tax-sharing agreement with the Company, for periods prior to January 1993, Borg-Warner Automotive is required to pay the Company for any operating loss carryforward apportioned to it at such time as the benefits related to such carry-forward are realized by Borg-Warner Automotive. Also, certain costs incurred at corporate headquarters are charged to Borg-Warner Automotive based on a service agreement with the Company. Retirement Benefit Plans A number of eligible salaried and hourly employees participate in contributory or noncontributory defined benefit or defined contribution plans. Funding policy is based upon independent actuarial valuations and is within the limits required by ERISA for U.S. defined benefit plans. The benefits provided to certain salaried employees covered under various defined benefit plans are based on years of service and final average pay and utilize the projected unit credit method for cost allocation. The benefits provided to certain hourly employees under various defined benefit plans are based on years of service and utilize the unit credit method for cost allocation. Under the defined contribution plans, contributions by the Company or its subsidiaries sponsoring the plans are based on the employees' salary, age, years of service, and/or a fixed schedule. 23 These contributions are charged to earnings as they are made to the various plans (see Note 9). Stock Options The Company uses the intrinsic value method for expense recognition for stock options and discloses additional information, including the impact under the fair value method, in the notes to the financial statements (see Note 10). Income Taxes Income taxes are determined using the liability method, under which deferred tax assets and liabilities are determined based on the differences between the financial accounting and tax bases of assets and liabilities. Deferred tax assets or liabilities at the end of each period are determined using the currently enacted tax rate expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be settled or realized (see Note 12). Earnings Per Common Share (EPS) In 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share." This statement replaced the presentation and calculation of primary EPS and fully diluted EPS with basic EPS and diluted EPS. The statement requires disclosure of basic and diluted EPS on the face of the financial statements. Basic EPS is based on average outstanding common shares. Diluted EPS is based on average outstanding common shares and common share equivalents. Common share equivalents recognize the dilutive effects of common shares which may be issued in the future upon exercise of certain stock options. Prior years EPS have been restated under the new method (see Note 14). New Accounting Pronouncements In January 1997, the Company adopted Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". The adoption of this standard did not have a material effect on the financial statements.
Note 2 -- Balance Sheet Information Detailed balance sheet data are as follows: December 31, (millions of dollars) 1997 1996 - ----------------------------------------------------------------------------- Receivables Customers $ 55.8 $ 66.1 Other 1.3 3.9 - ----------------------------------------------------------------------------- 57.1 70.0 Less allowance for losses 4.9 6.3 - ----------------------------------------------------------------------------- Net receivables $ 52.2 $ 63.7 ============================================================================= Other current assets Retained interest in receivables $ 30.8 $ 36.7 Restricted interest-bearing cash deposits 17.6 9.8 Other 23.9 27.0 - ----------------------------------------------------------------------------- Total other current assets $ 72.3 $ 73.5 ============================================================================= Other assets Net investment in sales-type leases $ 78.2 $ 54.4 Debt issuance costs 8.0 10.4 Deferred pension asset 12.1 9.1 Deferred subscribers' installation costs 6.3 5.4 Other 16.1 14.7 - ----------------------------------------------------------------------------- Total other assets $120.7 $ 94.0 ============================================================================= Accounts payable and accrued expenses Trade payables $ 36.5 $ 42.5 Payroll and related 38.6 41.6 Casualty insurance 27.6 44.4 Interest 6.7 5.2 Liabilities to former shareholders 7.7 8.7 Deferred income 10.1 10.3 Other 18.3 21.0 - ----------------------------------------------------------------------------- Total accounts payable and accrued expenses $145.5 $173.7 =============================================================================
The Company has an agreement under which it sells a revolving pool of trade accounts receivable to a special purpose subsidiary of the Company. At December 31, 1997 and 1996 the subsidiary had purchased $150.8 million and $156.7 million of such accounts receivable. The subsidiary sells up to $120 million of undivided interests in such accounts receivable. The difference represents the interest retained by the Company which is considered as an interest in a security and has been included in "Other current assets". The fair value of the retained interest approximates its carrying value 24 Borg-Warner Security Corporation due to the short-term nature of the receivables. Also included in "Other current assets" is $17.6 million and $9.8 million at December 31, 1997 and 1996, respectively, representing interest-bearing cash deposits held in trust under the terms of the agreement. These deposits represent proceeds of collections held back based on the amount of eligible receivables in the pool. The Company's retained interest in the receivables and cash deposits are generally restricted. Selling, general and administrative expenses include provisions for losses on receivables of $1.8 million, $2.7 million and $4.4 million in 1997, 1996 and 1995, respectively. Accumulated depreciation related to capital leases amounted to $0.2 million and $8.8 million at December 31, 1997 and 1996, respectively. Accumulated amortization related to excess purchase price over net assets acquired amounted to $74.9 million and $74.2 million at December 31, 1997 and 1996, respectively. Trade payables include checks outstanding in excess of bank deposits in the Company's central disbursement accounts, since arrangements with the banks do not call for reimbursement until checks are presented for payment. Such amounts were $25.6 million and $32.7 million at December 31, 1997 and 1996, respectively. The non-current portion of the casualty insurance liability, included in other long-term liabilities, was $58.6 million and $44.2 million at December 31, 1997 and 1996, respectively. The total discounted insurance accrual, including the portion reflected in accounts payable and accrued liabilities, was $86.2 million and $88.6 million at December 31, 1997 and 1996, respectively. The estimated aggregate undiscounted insurance liability was $101.1 million and $101.9 million at December 31, 1997 and 1996, respectively. The discount rate used to value the future obligation at December 31, 1997 and 1996 was 6.0 percent and 5.5 percent, respectively. Note 3 -- Investment in Affiliates On January 24, 1997, the Company's armored security services unit entered into a business combination with Loomis Armored. The combined company, known as Loomis, Fargo & Co., is owned 51 percent by the former Loomis shareholders and 49 percent by the Company. The Company's armored services unit contributed substantially all of its assets and assigned certain of its liabilities to Loomis, Fargo in exchange for (i) 4,900,000 shares of Loomis, Fargo common stock and (ii) a cash payment of approximately $105 million which includes amounts paid to satisfy intercompany indebtedness assumed by Loomis, Fargo. The cash proceeds received were net of transaction costs and subject to certain adjustments. At December 31, 1997, $3.5 million has been expended to settle working capital adjustments and $8.7 million for payments of retained casualty insurance liabilities. The business combination impacts 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 1997. Armored security revenues were $15.3 million, $246.3 million and $231.0 million in 1997, 1996 and 1995, respectively. Armored security operating profit was $0.9 million in 1997, compared with $12.1 million in 1996 and $13.7 million in 1995. Total assets at December 31, 1996 were $87.4 million. 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. In 1997, the net gain recognized by the Company on the combination was $2.2 million. The net loss recognized under the equity method for the year was $1.1 million. The Company does not guarantee the indebtedness of Loomis, Fargo nor is it required to fund Loomis, Fargo's future operations. Note 4 -- Discontinued Operations As of September 30, 1996, the Company's courier services 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. The Company incurred an after-tax charge of $25 million, $1.06 per share, in 1996 to reflect the future realizable value of this business. At December 31, 1997, the net assets of the discontinued operation consist mainly of customer receivables, property, plant and equipment and accounts payable. Net service revenues were $142.2 million, $140.0 million and $154.0 million in 1997, 1996 and 1995, respectively. Net loss was $7.2 million (net of $3.9 million tax benefit), $5.4 million (net of $2.8 million tax benefit) and $2.5 million (net of $1.0 million tax benefit) in 1997, 1996 and 1995, respectively. Management believes that the estimated loss for the disposal of the unit recorded in 1996 continues to be adequate to cover the ultimate disposition of the operation. The Company has an active program in place to find a buyer for the unit and expects that the unit will be sold in the near future. 25 Note 5 - Notes Payable and Long-Term Debt The following is a summary of notes payable and long-term debt which reflects all borrowings of the Company and its consolidated subsidiaries:
December 31, 1997 December 31, 1996 (millions of dollars) Current Long-Term Current Long-Term - ------------------------------------------------------------------------------------------------------------------- 9 1/8% senior subordinated notes (face amount $150 million due 2003) $ -- $149.2 $ -- $149.2 9 5/8% senior subordinated notes (face amount $125 million due 2007) -- 124.2 -- -- Bank revolving credit loan due through 1999 (at an average rate of 7.9% in 1997 and 8.5% in 1996) -- 63.9 -- 86.8 Bank term loan due 1998 (at an average of 8.9% in 1996) -- -- -- 196.8 Capital lease liability (at an average rate of 9.2% in 1997 and 10.2% in 1996) 1.3 5.0 2.4 5.3 Unsecured notes (at an average rate of 7.6% in 1997 and 7.3% in 1996) 1.1 0.2 2.0 0.1 - ------------------------------------------------------------------------------------------------------------------- Total notes payable and long-term debt $2.4 $342.5 $4.4 $438.2 - -------------------------------------------------------------------------------------------------------------------
Maturities of long-term debt, including unamortized discount of $1.6 million, are as follows: 1999, $11.5 million; 2000, $21.3 million; 2001, $31.2 million; 2002, $4.6 million; and after 2002, $275.5 million. Included in long-term debt at December 31, 1997 and 1996 were obligations of $278.6 million and $154.5 million, respectively, with fixed interest rates and $63.9 million and $283.7 million, respectively, with variable interest rates (generally based on LIBOR or prime rate). In 1997, the Company completed a refinancing which included a new $285 million bank facility and the issuance of $125 million principal amount of 9 5/8% senior subordinated notes due in 2007. The bank facility includes a revolving credit commitment of $155 million and the capacity to issue up to $155 million letters of credit. The bank facility is available through March 31, 2002. The committed amount under the bank facility reduces semi-annually beginning September 30, 1999. Available future commitments at December 31 are as follows: 1998, $285 million; 1999, $275 million; 2000, $255 million; and 2001, $225 million. At December 31, 1997, unused revolving credit commitments were $91.1 million, and letters of credit totalling $110.8 million were issued and outstanding. The credit facilities contain numerous financial and operating covenants including, among others, covenants requiring the Company to maintain certain financial ratios and restricting its ability to incur additional indebtedness, to create or permit to exist certain liens, or to pay dividends. To secure its obligations under these facilities, the Company pledged the stock of certain of its subsidiaries. In 1995, an extraordinary loss of $4.7 million, net of tax, was realized related to the extinguishment of debt in connection with the amendment of the Company's credit facilities. Note 6 - Fair Value of Financial Instruments The methods and assumptions used to estimate the fair value of each class of financial instrument are as follows: Cash and cash equivalents, receivables, notes payable and accounts payable The carrying amounts approximate fair value because of the short maturity of these instruments. Long-term debt The carrying amounts of the Company's bank borrowings under its short-term bank lines and revolving credit agreement approximate fair value because the interest rates are based on floating rates identified by reference to market rates. The fair values of the Company's other long-term debt either approximate carrying value or are estimated based on quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The carrying amounts and fair values of long-term debt at December 31, 1997 and 1996 were as follows:
December 31, (millions of dollars) 1997 1996 - ------------------------------------------------------------------------------- Carrying amount $342.5 $438.2 Fair value 347.1 437.7
Interest rate swaps The Company uses interest rate swap agreements to manage exposure to interest rate fluctuations. The Company does not use derivative instruments for speculative purposes. The differential paid or received on interest rate swap agreements is recognized as an adjustment to interest expense in the period incurred or earned. The Company has no interest rate swap agreements outstanding. 26 Borg-Warner Security Corporation Letters of credit The Company utilizes third-party letters of credit to guarantee certain casualty insurance activities. The letters of credit reflect fair value as a condition of their underlying purpose and are subject to fees competitively determined in the marketplace. The contract value/fair value of the letters of credit at December 31, 1997 and 1996 were $110.8 million and $136.3 million, respectively. To monitor the counter parties' ability to perform, these letters of credit are only executed with major financial institutions. Note 7 - Commitments The Company is committed to pay rents on non-cancelable operating leases with terms exceeding one year. Rental amounts committed in future years are summarized at December 31, 1997 as follows:
Fiscal year (millions of dollars) - ---------------------------------------------------------------- 1998 $12.6 1999 9.2 2000 5.8 2001 2.8 2002 1.9 2003 and after 6.4 - ---------------------------------------------------------------- Total $38.7 ================================================================
Total rental expense amounted to $17.9 million, $26.7 million and $26.1 million in 1997, 1996 and 1995, respectively. Note 8 - Contingent Liabilities The Company's discontinued property and casualty insurance subsidiary ("Centaur") ceased writing insurance in 1984 and has been operating under rehabilitation since September 1987. Rehabilitation is a process supervised by the Illinois Director of Insurance to attempt to compromise claim liabilities at an aggregate level that is not in excess of Centaur's assets. In rehabilitation, Centaur's assets are being used to satisfy claim liabilities under direct insurance policies written by Centaur. Any remaining assets will be applied to Centaur's obligations to other insurance companies under reinsurance contracts. 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 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 $7 million (relating to environmental matters with respect to discontinued operations of the Company). The Company has requested that its discontinued automotive subsidiary, Borg-Warner Automotive, indemnify it against certain past and future costs relating to environmental and financing liabilities associated with certain former automotive operations. At December 31, 1997 such past costs were approximately $3.5 million. Borg-Warner Automotive has contested its indemnification obligation with respect to such liabilities. The parties submitted the dispute to binding arbitration. In November 1997, the arbitrator found in favor of the Company. In February 1998, an appellate panel upheld the arbitration award. Separately, in January 1998, Borg-Warner Automotive filed suit against the Company raising the same issues asserted in the arbitration and other issues related to the 1993 spin-off of Borg-Warner Automotive. The lawsuit seeks specific performance, equitable relief and unspecified compensatory and punitive damages. 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. 27 Note 9 - Retirement Benefits The Company has various defined benefit and contribution plans which cover eligible employees. Retirement benefit expense (income) amounted to ($0.8) million, $4.5 million and $4.7 million in 1997, 1996 and 1995, respectively. This expense includes post-retirement life insurance and medical benefits of $0.3 million for 1997, 1996 and 1995, respectively, as well as defined contribution plan expenses of $1.5 million, $1.5 million and $1.7 million in 1997, 1996 and 1995, respectively. Also, under the provisions of SFAS No. 88, "Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," benefit freezes resulted in the recognition of $3.7 million of net curtailment gains in 1997. This gain resulted from the net decrease in the Company's benefit obligation for employees affected by the armored services unit combination with Loomis Armored Inc., the treatment of the courier services unit as a discontinued operation and other benefit freezes. The following table sets forth the funded status of the defined benefit plans:
Funded Status December 31, 1997 December 31, 1996 (millions of dollars) Over Over Under - ------------------------------------------------------------------------------------------------------ Actuarial present value of benefit obligations: Vested benefits $102.0 $60.6 $ 25.7 Non-vested benefits 2.6 2.6 0.1 - ------------------------------------------------------------------------------------------------------ Accumulated benefit obligations 104.6 63.2 25.8 Effect of projected future compensation levels 2.0 5.0 -- - ------------------------------------------------------------------------------------------------------ Projected benefit obligation 106.6 68.2 25.8 Plan assets at fair value 124.4 81.4 20.5 - ------------------------------------------------------------------------------------------------------ Assets in excess of (less than) projected benefit obligation 17.8 13.2 (5.3) Unrecognized net loss (gain) (6.5) (4.9) 3.1 Unrecognized prior service cost 0.8 0.8 -- - ------------------------------------------------------------------------------------------------------ Net asset (liability) before minimum liability 12.1 9.1 (2.2) Adjustment required to recognize minimum liability -- -- (3.1) - ------------------------------------------------------------------------------------------------------ Net asset (liability) on balance sheet $ 12.1 $ 9.1 ($5.3) ======================================================================================================
Assets held in trust for the defined benefit plans are comprised primarily of marketable equity and fixed income securities. Provisions of FASB Statement No. 87 require the Company, under certain circumstances, to record a minimum pension liability relating to unfunded accumulated benefit obligations and reduce shareholders' equity, net of future tax benefits. During 1997, minimum pension liability recorded in prior years was eliminated as a result of the merger of several plans and performance of invested assets. Net periodic pension expense for the defined benefit plans was comprised as follows:
Year ended December 31, (millions of dollars) 1997 1996 1995 - -------------------------------------------------------------- Service cost $ 2.4 $ 3.3 $ 2.4 Interest cost 7.6 7.0 6.9 Actual return on assets (25.7) (12.5) (20.4) Net amortization and deferrals 16.8 4.9 13.8 - -------------------------------------------------------------- Net periodic pension cost $ 1.1 $ 2.7 $ 2.7 ==============================================================
The Company's assumptions used as of December 31, 1997, 1996 and 1995 in determining the pension cost and pension liability shown above were as follows:
(percent) 1997 1996 1995 - -------------------------------------------------------------- Discount rate 7.5 8.0 7.5 Rate of salary progression 4.0 4.0 4.0 Long-term rate of return on assets 10.0 10.0 9.5
The Company also has post-employment benefits covering certain existing and former employees, including employees of businesses which have been divested by the Company. The liabilities on the Company's balance sheet for these benefits as of December 31, 1997 and 1996 were $10.7 million and $11.5 million, respectively, and are included in "Other long-term liabilities". The discount rate used in determining this liability was 7.5% in 1997 and 8.0% in 1996. Medical expense increases are projected to be 6.25% in 1998 grading to 5.25% in 1999. 28 Borg-Warner Security Corporation Note 10 - Stock Options The Company has stock incentive plans that authorize the grant of options to purchase shares of the Company's common stock. All options granted to date carry exercise prices ranging from $5.00 to $20.75 per share. These prices correspond to the fair market value (as defined in the plans) of the Company's common stock at the time of grant with a graded vesting schedule between two to three years. In 1997, 1996 and 1995 there were no options canceled or converted. Common shares under option for the years ended December 31, 1997, 1996 and 1995 are summarized as follows:
Number of Shares (thousands of shares) Weighted-Average Exercise Price 1997 1996 1995 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Shares under option at January 1 1,545 1,810 1,843 $12.20 $13.34 $14.49 Granted 843 159 390 11.30 10.98 8.50 Exercised (273) (66) (141) 6.12 5.00 5.00 Forfeited (143) (358) (282) 16.03 18.76 18.36 - --------------------------------------------------------------------------------------------------------------------------- Shares under option at end of year 1,972 1,545 1,810 $12.38 $12.20 $13.34 =========================================================================================================================== Options exercisable 917 985 800 =================================================================================== Shares available for future grant 664 1,177 78 =================================================================================== Weighted-average fair value of options granted during the year $ 4.39 $ 4.00 $ 3.57 ===================================================================================
Additional information regarding options outstanding as of December 31, 1997 is as follows (thousands of shares):
Options Outstanding Options Exercisable -------------------------------------------------------------- --------------------------------- Weighted-Average Range of Number Remaining Weighted-Average Number Weighted-Average Exercise Prices Outstanding Contractual Life (yrs) Exercise Price Exercisable Exercise Price - ------------------------------------------------------------------------------------------------------------------------ $ 5.00- 8.75 426 6.8 $ 8.20 281 $ 8.05 10.56-15.94 1,251 8.1 12.38 368 15.33 16.03-18.83 233 3.8 17.98 217 17.99 19.06-20.75 62 5.8 20.04 51 20.11 - ------------------------------------------------------------------------------------------------------------------------ $ 5.00-20.75 1,972 7.2 $12.38 917 $14.00 ========================================================================================================================
The 1,055 thousand options outstanding at December 31, 1997 that are not presently exercisable will vest according to various schedules between two to three years. The Company has retained the "intrinsic value" method of accounting for stock-based compensation expense under APB 25. Had compensation cost been determined based on the "fair value" method under SFAS 123, the Company's pro forma net income and earnings per share would have been as follows:
Year Ended December 31, (millions of dollars, except per share) 1997 1996 - ------------------------------------------------------------------------ Net income (loss) As reported $19.0 $(14.6) Pro forma 18.2 (14.9) Earnings (loss) per share-basic As reported $0.81 $(0.63) Pro forma 0.78 (0.64) Earnings (loss) per share-diluted As reported $0.79 $(0.62) Pro forma 0.76 (0.63)
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997 and 1996, respectively: expected volatility of 41% and 41%; risk-free interest rates of 5.28-5.30% and 6.15-6.22%; and expected lives of four and three to four years. 29 Note 11 - Business Segment Information The Company's continuing operations have been classified into three business segments: physical, electronic and armored security services. The physical security segment provides contract security officers to patrol client facilities, monitor electronic systems and control public and employee access. The electronic security segment primarily designs, installs, monitors and services sophisticated electronic security systems and fire and intrusion detection systems. The armored security segment transported currency, securities and other valuables. Additionally, this segment provided full-service automated teller machine operations and cash management services such as deposit verification and currency processing. As discussed in Note 3, the Company combined its armored security business with Loomis Armored Inc. to form a new company, Loomis, Fargo & Co. The Company accounts for its investment in Loomis, Fargo under the equity method. The business combination impacts the comparison of the Company's 1997 results to prior periods because the armored security segment was included in the Company's results of operations for only 23 days in 1997. 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. Certain interim reported information has been reclassified to conform with the full year presentation. Identifiable assets are those assets employed in each segment's operations, including an allocated value to each segment of cost in excess of net assets acquired. Corporate assets consist principally of cash and cash equivalents, certain corporate receivables and other assets. 30 Borg-Warner Security Corporation Summarized financial information by business segment for 1997, 1996 and 1995 is as follows:
Year Ended December 31, (millions of dollars) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------ Net service revenues: Physical security services $1,289.3 $1,223.8 $1,222.8 Electronic security services 243.4 241.1 254.7 Armored security services 15.3 246.3 231.0 - ------------------------------------------------------------------------------------------------------ Total net service revenues $1,548.0 $1,711.2 $1,708.5 ====================================================================================================== Operating profit: Physical security services $ 64.9 $ 62.1 $ 56.4 Electronic security services 14.5 18.9 15.8 Armored security services 0.9 12.1 13.7 - ------------------------------------------------------------------------------------------------------ Total operating profit 80.3 93.1 85.9 Other expense, net 8.3 13.1 14.7 Interest expense 42.0 56.6 55.9 - ------------------------------------------------------------------------------------------------------ Earnings before taxes 30.0 23.4 15.3 Provision for income taxes 11.0 9.5 6.9 - ------------------------------------------------------------------------------------------------------ Earnings from continuing operations $ 19.0 $ 13.9 $ 8.4 ====================================================================================================== Depreciation: Physical security services $ 4.3 $ 5.7 $ 7.3 Electronic security services/(a)/ 34.2 34.2 37.4 Armored security services 0.4 7.0 7.1 Corporate 0.2 0.1 0.3 - ------------------------------------------------------------------------------------------------------ Total depreciation $ 39.1 $ 47.0 $ 52.1 ====================================================================================================== Amortization of excess purchase price over net assets acquired: Physical security services $ 7.8 $ 8.9 $ 8.9 Electronic security services 3.0 2.9 2.8 Armored security services 0.1 1.4 1.5 Corporate 0.2 0.2 0.2 - ------------------------------------------------------------------------------------------------------ Total amortization $ 11.1 $ 13.4 $ 13.4 ====================================================================================================== Capital expenditures and investment in sales-type leases: Physical security services $ 4.1 $ 3.1 $ 3.6 Electronic security services 43.6 36.2 45.4 Armored security services 0.2 8.1 3.7 - ------------------------------------------------------------------------------------------------------ Total capital expenditures and investment in sales-type leases $ 47.9 $ 47.4 $ 52.7 ====================================================================================================== Identifiable assets: Physical security services $ 206.4 $ 231.1 Electronic security services 346.7 348.2 Armored security services -- 87.4 Discontinued operations 15.4 12.6 Corporate 91.1 81.5 - ------------------------------------------------------------------------------------------ Total identifiable assets $ 659.6 $ 760.8 ==========================================================================================
/(a)/ Excludes principal repayments of sales-type leases totalling $13.0 million, $9.9 million and $4.6 million in 1997, 1996 and 1995, respectively. 31 Note 12 -- Income Taxes Earnings before income taxes from continuing operations and provision for income taxes consist of:
Non- 1997 Non- 1996 Non- 1995 (millions of dollars) U.S. U.S. Total U.S. U.S. Total U.S. U.S. Total - --------------------------------------------------------------------------------------------------------------------- Earnings before income taxes $26.7 $3.3 $30.0 $19.1 $4.3 $23.4 $11.9 $3.4 $15.3 ===================================================================================================================== Income taxes: Current: Federal/Foreign $ 0.5 $1.3 $ 1.8 $ 0.7 $1.3 $ 2.0 $ 6.4 $1.5 $ 7.9 State 1.5 -- 1.5 1.5 -- 1.5 1.0 -- 1.0 - --------------------------------------------------------------------------------------------------------------------- 2.0 1.3 3.3 2.2 1.3 3.5 7.4 1.5 8.9 Deferred 7.7 -- 7.7 6.0 -- 6.0 (2.0) -- (2.0) - --------------------------------------------------------------------------------------------------------------------- Provision for income taxes $ 9.7 $1.3 $11.0 $ 8.2 $1.3 $ 9.5 $ 5.4 $1.5 $ 6.9 =====================================================================================================================
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) 1997 1996 1995 - ---------------------------------------------------------------------------------------- Income taxes at U.S. statutory rate of 35% $10.5 $ 8.2 $ 5.3 Increases (decreases) resulting from: State income taxes 1.0 0.8 0.8 Non-temporary differences 0.1 0.7 0.7 Other, net (0.6) (0.2) 0.1 - ---------------------------------------------------------------------------------------- Income taxes reported $11.0 $ 9.5 $ 6.9 ========================================================================================
Following are the components of the net deferred tax asset as of December 31, 1997 and 1996:
(millions of dollars) 1997 1996 - ---------------------------------------------------------------------------------------- Deferred tax assets: Liabilities for casualty insurance $ 35.9 $ 35.6 Liabilities related to discontinued operations 7.9 9.6 Liabilities for pension benefits -- 0.4 Liabilities for other post-retirement benefits 4.2 4.6 Other, net 1.1 2.8 Net operating loss carry-forward -- 10.9 General business credit 24.8 26.3 Minimum tax credit 26.6 26.6 Foreign tax credit 0.4 1.3 - ---------------------------------------------------------------------------------------- Total deferred tax assets 100.9 118.1 Valuation allowance (5.3) (6.8) - ---------------------------------------------------------------------------------------- 95.6 111.3 Deferred tax liabilities: Fixed assets (37.7) (43.9) Investments (13.1) (13.1) Net excess purchase price over net assets acquired (5.7) (7.5) - ---------------------------------------------------------------------------------------- Total deferred tax liabilities (56.5) (64.5) - ---------------------------------------------------------------------------------------- Net deferred tax asset $ 39.1 $ 46.8 ========================================================================================
32 The foreign tax credit carry-forward has been fully considered in the valuation allowance at both December 31, 1997 and 1996 while an additional allowance of $4.8 million and $5.5 million at December 31, 1997 and 1996, respectively, has been established against the other credits. The general business credit carry- forward will expire in years 2004-2009 while the minimum tax credit can be carried forward indefinitely. Note 13 - Capital Stock The following table summarizes the Company's capital stock at December 31, 1997 and 1996:
December 31, (thousands of shares) 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Common stock, $.01 par value: Authorized 50,000.0 50,000.0 Issued 23,362.8 22,446.1 Outstanding 23,326.8 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 --- --- Note 14 - Earnings Per Share 1997 1996 1995 Per Share Per Share Per Share (millions of dollars, except per share) Earnings Shares Amount Earnings Shares Amount Earnings Shares Amount - ------------------------------------------------------------------------------------------------------------------------------------ Earnings from continuing operations $ 19.0 $13.9 $8.4 Basic EPS Earnings available to common shareholders 19.0 23.5 $0.81 13.9 23.3 $0.60 8.4 23.1 $ 0.36 ==================================================================================================================================== Effect of Dilutive Securities Outstanding stock options - 0.6 - 0.2 - 0.3 Diluted EPS Earnings available to common shareholders + assumed conversions $ 19.0 24.1 $0.79 $13.9 23.5 $0.59 $8.4 23.4 $ 0.36 ==================================================================================================================================== 33
Note 15 - Interim Financial Information (Unaudited) 1997 Quarter Ended 1996 Quarter Ended (millions of dollars, except per share) Mar. 31 June 30 Sept. 30 Dec. 31 Year 1997 Mar. 31 June 30 Sept. 30 Dec. 31 Year 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Net service revenues $382.4 $378.6 $390.8 $396.2 $1,548.0 $414.1 $418.3 $434.9 $443.9 $1,711.2 Cost of services 304.4 300.4 313.8 313.7 1,232.3 329.6 332.2 348.2 350.2 1,360.2 Selling, general and administrative expenses 51.8 48.7 45.8 48.3 194.6 52.7 52.2 51.8 53.9 210.6 Depreciation 9.8 9.8 9.9 9.6 39.1 12.1 11.8 11.7 11.4 47.0 Other expense, net 0.6 2.5 3.3 3.6 10.0 3.3 3.4 3.4 3.3 13.4 Interest expense and finance charges 10.6 10.2 10.6 10.6 42.0 14.5 14.1 14.1 13.9 56.6 - ---------------------------------------------------------------------------------------------------------------------------------- Earnings before income taxes 5.2 7.0 7.4 10.4 30.0 1.9 4.6 5.7 11.2 23.4 Provision for income taxes 1.2 2.9 2.7 4.2 11.0 0.3 1.7 2.5 5.0 9.5 - ---------------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations 4.0 4.1 4.7 6.2 19.0 1.6 2.9 3.2 6.2 13.9 Loss from discontinued operations, net of income taxes - - - - - (1.1) (1.0) (26.4) - (28.5) - ---------------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) $ 4.0 $ 4.1 $ 4.7 $ 6.2 $ 19.0 $ 0.5 $ 1.9 $(23.2) $ 6.2 $ (14.6) ================================================================================================================================== Earnings (loss) per common share - basic: Continuing operations $ 0.17 $ 0.18 $ 0.20 $ 0.26 $ 0.81 $ 0.07 $ 0.12 $ 0.14 $ 0.27 $ 0.60 Discontinued operations - - - - - (0.05) (0.04) (1.14) - (1.23) - ---------------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) per share $ 0.17 $ 0.18 $ 0.20 $ 0.26 $ 0.81 $ 0.02 $ 0.08 $(1.00) $ 0.27 $ (0.63) - ---------------------------------------------------------------------------------------------------------------------------------- Earnings (loss) per common share - diluted: Continuing operations $ 0.17 $ 0.17 $ 0.19 $ 0.26 $ 0.79 $ 0.07 $ 0.12 $ 0.14 $ 0.26 $ 0.59 Discontinued operations - - - - - (0.05) (0.04) (1.13) - (1.21) - ---------------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) per share $ 0.17 $ 0.17 $ 0.19 $ 0.26 $ 0.79 $ 0.02 $ 0.08 $(0.99) $ 0.26 $ (0.62) ==================================================================================================================================
34 To the Board of Directors and Shareholders, Borg-Warner Security Corporation We have audited the consolidated balance sheets of Borg-Warner Security Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP ---------------------- Deloitte & Touche LLP Chicago, Illinois February 3, 1998 35 EX-21 12 SUBSIDIARIES OF THE COMPANY EXHIBIT 21
% of Voting Securities Owned by PLACE OF Immediate NAME OF SUBSIDIARY ORGANIZATION 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 Government Services, Inc. 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 Services, Inc. Delaware 100% Wells Fargo Guard Service, Inc. of Florida Florida 100% Wells Fargo Special Services, Inc. Delaware 100% BPS Financial 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. Ontario 100% BW-Canadian Guard Corporation Delaware 100% Burns International Security Services, Ltd. (Ontario) 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 Delivery Services, Inc. Delaware 100% Wells Fargo Alarm Services, Inc. Delaware 100% BW-Chemicals Corporation Delaware 100% Wells Fargo Armored Service Corporation Delaware 100% Wells Fargo Pyro Technologies, Inc. New Jersey 100%
EX-23 13 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-23046 and No.333-34877) and the Registration Statement on Form S-3 (No. 33-60294) of our reports dated February 3, 1998 appearing in and incorporated by reference in the Annual Report on Form 10-K of Borg-Warner Security Corporation for the year ended December 31, 1997. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Chicago, Illinois March 27, 1998 EX-27 14 FINANCIAL DATA SCHEDULE
5 1,000,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 9 0 57 5 11 144 352 211 660 148 343 0 0 0 65 660 0 1548 0 1232 49 2 42 30 11 19 0 0 0 19 .81 .79
EX-99 15 CAUTIONARY STATEMENT EXHIBIT 99 Information provided by the Company from time to time may contain "forward- looking statements" as defined by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties including, but not limited to, those discussed below, which could cause actual results to differ materially from those projected in the forward-looking statement. 1. The Company's business is labor intensive and, accordingly, is affected by the availability of qualified personnel and the cost of labor. Contraction of the labor market in the various regions of the United States where the Company has its principal operations, whether caused by high economic growth in such regions or any other factors, may increase the Company's direct costs through higher wages and increased amounts of unbilled overtime. Employee turnover can result in increased recruiting, screening and training costs and affect the quality of service performed by the Company. In addition, while the Company's customer agreements typically adjust the billing rate based on changes in any law, ruling or collective bargaining agreement causing change in wage rates or other costs, competitive pricing conditions in the industry may constrain the Company's ability to adjust its billing rates to reflect such increased costs. 2. The Company has a significant amount of debt compared to stockholders' equity. The degree to which the Company is leveraged could have important consequences to the Company's operations, including (i) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be limited; (ii) a significant portion of the Company's cash flow from operations must be dedicated to the payment of principal and interest on its indebtedness, thereby reducing the funds available to the Company for its operations; (iii) certain of the Company's borrowings are and will continue to be at variable rates of interest, which could result in higher interest expenses in the event of increases in interest rates; (iv) such indebtedness contains and will contain financial and restrictive covenants, the failure to comply with which may result in an event of default which, if not cured or waived, could have a material adverse effect on the Company. 3. The Company continues to remain responsible for certain liabilities of businesses which the Company discontinued or disposed of in prior years, consisting primarily of environmental liabilities and indemnity obligations under contracts for sale of businesses. Although the Company believes that any liabilities remaining with respect to discontinued operations (including any potential environmental liabilities) will not have a material adverse effect on its financial position or operating results, no assurance can be given as to the ultimate outcome with respect to such liabilities. 4. Due to the nature of the Company's security services business, its operations are subject to a variety of federal, state, county and municipal laws, regulations and licensing requirements. Changes in such laws, regulations and licensing requirements may constrain the Company's ability to provide services to customers or increase the costs of such services. Competitive pricing conditions in the industry may constrain the Company's ability to adjust its billing rates to reflect such increased costs. 5. The nature of the Company's services potentially exposes it to greater risks of liability for employee acts, injuries (including workers' compensation claims) or omissions than may be posed by other service businesses. The Company carries insurance of various types, including workers' compensation, automobile and general liability coverage. These policies include deductibles per occurrence for which the Company is self-insured. While the Company seeks to maintain appropriate levels of insurance, there can be no assurance that the Company will avoid significant future catastrophic claims or adverse publicity related thereto. There can be no assurance that the Company's insurance will be adequate to cover the Company's liabilities or that such insurance coverage will remain available at acceptable costs. A successful claim brought against the Company for which coverage is denied or which is in excess of its insurance coverage could have a material adverse effect on the Company's business, financial condition and results of operations. 6. The Company intends to grow by pursuing acquisitions when attractive opportunities arise. However, there can be no assurance that the Company will complete acquisitions at favorable prices, that such acquisitions will be successfully integrated into the Company's existing operations or that such acquisitions will not be dilutive to earnings. In addition, the need to focus management's attention on integration of acquired businesses may limit the Company's ability to pursue other opportunities related to its business. 7. The protective services industry generally is highly fragmented and very competitive. The Company's physical security unit competes in a business environment with low barriers to entry, while its electronic security unit competes in a business environment characterized by relatively high capital investment due to the equipment and technology required. Consequently, the Company's business is subject to additional competition and the introduction of new technology or enhancements to existing technology. Some of the Company's competitors are materially larger than the Company and have greater financial and other resources available to them. Given the Company's high degree of leverage and the restrictions on capital spending contained in its credit facilities, there can be no assurance that the Company will be able to maintain levels of spending required to provide customers with advanced technological equipment. -2- SCHEDULE II BORG-WARNER SECURITY CORPORATION VALUATION AND QUALIFYING ACCOUNTS ($ MILLIONS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - -------- ---------- ----------------------- ---------- ---------- Years Ended December 31, (1) (2) Balance at Charged to Charged to Balance at Beginning Costs and Other Close of Description of Period Expenses Accounts Deductions Period - ----------- --------- ---------- ---------- ---------- ---------- 1995 Allowance for Doubtful Accounts $7.4 $4.4 $2.3 $7.3 $6.8 ========= ========== ========== ========== ========== 1996 Allowance for Doubtful Accounts $6.8 $2.7 $3.1 $6.3 $6.3 ========= ========== ========== ========== ========== 1997 Allowance for Doubtful Accounts $6.3 $5.3 $0.5 $7.2 $4.9 ========= ========== ========== ========== ==========
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